Talk about higher for longer: This morning’s reading of non-farm payrolls for May featured a net 339,000 advance, way above the 195,000 consensus and catching the bond market off-guard, as evidenced by the 15-basis point leap in two-year yields, to 4.49%, as of mid-afternoon. 

As Bianco Research relays, that marks the 14th consecutive monthly reading in which payrolls topped economist expectation. That’s easily the longest streak since record keeping began in 1997, towering over the prior peaks of five straight “beats” in 1998 and 2020. 

Who said trees can’t grow to the sky?  The U.S. Senate passed legislation suspending the $31.4 trillion national debt ceiling and capping federal spending through 2024 in a bipartisan 63-to-36 vote yesterday, wrapping up weeks of well-ventilated political haggling. “We’ve saved the country from the scourge of default,” crowed Senate majority leader Chuck Schumer (D. – N.Y.).

Observers outside the Beltway took a slightly more jaundiced view. Bloomberg economists Anna Wong and Maeva Cousin wrote Tuesday that the spending freeze “will deal an additional short-term blow to an economy already vulnerable to recession. Yet [it will] barely dent the unsustainable medium-term trajectory of U.S. federal debt – which we estimate is still on track to rise from 97% of GDP in 2022 to more than 130% of GDP by 2033.”  At the turn of the century, Washington’s output-adjusted borrowings stood below 30%.

The post-Covid inflation updraft and accompanying upward lurch in federal borrowing costs continue to reverberate. Net interest expense registered at 1.9% of output last year, topping the 1.5% long-term average.  That metric will reach 2.7% next year, if guesstimates from the Congressional Budget Office are on the beam, on their way to 3.7% by 2033. For context, the post-WWII peak stands at 3.2%, logged in 1991. 

To be sure, Uncle Sam has company in the struggle to keep his obligations in check.  Fitch Ratings warned yesterday that Europe’s leading economies will have trouble whittling down their sovereign debt loads despite a revenue-driven fiscal improvement last year. The Covid-era borrowing binge will continue to weigh on the bloc, the rating agency reckons, as euro area debt to GDP stood at 92% at year-end, down from 95.5% in the prior year but well above the 84% seen in 2019. 

With price pressures still percolating on the Old Continent, European Central Bank governing council member Klaas Knot pushed back on market expectations of an easing pivot in 2024, likewise warning of side effects from elevated government indebtedness including “rising interest expenses.” Benchmark borrowing euro costs currently rest at 3.25%, following the ECB’s eight-year experiment with negative nominal rates. 

Then there’s China, where debt-soaked local authorities labor to stay above water. Nearly one half of the revenue last year, a new report from Rhodium Group finds, up from one-third of municipalities in that predicament during calendar 2021. A sample of 2,892 government financing vehicles (LGFVs) – the contraptions used to fund infrastructure spending projects – saw their cash positions collectively slip by 10.3% year-over-year to RMB 7.8 trillion ($1.1 trillion), the first such decline since 2018, while interest bearing debt stood at RMB 54 trillion along with an additional RMB 5 trillion in payables to contractors and suppliers. 

“The current weakness of localities’ finances prevents Beijing from utilizing fiscal policy to support the economy,” the Rhodium analysts conclude. “In fact, this is the primary reason that there has been no meaningful fiscal support for China’s recovery this year.”  For more on the Middle Kingdom’s local debt problem, see the issue of Grant’s Interest Rate Observer dated May 19. 

Indeed, the combination of towering obligations and elevated borrowing costs relative to the post-crisis norm make for a heady brew. “At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic levels and is expected to continue increasing rapidly,” the Institute of International Finance relayed in a mid-May analysis. “Despite concerns about a potential credit crunch. . . government borrowing needs remain elevated.” 

Stocks stormed higher again to the tune of 1.3% as of mid-afternoon, when your correspondent had to leave, while the VIX continued its freefall to a sub-15 reading, its most placid since t

- Philip Grant

Some 61% of U.S. adults are invested in the stock market, an April poll from Gallup found. That’s the highest share since 2008, up from 58% last year and 52% as recently as 2016.

A paucity of income-generating opportunities during the post-crisis E-Z money epoch (witness the sub-1% average interest rates on offer for five-year certificates of deposit from 2012 to 2017 and 2020 to mid-2022, per data from Bankrate.com) can explain the growing popularity, some believe. “My overarching conclusion about why equity ownership is relatively high is that the ‘there is no alternative’ principle was alive and well, until very recently,” Christine Benz, direct of personal finance and retirement at Morningstar, told Yahoo! Finance Thursday. 

By the same token, last year’s outsized losses from “Super Safe” Treasurys as interest rates climbed off the mat factors into the migration. “Although 2022 was a bum year for [both] stocks and bond[s]. . . investors expect volatility and periodic losses from stocks, they don’t expect it from bonds,” Benz added. 

Welcome to the spin zone. Atmus Filtration Technologies, Inc., formerly a division of Cummins, Inc., made its New York Stock Exchange debut in style on Friday, enjoying an 11% rally after raising $275 million.  

Marking the seventh-largest U.S. initial public offering of 2023 thus far, that transaction underscores healthy investor demand for corporate spin-offs, which represent a bright spot within still-dormant equity capital markets.  On May 4, Johnson & Johnson listed its consumer health products unit Kenvue, Inc. in a $4.37 billion deal – marking the only stateside IPO of $1 billion or more in the year to date – with shares subsequently higher by 16%. Overall, those commercial offspring have accounted for four of the five largest debuts over the past year, data from Bloomberg show, reflecting ongoing risk aversion following last year’s protracted market weakness. 

