July 03, 2025

Macrofinancial Outlook for the Day

Data

Manufacturing Activity

ISM: Despite Accelerating Price Pressure, Manufacturing Activity Stayed Consistent With A Contraction In June 2025. According to Bloomberg, “US factory activity contracted in June for a fourth consecutive month as orders and employment shrank at a faster pace, extending the malaise in manufacturing. The Institute for Supply Management’s manufacturing index edged up 0.5 point last month to 49, according to data released Tuesday. Readings below 50 indicate contraction. A measure of prices paid for raw materials showed slightly faster inflation.” [Bloomberg, 2025-07-01]

• June 2025: Price Pressure Reached Its Highest Level Since June 2022. According to Bloomberg, “Meanwhile, higher materials costs remain an issue for producers, the ISM survey indicated. The group’s price measure ticked up to 69.7, near the highest level since June 2022.” [Bloomberg, 2025-07-01]

• June 2025: The Ratio Between ISM Survey Respondents Talking About Reducing Headcount Relative To Those Talking About Hiring Reached One Of Its Widest Levels On Record. According to Bloomberg, “For every comment on hiring, there were 3.2 on reducing head counts — one of the widest ratios since ISM began tracking employment comments — reflecting companies’ continuing focus on accelerating staff reductions due to uncertain near- to mid-term demand.” [Bloomberg, 2025-07-01]

Economic Degradation

Worse Information

July 2025: The Trump Administration Proposed Cutting Almsot A Fifth Of NOAA’s Staff. According to Bloomberg, “The National Oceanic and Atmospheric Administration is proposing cutting about 18% of its workforce and slashing $1.5 billion from its budget, including terminating programs to protect coastal communities and research that supports better forecasts and natural disaster prediction. At least 2,256 positions, out of 12,596 have been targeted for elimination, according to budget estimate released Monday. NOAA’s Oceanic and Atmospheric Research office, described as ‘the engine that drives the next-generation’ of science and technology, will be eliminated, with some of its functions going to other departments.” [Bloomberg, 2025-07-01]

Claiming AI Could Fill In The Gaps, The Trump Administration Has Pushed For Cuts To The Data And Researchers Involved In Building Climate And Weather Models. According to Bloomberg, “The budget comes amid President Donald Trump’s cuts to climate research and federal weather forecasting agencies, reductions that critics say will diminish the ability to predict weather and erode the quality of weather models as fewer observations are made. Commerce Secretary Howard Lutnick pushed back against some of these criticisms in a congressional hearing earlier this year, saying the agency will use automation and AI to cover the gaps.” [Bloomberg, 2025-07-01]

• Since 2007, Improvements In Forecasts Had Saved An Average Of $5 Billion Per Storm, Dramatically More Than NOAA’s Budget. According to Bloomberg, “A recent study showed forecast improvements since 2007 have saved the US economy $5 billion per storm that makes landfall, Franklin said. ‘That’s four times the annual National Weather Service budget and we had five landfalling US hurricanes last year.’ The cuts would not just affect climate change research, but also many aspects of long-term weather, Swain said. A number of high-profile labs, including the National Severe Storms Lab that was made famous by the movie Twister, would be impacted.” [Bloomberg, 2025-07-01]

Capital Flight

In The First Half Of 2025, MSCI’s Gauge Of The 25 Smallest And Less Liquid Equity Markets Saw Its Largest Rally Since 2007. According to Bloomberg, “Frontier-market stocks are poised for more gains after their strongest first half in 18 years, strategists said. MSCI Inc.’s gauge of 25 smaller and less liquid equity markets advanced 17% in the first six months of the year, its biggest rally for that period since 2007. The advance was underpinned by a weaker dollar, relative insulation from global risks and the reduced threat of an oil-price spike. Investors have pumped funds into frontier nations such as Vietnam and Morocco as they chase higher returns and options outside the US, where unpredictable trade policies and rising debt levels have spooked markets. The slump in the dollar, which is down about 9% for the year, has helped reduce import costs and support growth in developing economies. ‘Frontier markets are cheap,’ said Charlie Robertson, head of macro strategy at FIM Partners. ‘Many in Frontier are tariff-resistant, lovers of a weak dollar and getting a double-whammy benefit from lower oil prices cutting the import bill and inflation.’” [Bloomberg, 2025-07-02]

