The U.S. Debt Problem

In this issue of the Peel:

• From October 2023 to December 2023, which is the fiscal first quarter for ‘24, the U.S. managed to rack up a deficit of just under $510bn.
• BNY Mellon and Citigroup had a ripe day, while Delta Airlines and UnitedHealth Group suffered share price declines.
• After SEC approval of spot BTC ETFs on Thursday, a total of 124.2 million shares traded hands, with $GBTC being the most heavily traded ETF debut in global financial history.

Market Snapshot

Happy Monday, apes.

And happy Martin Luther King Day. I know that markets are closed today as it’s a holiday, but every day is a hustle at the Daily Peel headquarters.

Earnings szn is off to a hot start, with the big banks dropping last week and into the early days of this week, but the real hot news of the weekend was, of course, the publication of WSO Alpha’s first-ever Equity Research Report!

We dive deep into all things Zillow and the broader housing market, so check things out here to see our official take and tell us how wrong we are. As always, we’re looking for ALL the smoke.

Let’s get into it.

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Banana Bits

• Earnings szn got off to a tough start, with the world’s most valuable bank falling 0.73% on the day as a result.
• Even with higher rates to pad profits, Bank of America couldn’t escape Uncle Sam and the regulatory payments they had to make last quarter, sending shares lower as well.
• Despite the immense size of the U.S. deficit (more below), this fiscal hole has never once led to a recession.
• Per Bank of America data, spending in 2023 was 4% higher than in 2022 and an insane 35% higher than in 2019.

Macro Monkey Says

Deficits Get Deafening

If you don’t pay your car loan, the bank is gonna be rolling around in your 2017 RAV4 pretty soon. However, if the U.S. government doesn’t pay their debts…

Well, we don’t really know… and I don’t think anyone wants to find out.

Nevertheless, the U.S. government—much like the parents of a student studying philosophy—is quite hesitant to pay their bills, to say the very least.

And this became all too clear with the release of the latest data on the U.S. government’s fiscal first quarter for 2024. It turns out that the deficit is getting so loud that we don’t want to hear about anything else.

From October 2023 to December 2023, which is the fiscal first quarter for ‘24 (as our government includes counting in the list of things they struggle with), the U.S. managed to rack up a deficit of just under $510bn.

In the last month of 2023, which is also the 3rd month of the 2024 fiscal year, the deficit managed to reach $129.4bn alone.

Clearly, that means we could use the help of a financial advisor and that somebody, somewhere, got a really nice Christmas gift from big dawg Joey B’s admin (looking at you, Zelenskyy).

Anyway, “deficits” refer to the difference in any given year between revenue earned and money paid out from the federal government. And with all the records surrounding the size of the deficit we’ve achieved in recent years, we’re just waiting on our gold medal at this point.

In theory, fiscal deficits should be a problem. Whether it’s lower investment, destabilization, or anything else, a government that doubles as a cash incinerator should probably not be a good thing.

But, when you hold the global reserve currency, the strongest military in the world, and 57 Super Bowl Championships, it’s hard for anyone to question the U.S.

During the fiscal year 2023, the U.S. managed to run up a total deficit of $ 1.7 trillion. For 2024, it’s already expected that we will top $2tn, pouring gasoline on the already-burning ~$34tn in total national debt that we already have.

That means the U.S. has roughly a 136% national debt/GDP ratio. When putting that debt against the revenue actually collected from the federal government, that gives us roughly a 766% revenue/national debt ratio.

That 2023 deficit included ~$660bn in interest payments alone. Assuming the same figure (which won’t be, probably even larger) and the $1.66tn federal budget planned for fiscal year ‘24, that means 40% of the budget is going to interest payments alone.

Source

And while nobody really knows what that means on a grander scale, it certainly means less funding going to welfare services, scientific research, the military, and everything else the federal government is involved in.

Needless to say, a sky-high deficit growing at faster and faster rates each year is concerning. Meanwhile, however, countries like Japan have debt/GDP ratios well over 226%.

So, simply crossing the 100% threshold might not be a huge deal in the short term, but at a certain point, there’s gonna be a problem. That could manifest in defaulting on interest payments so that we can still send out social security checks or any other myriad of ways, but as soon as it does happen, all bets are off.

Missing an interest payment means loss of the “risk-free” status that U.S. debt has long enjoyed and where the global financial system lies.

As these things have never happened before, we don’t have a case study to go off of, so it’s not like we can plan for the consequences in advance.

And while it might not be an immediate problem that’s going to affect anyone today, tomorrow, or even in 2025, eventually, enough becomes too much. With this in mind, and for the first time ever, this is one that no one wants to stay tuned for.

What's Ripe

BNY Mellon (BK) $54.85 (↑ 4.02% ↑)

• At least higher rates are helping someone, including BNY Mellon and anyone lucky enough to be holding shares on Friday. Strong net interest revenue and rising assets under management gave investors a happy Friday.
• Don’t ask why GAAP EPS was down ~47% compared to the same period last year. Just enjoy the fact that adjusted (a.k.a. bullsh*t) EPS of $1.28 did beat expectations! At the same time, sales of $4.31bn eked out a beat against the $4.29bn expected.
• Unusual charges did dampen that GAAP EPS figure, to be fair, including $752mn linked to the morons that blew up Silicon Valley Bank.
• Overall, the 4% growth in net interest, along with the 8% increase in assets under custody, showed investors that the bank was able to show a strong performance despite the financial turbulence of the last quarter of 2023. A win is a win.