“Typically, the spinoff IPOs tend to have a better track record of profitability as well as a greater cushion of capital,” Roth MKM analyst Rohit Kulkarni observed to Bloomberg.  Considering “today’s risk-off market, such offerings are better received by investors.” 

Of course, the Covid-era capital markets bacchanal colors that newly chastened attitude, as the aftermath of the supersonic boom in special purpose acquisition companies presents a lingering headache for Mr. Market. The Wall Street Journal warned last month that more than 100 firms that merged with those blind pools are at risk of running out of cash within the next year, potentially joining a dozen of the so-called de-SPACS which have already filed for bankruptcy protection during this cycle.  On average, that cadre retains cash and short-term investments sufficient to cover only five months of operations. 

With the zero-rate era that accompanied the 2020 and 2021 SPAC issuance boom now firmly in the rear-view, onerous terms await those firms looking to bolster their flagging coffers. “The financings that are available to these failing companies are just going to accelerate their demise,” Adam Epstein, founder of Third Creek Advisors, contended to the Journal. 

The bygone SPAC bubble may have given way to heavy financial weather for frail corporate citizens, but one contingent emerges from the financial wreckage in shipshape.  A WSJ review of 460 de-SPACS found that corporate officers, directors and other insiders at 232 of those sold an average $22 million in shares per company “through well-timed trades, profiting before share prices collapsed.” Some 20% of that group monetized at least $100 million of company stock, while insiders at a dozen firms offload $500 million or more into the market. 

Stocks gave back some early gains to finish unchanged on the S&P 500, though the Nasdaq 100 managed a 0.5% advance thanks to the usual suspects like Nvisda, which added another 3% to finish near the $1 trillion market cap milestone. Treasurys caught a strong bid with the two-year yield dropping to 4.46% and the long bond to 3.9%, down eight and six basis points on the day, respectively, while gold rebounded to $1,978 per ounce and WTI crude slipped below $70 a barrel. 

- Philip Grant

Nvidia Corp. sent its legion of fans into delirium after guiding fiscal second quarter revenues to about $11 billion, blowing away the $7.2 billion sell-side consensus. Shares in the artificial intelligence darling vaulted higher by 24% in response, extending year-to-date gains to 165%. 

Today’s bull frenzy leaves Nvidia in rarefied air, adding nearly $250 billion to its market valuation at its intraday highs. As Richard Bernstein Advisors points out, only 25 members of the S&P 500 sport market capitalizations greater than that sum.  

Then, too, the eye-popping move shatters a venerable record: Kevin Duffy, co-founder of Bearing Asset Management, relays that Nvidia’s $940 billion market cap stands at 64 times gross profits over the 12 months through April.  At the peak of the dot-com bubble, shares of tech darling Cisco crested at a mere 53 times trailing gross profit.  

Them’s fightin’ words: S&P Global downgraded SoftBank Group Corp. to double-B from double-B-plus Tuesday, warning that “asset risk in [the firm’s] investment portfolio is rising more than we had assumed,” and that “its liquidity and creditworthiness are likely to remain materially weakened for the next year or so.”  

The $100 billion Vision Fund and its $40 billion sequel represent the primary culprits, as cumulative, unrealized losses from those in-house venture capital divisions stood at $8.5 billion as of March 31.  SoftBank had logged $66.4 billion in paper profits as the private capital bubble climaxed in spring 2022 after pouring $44.3 billion into startups over the preceding 12 months, before slamming the brakes to the tune of just $3.1 billion of investments over the subsequent fiscal year as greed gave way to fear.

On form, SoftBank declined to turn the other cheek, critiquing S&P’s decision thus: “over the past year, our strict defensive financial management has strengthened our financial position as never before. . . it is extremely regrettable that our financial soundness was not properly assessed.” Recall that, in response to a two-notch downgrade from Moody’s in 2020, SoftBank effectively fired the agency for its “biased and mistaken views” by ceasing to furnish financial information. 

While SoftBank continues its tradition of sparring with the rating agencies, the pending IPO of chipmaker and portfolio company Arm Ltd., which will reportedly raise some $10 billion, looms as a potentially decisive moment for Masayoshi Son’s firm. As S&P noted in its downgrade, unlisted companies composed 69% and 85% of Vision Fund 1 and 2’s assets, respectively, as of March 31.  

Increasingly bruising conditions in the v.c. market at large color that concentration.  Industrywide internal rates of return slumped to negative 7% over the 12 months through September 30 (the most recently available figure), PitchBook relayed earlier this month, marking the worst such annual showing since 2009. IRRs have now deteriorated for five consecutive quarters, the longest losing streak in over a decade, with another decline likely on tap for the final three months of 2022, the data service advises.

Indeed, some industry Johnny-come-lately’s may not survive the cull. “There is a segment of the venture market that has little traction and no real prospects for raising additional capital,” Jay Ripley, head of investments at Global Endowment Management, told The Wall Street Journal last week, adding that numerous startups funded during the Covid-era boom “are presumably going to be written down to zero, or near zero.”

