Has the penny finally....

Honest words from a Billionaire Investor

A breath of fresh air from Gundlach.....

“When you have been around for 40 years you think you have learnt stuff. You think that you understand relationships, you can tap into your experience about how things interrelate and act. BUT WHAT IF YOUR EXPERIENCE IS ALL INFORMED BY A SECULAR TREND THAT ISNT IN PLACE ANYMORE. What happens if falling interest rates were significant in creating those relationships and if they are not falling anymore, then maybe those relationships are irrelevant”.

Jeffrey Gundlach

The Bond Vigilantes are back in the saddle

There has been a lot of talk this week about how the US "bond market" has settled down as upward pressure on yields subsides. This misses the point completely. Some force, other than the usual driver (Central banks) drove yields to a place they have not been for quite a while. The term "Bond Vigilantes" was first coined 40 years ago to describe a scenario where bond investors sell their bond holdings as a response to perceived fiscal recklessness. The heavy buying finger of the FED forced the vigilantes into exile. Their future influence is not the point - the fact that they are back on the pitch is the point!

US economic resilience

Despite the most aggressive fed funds rate hiking cycle in history the US economy remains resilient. It is clear that many parts of Europe (Sweden, Germany) are in recession territory. The outlook for Europe is not great. It is hard to argue with recent US economic data. Both real GDP and non-farm business output rose in Q3. Unemployment remains stubbornly low and inflation is clearly receding. Economist Ed Yardeni says that the US consumer remains strong and continues to spend. One persons income is another persons spending which is reinforcing employment stability. Yardeni also says that the impact of the “baby boomer” generation remains under-appreciated as this huge cohort of retirees continues to spend supporting sectors like tourism & hospitality, financial services and healthcare. But….the economy is not the market and the earnings requirements to justify current valuations into a potentially slower economy is challenging. Recent employment data has also been weaker. China is clearly in deep trouble as is the UK & Europe . Perhaps the real news is the price of a barrel of oil - well down from its peak of $93 in September to $77 today. Perhaps the best barometer of global economic health.

Work from Home is here to stay

WeWork is the latest high-profile casualty of this new post-pandemic economy. The company hit a perfect storm of hybrid working, de-urbanization post-covid and rising costs of capital. Cheap money fueled their growth. A WeWork statement said that it is looking to restructure $13bn in lease obligations. How does a company like WeWork have a valuation of $47bn less than four years ago and files for Chapter 11 this week? The FT reported that the company’s market capitalization has shrunk to $40mn, its bonds are trading at depressed levels and shareholders will be wiped out in the ensuing bankruptcy. The take-away here is that “Work From Home” (WFH) is real and its not going away. Many large corporates were forced into U-turns including Mr. Musk and General Motors.

Not all that glitters is gold!

Many feel that “content writing” is a waste of time now that “magical AI” is here. We can look at this another way. Will AI make people inherently lazy as they allow the “computer” to do the donkey-work? There is only one problem - the devil is in the detail (and the donkey-work). I advise students to keep doing the work and learn the basic skills as the new utopia promised by the AI evangelists might not be that productive. There isnt much talk of the Metaverse recently for some strange reason!

US Debt Position: No easy answers here I’m afraid

Financial markets are closer to physics than we might care to believe. Gravity, velocity and momentum spring to mind. The best analogy for the spiraling US debt situation is the “snowball effect”. Snow accumulates slowly initially and over time more snow sticks to the ball as it grows larger (and heavier). The US debt to GDP level went from 80% to 100% during the pandemic. This naturally leaves a bigger stock of debt to service. Secondly, the spike in interest rates makes those servicing costs much more restrictive from a fiscal perspective. How do you deal with the deficit: spending cuts and tax increases. A key point in relation to this debt situation is the level of current debt (less important) versus the trajectory of future interest payments - think about that Snowball….there you go!

Defaults are a rising...

The US Federal Reserve puts the total amount of corporate borrowing in America at $13trn. What happens to this debt pile when it has to be refinanced at todays rates (plus a premium by the way which everyone forgets about). Its inevitable that defaults will rise and there is evidence (from Moody’s) that this is rapidly increasing. Higher rates also sucks demand out of the economy as consumers become more cautious with their discretionary spending.

The “real” cruelty of normalized interest rates

Before we shed a tear for the property moguls or the tech firms having to refinance existing debt arrangements, spare a thought for emerging market economies. The Deputy Chief Economist of the World Bank has highlighted the plight of low-income countries faced with huge debt refinancing costs. The Covid-19 pandemic resulted in excessive borrowing (for largely humane purposes). Its not difficult to see how this plays out with debt servicing levels rising leading to inevitable budgetary constraints domestically for these countries. Social problems will follow. You also have to factor in the currency implications of higher US rates as struggling EM countries are forced to defend their domestic currencies and keep rates high. A dose of context is important here. The phrase “1st world problems springs to mind”.

Joe Biden: A Clear & Present Danger

The recent New York Times/ Siena poll just confirmed what many believe – the trump machine is building momentum. The poll indicated that Trump beats Biden in five out of six of the critical (swing) battleground states. Biden’s big problem is the economy and recession timing thereof. Most of the commentary that I have read has a recession somewhere in 2024 either Q3 or Q4. Also, the escalation in the middle east will push energy prices up at the pumps probably at the worst possible time for the President. The cynic might point to the huge activity of Mr. Blinken in that regard in recent weeks. There is no doubt that age is a factor here also. Throw a weak economy into that mix and Biden looks very vulnerable. All awhile “the Donald” is playing a masterclass in victimhood personally attacking the judge and prosecution team. The judge’s reaction tells its own tale:

“Mr Kise, can you control your client? This is not apolitical rally,”.

It absolutely is and will continue to be from a November2024 perspective.

Beware of "Free Money" Theories

I started with Gundlach so I will finish with a stinging retort that he gave to a Question on MMT. I couldn't resist....

"You notice how Modern Monetary Theory disappeared. That was about five years ago, you could spend endless amounts of money and they had some bizarre theory that it wouldn't cause inflation. I think all of those guys have gone back into their rat hole because you obviously got inflation when we spent $4.5 trillion dollars".

Ouuch!