Treasury, Michael Lewis, Batteries

Impact of rate moves, serious but manageable

For the past few weeks, we’ve been discussing how the increase in the long end of the treasury curve continues to create issues across financial markets. The 20-year treasury bond is currently over 5%, meaning a buyer at today’s prices earns 5% every year risk-free, and anyone stuck holding lower-yielding debt has lost an incredible amount of market value. TLT, the ETF tracking long-duration Treasuries and a proxy for the mechanism that broke Silicon Valley Bank, is now down over 50% from its 2021 peak. The total size of the long-duration treasury market is relatively contained at $4.2 Trillion. A fair estimate is holders of long-duration treasury bonds have lost over $2 Trillion in value over the past two years.

The total Treasury market is roughly $26T. 20% is held on the Fed balance sheet, meaning the government is paying itself a meaningful portion of its interest payments. Given that the Treasury issues bonds at different maturity rates, our total cost of debt today is around 2.8% or $750B. Only 20% of the Treasury’s debt pays interest at the maximum short-term rate of 5.20%. Depending on the maturities of the 2-10 year Treasury Notes, we have another 1-2 years before the largest portion of our debt begins to roll over at higher interest rates.

This is good news because the enormous cost of servicing US debt may peak and fall in 2024. Over the next 12-24 months, the Fed’s rate cuts will immediately start reducing the cost of our short-term TBills. 

In the interim, the real impact of the 5% rate on the 20-year treasury is its role as a benchmark and discount rate for valuations. It’s much more challenging to plan and execute a real estate project with a 5% cap rate when, on the surface, you can earn 5% on the treasuries doing nothing. All of this points to the need for the Fed to start planning its rate-cutting schedule over the next 12 months.

Sam Bankman-Fried and Michael Lewis

Michael Lewis is a universally beloved financial writer, and I’ve enjoyed many of his books, like Liars Poker, The Big Short, Money Ball, Blind Side, and so on. I met him in March of 2021 at the FTX Bahamas crypto conference, and we talked about his upcoming book on crypto and how he had been shadowing Sam Bankman-Fried (aka SBF).

Unfortunately, as you all know, Sam is responsible for misallocating an estimated $10B of his customer’s deposits. FTX accounts presented themselves like any regular bank or brokerage account in that customers deposited their funds in their own accounts in their own names. Except that’s not what happened. When the crypto markets soured, and net customer deposits turned negative for the first time since the bull run started, customers went to withdraw their funds and found they were simply not there. Sam had purchased real estate, donated to politicians, invested in a wide range of VC deals in the firm’s name and lost a considerable sum in his hedge fund. Sam’s fraud was blatant and obvious in that he used customer deposits as a personal discretionary financial account. It’s not a Ponzi scheme by the technical definition, but it is Ponzi’s closest relative.

The start and end of the story is that Sam had created a new brokerage firm, gambled and lost his customer’s deposits. However, in Michael Lewis’s 60-minute segment this week, he defended Sam in some weird ways. When the anchor compared SBF to Elizabeth Holmes, Lewis refuted it, saying that losing FTX customer money was a lesser crime than Theranos. Fraud is fraud regardless of the industry. He also called FTX a great real business that would have made tons of money if no one had cast doubts. In other words, criminals are great business people until they get caught? I don’t think so.

Bernie Madoff fooled many intelligent and successful people, and so did SBF. He has deep and powerful ties with parents who are Stanford law professors, and his business and romantic partner Caroline Ellison’s father is the head of the economics department at MIT. Unfortunately, it’s clear that Michael Lewis likes SBF and is more than going easy on him, but it’s coming at the cost of his integrity and reputation. Lewis’ 200 page book was just released, crafting a narrative around SBF, telling fun and distracting stories as the trial kicked off earlier this week. My guess is that Lewis is actively limiting his liability after having evaluated and vouched for SBF and likely created introductions for investors. Michael Lewis tells fun and entertaining stories, but he’s not accurately representing what happened here, and SBF is not a quirky kid who got in over his head.

Shortages become gluts –  Lithium Batteries

Lithium prices that went parabolic during the pandemic are now back to normal pre-pandemic levels. Prices are down about -75% from the peak, which persisted as late as Jan 2023. From a raw materials standpoint, a Tesla battery has approximately 140 pounds of lithium. This year-to-date price drop represents a roughly $4200 decline in raw material cost per Tesla and a meaningful decline in the general cost of battery storage.