As the v.c. realm wallows in despair, the aptly dubbed “epitome of the cycle,” (Grant’s Interest Rate Observer, Dec. 15, 2017) looks for greener pastures. Bloomberg reported Monday that SoftBank “is working on plans to become a lender in the $1.5 trillion world of private credit,” prospectively targeting “low double-digit yields [from] the strategy.”

Fair warning, direct lenders. 

The (artificial) intelligent investor: stocks enjoyed a near 1% advance on the S&P 500 and a 2.4% jump for the Nasdaq 100 as the Nvidia results stirred animal spirits, while Treasurys were hammered on the short end with the two-year yield ripping 19 basis points to 4.5%. Gold continued its descent to $1,941 per ounce, WTI crude slipped below $72 a barrel and the VIX pulled back to near 19.  

- Philip Grant

Tremors in investment grade: the triple-B-rated portion of the Bloomberg U.S. Corporate Bond Index sports a 53-basis point yield premium to single-A’s as of this afternoon, up from 45-basis points in March and representing the largest such pickup in six months. 

That gradual creep wider comes as some $11.4 billion worth of formerly high-grade issuers were downgraded to junk by Barclays’ count in the first quarter. The investment bank predicts the full-year tally of so-called fallen angels will reach as much as $80 billion, a figure exceeded on only three occasions (2009, 2016 and 2020) over the past two decades.  

“No bears allowed,” read a sign at the entrance of last week’s spring bitcoin conference in Miami, reports The Wall Street Journal. Crypto bulls were likewise in shorter supply, as attendance at the annual conclave of true believers reportedly registered at about half of last year’s 26,000-strong headcount.  

Spirits weren’t exactly glum, however. A gospel choir led attendees in a rendition of “When the Saints go Marching in” Thursday with one singer carrying a “Hallelujah Bitcoin” sign, while pallbearers lifted an open casket filled with dollar bills and affixed with a “#FiatFuneral” label. “It’s really a pep rally. It’s really what this is,” Kurt Wuckert, Jr., chief bitcoin historian at CoinGeek, told the Journal.

Enthusiasts can use some extra encouragement, as digital assets are collectively valued at $1.14 trillion per Coinmarketcap.com following a 44% year-to-date rebound but remain at less than half of the $2.8 trillion seen in fall 2021. Beyond that still-daunting drawdown, a precipitous decline in trading activity highlights the industry’s malaise. Bitcoin liquidity on U.S. exchanges sits at roughly half its early 2023 levels, data provider Kaiko finds, while peer Coin Metrics relays that daily bitcoin trading volume sank to some $4 billion last week from $20 billion in early March. 

Helping drive the sharp curtailment in turnover: Bloomberg reported Friday that major proprietary players like Jane Street and Jump Trading have recently throttled back their crypto presence in response to enhanced scrutiny from U.S. regulators and the demise of industry mainstays Silvergate Bank and Signature Bank.  That retrenchment has duly rippled across the industry, as the Wall Street names “brought real gravitas and legitimacy to an industry that was kind of on the fringes and made it feel more mainstream, more secure,” Michael Safai, co-founder of London-based proprietary high-frequency crypto trading firm Dexterity Capital, told Bloomberg. “There’s [now] a bunch of other shops out there like us, that are so small that you have probably never heard of.” 

Waning activity makes for a curious contrast for one of the industry’s foremost pieces of financial artifice. So-called stablecoin tether, which is purportedly backed 1:1 by U.S. dollars and which serves as a prominent means for traders to convert their fiat to crypto and back again, saw its market value reach $82.9 billion yesterday, nearly matching the $83 billion peak logged in early 2022, despite daily volumes languishing at multi-year lows and market share remaining steady relative to competing tokens. 

The divergence is a “questionable” one, Kaiko concluded in a Monday analysis, which noted that “historically, changes in trade volume have been loosely correlated with changes in tether’s market cap, with occasional surges during periods of notable market activity. Today, the correlation is at zero.” For an early, skeptical look at the mechanics underpinning crypto’s Grand Central Station, see the Sept. 18, 2017 edition of Grant’s Interest Rate Observer.

While tether maintains its intriguing buoyancy, a fellow industry mainstay faces renewed questions about its treatment of customer assets. Reuters reports today that Binance, the world’s largest crypto exchange, comingled client funds with its own during late 2020 and 2021. Monies running into the billions of dollars were, reportedly, improperly mixed on a near-daily basis during that time, via accounts that Binance held at the aforementioned Silvergate Bank.  

For its part, Binance denied Reuters’ contention, with a spokesperson stating that the accounts in question “were not used to accept user deposits, [but rather] . . . to facilitate user purchases” of the bourse’s in-house dollar-backed crypto, BUSD. 

Former U.S. regulators took a dim view of those arguments, noting that, during the period in question, Binance’s website described such dollar transfers as “deposits” to be “credited” to customer trading accounts in BUSD, with those funds available for withdrawal as fiat currency. “These representations created the expectation that clients’ funds would be safeguarded in the same way as traditional cash deposits,” one anonymous regulatory alum added to Reuters. 

Of course, “safeguard” is a relative term in crypto. CoinDesk reports today that defunct digital exchange FTX may soon get another lease on life, as expense filings show that new CEO John Ray III spent nearly seven hours of April work time on items related to “2.0” (likely meaning FTX 2.0), “restart” or “reboot,” among other terms potentially pointing to a sequel to Sam Bankman-Fried’s disgraced outfit.  Those hints follow some hopeful commentary regarding a restart, as Ray told the WSJ in January that “everything is on the table. If there is a path forward on that, then not only will we explore that, we’ll do it.” 