• 

Financial Instability

Riskily-Named Bank

Trump-Aligned Billionaires Palmer Luckey, Joe Lonsdale, And Peter Thiel Have Put Money Into A Bank With The Goal Of Serving Startups And Crypto Businesses. According to the Financial Times, “A group of tech billionaires led by Palmer Luckey, co-founder of military contractor Anduril, is preparing to launch a US bank intended to fill the gap left by Silicon Valley Bank serving start-ups, including cryptocurrency businesses. To be named Erebor, the bank would be backed by high-profile tech investors including Joe Lonsdale, the founder of venture capital firm 8VC and a co-founder of Peter Thiel’s defence group Palantir, according to people familiar with the matter. Thiel’s venture capital fund, Founders Fund, would also be among the investors, according to two people close to the matter. Like Anduril and Palantir, Erebor’s name is a reference to JRR Tolkien’s The Lord of the Rings. Erebor is the ‘lonely mountain’ whose treasures are reclaimed from the dragon Smaug. Luckey and Lonsdale — who were big donors to Donald Trump in the 2024 US presidential election — want the bank to take over the niche once occupied by SVB as the go-to lender for riskier companies and cryptocurrency players that traditional banks might reject. Erebor has applied for a national bank charter in the US, a licence that allows a financial institution to operate as a bank.” [Financial Times, 2025-07-01]

• The Bank, Whose Banking Charter Is Before The Trump Administration Would Be Named Erebor, After The Dwarven Stronghold Retaken In The Hobbit. According to the Financial Times, “A group of tech billionaires led by Palmer Luckey, co-founder of military contractor Anduril, is preparing to launch a US bank intended to fill the gap left by Silicon Valley Bank serving start-ups, including cryptocurrency businesses. To be named Erebor, the bank would be backed by high-profile tech investors including Joe Lonsdale, the founder of venture capital firm 8VC and a co-founder of Peter Thiel’s defence group Palantir, according to people familiar with the matter. Thiel’s venture capital fund, Founders Fund, would also be among the investors, according to two people close to the matter. Like Anduril and Palantir, Erebor’s name is a reference to JRR Tolkien’s The Lord of the Rings. Erebor is the ‘lonely mountain’ whose treasures are reclaimed from the dragon Smaug. Luckey and Lonsdale — who were big donors to Donald Trump in the 2024 US presidential election — want the bank to take over the niche once occupied by SVB as the go-to lender for riskier companies and cryptocurrency players that traditional banks might reject. Erebor has applied for a national bank charter in the US, a licence that allows a financial institution to operate as a bank.” [Financial Times, 2025-07-01]

• In Addition To Targeting Clients In Startups And Cryptocurrency, It Would Also Look To Give Foreign Companies Access To The American Banking System. According to the Financial Times, “‘The bank will be a national bank . . . providing traditional banking products, as well as virtual currency-related products and services, for businesses and individuals,’ according to the application, made public this week. Its target market would be businesses that were part of the US ‘innovation economy’, in particular tech companies focused on virtual currencies, artificial intelligence, defence and manufacturing, the filing said. It would also serve individuals who work for or invest in these companies. It also planned to work with non-US companies ‘seeking access to the US banking system’.” [Financial Times, 2025-07-01]

Context: A Bad Name and Bad Strategy

Correlated Risk

Banks are kind of magical. Individuals give them money that can be (for the most part) withdrawn without any notice, and those individuals are compensated (barely in recent years) for that flighty money. That is because the bank is able to use that flighty money to make longer term loans, and capture the difference between the interest rate it charges and the interest rate it pays. In order for this business model to work, the bank always has to have enough liquidity to make sure that anyone making a withdrawn can get their money at any time. That means that you can’t loan out all of the money deposited with you at any given time.

In order to know how much you have to have on reserve at any given time, you need to know how many deposits will be withdrawn at that time. Luckily, with a large enough number of depositors, the statistics are fairly simple…unless those depositors have something in common. As Matt Levine explained in 2023 as SVB broke down, something Thiel and Founders Fund should be intimately familiar with given their role in triggering the run:

The lesson might be that there are some industries that are bad to bank. Imagine that it was 2021, and someone was like “do you want to start the Bank of Crypto? What about the Bank of Venture-Backed Tech Startups?” You’d be tempted, right? Those industries had so much money! They seemed cool. If you were their bank — if you were the specialized bank that exclusively focused on those industries — influencers on Twitter would tweet nice things about you, and you’d get invited to fancy parties. Also, as their bank, you’d probably find a way to get a cut of growing industries with lots of potential. Provide banking services to tech startups, get warrants in those startups, get rich when they go public. Provide banking services to crypto exchanges, start some sort of blockchain-based payment network, get rich through the magic of saying “blockchain” a lot.

But the structure of being the Bank of Crypto or Startups was a bit rickety. Traditionally, the way a bank works is that it takes deposits from people who have money, and makes loans to people who need money. The weird problem with focusing exclusively on crypto or startups in 2021 is that they had too much money. If you were the Bank of Startups, the main service that you provided to startups is that equity investors would give them a truck full of cash and they’d deposit it at your bank. Here is how SVB Financial Group, the holding company of Silicon Valley Bank, describes the vibe of 2021 and 2022 in its Form 10-K two weeks ago:

“Much of the recent deposit growth was driven by our clients across all segments obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities—which during 2021 and early 2022 were at notably high levels.”

