Helping Hand
Here’s a Tweet this afternoon from Changpeng Zhao,
Here’s a Tweet this afternoon from Changpeng Zhao, founder and CEO of leading crypto exchange Binance, putting a philosophical spin on the asset class’s 65%, 11-month drawdown:
It's not how much crypto you have; it's how many people you helped.
Not to mention, he might have added, the friends we made along the way.  Speaking of which, recall that in June, Reuters reported that “hackers, fraudsters and drug traffickers,” including groups under U.S. sanctions for assisting North Korea’s nuclear weapons program, illegally laundered at least $2.35 billion through Binance over the previous five years.
Weapons of Mass Distraction
The Reddit crowd swims into the deep end of the pool.
The Reddit crowd swims into the deep end of the pool. Though last year’s meme stonk frenzy has largely receded into the background as global asset prices turned south, the retail ranks have found a new plaything in the form of short-dated options. Citing data from derivatives analytics firm SpotGamma, The Wall Street Journal relays that contracts expiring within one week now account for half of total U.S. options volume, up from 45% last year and one-third in 2019. 
“Speculators love them,” Steve Sosnick, chief strategist at Interactive Brokers, told the Journal. “If you’re speculating, you don’t necessarily want to think about the move in three months – you want to think about the move tomorrow.”   
Beyond trying to guess the market’s next gyration, some so-called Apes have begun dabbling in the financial dark arts. Data from digital brokerage eToro show that newly opened short positions on U.S. equities tracked 61% ahead of last year’s pace over the first eight months of 2022. 
Living on a Thin Line
It's alive!
It’s alive! Junk bonds were an active participant in the powerful rally to begin the fourth quarter, as the Bloomberg U.S. High Yield Index logged a 1.31% price gain yesterday, its best one-day showing since the spring. That snap-back follows a minus 4% total return in the three months through Sept. 30 to mark that gauge’s third consecutive quarterly loss, the longest such skid since March 1990.
Perhaps emboldened by that reversal, investors poured a net $979 million into the iShares iBoxx $ High Yield Corporate Bond ETF (ticker: HYG) and SPDR Bloomberg High Yield Bond ETF (ticker: JNK) over the past two days alone. That tidy sum is equivalent to more than 2% of the benchmark ETFs combined assets under management.   
While this week’s action represents a welcome respite, speculative-grade borrowers will need more where that came from, as the primary markets continue to fizzle.  Following the weakest September issuance slate since 2011, domestic high-yield supply stands (or crouches) at just $87 billion in the year-to-date, a pittance compared to $458 billion in full year 2021 and $432 billion across 2020. At least ten global bond deals were delayed or shelved entirely in September, Bloomberg relays, compared to one such scuttled transaction in the prior month. Meanwhile, pronounced monetary tightening has helped push the ICE BofA High Yield Index’s effective yield to 9.02% as of yesterday, more than double its year-end 2021 level. 
That dynamic seems ripe for mischief. Analysts at Moody’s Investors Service predicted Monday that “evaporating issuance will erode [corporate] liquidity conditions, igniting defaults.” The rating agency pencils in a 4.4% high-yield default rate over the 12 months through August 2023 in a baseline scenario, up from less than 2% over the past year and a long-term average of 3.7%. Under a “moderately pessimistic” scenario, that tally could jump to 7.8%, Moody’s predicts. 
Indeed, the preconditions for a financial accident are taking shape, one bulge bracket firm believes. Noting that their in-house credit stress indicator, which measures market conditions including issuance, leverage, frequency of distress and volatility, has surpassed its June peak to stand at the precipice of a “critical zone,” Bank of America strategists Oleg Melentyev and Eric Yu warned Friday that “credit market dysfunction starts beyond this point.” 
Recap Oct. 5
An OPEC production cut followed by deeper than expected drawdown in domestic oil inventories ignited more strength in the energy patch, as WTI crude climbed back above $88 a barrel for its best finish in three weeks, while stocks maintained an upbeat tone by erasing near 2% intraday losses on the S&P 500 to finish nearly flat on the day.  Treasurys came for sale in bear steepening formation as the long bond rose eight basis points to 3.78%, gold pulled back only slightly at $1,726 per ounce and the VIX settled south of 29. 
- Philip Grant
The Daly Show
Hold your horses:
Hold your horses: Though the market has begun to price a slower pace of rate hikes in the coming quarters (see yesterday’s ADG for more), San Francisco Fed President Mary Daly pushed back on that notion in an interview today with CNN:
Inflation hasn’t really gotten into the psychology of Americans, [but keeping it that way] will require that we follow through on our commitments to bring inflation down, which does mean further rate hikes and holding those restrictive policies in place until we are truly done with bringing inflation back to target.
Daly, who is not a voting member of the Federal Open Market Committee this year, went on to express optimism that the central bankers can tap the economic brakes without spurring undue side-effects:
I really see us being able to slow the economy, slow growth, slow the labor market. Yes, there will be an increase in unemployment, but I think the 4.5% range is the right range [compared to the 3.7% seen in August]. 
Considering the Fed governor’s past proclamations, that sanguine view of the labor market outlook may require a grain of salt. In March of 2021, Daly offered the following regarding inflation: “I’m in the camp that this is transitory, and also that a little inflation is a good thing for us.”  Indicating her “tolerance” for measured inflation of 2.4% to 2.6% per annum, Daly added that “we’re a long way from achieving” employment and price stability goals [the CPI grew 1.7% year-over-year in February of last year] “so it’s not really the right time to start talking about” withdrawing the virus-era stimulus shower. 
Meanwhile, one data point suggests the economy is undertaking a pivot of its own. According to today’s latest edition of the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey, unfilled U.S. jobs fell to 10.1 million in August from 11.2 million in the prior month.  Not only was August’s reading the weakest in over a year, but that 1.1 million sequential decline was unheard of prior to the pandemic lockdowns, more than doubling the single worst month of the 2008-era crucible. “The ratio of job vacancies to unemployed persons fell sharply in August [to 1.7 from 2 in July],” Bloomberg economist Eliza Winger writes. “Such a large drop usually implies a recession.” 
Dollar Bill Blues
Wall Street wields the red pen.
Wall Street wields the red pen. The sell-side has been busy ahead of next week’s start to the third quarter earnings season, trimming earnings per share estimates across the S&P 500 to $55.51 as of Sept. 29 from $59.44 on June 30, FactSet analyst John Butters relayed Friday. That downward revision is nearly triple the average such inter-quarterly tweak in quarterly EPS during the past five years (a period that included a 37% downside revision in the spring of 2020) and comes on the heels of six quarterly estimate increases in the last eight tries. Overall, annual earnings growth is now expected to reach 2.9% across the broad average, which would be the slowest such pace since fall 2020. 
Likewise, S&P 500 net profits as a percentage of revenue will register at 12.2%, analysts reckon, unchanged from the prior quarter and down from 12.9% a year ago, but comfortably above the five-year average of 11.3%, let alone the post-1993 mean of 8.3%.  
Persistent strength in the buck relative to its global peers plays no small role in that retrenchment, as the U.S. Dollar Index has logged a 15% advance in the year-to-date and remains near its most elevated level since the aftermath of the dot.com bubble in 2002. “These things happen with a lag, and the real aggressive up move in the dollar happened in the last few months,” Huw Roberts, head of analytics at Quant Insight, added to Bloomberg. “So, it’s probably now beginning to have a material impact on company bottom lines.” 
That dynamic presents a particular problem for the lynchpin technology sector, which generates 58% of its revenues outside the U.S., FactSet finds. “If we think about the things that have gone wrong for tech this year, [the dollar] is just the icing on the cake,” Denny Fish, portfolio manager at Janus Henderson, laments to The Wall Street Journal. “We’ve had inflation, rising rates, everyone expecting the economy to slow materially and now we have this currency headwind.” 