To that end, animal spirits die hard, multi-billion-dollar (alleged) frauds aside.  FTX’s in-house FTT token snapped higher in response to the CoinDesk dispatch, pushing its market value to $375 million this morning from $315 million in the wee hours on Monday. 

Stocks came under pressure with the S&P 500 slipping 1.1% for its worst showing in an even three weeks, though Treasurys finally caught a bid as the two-year yield fell three basis points to 4.26%, bolstered by a strong auction this afternoon. WTI crude rallied above $73 a barrel, gold stayed little changed at $1,977 an ounce and the VIX jumped above 18. 

- Philip Grant

There’s nothing artificial about his hype skills. Here’s Elon Musk expounding on Tesla’s virtues in a most contemporary fashion Tuesday (hat tip @TheTranscript):

Very few people, even in the AI community, do not [sic] appreciate just how much capability Tesla has in AI. It's by far the most advanced real-world AI. There's no one even close.

Tesla shares are up 46% this year but remain 32% below levels seen when Grant’s Interest Rate Observer had its bearish say on Sept. 30. 

In the words of screenwriter William Goldman, “nobody knows anything.” Investors have been thrown for a loop in attempting to divine the course of monetary policy, as evidenced by the helter-skelter path of interest rate futures. Markets currently anticipate 21% odds of a further 25-basis point increase to the current 5.08% funds rate at the June meeting; compared to 3% in early May and 31% on Thursday.

Spurring today’s reversal: dovish commentary from Fed chair Jerome Powell, who cited side effects from the central bank’s acute-yet-belated tightening from near zero in early 2022. “We’ve come a long way,” he said. “The stance of policy is restrictive, and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses.” 

Today’s remarks, fittingly delivered in a panel with uber-dovish, Nobel-prize winning predecessor Ben S. Bernanke, represent an evolution in the Fed head’s public messaging. Recall that Powell channeled Paul Volcker himself at his annual Jackson Hole address a mere nine months ago: 

The FOMC’s overarching focus right now is to bring inflation back down to our 2% goal. . . Without price stability, the economy does not work for anyone. . . The burdens of high inflation fall heaviest on those who are least able to bear them.

While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

One of Powell’s more prominent colleagues, meanwhile, carries a torch for the ultra-low borrowing costs of yore, despite the 5.5% annual increase in April core CPI. New York Fed President John Williams waded into hypotheticals in Washington D.C. this morning, informing listeners-in that the so-called r-star, or “the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable” remains near 1%, in-line with its pre-virus level and below the 2% to 3.5% range seen from 1985 to the financial crisis. “Importantly, there is no evidence that the era of very low natural rates of interest has ended,” Williams concluded. 

Imaginary interest rates aside, the Fed has company in its current predicament, as policymakers at the Bank of England and European Central Bank likewise contend with the consequences of their failure to identify bourgeoning inflationary pressures and throttle back on Covid-era stimulus showers in a timely manner.  

Stephen King, senior economic advisor to HSBC, argues in the Financial Times today that monetary mandarins’ overconfidence in their own ability to shape public expectations surrounding inflation backfires when reality doesn’t comport. As price pressures mount and persist contrary to policymaker messaging, the citizenry instead comes to believe that “the central bank is talking nonsense,” spurring aggressive rate hikes in a bid to maintain institutional credibility. 

To that end, a new report from the ECB today shines a light on off-the-record musings from central bankers to the press, discovering that 368 news stories over the 20 years through 2021 were based on such leaks. “Our findings suggest that market participants would be well advised to ignore such unattributed communications in most cases,” the authors conclude.

Attributed ones, too, perhaps. 

Stocks finished just south of unchanged to wrap up another banner week for the bulls with 1.5% and 3.6% gains for the S&P 500 and Nasdaq 100, respectively.  Treasurys traded weaker once more, with the policy-sensitive two-year yield rising to 4.28% from 4.24% yesterday (not 4.02% as typo’d here) and the long bond likewise rising four basis points to 3.95%. Gold bounced to $1,978 an ounce, WTI crude remained near $72 a barrel and the VIX edged higher towards 17. 

- Philip Grant

Pfizer, Inc. has launched a mammoth $31 billion, eight-part offering of senior unsecured notes to help fund the purchase of biotech firm Seagen, Inc. Today’s sale, the fourth-largest corporate bond sale in history, attracted a cool $85 billion order book for the provisionally single-A-plus-rated obligations, Bloomberg relays, which feature maturity ranges of between two and 40 years. 

Thanks to that brisk demand, each of the eight tranches projects to price some 20 basis points inside of initial price talk as of this afternoon, with the 40-year maturity set to carry a 165-basis point pickup to Treasurys. For context, the single-A-rated portion of the Bloomberg U.S. Corporate Bond Index sports a 126-basis point option-adjusted spread. 

Good things come to those who wait (and wait). Japan’s Topix Index logged a 0.6% gain Tuesday, pushing year-to-date gains to 13.9% in local currency terms and leaving that gauge at a 33-year high. The market cap-weighted Topix remains 26% below its blow-off peak logged in the late stages of 1989 in nominal terms, with a 19% return over that stretch after accounting for reinvested dividends.   