Citigroup (C) $52.62 (↑ 1.04% ↑)

• Turns out missing sales estimates and losing $1.8bn is a damn strong quarter in the eyes of Wall Street. Ironically however, if you replace “sales estimates” and “$1.8bn” above with “the Uber I called” and “my wallet,” you’ve just described what we’d call a “damn strong” Friday night at The Daily Peel Global HQ.
• CEO Jane Fraser’s corporate overhaul drove much of that $1.8bn loss, but for once, Wall Street is apparently looking at the long-term implications. Excluding these impacts, Citi reported adjusted EPS of $0.84/sh on $17.4bn in sales vs the $0.81/sh expected on $18.74bn expected.
• Also on Friday, the Wall Street bank announced plans to lay off some 20,000 employees as part of that overhaul, already anticipating $1bn in severance costs alone. That’s about 10% of their workforce and is expected to finish in 2026.
• Still, compared to other major banks like J.P. Morgan and Bank of America that also reported on Friday (more on those tomorrow), Citigroup had a much better weekend.

What's Rotten

Delta Airlines (DAL) $38.47 (↓ 8.97% ↓)

• Oh, this company managed to hit record revenues and double profits last quarter? Damn, if only anyone cared.
• Despite Delta’s rock-solid quarter built on high demand for travel and an ability to continue to pass along inflation-era costs, markets sent this and other airline stocks into a nose dive on Friday as the company also slashed its full-year outlook on net income.
• For the last quarter of 2023, EPS came in at $1.28/sh vs expectations for $1.17/sh, while revenue of $14.2bn beat as well, but by a small margin.
• But as Mr. Market only cares about what’s next for companies, the full-year profit warning that came with these earnings stole the spotlight. Worries about demand for travel in 2024 put further weight on Delta and other travel shares on Friday, giving them a not-so-happy New Year so far.

UnitedHealth Group (UNH) $521.51 (↓ 3.37% ↓)

• Speaking of companies killing the vibe for their entire industry, UnitedHealth Group and the soaring medical costs they reported did not head into the weekend on a particularly high note.
• The U.S.’s largest health insurer reported a strong quarter overall, delivering EPS of $6.16/sh on $94.4bn in revenue vs estimates for $5.98/sh on $92bn on the top line.
• But, reading further into the report reveals a potentially bleaker future for the firm as medical costs—and with that, the costs to insure them—are rising faster than our national debt, which has investors concerned.
• Executives tried to assure investors these rising costs wouldn’t bleed into 2024 as increased claims in the last 2 months of 2023, largely linked to an increase in C-19 cases (isn’t that over?), were allegedly “anomalous.” Well, we’ll see.

Thought Banana

BTC + ETFs = $$$

Call me a math-a-magician because the latest discovery of an equation in all of mathematics, as seen above, officially holds true. Feel free to do the proof yourself.

Or, for proof, you can simply check out this table right here:

Source

That far right column (no, not Alex Jones’ blog) indicates the total amount of shares that traded hands on Thursday for each ETF offering.

According to data from Bloomberg, Grayscale’s 55mn shares translated to >$4.6bn, officially solidifying $GBTC as the most heavily traded ETF debut in global financial history.

But, to be fair, this thing has been around since 2013 in a trust structure, so the familiarity among investors helps.

In total, 124.2mn shares traded hands, and just as predicted, volume was wildly top-heavy, with the top 3 alone making up just under 88% of the total volume for all 11 ETFs.

Now, this isn’t to pretend like this wasn’t all expected, but the magnitude of the eagerness investors showed to exposure to BTC price action certainly was not.

Looking into the future, potential spot price ETFs for other digital assets like Ethereum could be the next big news within the non-traditional finance space. But at the same time, those of us in traditional finance are now just left to wonder what kind of impact this could have on Coinbase, Robinhood, and other digital asset trading stocks.

Plus, last week, we made the mistake of saying VanEck had the only cool ticker with “HODL.” But clearly, Valkyrie’s “BRRR” ticker is chill af (literally), while Hashdex’s “DEFI” is okay, too, if only BTC was a DeFi asset.

That must be why they’re in last place as of now.

The Big Question: What’s the next big news item we can expect to drive token prices? How will the release of these products impact “tradfi” (traditional finance) companies operating in the digital asset space?

Banana Brain Teaser

Yesterday —

Last week, Jack worked 70 hours and earned $1,260. If he earned his regular hourly wage for the first 40 hours worked, 1.5 times his regular hourly wage for the next 20 hours worked, and 2 times his regular hourly wage for the remaining 10 hours worked, what was his regular hourly wage?

Answer

$14.00

Today —

Five machines at a certain factory operate at the same constant rate. If four of these machines, operating simultaneously, take 30 hours to fill a certain production order, how many fewer hours does it take all five machines, operating simultaneously, to fill the same production order?

Shoot us your guesses at vyomesh@wallstreetoasis.com .

Wise Investor Says

“I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; in-as-much as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country.” — Andrew Jackson

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team