Yet this year’s bear market hasn’t exactly ushered in wholesale migration from the darlings of the prior cycle. Thus, the S&P 500’s Information Technology sector continues to command a 26.6% share of the market cap-weighted index. That’s down only slightly from the 29.2% on Dec. 31 as the virus-era bull stampede reached its climax, and well above the 14.3% foothold as of year-end 2002. Today’s share could easily be much higher, as tech-adjacent firms like Amazon.com and Tesla, which themselves garner 3.3% and 2.1% respective weightings in the S&P, reside in the consumer discretionary realm. 
Recap Oct. 4
The fourth quarter is off to a snappy start as stocks ripped another 3% on the S&P 500 to leave that broad index sporting its best two-day rally since the depths of April 2020, while Treasurys also finished a bit stronger with the two- and 30-year yields slipping two and three basis points, respectively, to 4.1% and 3.7%. WTI crude vaulted above $86 a barren and gold rallied to $1,737 an ounce, though the VIX pulled back just a single point to 29. 
- Philip Grant
A Dog's Life
Easy money for international harmony:
Easy money for international harmony: This afternoon, the United Nations issued a statement criticizing the Federal Reserve and other central banks for their policy tightening campaigns, arguing that the Third World is ill prepared for the consequences of benchmark interest rates well above zero across the West. “There’s still time to step back from the edge of recession,” Rebecca Grynspan, secretary general of the U.N.’s Conference on Trade and Development, said in a statement. “We have the tools to calm inflation and support all vulnerable groups. But the current course of action is hurting the most vulnerable, especially in developing countries.” 
Data from today suggest that the diplomat bureaucrats may have a point. JPMorgan’s in-house global manufacturing index decelerated for a fourth straight month in September, to 49.8, the gauge’s first reading south of the 50 mark delineating expansion from contraction since June 2020.  Similarly, the Institute for Supply Management’s September PMI slumped to 50.9, the weakest reading since May of that plague year, while the new orders component languished at 47.1, territory that had only been breached on the downside four times over the past decade, including three straight readings during the spring of 2020. 
Interest rate futures are beginning to discount the potential of a turning tide, now pricing in a 4.14% funds rate by the end of next year, down from 4.5% one week ago. 
Meanwhile, Bianco Research notes that the 10-year note wrapped up Friday’s trading with its ninth consecutive weekly price decline, settling at 3.83% yield compared to 2.67% at the end of July.  That’s the longest such losing streak such streak in 28 years and only the fourth such instance of uninterrupted losses since September 1981, a month that marked the climax of a 35-year bear market in bonds.  
Might pockets of relative value finally be presenting themselves in the Treasury complex? See the analysis “Biography of a dog” in the current edition of Grant’s Interest Rate Observer dated Sept. 30 for more. 
Party Favors
When the music’s over, turn out the lights.
When the music’s over, turn out the lights. The ongoing “crypto winter” has taken a telling toll on the nascent asset class, in the form of surging ranks of forsaken tokens. Citing crypto data firm Nomics, Bloomberg relays today that some 12,100 separate digital ducats have gone at least one month without registering a single trade so far this year. That’s more than triple last year’s tally of such abandoned contraptions, and compares to 766 so-called zombie tokens in 2019 and only four across 2017.  
“During the bull market of 2021, there was plenty of money, attention and liquidity for new and existing projects,” CryptoCompare research analyst Jacob Joseph commented to Bloomberg. “However, in the ongoing bear market, even good projects with utility will struggle to sustain their operations as they lose access to capital and funding.” 
On that score, fortune favors the bold. The Financial Times reports that Alex Mashinsky, founder of bankrupt Celsius Networks, yanked $10 million from the stricken crypto lender in May, weeks before the firm halted withdrawals ahead of its July bankruptcy filing. Celsius, which advertised annual interest rates of more than 17% on some cryptos and was accused by Vermont state regulators of “offering yields to existing investors [that] were probably being paid with the assets of new investors,” sported as much as $25 billion in crypto assets last year and was valued at $3 billion in a fall 2021 funding round but faced a $1.2 billion hole in its balance sheet as of this summer. Though the Vermont watchdog concluded that Celsius was insolvent by the middle of May, the company declared days before halting withdrawals that the business was operating “full speed ahead.” 
“In mid to late May 2022, Mr. Mashinsky withdrew a percentage of cryptocurrency in his account, much of which was used to pay state and federal taxes,” a Celsius spokesperson told the FT. “In the nine months leading up to that withdrawal, he consistently deposited cryptocurrency in amounts that totaled what he withdrew in May. He continues to be committed to working with and uniting the community around a recovery plan that will maximize coin and liquidity for all.” 
Recap Oct. 3
Happy days are here again, as investors greeted the fourth quarter by sending stocks higher by 2.6% on the S&P 500, the broad index’s best one-day showing since July 27. Similar strength in the Treasury complex left the two-year note at 4.12% and the long bond at 3.73%, down ten and six basis points from Friday’s close, respectively, while gold jumped more than 2% to $1,709 an ounce and WTI crude advanced above $83 a barrel. The VIX retreated to 30, down 5% from the prior session. 
- Philip Grant
That's What Friends are For
A headline from the Financial Times today:
Paraguay calls for Taiwan to invest $1 billion to remain allies
Back to School
Auf wiedersehen, price stability.
Auf wiedersehen, price stability. Eurozone CPI rose by 10% from a year ago in September, data from Eurostat today show, topping the 9.7% consensus (the fifth straight hotter-than-expected reading) and eclipsing the prior common currency-era record high of 9.1% established last month. Spiraling energy prices were the primary culprit, with a measured 40.8% annual leap, though so-called core inflation likewise reached a record 4.8% year-over-year clip, up from 4.3% a month ago.  Prior to this year, that stripped-down figure hadn’t topped 2% since the early aughts. 
Expectations for continued outsize price pressures are increasingly entrenched, as the Organization for Economic Co-operation and Development ratcheted up its projected eurozone inflation rate for 2023 to 6.2%, up 160 basis points from the prior figure and north of the European Central Bank’s 5.5% guesstimate. ECB President Christine Lagarde acknowledged that uncomfortable trend in an address to parliament earlier this week: “The risks to the inflation outlook are primarily on the upside,” she said. “We expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”  
Concerning the tightening cycle’s ultimate trajectory, Lagarde added that “what we want to do is to arrive at the point where monetary policy is neither stimulating, nor [restrictive]. . . we are not there.” Some disagreement on that score is evident, as fellow Governing Council member Ignazio Visco said today that “rising inflation is now being accompanied by a sudden deterioration in the economic growth outlook. In this context, excessively rapid and pronounced rate hikes would end up increasing the odds of a recession.” 
Interest rate futures now pencil in a 1.5% deposit rate at the end of next month thanks to an expected 75 basis point hike at the Oct. 27 meeting, followed by a further 50 basis point increase in December. The policy rate was at minus 50 basis points as recently as July, concluding an eight-year sojourn south of the zero percent border. 
Yet as Frankfurt responds to the epic inflationary gales, the monetary mandarins continue to carry the torch for the so-called unconventional policies that predominated during the recent cycle. A newly released ECB working paper examining the effects of low and negative nominal interest rates on consumer savings habits finds the following:  
Reductions in nominal rates to very low levels may potentially give rise to upward pressure on consumer savings, as households strive to compensate for the associated decline in nominal interest income. 
Indeed, the idea that lower rates require more capital to generate the same level of income is an intuitive one – see the analysis “Euthanasia of the dons” in the Sept. 18, 2020 edition of Grant’s Interest Rate
Observer for more on that dynamic, in the context of the now-stricken U.K. pension system. But rather than suggesting that the imposition of bottom-scraping borrowing costs in the name of goosing economic activity is a futile, or even counterproductive exercise, the observed relationship between low rates and increased savings presents a public relations opportunity, the authors write:
The finding. . . suggests a need to emphasize more the benefits of lower rates for future household incomes in central bank communications.