An influx of overseas capital colors today’s market milestone. Citing data from the Tokyo Stock Exchange (TSE), the Financial Times relays that net inflows from non-Japanese investors reached nearly $30 billion over the past five weeks, among the largest such outlays over the past 10 years. 

That’s not to say that foreigners are suddenly enamored of the Land of the Rising Sun: Bank of America’s latest Global Fund Manager Survey, undertaken in early May and released this morning, shows that respondents were a net 11 percentage points underweight Japan on average, down slightly from minus 10 percentage points in the prior reading. While the Topix has been spinning its wheels for more than three decades following the titanic 1980s equity and real estate bubble, the S&P 500 has returned more than 2,000% since the start of 1990. 

Might better days finally be ahead? “We have entered a two- to three-year bull market period for Japan now,” Macquarie deputy head of Japan research Neil Newman told Bloomberg. “This has legs. Liquidity is good and with corporate earnings looking solid now, [Japan] will draw further attention.”

Structural factors also loom large, in the form of an institutional nudge for publicly traded firms to enact investor-friendly reforms. Last year, the Japan Exchange Group rolled out a reorganization of the Tokyo Stock Exchange, creating a “prime” category of the Topix earmarked for constituents who “center their business on constructive dialogue with global investors.” More recently, newly minted Japan Exchange Group head Hiromi Yamaji urged executives to focus on improving shareholder returns last month, while the TSE in January ordered member firms trading at less than book value to draft capital improvement plans to remedy that state of affairs.  

Sure enough, dividends and buybacks reached nearly ¥27 trillion ($200 billion) over the 12 months through March, data from Jefferies show, up from ¥19 trillion two years earlier.  “More has happened with this [project] in the last two years than in the [prior] 30,” Jeff Atherton, head of Japan equities at Man GLG, told the FT. Even so, nearly half of publicly traded Japanese firms still sport net cash on their balance sheet, the brokerage finds, compared to 22% in the U.S.

Warren Buffett’s imprimatur further underscores Japan’s investment story.  Berkshire Hathaway’s boss visited the nation last month, revealing that his firm has upsized its stakes in Japan’s five largest trading houses, or wide-ranging conglomerates, and may further ratchet up its position in the coming months. 

Preceding the Oracle of Omaha by some six months, Grant’s Interest Rate Observer levied a bullish verdict on trading house Mitsubishi Corp. in the Feb. 7, 2020 issue (shares are since up 73% in dollar terms, compared to 31% for the S&P 500) also flagging the publicly traded Nippon Active Value Fund as a way to potentially capitalize on nascent investor activism, with that vehicle since returning 48% in dollar terms. “You have the beginning of something that really hasn’t existed before, and that is a market for corporate control in the Japanese context,” Gifford Combs, a member of Nippon Active Value Fund’s investment adviser, relayed to Grant’s in spring 2021.  

Relatively undemanding valuations – witness the sub-14 times price-to-forward earnings multiple for the Topix, compared to a bit more than 18 times stateside – complement the bull case. “You can find value in almost any sector in Japan,” Kevin Durkin, founder and chief investment officer of Ballina Capital LLC, reported to Grant’s last month.  See the issue of Grant’s Interest Rate Observer dated April 21 for a profile of the investor, featuring a trio of long ideas to play a further capital markets revival in the world’s third-largest economy. 

Red was in fashion today:  Treasury yields rose across the board with the long bond settling at 3.87% for its most elevated finish since the day before Silicon Valley collapsed in early March.  Stocks absorbed a late selloff as the S&P 500 settled some 0.7% lower, gold fell to $1,993 an ounce and WTI crude slipped below $71 a barrel. For its part, the VIX jumped 5% to 18. 

- Philip Grant

Omaha is so last week. From the New York Times:

The city of Kyle, Texas, is calling all Kyles, from anywhere in the world, to join their similarly named brethren at a fair this month. The assignment: Snatch the world record for the largest meeting of people with the same first name, set in 2017, when 2,325 men called Ivan gathered in a town in Bosnia.

The gathering of Kyles, from May 19 to 21, will be the city’s first ever Kyle Fair. . . An 11,000-strong community of Kyles on Reddit, known as a “place for Kyles and Kyle enthusiasts,” shared links to the Texas event, seeking carpools and spreading the word.

“My fellow brothers, it is now our time!” a Kyle wrote.

Talk about haves- and have-nots. Large cap technology firms continue to carry the load for the bull crowd, with the S&P 500 Information Technology subsector up 21% this year. Driving that strength: the NYSE’s FANG+ Index, an equal-weighted ten-stock gauge of mainstays like Apple, Amazon, Tesla and Nvidia, has logged an eye-popping 45% advance thus far in 2023, pushing the group’s collective market capitalization above $9 trillion from $6.5 trillion at year-end. 

That $2.5 trillion in additional market cap virtually matches gains for the broad S&P 500 – which is up 8% in the year-to-date – while an equally weighted version of the broad index remains stuck almost unchanged. Let’s review some of the factors driving that striking dynamic.

The budding artificial intelligence boom, spurred by the splashy debut of Microsoft-backed ChatGPT, looms large: witness the 96% upside jolt for Nvidia shares since January. Strategists at Société Générale conclude today that “without the AI-popular stocks, the S&P 500 would be down 2% this year.”  That dynamic is certainly not lost on the rest of Silicon Valley, as Alphabet, Meta Platforms, Microsoft, Amazon and Apple collectively mentioned “AI” 190 times on their first quarter conference calls, Statista analyst Felix Richter relayed yesterday, up from 36 a year ago. 