People kept flinging money at SVB’s customers, and they kept depositing it at SVB. Perfectly reasonable banking service.

But the customers didn’t need loans, in part because equity investors kept giving them trucks full of cash and in part because young tech startups tend not to have the fixed assets or recurring cash flows that make for good corporate borrowers.1 Oh, there is some tech-industry-adjacent lending you can do.2 Tech founders want to buy houses, and you can give them mortgages. Venture capital and private equity funds want to manage liquidity and/or juice their reported return rates by paying for investments with borrowed money rather than drawing from their limited partners, so you can get into the capital-call-line-of-credit business. There are vineyards near Silicon Valley and you can develop an expertise in vineyard financing. And, sure, some of your tech-company customers do need to borrow money, and are creditworthy, and you lend them money and that works out. But there is a basic imbalance. Customer money keeps coming in, as deposits, but it doesn’t go out, as loans.

So you have all this customer cash, and you need to do something with it. Keeping it in, like, Fed reserves, or Treasury bills, in 2021, was not a great choice; that stuff paid basically no interest, and you want to make money. So you’d buy longer-dated, but also very safe, securities, things like Treasury bonds and agency mortgage-backed securities. We talked yesterday about how this worked out at Silvergate Capital Corp., the actual Bank of Crypto. And as of the end of 2022, Silicon Valley Bank, the actual Bank of Startups, had about $74 billion of loans and about $120 billion of investment securities.

Crudely stereotyping, in traditional banking, you take deposits and make loans. In the Bank of Startups, in 2021, you take deposits and mostly buy bonds. Again crudely stereotyping, corporate loans often have floating interest rates and shorter terms, while bonds have fixed interest rates and longer terms. None of this is completely true — there are fixed-rate corporate loans and floating-rate bonds, traditional banking tends to involve making lots of loans (like mortgages) with long-term fixed rates, you can do swaps, etc. — but it is a useful crude stereotype.3

Or, to put it in different crude terms, in traditional banking, you make your money in part by taking credit risk: You get to know your customers, you try to get good at knowing which of them will be able to pay back loans, and then you make loans to those good customers. In the Bank of Startups, in 2021, you couldn’t really make money by taking credit risk: Your customers just didn’t need enough credit to give you the credit risk that you needed to make money on all those deposits. So you had to make your money by taking interest-rate risk: Instead of making loans to risky corporate borrowers, you bought long-term bonds backed by the US government.

The result of this is that, as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups. At the Financial Times, Robert Armstrong writes:

“Few other banks have as much of their assets locked up in fixed-rate securities as SVB, rather than in floating-rate loans. Securities are 56 per cent of SVB’s assets. At Fifth Third, the figure is 25 per cent; at Bank of America, it is 28 per cent.

For most banks higher rates, in and of themselves, are good news. They help the asset side of the balance sheet more than they hurt the liability side. … SVB is the opposite: higher rates hurt it on the liability side more than they help it on the asset side. As Oppenheimer bank analyst Chris Kotowski sums up, SVB is ‘a liability-sensitive outlier in a generally asset-sensitive world’.”

But there is another, subtler, more dangerous exposure to interest rates: You are the Bank of Startups, and startups are a low-interest-rate phenomenon. When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is ‘we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future’ sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off. Your clients who were ‘obtaining liquidity through liquidity events, such as IPOs, secondary offerings, SPAC fundraising, venture capital investments, acquisitions and other fundraising activities’ stop doing that. Your customers keep taking money out of the bank to pay rent and salaries, but they stop depositing new money.

This is all even more true of crypto — I mean, the Fed raised rates once and the entire crypto industry vanished?4 — but it is not not true of startups. But if some charismatic tech founder had come to you in 2021 and said ‘I am going to revolutionize the world via [artificial intelligence][robot taxis][flying taxis][space taxis][blockchain],’ it might have felt unnatural to reply ‘nah but what if the Fed raises rates by 0.25%?’ This was an industry with a radical vision for the future of humanity, not a bet on interest rates. Turns out it was a bet on interest rates though.

[…]

Both crypto and venture capital booms were children of the ultra-low rates of the past decade and a half. Now, rising rates and the shrinking of the Federal Reserve’s balance sheet have burst those industry bubbles and increased the competition among banks for funding.