Of course, the Ph.D. economists might need to speak more slowly and distinctly in their efforts to enlighten the thick-headed masses:
The significance of the reversal in the response of savings to interest rates appear to be predominantly driven by older consumers and consumers with less educational attainment who may have lower levels of overall financial literacy. 
For this reason, public policies aimed at enhancing levels of financial literacy, knowledge about inflation as well as the reasons behind low and negative nominal rate policies may be particularly important in enhancing policy effectiveness in a low interest rate environment.
Crack open those economics textbooks, citizen. 
Recap Sept. 30
It was a fitting end to another miserable quarter, as a late collapse left the S&P 500 nursing a 1.5% loss, as the broad average has now given up 25% this year and endured three straight quarterly declines for the first time since the financial crisis. Appropriately, bonds provided no relief, as yields rose across the Treasury complex to leave the two-year at 4.22% and the long bond at 3.79%. WTI crude slipped below $80 a barrel, gold managed to edge higher at $1,670 per ounce and the VIX retreated to 31.5. 
- Philip Grant
Look Who's Talking Too
“The pound is blowing up,”
“The pound is blowing up,” Turkish President Recep Erdogan observed during a television interview today, referring to the outsized currency weakness faced by Great Britain in the wake its incoming government’s fiscal stimulus proposal.  
Though his own nation is wracked with a measured 80% annual rate of inflation and a currency that has lost 50% of its value against the dollar over the past year, the undeterred statesman laid out his plan of attack: “The interest rate has been lowered to 12%,” he observed, referring to last week’s 100 basis point rate cut. “From now on there is no going up, it will fall further. That will also reduce inflation.” 
Avian Flew
The epitome of the cycle battens down the hatches.
The epitome of the cycle battens down the hatches. Layoffs are underway at the Vision Fund, Bloomberg reports today, with SoftBank Group Corp.’s in-house venture capital behemoth set to part ways with about 150 employees, representing some 30% of total headcount.  Those cuts, reportedly upsized from an initially planned 20% culling, follow SoftBank founder and CEO Masayoshi Son’s August vow to slash costs in the wake of a bone-crunching $38.5 billion loss over the six months through June.  It’s not just the rank-and-file heading to the exits, as the company announced the departure of Rajeev Misra, who helmed the Vision Fund since its 2017 launch, in July. 
“Right-sizing” isn’t the only defensive maneuver on the corporate agenda. Last month, Son announced that SoftBank will settle contracts tied to the company’s massive stake in Alibaba by delivering shares rather than cash, a move that will replenish corporate coffers by $34 billion while reducing Softbank’s position in the Chinese e-commerce giant to 15% from the previous 24% stake. That decision represents “a landmark shift,” analysts at CreditSights wrote last month, bolstering SoftBank’s balance sheet but underscoring a “weakening” asset mix, “away from [highly liquid] Alibaba and towards private and/or riskier investments” within the Vision Fund.
SoftBank’s pivot is instructive. Global deal volume stands at just $640 billion in the nearly completed third quarter, data from Bloomberg show, a tally that stands to break the streak of eight quarters featuring at least $1 trillion in merger and acquisition activity. With the capital markets all but frozen to the tune of a 94% year-over-year decline in U.S. IPO volume and record 244 session stretch without the debut of a technology firm valued at $50 million or more, beneficiaries of the bygone boom must adapt to a new state of play.  
To wit, behold the travails of five-year-old electronic scooter firm Bird Global, Inc. (ticker: BRDS), which came public last year via a merger with blank check company Switchback II at a $2.3 billion valuation after raising $533 million across a trio of private funding rounds. As a Crunchbase dispatch from last Friday details, Bird founder Travis VanderZanden celebrated the imminent listing in summer 2021 by splurging on a $21.8 million Coral Gables, Fla. palace featuring nine bedrooms, 11 baths, infinity edge pool and private dock. 
With Bird shares off 96% from their November 2021 debut to leave the firm sporting a fun-sized $101 million market cap, VanderZanden’s 9% equity stake is now worth about half of his dwelling’s purchase price. Evidently undaunted by the turn in financial conditions, the executive put the mansion (which was previously owned by a Panamanian shell company according to Crunchbase) back on the market at a $39.9 million asking price, an 83% premium to last year’s figure. 
As for Bird, which identified an $800 billion total addressable market for its “micromobility” products in its pre-IPO marketing materials and projected $400 million in 2022 revenues, the outfit managed a $106 million top line over the first six months of the year, with net losses reaching a cool $300 million over that stretch. 
Recap Sept. 29
Stocks gave back yesterday’s gains and then some, with the S&P 500 sliding 2.1% to close within 8% of its pre-pandemic highs logged in February 2020.  Another punishing session for short-dated Treasurys saw two-year yields jump nine basis points to 4.16% (they were below 3% as recently as the beginning of August) while the long bond finished little changed at 3.71%. Gold held at $1,669 an ounce, WTI crude ticked below $82 per barrel and the VIX settled near 32 to remain near its highest levels of the year. 
- Philip Grant
Buzzword Bingo
For the people: Here’s a Tweet from Ark Invest announcing the creation of a retail-focused venture capital fund in tandem with investment platform Titan, featuring turns of phrase that invoke the glory days of 2021:
ARK is excited to share the exciting news of our partnership with @titanvest! Together, we aim to democratize investing, enabling investors to capitalize on exponential growth opportunities.
The fund, which will seek capital from individual investors beginning at increments of $500, will sport a 2.75% management fee, along with 1.47% in distribution expenses and other fees which will bring the annual expense ratio to 4.22%, Ark relays. 
Nobody said promoting democracy comes cheap. 
Low Places
Talk about central booking.
Talk about central booking. Jerome Powell turned his attention to a prominent corner of the cryptocurrency market in a panel discussion today hosted by the Banque de France, observing that this year’s swift rise in interest rates has revealed “significant structural issues in the decentralized finance ecosystem.” The Fed chair added that, while “the interaction between the DeFi ecosystem and the traditional banking system and traditional financial system is not that large at this point. . . that situation will not persist indefinitely. There’s a real need for more regulation.” Powell’s peer, ECB governing council member Francois Villeroy de Galhau, concurred, adding that “the so-called ‘crypto-winter’ is no reason for complacency or inaction.” 
Regulators’ growing attention on the “ecosystem” comes as a pre-eminent industry player loads up its war chest. Digital exchange FTX is in negotiations to raise up to $1 billion at a $32 billion valuation, CNBC reported last week, as the digital exchange eyes an array of crypto assets laid low by this year’s punishing price action. Crypto magnate Sam Bankman-Fried’s outfit is already getting to work, announcing yesterday that it will purchase the assets of bankrupt broker-cum-lender Voyager Digital for about $1.4 billion. 
Voyager, which went under in July following the demise of crypto hedge fund Three Arrows Capital, rebuffed an approach from FTX earlier this year, terming it a “lowball bid dressed up as a white knight rescue.” Alameda Research, the 30-year-old Bankman Fried’s other crypto trading enterprise, had previously borrowed $377 million from Voyager, then lent the troubled exchange $75 million and held a now-worthless 10% equity stake in the outfit.  
Yet while Bankman-Fried ramps up his dealmaking, one of his top lieutenants looks for the door: This morning, FTX U.S. president Brett Harrison announced his resignation from the company after an eighteen-month stint, noting on Twitter that he plans to remain in the digital asset realm for his next gig. 