Persistent stock purchases likewise play their role. Apple, Microsoft, Alphabet and Meta have collectively spent $50 billion on buybacks this year through Wednesday according to Bloomberg.

Though that’s 10% below last year’s pace, the S&P 500 at large has seen a 24% decrease in repurchase activity, pushing that quartet’s share of total buybacks to 27% from 24% at this stage in 2022.  “These companies still print lots and lots of cash and they’ve got to find somewhere to deploy that cash,” noted Scott Landner, chief investment officer at Horizon Investments. 

Financial nip-and-tucks have likewise served as a tailwind. As The Wall Street Journal documented last week, tech firms including Alphabet, Meta, Microsoft and Amazon are burnishing their income statements by extending the useful life of servers, network equipment and other key assets. That accounting maneuver serves to decrease depreciation expense by spreading the cost over a longer period: servers’ average useful life now stands at about 5.6 years, research firm Omdia finds, up from 5.2 years in 2021 and 2022. 

In the case of Alphabet, that change served to add $770 million of net income over the three months through March, equivalent to 5.1% of its bottom line. In February Google’s parent company projected a $3.4 billion drop in depreciation expense this year relative to 2022. 

Some observers are skeptical over the lasting utility of those tweaks: “You’re going to see a boost in net income in current quarters that isn’t a sustainable growth mechanism,” Kris Bennatti, chief executive of investment research firm Bedrock AI, told the WSJ. “Investors and the rest of the market will just have to be careful to know what’s driving those profitability figures,” added Julie Bhusal Sharma, technology equity analyst at Morningstar.

Meanwhile, earnings prospects are on the wane, as Wall Street now expects the S&P 500 technology sector to log a 7.3% annual decline in profits for the second quarter according to data from Bloomberg, compared to a negative 6.3% guesstimate as of March 31. Likewise, the sell-side now pencils in a 1.5% year-over-year decline in third quarter earnings per share, down from a positive 0.6% figure six weeks ago.  

Though such downshifts in earnings expectations are not unusual, rich valuations leave the bulls with limited room for error: the S&P 500 technology group now trades at more than 26 times forward earnings estimates, compared to a 10-year average valuation of roughly 20 times, while the NYSE FANG+ gauge commands a 35-times forward earnings multiple, up from just under 20 last fall. “It’s just too rich for my blood,” comments Bloomberg analyst Michael Casper on the sector. “The fundamental picture still isn’t where you want it to be.” 

Stocks again finished little changed on the S&P 500 as the broad index finished a forgettable week 0.3% lower, while Treasurys came for sale with the two-year yield jumping nine basis points to 3.98% and the long bond rising to 3.78% from 3.73% yesterday. WTI crude fell to $70 per barrel, gold edged lower to $2,016 an ounce and the VIX crept above 17. 

- Philip Grant

The results are (mostly) in.  With 91% of domestic investment-grade issuers having reported first quarter figures, earnings per share and revenue topped consensus estimates by 5.7% and 2.3% on average, respectively, well above the pre-virus baselines of 3.7% and 0.7%, strategists at Bank of America tabulate.

An apples-to-apples comparison lends itself to a less sunny conclusion, however. Excluding the particularly volatile energy and financials categories, earnings in the first quarter slumped 8.3% year-over-year on a nominal basis, while revenues rose 3.3%, well below measured inflation. That follows a 10.9% annual decline in fourth quarter earnings among the ex-energy and financials contingent. 

It’s voter appreciation season by the Bosporus. As hotly contested Turkish elections loom on Sunday, President Recep Tayyip Erdogan spares no expense in his efforts to keep the big chair, unveiling a 45% pay hike for some 700,000 government employees yesterday, while vowing that he will “not let anyone be crushed by inflation.”  

That outlay follows an April 23 announcement that households would enjoy free natural gas for a month, complementing other recent gifts from the public purse including subsidized electricity prices, increased pensions for the public sector and free internet for students. Various polls show Erdogan locked in a tight race with opposition coalition head Kemal Kiliçdaroglu, with a May 28 runoff in store if neither candidate manages to garner 50% of the vote.

Relatively good news on the inflation front colors the strongman’s generosity, as measured inflation fell to 43.7% year-over-year last month, down from 50.5% in March and a cool 85% in October. Then again, food prices jumped 54% over the 12 months through April, while the lira remains stuck near record lows against the dollar, having lost 65% of its exchange value since early 2021. 

By way of response, Erdogan obliged the Central Bank of the Republic of Turkey to cut interest rates to 8.5% from 14% last year in hopes of bringing down inflation, removing a trio of governors since 2019 who were not inclined to play ball with his counterintuitive easy-money strategy.  “We used to be able to buy three to four bags of groceries for 150 to 200 lira,” Istanbul-based barber Hakim Ekinci laments to Reuters. “Now we can barely fill two bags.” 

What’s more, Turkish authorities have spent no small sum of financial firepower to prop up the faltering currency. The CBRT has burned through nearly $177 billion via backdoor interventions since December 2021 – equivalent to nearly 20% of nominal output last year – Bloomberg  economics calculated yesterday, with April’s tally alone topping $30 billion as the imminent elections ratchet up urgency among the political class. Net of swaps (i.e., short-term borrowings from local banks), central bank reserves slumped a further $10.5 billion last month to reach negative $68.4 billion. 

