Dear Reader,
We left off yesterday with the predicament the banking industry has found itself in courtesy of the record pace of interest rate hikes and the duration risk it’s created for banks.
Bank solvency has been preserved thanks to the Bank Term Funding Program (BTFP) injecting cash into banks in exchange for bank collateral in the form of U.S. Treasuries and mortgage-backed securities at par value. But it hasn’t stopped the capital outflows from the banks.
This is because unless depositors have $25 million on deposit – which would earn about 3% – most are earning just 0.24% on average. Who would want to leave their capital in a bank to earn such a measly rate? Especially considering the yield of the 3-month U.S. Treasury is at 4.8375%.
The real question I posed yesterday was where is all the money fleeing to? If it is leaving the banking system, where is it running off to? The answer is money market funds. The intake has been stunning in the last year.
In the last 12 months alone, capital inflows into money market funds have skyrocketed from $4.45 trillion to almost $5.3 trillion and growing. That’s an almost 17.5% increase in just a year.
The reason is simple – the capital outflows are all about finding yield. And depositors don’t need a $25 million deposit to get just 3%. In fact, it’s normal to find money markets yielding between 4.25% and 4.75%, and many don’t have minimums. Money markets are for everyone, not just massive depositors.
And given the current direction of the 3-month U.S. Treasury yields, money market rates are likely going higher. Given the expectation of an additional 25-basis-point hike by the FOMC on May 3, and the continued quantitative tightening, we shouldn’t be surprised to see money market rates at, or slightly above, 5% in a matter of weeks.
With what the banks are currently offering, it’s pretty obvious that capital outflows will continue into money market funds over the coming months.
And that means banks – especially regional banks – will continue to need liquidity injections from the BTFP to stay solvent and fund those capital outflows. It also means these banks will not have the liquidity to lend. In fact, we can already see this happening in the numbers.
U.S. bank lending has collapsed by the largest amount in history dropping by $104.7 billion in the last two weeks of March.
This is the beginning of a nasty credit crunch.
As yields on money market funds increase, even more capital will flee the banks. This will cause the banks to go even deeper into “debt” with the Federal Reserve (FDIC) via the BTFP. Bank lending will continue to decline, which will directly slow down economic activity. And capital will continue to flee to safety and out of the equity markets thanks to the coming credit crunch.
This is a terrible short-term environment for the markets. And the Fed appears hell-bent on making matters worse.
On March 22, we witnessed yet another historic moment in the new age of space exploration. Relativity Space successfully launched its Terran 1 rocket past the Kármán line and into space.
Longtime readers will know that this has been a prediction of mine. I’ll admit, I thought we would have seen this milestone last year, but it’s great that the team has finally pulled it off.
What makes this such a great milestone is that the Terran 1 is the world’s first 3D-printed rocket. As such, there were questions regarding whether the rocket could hold up to what’s called Max-Q. That’s the point where the rocket experiences the maximum amount of structural stress during the launch to orbit.
Well, the Terran 1 passed the test successfully. Here’s the launch in action:
Source: Relativity Space
As we can see, the Terran 1 held up to Max-Q just fine. This proves that 3D-printed rockets can indeed make it to space.
Now, the mission wasn’t perfect. The rocket crossed the Kármán line and made it to space, but a malfunction prevented it from entering orbit. It’s not unusual to have some kinks to iron out in the early launches. SpaceX took its bumps and bruises in the past, so Relativity’s launch is still considered a success.
The reality is that this was a major victory for the company and the entire industry.
If we remember, the beauty of Reality’s 3D-printed rockets is that they only take sixty days to manufacture. That enables Relativity Space to scale quickly and launch payloads to orbit, economically.
In fact, Relativity Space will be able to launch payloads into space for just $9,600 per kilogram (kg). That means it will be able to launch smaller objects like cube satellites for less than $100,000. Incredible.
What we’re looking at here is the democratization of access to space. Relativity Space is making small launches affordable to even small businesses.
Relativity competes in the segment of the market focused on payloads up to 1,250 kgs. They have now become a major player with the potential to pursue the public markets in the next 12–18 months.
Agility Robotics just hit a major milestone. The company’s bipedal robot, Digit, is now ready for mass commercialization.
Regular readers may remember Digit. We showed footage of the robot working in an industrial warehouse last April.
Remember, Agility Robotics didn’t design Digit to be a humanoid robot. It’s optimized for industrial and logistics applications.
That being the case, the robot never had a head. It was just two legs, two arms, and a torso.
But that just changed.
Agility Robotics finally gave Digit a “head.” And the benefit here is that the head is loaded with LIDAR equipment. This gives the robot advanced 3D-sensing and mapping capabilities.
Here’s Digit at work:
Source: Agility Robotics
Here we can see Digit lifting a bin off the shelf and placing it on a conveyor belt. Most likely, there’s another Digit robot at the other end of that belt who will grab the bin and move it to the desired location.
So with the addition of a head and advanced 3D-sensing abilities, Digit is now ready for prime time. I expect we’ll see these robots proliferate very quickly across warehouses, factories, and logistics centers. That will relieve humans of the physically strenuous, less desirable work that’s hard to hire and staff for.
But what’s even more exciting is the potential for technology like Digit to be used for last-mile delivery.
I can imagine a delivery truck pulling into a neighborhood and four or five Digits hopping out of the back, packages in hand. They walk their packages to the consumer’s doorstep, ring the doorbell, and then hop back into the truck to get ready for their next delivery.
That’s what’s coming. And it’s going to transform the logistics industry forever. It will also help solve widespread labor shortages for that kind of work.
And of course, Agility Robotics is one of the main players in this space. We’ll want to watch this company very closely as well.
We’ll wrap up with a next-generation approach to digital manufacturing. Iconic car maker BMW just struck a deal with Nvidia to roll out the Nvidia Omniverse platform across its global footprint.
The idea here is for BMW to create a “digital twin” of new factories while they are still being built.
“Digital twinning” is the act of accurately modeling a complex system with all its inputs, and then employing artificial intelligence (AI) and supercomputing technology to better understand it and ultimately predict potential outcomes.
The idea is that we can ingest data and run models to simulate scenarios within the digital twin. We can actually simulate work within these digital environments, and then we can make real-world predictions based on those outcomes.
What this means is that BMW will create an immersive digital representation of new factories while they’re under construction. This will allow employees to test, refine, and optimize the layout and processes that occur within the factory – all before the real factory is completed.
This is highly advantageous as it enables a new factory to hit the ground running in a fully optimized state. Using a digital twin means that it won’t take months or a year to optimize a factory environment after the factory is built. With Nvidia’s Omniverse technology, BMW will be able to do it all before new factories even open their doors.
This is the future. It’s a perfect use case for this kind of tech. This kind of digital twinning wouldn’t be possible without all the advancements in semiconductor technology and AI over the last couple of years. In time, all manufacturing companies will be using this technology.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