Harrison has company. Alex Mashinsky, CEO of bankrupt digital lender Celsius Network, tendered his walking papers this morning, days after CNBC reported that the firm discussed plans to provide customers turned creditors with crypto “IOUs” (recall that Celsius froze withdrawals in June before filing for chapter 11 weeks later) in an attempt at recompense. 
Some observers gave that initiative the side-eye. Mashinsky “doesn’t have any credibility to push through any reorganization plans, given his track record,” Mike Alfred, co-founder of financial software firm BrightScope, contends to Bloomberg. To that point, Vermont’s Department of Financial Regulation levied some spicy accusations earlier this month, accusing Mashinsky of making “false and misleading claims to investors about. . . the company’s financial health and its compliance with securities laws.” Green Mountain state regulators likewise accused Celsius, which offered annual interest rates of as much as 17% on crypto deposits, of “offering yields to existing investors [that] were probably being paid with the assets of new investors,” a dynamic typically considered a Ponzi scheme. 
As some crypto players eye the exits, others look to stay incognito. This morning, Interpol issued a so-called red notice seeking the arrest of Do Kwon, co-founder of defunct digital lending platform Terraform Labs, following the algorithmic stablecoin’s May collapse, a wipeout which deleted some $60 billion in notional asset value.  South Korean prosecutors, who had requested the red notice from Interpol, have also asked a pair of crypto exchanges to freeze some $67 million in bitcoins that had recently been shifted there from a wallet under Kwon’s control, CoinDesk reports.  
The executive, who reportedly moved from South Korean to Singapore in late April, tweeted this yesterday: “Yeah, as I said I’m making zero effort to hide. . . I go on walks and [to] malls.”  Kwon went on to claim that he remains in Singapore, though local police have been unable to track him down. “Locating and arresting someone is tricky. The situation changes every time,” the Seoul Southern District prosecutor’s office stated. “We’re doing our best to get him.”
One thing’s for sure: the constant string of drama does the digital asset realm no reputational favors. Speaking to the Financial Times yesterday, Thoma Bravo co-founder and bitcoin aficionado Orlando Bravo declared that “I’ve gotten to know [the crypto] world a little bit more, and some of the business practices don’t rise to the level of ethics that we’re all used to in private equity. . . and that has been a bit disappointing.” 
Recap Sept. 27
The bulls suffered a rug-pull of their own today, as stocks reversed sharp early gains to settle marginally lower on the broad S&P 500, the broad average’s sixth straight red showing.  Another bear-steepening selloff in Treasurys pushed the long bond to 3.87%, up 15 basis points from a day ago and nearly 100 basis points from its Aug. 1 closing level, while gold remained stuck at $1,636 per ounce and WTI crude bounced to $78.50 a barrel.  The VIX edged higher, ending the day a bit below 33. 
- Philip Grant
Here's a Tip
“We don’t get to choose the macroeconomic conditions always,”
“We don’t get to choose the macroeconomic conditions always,” Alphabet CEO Sundar Pichai told employees at a companywide meeting last week.  That remark from the head of Google’s parent company, reported on Friday by CNBC, follows a corporate directive earlier this month to limit staffer travel and gatherings to only the “business critical” variety, a designation which carries a “high bar.” In response to employee complaints over the c-suite’s perceived “nickel and diming,” Pichai responded thus: 
How do I say it? Look, I hope all of you are reading the news externally. The fact [is], we are being a bit more responsible through one of the toughest macroeconomic conditions underway in the past decade.
The search behemoth, which minted $67 billion in free cash flow and $76 billion in net income across 2021, saw sales growth slow to just 13% year over-year to $69.7 billion during the quarter ending June 30, short of the $70.8 billion analyst consensus and the fourth consecutive growth-rate slowdown relative to a year ago.  Revenues will sink 10% year-over-year to $58.6 billion in the third quarter if sell side guesstimates are on point, which would be the weakest top line showing since the start of 2020. 
Of course, the fact that a pre-eminent tech mainstay is tightening the corporate purse strings augurs poorly for less advantageously positioned peers. Along those lines, analysts at Jefferies report today that sales of Apple’s iPhone 14 are off to a slow start in China, with 987,000 deliveries over the first three days of availability. That’s off 11% from the same period following the iPhone 13’s launch a year ago. 
Those figures present a marked contrast to those seen earlier this month, when data from retailer JD.com suggested that iPhone 14 pre-orders were tracking at or above the iPhone 13’s and iPhone 12’s respective debuts in fall 2021 and 2020. “These initial data suggested that iPhone14 sales may not be as strong as the pre-level orders indicated, since pre-order does not come with any payment obligations,” the Jefferies analysts cautioned.  
Bolstering that perspective: Apple has instructed key supplier Foxconn to idle five iPhone 14 production lines at its Zhengzhou factory, Asian Tech Press reported Friday, “as the sales of this iPhone model fell short of expectations.” Overall smartphone sales in the Middle Kingdom totaled 19.1 million July, government statisticians find. That’s down 31% from the year-ago level. 
Cooling demand for its shiny new model would be no small development for the Cupertino-based behemoth, as iPhone sales compounded by 16.1% over the two years through June 30, accounting for 52% of total revenues over the preceding 12 months. 
Meanwhile, the everything store opts for some extra markdowns of its own.  Amazon announced today that it will hold a “Prime Early Access Sale” on Oct. 11 and 12, marking a departure from prior form as the comprehensive “Prime Day Sale,” which took place in July, was heretofore a once-per-annum occasion.
That move comes as annual U.S. e-commerce sales growth will shrink to just 9.4% this year, market research firm Insider Intelligence predicts, which would be the first time in the internet era that online transaction volumes will expand by less than 10% year-over-year. “These days, it’s not lost on you or me that folks are trying to make their dollar stretch,” Jamil Ghani, vice president of Prime, told CNBC.  
It's not just the masses contemplating a thriftier approach. Citing data from consulting firm MWPVL International, Bloomberg reported earlier this month that Amazon “has abandoned dozens of existing and planned [warehouse] facilities” around the country. That retrenchment, which includes 25 million square feet of cancelled or scuttled projects along with 28 million square feet of delayed space, marks a “striking contrast with previous years, when the world’s largest e-commerce company typically entered the fall rushing to open new facilities and hire thousands of workers to prepare for the holiday shopping season.” 
Similarly, researchers at DePaul University’s Chaddick Institute for Metropolitan Development found that Amazon Air freighters averaged 194 daily flights during the early stages of September, up 3.8% from March. That’s the slowest acceleration tracked by the institution since the early stages of the pandemic. For a sense of Amazon’s capacity expansion during recent years, such daily flights tracked at fewer than 100 as of May 2020. 
See the editions of Grant’s Interest Rate Observer dated July 22 and Aug. 5 for a closer look at the suddenly bruising environment faced by Silicon Valley’s leading lights, along with a pair of picks-to-not-click. 
Recap Sept. 26
The ship be sinking: A fifth consecutive selloff in stocks pushed the S&P 500 below its June closing lows, leaving the broad average at its weakest level since November 2020, while Treasurys were hampered once more with the long bond jumping 11 basis points to 3.72% while the two-year note rose seven points to 4.27%, double the yield on offer just six months back.  Relentless dollar strength helped keep key commodities in retreat, with gold notching multi-year lows at $1,630 an ounce and WTI crude settling south of $77 a barrel to return to its late-January levels. The VIX finished above 32, still a bit below the mid-June highs. 
- Philip Grant
Pound Sand
Mr. Market votes with his feet.
Mr. Market votes with his feet.  U.K. Chancellor of the Exchequer Kwasi Kwarteng’s newly unveiled fiscal package, featuring hefty tax cuts in tandem with sharp planned spending increases, met with a dramatic reaction: the pound tumbled more than 3% against the dollar to a fresh 37-year low of $1.09, while 10-year gilt yields ripped to 3.83% from 3.5%, the largest one-day gain since at least 1989. 