Balance of payment shortfalls likewise continue to mount. Turkey’s current account deficit footed to 5.5% of GDP across 2022, up from a 0.9% such gap in the prior year, leaving the external financing hole (which also includes debt maturities) at upwards of $230 billion, or about one-quarter of nominal output. “Another year with current policies would be impossible,” Caglar Gogus, CEO of Turkish conglomerate Dogan Holdings, told the Dunya newspaper. 

One thing’s for sure, foreign financiers aren’t sticking around to find out. Non-Turks now hold just 0.68% of domestic sovereign debt per the finance ministry, down from nearly 20% in 2017, while net external assets now stand at minus $10 billion after accounting for swaps according to Goldman Sachs, down from positive $17 billion at the start of 2023. 

Regardless of the ultimate election outcome, might an imminent course correction spur better days ahead? “If [Erdogan] was to change his view and adopt a more conventional policy, it will be very well received,” a senior emerging markets banker told the Financial Times Monday, hopefully musing that, in the event the incumbent emerges victorious, he may “realize now is the time he can pivot and re-attract foreign funds.” 

Kieran Curtis, head of EM local currency debt at U.K.-based assert manager Abrdn, added that “to the market, it doesn’t matter who is doing the policy. It’s a matter of [Turkey] doing the policy.” Tellingly, perhaps, economists now collectively project that the benchmark one-week repo rate will jump back to 23% by year end, data collected by Bloomberg show, nearly triple the current level.

If something can’t go on forever, it won’t – probably. 

Stocks finished higher by one-half percent on the S&P 500 in see-saw trading following a slightly softer than expected reading of April headline CPI, while Treasurys caught a bull-steepening bid with two-year yields diving 11 basis points to 3.9% and the long bond settling at 3.8% from 3.85% Tuesday.  Gold edged lower to $2,038 an ounce, WTI crude slipped below $73 a barrel and the VIX slumped below 16.5. 

- Philip Grant

Bills lose again. The U.S. Treasury sold three-month obligations at 5.14% this afternoon, up from an average 4.95% over the previous six auctions and marking the highest interest rate for that tenor in 22 years. That follows Thursday’s eye-catching issuance of $50 billion in four-week bills at a hefty 5.84%, the highest on record going back to the turn of the century and sharply above the 3.83% logged in the prior sale on April 26, after Treasury Secretary Janet Yellen warned that the government is on pace to breach the debt ceiling by June 1 if lawmakers fail to reach an agreement on raising the cap. 

“The optics are not great for Treasury debt when you see gap moves in auction yields,” Subadra Rajappa, head of U.S. interest rate strategy at Société Générale, told Bloomberg.  One thing’s for sure, a visual representation of short-term borrowing costs since the turn of the century is worth at least 1,000 words:

Three-month U.S. Treasury bill auction yields. Source: The Bloomberg

A Sunday night rug-pull:  The world’s largest crypto exchange closed the exit doors in the wee hours, as Binance twice suspended bitcoin withdrawals overnight, citing a “a congestion issue” stemming from “the large volume of pending transactions.” Binance relayed in a tweet that it will increase fees for pending transactions to encourage miners to process them, adding that “rest assured, [customer] funds are SAFU,” meaning safe under industry jargon. 

A barrage of trading volumes indeed spurred that service interruption, as 24-hour turnover on the digital bourse reached $6.9 billion as of this morning per Coinmarketcap.com, more than eight times the closest competitor.  As CNBC points out, the episode underscores structural limitations within the bitcoin network: namely, transactions get processed at a rate of seven to 10 per second, “making it unviable as a major global payment platform.” For context, Visa handles roughly 24,000 transactions per second. 

While Binance labors to keep its operations running smoothly, an industry peer attempts to beat the heat from Washington D.C. Coinbase CEO Brian Armstrong took to CNBC this morning to protest Securities and Exchange Commission chair Gary Gensler’s assertions that Coinbase improperly sells unregistered securities to investors, arguing that the regulator is out of step with fellow financial policymakers. “The SEC is a bit of an outlier here. . .I don’t think [Gensler] is necessarily trying to regulate the industry as much as curtail it.”  Recall that in March the SEC issued Coinbase a Wells Notice, i.e., a warning that enforcement action is forthcoming. Upwards of 35% of Coinbase revenues could be at risk depending on the government’s course of action, analysts at Jefferies guesstimate. 

Accordingly, Coinbase looks overseas to drive growth.  Continuing his media tour at the Dubai Fintech Summit, Armstrong told Bloomberg Television that “we are looking for a home to set up an international hub that could serve the long tail of countries in the world,” adding that the United Arab Emirates could fit the bill: “I would say that the UAE’s [regulatory] approach has been more forward thinking than the U.S.’”  

Meanwhile, this year’s rebound in crypto prices has not been much help for Coinbase. Trading volumes on the platform registered at just $26.8 billion over the first 25 days of April, the Financial Times reported, citing analytics firm CCDatal, down from $49 billion during the previous month and nearly $120 billion in January of 2022. “More capital is needed in the crypto economy,” Armstrong added. 