And so if you were the Bank of Startups, just like if you were the Bank of Crypto, it turned out that you had made a huge concentrated bet on interest rates. Your customers were flush with cash, so they gave you all that cash, but they didn’t need loans so you invested all that cash in longer-dated fixed-income securities, which lost value when rates went up. But also, when rates went up, your customers all got smoked, because it turned out that they were creatures of low interest rates, and in a higher-interest-rate environment they didn’t have money anymore. So they withdrew their deposits, so you had to sell those securities at a loss to pay them back. Now you have lost money and look financially shaky, so customers get spooked and withdraw more money, so you sell more securities, so you book more losses, oops oops oops.

As Armstrong puts it, SVB had “a double sensitivity to higher interest rates. On the asset side of the balance sheet, higher rates decrease the value of those long-term debt securities. On the liability side, higher rates mean less money shoved at tech, and as such, a lower supply of cheap deposit funding.”

Also, I am sorry to be rude, but there is another reason that it is maybe not great to be the Bank of Startups, which is that nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. If some depositors get spooked and take their money out, and other depositors evaluate your balance sheet and decide things are fine and keep their money in, and lots more depositors keep their money in because they simply don’t pay attention to banking news, then you have a shot at muddling through your problems.

But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say ‘hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,’ then all of your depositors will take their money out at the same time. In fact, Bloomberg reported yesterday:

Unease is spreading across the financial world as concerns about the stability of Silicon Valley Bank prompt prominent venture capitalists including Peter Thiel’s Founders Fund to advise startups to withdraw their money. …

Founders Fund asked its portfolio companies to move their money out of SVB, according to a person familiar with the matter who asked not to be identified discussing private information. Coatue Management, Union Square Ventures and Founder Collective also advised startups to pull cash, people with knowledge of the matter said. Canaan, another major VC firm, told firms it invested in to remove funds on an as-needed basis, according to another person.

SVB Financial Group Chief Executive Officer Greg Becker held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter.

Becker held the roughly 10-minute call with investors at about 11:30 a.m. San Francisco time. He asked the bank’s clients, including venture capital investors, to support the bank the way it has supported its customers over the past 40 years, the person said.

Nah, man, you don’t get to be a successful venture capitalist by taking a long view or investing in relationships or being contrarian. I’m sorry, I’m sorry, this is unfair. Of course they were right — Silicon Valley Bank did collapse, and if you got your money out early that was good for you — but that is largely self-fulfilling; if all the VCs hadn’t decided all at once to pull their money, SVB probably would not have collapsed.6

But it did:

Silicon Valley Bank collapsed into Federal Deposit Insurance Corp. receivership on Friday, after its long-established customer base of tech startups grew worried and yanked deposits.

Erebor is a Terrible name for a bank

Because the above section is way too long, and more important, this section will be as short as possible, but just as I believe that the name Palantir is a signal of its malevolent intentions, Erebor is a terrible name for a bank.

The timeline for Erebor is as follows: the Mountain, Erebor becomes a thriving location for dwarves, attracting the dragon Smaug, who kills most of the dwarves, and takes the treasure for himself. As a result, the economy that was built around Erebor dries up.

When a company of dwarves, led by Thorin, the grandson of the last king under the mountain, manages to retain control of Erebor, the consequences of Smaug’s long-holding of the treasure becomes apparent, as he infected it with Dragon-sickness, which makes anyone who holds the treasure extremely greedy. As a result, Thorin refused to cooperate with anyone else, including the men of Dale who were instrumental in defeating Smaug.

This dispute escalates into the battle of five armies, in which Thorin is killed.

After that, it served as the source of speculative expeditions to Moria, which ultimately created the false hope that led the fellowship there and to the death of Gandalf the grey. Not exactly the precedent that should be set in a bank aiming to serve other speculative ventures.

Trade War

Powell: Without Trump’s Tariffs, The Fed Probably Would Have Cut Interest Rates. According to Bloomberg, “Speaking Tuesday during a panel in Portugal, Fed Chair Jerome Powell repeated that the central bank probably would have cut rates further this year absent Trump’s expanded use of tariffs. Still, when asked if July was too soon for a rate cut, Powell didn’t rule out the possibility.” [Bloomberg, 2025-06-30]

Effect On Smaller Companies

JP Morgan: Almost Half Of Midsized Companies Import Goods Directly. According to Bloomberg, “Nearly half of these midsize companies — defined as those with between $10 million and $1 billion in annual revenue — import goods. New research from the JPMorganChase Institute breaks down the range of direct costs that they would face under the various tariff scenarios. ‘Since midsize firms have an outsize reliance on Chinese goods, making up 20.9% of their total 2022 goods imports, a rate of 55% still leads to substantial costs for some segments of the middle market,’ the JPMorganChase Institute report said.” [Bloomberg, 2025-07-02]