Don’t let Harry Melandri’s self-deprecating humor fool you, he is a wickedly smart market watcher and experienced financier. I use that broad term purposely because to try and limit Harry to a specific job function like analyst or strategist, would be to downplay his scope. In this conversation we talk tech, the Fed’s balance sheet, private credit and some major banking changes that could alter the macroeconomic landscape.
Is It An Owl or A Canary? The AI sector once again weighed down US equities. News that Blue Owl Capital pulled out of funding a $10 billion data center for Open AI raised new concerns about the spending tied to the AI data center build out. It’s not the first time Blue Owl has been in the news. A few weeks ago, their attempt to merge a non-public fund and public fund and limit redemptions spooked investors. Today it wasn’t just Blue Owl under pressure. Harry pointed out that Blue Rock Total Income and Real Estate Fund, which listed on the NYSE under BPRE, closed its first day of trading down 40% from its last listed net asset value. “Here’s my observation when I see a bunch of doors shutting, if I were one of the guys holding some pieces of paper like that, you know one of these funds, I’d be interested in an open door…seeing if I could get out before something like that happened to me. It seems to me that there’s a run on the BDCs (Business Development Companies), ..a slow run that’s taking place.” If true, that could mean a whole lot more trouble for the AI space.
Is it a Horse Race or a Shoo in? Chris Waller is the latest official to publicly audition for the role of Fed Chairman. Speaking at a Yale CEO summit, the Fed governor said there was room to cut rates another 50 to 100 basis points. The comments came just ahead of meeting with President Trump where he was expected to formally interview to head the Fed. Despite the campaign efforts, Harry thinks Kevin Hassett, Director of the National Economic Council will get the job (which matches up with current odds on Polymarket and Kalshi BTW). For Harry, the interesting thing about the process isn’t the changing leaderboard, but what it says about the administration’s priorities. Lower rates, yes, but also some other potentially big policy moves. “The really interesting thing from my point of view, given the research I’ve just been working on, was that Waller said there’s scope for bank reserves to come down.”
When Does Boring Become A Big Deal? Bank reserves? Basel III? For a lot of us this is where the mind starts to drift. Luckily, not Harry. His latest research report for MI2 Partners looks at what he believes will be an easing of supervisory rules that will enable banks to expand their balance sheets and push a lot more money out into the economy. From his report: “….the longer term objective of WH policy is to get the Fed out of the business of picking winners and losers. This administration wants to enable the banking sector to do its job, facilitating the flow of capital to American business.” Relaxing banking supervision ultimately, “…is all about the core policy of this administration which is re-shoring capacity and supply chains in the United States and among its allies.”
Banking Dominance. In this scenario, it’s not QE that juices the economy or government checks, but a banking system freed up from the regulatory cuffs put on in the wake of the GFC. If it happens, “You’re going to see an expansion of both the money supply and the velocity of money.” (side note: In an interview I did with Steve Hanke at the start of December he estimated that changes to the Supplemental Liquidity Ratio would release $2.6 trillion dollars. That’s a whole lotta money supply.)
Harry is gaming out some of the other impacts. “It’s going to be a tailwind for banks and bank stocks, but that has partially, if not fully happened.” (He points out the global systemically important bank stocks are up 40% YTD) What may not be priced is the extent that these newly freed up banks, with pristine balance sheets, push to reclaim the business and activity that moved into the shadow banking sector and private equity in the years following the GFC. Harry goes into some detail on this, but sums it up by saying, “I didn’t know why it was that Apollo stock was trading so badly…and now I think I do.”
There are other questions. Doug asked, “Does this put a floor under equities?” Harry thinks probably, but that might depend on how you feel about valutions. What about inflation? Short-term he isn’t worried, but longer-term this is likely a problem that bears watching. Does this liquidity find its way to crypto? He’s not sure, probably, but maybe stablecoins become the center of gravity.
There is a lot to unpack. We’ll stay on the case.
Thank you Michael Howell, Mark H, and many others for tuning into my live video! Join me for my next live video in the app.