Though digital asset punters are losing interest in transacting on the San Francisco-based exchange, that’s not to say that speculative fervor has abated. Citing data from Coingecko, CoinDesk relays that so-called meme coins logged $2.3 billion in trading volumes last week, up nearly 500% from the prior seven-day stretch and the highest such reading since the freewheeling days of spring 2021.  Helping drive that explosion: a parabolic rally in three-week-old, frog-themed token pepecoin, which vaulted from virtually zero to a roughly $1.5 billion market value on Friday before retrenching below $700 million as of this afternoon. 

Might those animal spirits signal that durable bull market conditions have taken shape? Not so fast, CoinDesk cautions: “historically, speculative mania in non-serious cryptocurrencies have presaged major market tops or bearish reversals in bitcoin.” 

Treasurys came under pressure in tandem with a flood of investment-grade corporate bond issuance, as two- and 30-year yields each rose eight basis points to 4% and 3.76%, respectively, while stocks floated through a quiet session with the S&P 500 settling unchanged and the Nasdaq 100 slightly higher. Gold rebounded a bit to $2,028 an ounce, WTI crude snapped back towards $73 per barrel and the VIX slipped below 17.

- Philip Grant

A Wednesday headline from Bloomberg:

Twitter Said to Make Second Interest Payment on Musk Buyout Debt

And an excerpt from Bloomberg Businessweek:

Small businesses are accusing Twitter Inc. of stiffing them, even as company owner Elon Musk, who has a personal net worth of more than $150 billion, is saying the social network’s finances are finally on the way to recovery.

Twitter is late on more than $10 million of payments to an array of companies that provide services from public relations advice to branded merchandise, according to claims in court filings. In April four vendors filed a joint lawsuit for breach of contract over the company’s allegedly unpaid bills and are seeking class action status. Since December at least 10 vendors
have sued the company on similar grounds. 

Whistling past the junk yard? Calm conditions persist in the high-yield bond market, as option-adjusted spreads on ICE BofA’s benchmark gauge settled yesterday at 479 basis points over Treasurys. That’s up from 422 basis points in February before banking trouble came to the fore, but well inside the 580-basis point pickup logged last July.  

Meanwhile, the primary market continues to show signs of life, as the banks arranging Blackstone’s majority purchase of Emerson Electric Co.’s climate technology division sold $2.25 billion of 6.5-year, double-B-minus-rated senior secured notes today at 6 5/8%, inside initial price talk of 6 3/4%.  High-yield issuance reached nearly $60 billion in the first four months of the year, compared to $102 billion during all of 2022. 

The relative vigor seen in the speculative-grade realm is noteworthy, considering the abundant evidence of mounting stress in the corporate sector. U.S. bankruptcies totaled 54 last month according to S&P Global, leaving the year-to-date figure at 236. That’s more than double the 109 logged in the first four months of 2022 and the highest such tally since the Great Recession’s aftermath in 2010.  Weakening credit quality is likewise apparent, with global bond downgrades totaling 77 in March by the rating agency’s count, the largest single month sum since June 2020. 

Accordingly, national thought leaders are getting nervous. The odds of recession within the next 12 months stand at 99%, the Conference Board warned on April 12, adding that “economic weakness will intensify and spread more widely throughout the US economy over the coming months.”  That perceived risk stood at zero as recently as the end of last year.  

Mr. Market concurs, as interest rate futures price in a 25-basis point cut to the Fed Funds rate in July, anticipating that the central bank will be soon forced into easing mode after raising rates above 5% yesterday to combat un-transitory inflation. Investors likewise ponder the odds of an even more abrupt 180, with swaps now pricing roughly 25% odds of a cut next month. 

On form, high-yield creditors can expect some rough road ahead if economic retrenchment is in the cards. The March 2020 crucible saw spreads vault to 877 basis points, while previous recessions in 2008 and 2002 included 1,977 and 1,059 basis point premiums, respectively. Of course, each of those prior peaks towers over today’s sub-500 basis point figure.

Then, too, a two-quarter contraction in output is no prerequisite for trouble in the roughly $1.5 trillion asset class. Witness the 775-basis point spread in the February 2016 energy meltdown, 841 basis point premium in October 2011 during the U.S. sovereign downgrade cum-E.U. sovereign credit crisis, or 652 basis point pickup in fall 1998 in the wake of Long Term Capital Management’s demise.  

“There’s absolutely no evidence of a recession risk premium” in junk, Goldman Sachs chief credit strategist Lotfi Karoui told The Wall Street Journal last Friday, going on to note that the asset class is often slow to adapt to imminent economic contractions. 

On that score, there’s no time like the present.  Noting that the Conference Board’s gauge of leading indicators slumped by 4.5% over the six months through March, a rate of deterioration seen during each of the past four downturns dating back to 1990 (and without any false positives over that stretch), Société Générale strategist Albert Edwards concludes that the data point “tells us a recession is a done deal, not tomorrow, not next week, but today.” 

Stocks chopped lower to the tune of 0.7% on the S&P 500 after yesterday’s late selloff, leaving the broad average 1.6% in the red this week so far. Treasurys rallied at the short end with two-year yields settling at 3.75% from 3.89% a day ago, though the long bond edged higher by three basis points to 3.73% as the curve continues to un-invert (two-year yields topped the 30-year by nearly a full percentage point on March 10).  Gold ripped again to $2,059 an ounce, WTI crude held below $69 a barrel and the VIX popped above 20. 

- Philip Grant