Tonight: Global banks are, once again, learning about the dangers of excessive leverage; the Great Stuck may be unstuck, but the Suez saga isn’t over; and the housing market has truly gone bonkers. Let’s get into it.
A little-known hedge fund has caused widespread chaos on Wall Street. And it’s a scary reminder of the dangers posed by extreme leverage, secret derivatives and rock-bottom interest rates, my colleague Matt Egan writes.
Archegos Capital, a hedge fund few people had heard of, used borrowed money to build massive positions that propped up media stocks including ViacomCBS and Discovery. It did so using complicated financial instruments called swaps (If you’re having flashbacks to 2008, stick with me…). The hedge fund’s type of excessive leverage is made possible by extremely low interest rates from the Federal Reserve.
Archegos’ complex strategy left the firm badly exposed, and its bets came under pressure as Viacom shares slipped over a large stock offering earlier in the week.
The hedge fund faced a so-called forced liquidation of its position, and that set off a bloodbath Friday that sank shares of ViacomCBS and Discovery more than 25% apiece.
The firesale wiped out more than half of Viacom’s value last week alone. Banks face billions in losses from their exposure to Archegos.
Here’s why this is scary for everyday Americans: In this era of easy money, Archegos was able to borrow so much that its failure created shockwaves large enough to ripple across Wall Street. And that can impact everyday Americans’ retirement accounts. It also demonstrates the intricate web linking firms across Wall Street — and the risks to the banks providing large amounts of leverage.
“It’s a wake-up call. With leverage, comes risk,” said Art Hogan, chief market strategist at National Securities Corporation. “We saw it on the short side when GameStop blew up. Now we are seeing it on the long side.”
NUMBERS OF THE DAY
Here’s a little by-the-numbers story that perfectly sums up what’s happening in the US housing market.
- A fixer-upper in suburban Washington, DC was listed for $275,000 on a Thursday. By Sunday evening, it had 88 offers.
- 76 were all-cash offers.
- Fifteen 15 of the offers came in sight-unseen.
- The four-bedroom, 1,800 square-foot home sold for $460,000 — nearly a 70% increase from the asking price. The buyer is an investor who is will likely to renovate and resell at an even higher price, according to the listing agent.
WHAT’S GOING ON?
The megaship that’s been clogging the Suez Canal for nearly a week was finally dislodged, clearing the way for hundreds of waiting vessels to begin transiting the vital trade artery.
High fives all around to the dredgers and tug boaters that worked to dislodge the beast. And a big tip of the hat to all the creators of memes that captured the absurdity of the way-too-big boat in the way-too-narrow corridor.
- It will take days to clear the backlog. There were more than 360 vessels — including 35 crude oil tankers and 96 container ships — waiting to use the canal.
- Shipping was a mess long before this. The pandemic upended global supply chains last year. Initially, economic activity ground to a halt. Then the buying sprees began with a vengeance — your Peloton splurge, your home office equipment, that new sofa and TV … all of those caught companies off guard and gunked up the works.
- Higher prices are coming. The average cost to ship a 40-foot container shot up from $1,040 last June to $4,570 on March 1, according to S&P Global Platts. Eventually, those costs could be passed on to consumers, adding to rising inflation — aka the i-word, aka the Wall Street Villain Who Shan’t be Named, aka the thing keeping investors up at night.
More than 80% of global trade by volume is moved by sea, and disruptions — even just one ship, albeit a ginormous one, running aground — can add billions of dollars to supply chain costs. It’s only a matter of time before those costs shift to consumers.
QUOTE OF THE DAY
“We have African Americans today who have a lot less wealth in part because they have not been able to inherent the wealth that would have accrued had their ancestors been able to accrue that wealth.”
WHAT ELSE IS GOING ON
- Rent relief: The federal ban on evictions has been extended yet again, this time to June 30, bringing relief to tens of millions of renters struggling to catch up.
- Saucy: Watch out, Rao’s. Carbone wants to be the new fancy grocery store pasta sauce.