Wall Street commentators were similarly aghast. “It was a shock as the details came out,” wrote Sarah Hewin, senior economist at Standard Chartered Bank. “Sterling is in danger,” George Saravelos, Deutsche Bank’s global head of FX research, added. 
A striking photo tells the tale. Hat tip to the Twitter account @MichaelAArouet:
In a Sentimental Mood
That was then:
That was then: Charles Schwab CIO Liz Ann Sonders relays that just a month ago, 96% of the S&P 500’s technology sector components traded north of their respective 50-day moving averages. As of this morning, that share was whittled to 3%. 
Though that bipolar flip-flop underscores the violent nature of the mid-summer bounce in stocks and subsequent reversal, other indicators suggest that investor despair has prevailed across what has proven a particularly difficult year. Ned Davis Research’s Crowd Sentiment Poll has pointed to “extreme pessimism” in each trading day going back to April 11. That active 111 day streak is already the third-longest on record going back to 1995, trailing only stretches in 2002 and 2008 to 2009. 
Investors have responded in kind. Citing data from Morningstar Direct, The Wall Street Journal relays that low volatility mutual and exchange traded funds have attracted a net $6.5 billion in assets in 2022 following two years of outflows during the virus-era bull stampede. As cash instead flowed into more speculative assets during those boom times, low-volatility strategies ended last year at their widest relative discount to the market at large since the 2000 bubble peak by the lights of Rob Arnott, founder and chairman of Research Associates. That gap has since narrowed: “Valuations [within that subset] are fairly in line with historical averages, so I would not say to avoid low volatility, as I did in 2016,” Arnott tells the Journal. “But as people who are fearful about the market turn to low-vol rather than exiting all together, we can expect those flows to push [low-vol] valuations much higher.”
Yet embers of the recent speculation bonfire continue to glow.  As the Journal documented on Tuesday, the unbowed throngs of meme stonk speculators have found a new favorite, in the form of Avaya Holdings Corp. (ticker: AVYA). Shares in the struggling software firm enjoyed a 200% rally over the five weeks through Monday on double the average daily trading volume relative to the prior five weeks, pushing Avaya’s market capitalization to as high as $200 million. That’s despite the company’s evident distress, as a first-lien term loan due 2027 last changed hands at 66 cents on the dollar, down from north of par just two months ago. “It seems naïve that anyone would be willing to give [Avaya] the benefit of the doubt,” Cowen analyst Lance Vitanza opined. “Our model shows they’re going to be out of cash [by] June.” 
Similarly, a cornerstone of the bygone bull market retains a devoted fanbase despite less-than-stellar recent results. Cathie Wood’s Ark Innovation ETF (ticker: ARKK) attracted a net $197 million on Tuesday (a session in which the S&P 500 declined by more than 1%), data from Bloomberg show, the largest one-day inflow since early July and a sum equivalent to about 2.5% of the total fund assets. ARKK, which has taken in a net $15.4 billion of investor cash over the past three years, now sports a $7.3 billion market cap following this year’s 59% decline. 
Recap Sept. 23
Stocks finished off their lows, but that’s about it in terms of good news for the bulls as the S&P 500 lost 1.7% to wrap up the week 4.7% in the hole. Another round of topsy-turvy Treasurys action left the two-year yield at 4.2%, a 59 basis point premium to the long bond (a year ago today, the 30-year yielded 1.92% compared to a 0.27% two-year). WTI crude fell below $80 a barrel, gold retreated to $1,652 an ounce and the VIX settled on the cusp of 30, a closing level last seen in June. 
- Philip Grant
Bankers' Glowers
Talk about a deal freeze.
Talk about a deal freeze. From Bloomberg:
Danish banks are handing out blankets to help staff cope with lower office temperatures introduced as part of a push to cut energy use. 
The Nordic country is capping heating at 19 degrees Celsius [66.2 degrees Fahrenheit] in government buildings and has encouraged private companies to follow suit amid worries the European energy crisis will result in blackouts. Almost all of Denmark’s major banks have [done so].
“These are items we normally hand out to clients,” Neel Rosenberg, spokesperson at Spar Nord Bank, relays. “But our employees can now use them if they want.”
The Other Guys
And then there were two.
And then there were two. As documented in this space Tuesday, it’s been a week to remember for monetary policy, with central banks far and wide unleashing major tightening moves over the past two days. But that’s not to say that everyone is swimming with the tide. 
This morning, the Japanese government waded into the currency market to bid up the yen, marking its first such intervention since the Asian currency crisis in 1998.  "We have taken decisive action” to address “speculative moves behind the current sudden and one-sided moves in the foreign exchange market,” Masato Kanda, the finance ministry’s currencies point man, confirmed to the press.
Today’s operation comes on the heels of the Bank of Japan’s stand-pat policy decision to maintain its yield curve control regime capping 10-year yields at 0.25% along with a minus 10 basis point policy rate, leaving Japan as the world’s only remaining nation opting to administer negative nominal borrowing costs. “We won’t raise rates for some time,” Kuroda declared at his presser. “We have thoroughly debated what’s the best monetary policy while considering what will happen from here, and concluded that we will continue with monetary easing.” Shortly thereafter, the yen zipped from near 146 to the dollar to fewer than 141 per buck, settling closer to 143 by mid-afternoon U.S. time. The yen-dollar exchange rate stood at 115 six months ago, as the Federal Reserve began to withdraw its virus-era stimulus regime. 
Kuroda’s dogged devotion to easy money comes as his long-desired inflationary episode finally takes shape. Thus, Japanese core CPI advanced by 2.8% from a year ago in August, marking its fifth straight month north of the BOJ’s 2% target and compared to 0.2% year-over-year in January. Headline CPI printed at 3% on an annual basis last month, its hottest reading since the aftermath of Japan’s titanic asset bubble in 1991. Bestowing on the public a glimpse into his crystal ball, Kuroda declared that: “It’s almost certain that the pace of price increases will fall below 2% next fiscal year and beyond.” Good to know. 
Some 5,500 miles west of Tokyo, local monetary mandarins judge that the status quo isn’t easy enough. Today, the Central Bank of the Republic of Turkey lowered its benchmark one-week repo rate to 12% from 13%, the second one-hundred basis point cut in five weeks to bring the easing cycle to 700 basis points going back to last summer.  Though measured inflation percolated at an 80.2% annual clip in August, the CBRT emphasized the growth picture in an accompanying statement, which we’ve lightly edited for clarity: 
Leading indicators for the third quarter continue to point to a loss of momentum in economic activity due to decreasing foreign demand. It is important that financial conditions remain supportive to preserve growth momentum. 
By way of response, investors sent the Turkish lira to 18.41 per buck, marking its weakest level on record. That exchange rate stood at 3.5 per dollar in mid-2016 and 8.5 a year ago. Similarly, five-year credit default swaps jumped 16 basis points to 751 basis points, nearly double this time last year. While Mr. Market has weighed in on the CBRT’s easy money adventures, strongman Recep Erdogan, who has cycled through four central bank governors since 2019 in his quest for sufficient dovishness, presses on. In an interview on Tuesday, Erdogan declared that “inflation is not a crippling economic threat,” offering the following assurance: “I am an economist.”
He's all yours, Ph.D.s.
QT Progress Report
A $5 billion weekly decline in Reserve Bank Credit leaves interest-bearing assets on the Fed balance sheet at $8.78 trillion. That’s down $140 billion, or about 1.6%, from the late March peak. 
Recap Sept. 22
Another day, another selloff as the S&P 500 retreated another 80 basis points while the Nasdaq 100 sank 1.2%, leaving those indices lower by 21% and 30% in the year-to-date, respectively.  Yet the price action in bonds made those results look positively bullish, as Treasurys were demolished with the two- and 30-year yields vaulting to 4.11% and 3.65%, respectively, up nine and 15 basis points from yesterday’s close. WTI crude continued to consolidate near $83 a barrel, gold edged higher to $1,680 an ounce and the VIX ticked lower to 27. 
- Philip Grant
Liability Coverage
Here’s Fed Chair Jerome Powell at this afternoon’s press conference, following the latest 75 basis point hike to the funds rate: “Think of price stability as an asset that delivers benefits to the public."
Second Nature
Deal mode deactivated:
Deal mode deactivated: Apollo co-president Scott Kleinman predicted at a conference yesterday that buyout activity will be muted through the end of next year, as the virus-era bacchanal gives way to precarious financial and economic conditions. “The Fed has avoided using the R-word but when their specific goal is to cool down consumer demand that sounds [like] recession, in a nicer way,” he said.  Kleinman estimated that three-quarters of the private equity industry is in fundraising mode, a “wacky dynamic” considering the slowdown in activity. In a given year, 25% of managers might be raising capital, he added. 
Luckily, the cash-hungry p.e. cohort has a friend in America’s largest pension fund. The California Public Employees’ Retirement System rolled out an upsized 15% exposure target to so-called real assets for the fiscal year beginning July 1 from 13%, including a 13% allocation to private equity from a previous 8% bogey. 
“We have more room to do more with private equity since we were late to the game,” Nicole Musicco, CIO of the $440 billion fund, declared at an investment committee meeting on Monday. The executive reckons that insufficient p.e. exposure from 2009 to 2018 cost Calpers as much as $18 billion in profits.  Overall, p.e. holdings among state and local pension funds reached $480 billion as of this summer according to Preqin, up 60% from 2018.
Then, too, the retail and high net worth crowds serve as an increasingly viable source of funds. Apollo plans to raise more than $6 billion this year from individual investors, Kleinmann relayed yesterday, up from $1 billion across 2021.  The executive added that $15 billion in such fundraising represents his firm’s targeted annual run-rate. 
Last week, fellow buyout behemoth KKR announced it will make a piece of its $4 billion healthcare fund available on the blockchain to facilitate investments from the public. That move will allow KKR to fundraise in smaller increments and improve liquidity and transaction monitoring, co-head of U.S. private wealth Dan Parant told The Wall Street Journal. “There’s just so many barriers that have made private markets difficult to access for individual investors,” Parant lamented.
Considering that cumulative dry powder, or uncommitted capital, under p.e. management stood at $749 billion as of June 30 according to PitchBook, up nearly 50% from five years earlier, the industry’s front-footed fundraising push might strike some as curious. But as markets falter following their multi-year levitation, the prospect of capital calls to limited partners, themselves often beset with losses elsewhere in their portfolios that serve to drive up relative allocations to private assets, stands as a clear and present danger. For instance: p.e. distributed $2.7 trillion to LPs from 2011 to 2021, data from Preqin show, against just $2 trillion in capital calls during that stretch. But during the 2008 to 2010 misadventures, capital calls topped distributions by $43 billion per annum, a sum then equivalent to 5% of industry AUM. 
Indeed, the secondary market, in which p.e. investors sell their interests to other LPs, has come alive as the search for liquidity intensifies. Such transactions totaled $53 billion over the first half of 2022, advisory Campbell Lutyens finds, up from $3 billion over the same stretch last year. Public pension plans accounted for 48% of the LP selling contingent over the six months through June compared to 29% in the same period a year ago. 
As a new, less favorable investing climate takes shape, some LPs are less than pleased with the current state of play. Mikkel Svenstrup, CIO at Denmark’s largest pension fund ATP, sounded the alarm over the rising proliferation of secondary transactions (not to be confused with the secondary market mentioned above) and so-called continuation fund deals, in which sponsors sell to another p.e. fund or from one of its funds to another, respectively. Some 80% of portfolio company transactions among funds that ATP has invested in fell under those categories last year. 
“This is not good business, right?” he rhetorically asked the Financial Times. “This is the start of, potentially, I’m saying ‘potentially,’ a pyramid scheme. Everybody’s selling to each other. . . banks are lending against it.” As for his industry outlook: “It’s not that I think the private equity market is going to drop off a cliff, we’re just going to be looking [at] potentially low returns and high costs.”  
Recap Sept. 21
A brief post-FOMC bounce gave way to more despair for the bulls as stocks tumbled into the close to leave the S&P 500 weaker by another 1.7%, leaving the broad index within 3% from its year-to-date lows.  The Treasury curve continued to pancake as the two-year yield vaulted above 4% while the long bond rallied to 3.5%, while a fresh 20-year high for the Dollar Index didn’t stop gold from bouncing to $1,683 an ounce.  WTI crude ticked to $83 a barrel, and the VIX continued to betray little panic, settling at 28. 
- Philip Grant
Soylent Green Energy
Mmmm, delicious:
Mmmm, delicious: Police charged Beyond Meat chief operating officer Doug Ramsey with third-degree battery and “terroristic threatening” over the weekend, after the executive allegedly bit another man on the nose in an apparent road rage incident following the University of Arkansas’ football game on Saturday. 
Though that purveyor of faux meat finds himself in hot water for displaying unconventional taste, culinary experimentation remains all the rage. The Food and Drug Administration issued a statement today advising the masses against undertaking the newest social media craze: cooking chicken soaked in NyQuil. 
"Boiling a medication can make it much more concentrated and change its properties in other ways," the FDA said. "Even if you don't eat the chicken, inhaling the medication's vapors while cooking could cause high levels of the drugs to enter your body. It could also hurt your lungs."
À chacun ses goûts.
Race to the Top
Ladies and gentlemen, start your engines.
Ladies and gentlemen, start your engines. At least a dozen central banks around the world have conducted or will conduct policy meetings this week, with economists penciling in nearly 500 basis points of tightening across that cohort by Deutsche Bank’s count.  Let’s review:
This morning, Sweden’s Riksbank kicked things off by increasing its benchmark rate to 1.75% from 0.75%, topping the consensus estimate for a 75 basis point hike and marking the largest tightening move since the central bank enacted its 2% inflation target in 1993 (headline CPI grew at 9.8% year-over-year in August). “The risk is still large that inflation becomes entrenched, and it is extremely important that monetary policy acts to ensure that inflation falls back and stabilizes,” the accompanying statement said. The Riksbank, which imposed negative nominal rates in 2015 and maintained 0% borrowing costs as recently as March, now forecasts a 2.5% rate by the fall of 2023.   
The Swedes have company. The Swiss National Bank, which similarly enacted a negative-rate regime in December 2014, will hike the current minus 0.25% benchmark rate by 75 basis points on Thursday if the economists are on the beam.  With the European Central Bank jamming benchmark rates back above zero this month for the first time since 2016, some observers aren’t unhappy to see the back of the negative rate experiment.  “It has not proven to be the holy grail we were looking for,” Katharina Utermöhl, senior European economist at Allianz, lamented to the Financial Times. Underscoring that point: Today’s reading of German PPI for August showed a 45.8% annual growth rate, accelerating from 36.8% a month ago.  
Similarly raging inflation in Great Britain may force the Bank of England’s hand at Thursday’s conclave. 
Though the consensus points to a 50 basis point increase to the current 1.75% policy rate, some economists think more drastic measures are called for. In light of August’s 9.9% rate of measured inflation and a faltering currency (the pound logged a 37-year low against the greenback on Friday, which coincidentally marked the 30-year anniversary of the “Black Wednesday” currency devaluation that filled George Soros’ pockets), “the arguments for a 75 basis-point move are more compelling than those for a 50 basis point increase,” BNP Paribas chief European economist Paul Hollingsworth writes. 
Then there’s tomorrow’s rate decision from the Federal Open Market Committee.  With economists and market projections both pointing to a 75 basis point bump to the funds rate, the question of how long the rapid tightening cycle will persist looms large, with the effective funds rate primed to vault above 3% from 0.08% just six months ago. 
Yesterday, Nick Timiraos of The Wall Street Journal clued readers into the monetary mandarins’ thinking, writing that “Fed officials, while reluctant to say it bluntly, could raise rates until they force unemployment higher and slow wage growth, the mirror image of their strategy through the end of last year.” Indeed, the Fed kept the stimulus firehose flowing through March of this year. Anyway, the Federal Reserve Bank of Atlanta’s wage growth tracker showed a 6.7% advance for the three month moving average through August, up from 4.5% in December and 3.8% on the eve of the pandemic in January 2020. 
Sure enough, interest rate futures now price 77% odds of an additional 75 basis point hike at the Nov. 2 meeting, Bianco Research relays, a move which would leave the funds rate at a range of 3.75% to 4%.  Prior to last week’s hotter-than-expected reading of August CPI, the market anticipated only 14% odds that the Fed would hike by a further three-quarters of a percent in November. 
How to navigate the rocky financial waters brought about by the unfolding sea change in global monetary policy?  See the analyses “Stock with a story” and “You could do worse” from the current edition of Grant’s Interest Rate Observer dated Sept. 16 for a series of picks-to-click that may be well positioned for today’s rising rate regime. 
Recap Sept. 20
Another ugly day featured a 1.2% drop for the S&P 500, as that broad index continues to retrace the mid-summer rally with its weakest close in more than two months, while Treasurys remained broadly under pressure with the long bond settling at 3.57%. Gold continued to languish at $1,673 an ounce, WTI crude retreated to $84 a barrel and the VIX ticked to 27.  
- Philip Grant
Built to Spill
Cleanup on aisle one.
Cleanup on aisle one. This morning, the price of bitcoin slumped to $18,300, touching its lowest level since the middle of June as the stock market was logging its 2022-to-date nadir. With last week’s ethereum “merge” (software update) now in the rear-view, “bullish catalysts are currently quite limited for crypto,” Matthew Dibb, chief operating office of digital investment firm Stack Funds, laments to CoinDesk. “The appreciation of the Dollar Index is all we really need to understand the sentiment in risk assets. . . and it doesn’t look good,” he added. 
No kidding: The shakeout in digital currencies has whittled the cohort’s aggregate valuation to $930 billion by Coinmarketcap.com’s count, compared to $2.87 trillion just ten months ago. 
A news item today colors crypto’s harrowing descent to earth. Bloomberg relays that South Korean prosecutors have enlisted Interpol in their efforts to track down suspected fraudster Do Kwon, creator of the so-called algorithmic stablecoin TerraUSD, which collapsed this spring in spectacular fashion.  Kwon, who moved to Singapore in April, weeks before Terra bought the farm, “is clearly on the run as his company’s key finance people also left for the same country during that time.” A spokesperson told the press. “We are doing our best to locate and arrest him.” 
For his part, Kwon contended via Tweet that he is “not ‘on the run’ or anything similar. . . we are in full cooperation, and we don’t have anything to hide.”  Prosecutors reportedly beg to differ, telling the Yonhap news agency that Kwon’s attorneys have indicated he will not agree to appear for questioning. 
Yet, as ever in the crypto realm, hope springs eternal. Terra’s eponymous cryptocurrency now changes hands at $2.90 per coin, up nearly 50% from a month ago, conferring on the digital ducats a fully diluted market value of $2.9 billion.  
The Hangover Part Three
This Wednesday will represent the 238th straight trading day without the IPO
This Wednesday will represent the 238th straight trading day without the IPO of a domestic technology firm valued at $50 million or more, analysts from Morgan Stanley find. That’s the longest such stretch on record, surpassing IPO droughts during the aftermath of the 1990s Nasdaq bubble and Lehman Brothers’ demise in 2008.  With a modest $7 billion in total fundraising so far in 2022, overall IPO volumes are off a cool 94% from last year’s record pace per Dealogic. 
The aftermath of the pandemic-era issuance barrage has proven painful. Renaissance Capital’s IPO Index, which tracks the largest and most-liquid domestic firms listed in the past 24 months, is off 46% year-to-date, more than double the S&P 500’s pullback. Just 28% of last year’s IPO class was profitable, data from Statista show.  That compares to more than 50% during each of the three years ending in 2012. 
Against that difficult backdrop, a leading light of the heretofore white-hot private markets prepares make its move. The Wall Street Journal reports that Instacart is planning to structure its forthcoming IPO primarily to maximize employees’ ability to monetize their own stock, rather than as a means of raising capital for the company.   
It’s been a long and winding road for the decade-old grocery delivery firm, which raised funds at a $39 billion valuation in March 2021, a 120% premium to a funding round just five months earlier. Instacart subsequently marked down its internal valuation to $24 billion this spring, a move which allowed the firm to shell out new restricted stock units at the lower price (outside investors took an even larger markdown, with buy side behemoth Capital Group slicing its own appraisal to $14.7 billion in July).  
While Instacart managed to generate a net profit under generally accepted accounting principles during the second quarter, other beneficiaries of the recent venture capital boom find themselves in a less comfortable position. “Some startups,” the Journal notes, are left with “few options but to spend through their cash reserves while they wait for the stock market to calm.”
Recap Sept. 19
A late lift left stocks at their best levels of the day, with the S&P 500 logging a 76 basis point advance, while another lurch higher in two-year yields (now at 3.95%) headlined a Treasurys trading session that also saw the 10-year top 3.5% intraday for the first time since 2011.  WTI crude held at $85 a barrel, gold likewise drifted sideways at $1,684 per ounce and the VIX retreated below 26. 
- Philip Grant
Meeting of the Minds
From United Press International:
An outdoor showing of the film 101 Dalmatians in England broke a Guinness World Record when 127 dogs attended the film.
The previous record for most dogs at an outdoor cinema screening was set in 2019 in Brazil, when 120 dogs attended a showing of The Secret Life of Pets 2.
Tumbling Dice
Let the chips fall where they may.
Let the chips fall where they may. The well-ventilated $15 billion Citrix Systems financing deal is off to a rocky start, as the Financial Times reports that the software firm’s sponsors revealed to investors last week that Citrix will need to draw down a $200 million credit line shortly after the leveraged buyout closes to pay for cost-cutting initiatives and employee relocation expenses. 
Unsurprisingly, considering market conditions, that news was greeted less-than enthusiastically.  “They don’t have cash on hand and cash in the business to pay for severance and other wind-down cash expenses,” one investor on last week’s call told the FT. “It was lousy.”  
With commitments due on Monday, banks attempting to syndicate the buyout debt have offered the secured bond tranche at a yield of as much as 9.5%, compared to initial projections of 8.5% to 9%. Nevertheless, demand has remained “tepid,” the pink paper relays. 
Citrix’s experience is instructive: High-yield supply came to a meager $8.1 billion last month, PitchBook finds, down from an average $43.9 billion over the past two Augusts and the weakest showing for that month since 2014. Similarly, leveraged loan issuance registered at $4.79 billion in August to leave year-to-date volume at $213 billion, down 66% from last year’s pace.  In tandem with that slowdown, upwards of $150 billion worth of mergers and acquisitions have been tabled over the last three months alone, Bloomberg relays. 
The issuance drought is emblematic. “Stickier-than-expected inflation and lower growth expectations in the U.S. and abroad present a challenging environment for credit,” strategists at Barclays understated this morning. “We think the overall backdrop calls for wider spreads,” they predict.  
One thing’s for sure: the longstanding, EZ money fueled asset price bacchanal has ushered in a slew of speculative, potentially vulnerable credits. An analysis yesterday from PitchBook finds that single-B-minus rated credits now represent the largest component of the $1.425 trillion loan market with a 28.4% share.That’s the first time that that ratings category, typically the weakest in which such loans are issued, constitutes index’s plurality in the 25 years that LSTA has tracked the data.  For context, single-B-minus loans accounted for less than 12% of the market five years ago this month, with $95.8 billion outstanding in September 2017 compared to more than $400 billion today. 
Considering that fundamental deterioration, the rapid change in borrowing costs looms large. For a sense of scope, yields on the ICE BofA Single-B High Yield Index stand at 8.68%, compared to 4.75% at the end of last year. 
Rising rates and a suddenly shaky economy (see shipping giant FedEx’s profit warning today) could make for a combustible combination, some on Wall Street believe. Yesterday, a team of analysts at UBS led by Matthew Mish warned that loan defaults could reach 10% if the Fed Funds rate reaches 5% (that key rate will surpass 3% following next week’s meeting, interest rate futures predict). Similarly, a 4% funds rate along with a 10% decline in earnings growth would be sufficient for an 11% default rate, while under an extreme scenario of 5% rates and 15% earnings retrenchment, a 15% default frequency may be in the cards. 
For context, loan defaults peaked at 10.81% in November 2009, and never rose above 4.2% during the 2020 Covid crisis.  Underscoring Washington’s stimulus-soaked response to the bug, the trailing 12-month rate ticked up to 0.86% in early September, the first time that gauge topped 0.6% in a year.  As for the financial storm clouds now rolling in, the June 24 edition of Grant’s Interest Rate Observer put it this way: “we liken the degree of difficulty in achieving a so-called soft landing to that of cleanly yanking a tablecloth out from under a setting of crystal, china and bull-market champagne flutes."
Your move, Jerome and Co. 
What is this, a balance sheet for ants?  Yesterday’s edition featured a noteworthy typo, as the Fed’s collection of interest-bearing assets is up by $4.6 trillion from its pre-pandemic level, not, of course, $4.6 billion. 
Recap Sept. 16
An 80 basis point retreat for the S&P 500 wrapped up nightmarish week for stocks, as that broad average lost 5.7% to finish within 6% of the year-to-date lows logged in mid-June.  The upside-down Treasury curve saw a measure of steepening today as the two-year yield edged lower to 3.85% to back off yesterday’s 15-year closing highs while the long bond rose four basis points to 3.85%, while WTI crude and gold could each manage only a feeble bounce to settle at $85 a barrel and $1,683 an ounce, respectively. After climbing above 28 at the open, the VIX settled near 26 to remain in the middle of its six-month range.  
- Philip Grant
Dream Weaver
Who says it isn’t easy being green?
Who says it isn’t easy being green?  Former staffers at the New York Stock Exchange are hopping on the sustainable investing bandwagon, announcing yesterday they will seek regulatory approval for the launch of the Green Impact Exchange next year, which “would be the first registered exchange dedicated” to companies “committed to green corporate governance.” The newfangled bourse plans to implement listing standards compelling constituents to adhere to environmentally friendly governance standards and will permit those firms to maintain dual listings.
Across the Atlantic, brisk demand for debt under the environmental, social and governance (ESG) banner defies an otherwise lean year for the primary credit markets. Of the nine corporate bonds that came to market yesterday, six were ESG-related, leaving that category with a 38% share of September issuance and 24% in the year-to-date per Bloomberg.  ESG supply tops €30 billion ($30 billion) so far in September, already approaching this year’s full month peak of just over €40 billion in May. Overall, one-third of globally managed assets will be labeled ESG by 2025, if Bloomberg estimates are on the beam, equivalent to an impressive $50 trillion. 
Recent performance doesn’t lend much to that enthusiasm. The Bloomberg MSCI Global Aggregate ESG Weighted Index has lost 17.4% in the year-to-date through Wednesday, compared to a 16.9% drop for the broader Global Aggregate bond gauge. Similarly, BlackRock’s iShares MSCI USA ESG Select ETF is off 18.1% so far in 2022, trailing the 16.3% loss for the S&P 500. Then, too, investment virtue doesn’t come cheap: ESG-focused ETFs funds charge an average of 65 basis points in annual fees, Morningstar found in the spring, well above the 41 basis point expense ratio for conventional ETFs. 
Vaguely defined parameters may ultimately prove a greater impediment to widespread adaptation of the sustainable investing movement. Recall last year’s so-called greenwashing scandal in which a whistleblower at DWS alleged that the asset management behemoth improperly claimed ESG assets of €459 billion in its 2020 annual report, while actual holdings represented “only a fraction of that sum” per a concurrent internal audit. The company duly slashed its ESG-classified holdings to €115 billion in last year’s report.  
As that experience illustrates, the question of how to enact objective benchmarks for sustainable or ESG-compliant assets remains an unresolved one. For instance, a July 2020 study in the Journal of Portfolio Management found that ESG assessments among major providers varied widely across each individual criterion, with the correlation between MSCI and Morningstar Sustainalytics ratings of environmental, social and governance metrics measuring at 0.11, 0.18 and -0.02, respectively. That compares to an overall correlation of 0.92 among credit ratings assigned by Moody’s, S&P and Fitch, the Review of Finance determined this spring.  
Referencing that yawning gap, a paper last month from Stanford Graduate School researcher Brian Tayan et al. concluded that ESG ratings providers are either “measuring unrelated constructs or they have significant measurement error in measuring the same construct.” 
To be sure, the ESG revolution hasn’t exactly ushered in a corresponding uprising of good corporate governance.  For instance, last year’s IPO bumper crop featured 98 U.S. firms that debuted via a dual class share structure according to University of Florida professor Jay R. Ritter, equivalent to 32% of the total.  That’s both the highest gross figure and largest share of new public entrants employing that management-friendly tactic. For context, roughly 90% of domestic public companies utilize the traditional one-share, one-vote system, according to the Council of Institutional Investors.  
Indeed, the amorphous ground rules guiding the sustainability craze leave plenty of room for interpretation, as a Bloomberg headline from Tuesday illustrates:
ESG DAILY: New York Times Staffers Fight Return-to-Office Push
Environmental, Social-distancing and governance?
QT Progress Report
Nothing doing this week, as Reserve Bank Credit remained at $7.89 trillion.  Such interest-bearing assets on the Fed balance sheet are off by $135 billion from their late March highs, and higher by some $4.6 trillion from the onset of the pandemic. 
Recap Sept. 15
It remains tough sledding for the bulls with quarter-end looming, as stocks dipped by another 1.7% on the Nasdaq 100 while more pronounced pressure on short-dated Treasurys pushed the two-year yield to 3.87%, nearly 40 basis points north of the long bond. That price action was no help for key commodities, as gold slumped 2% to $1,674 an ounce and WTI crude retreated to $85 per barrel. The VIX held north of 26, finishing marginally higher on the day. 
- Philip Grant
Price Check
Better luck next month.
Better luck next month. Today’s hotter-than-expected CPI print for August renders a 75 basis point-plus hike at next week’s Fed meeting a virtual lock, interest rate futures predict. Considering the violent price action in stocks and Treasurys in response, speculation on the CPI’s near-term course may prove a worthwhile exercise.
When might the beleaguered bull crowd finally enjoy some relief? Utilizing the Cleveland Fed’s guesstimate of 0.36% monthly CPI growth for September, Bianco Research analyst Gregory Blaha finds that annual CPI would end 2022 at 8.07% and March 2023 at 6.23% if the monthly average growth rate since the start of the pandemic remains in force during the fourth quarter. In the happy event that monthly price pressures drop to zero after September, year-over-year CPI would register at 6.61% in December, and 3.39% three months after that.
“Anyone calling for inflation to fall somewhere near 6% [by year-end] is actually calling for deflation over the next five months,” Blaha concludes. “Lower gasoline prices in the U.S. have helped keep the month-over-month numbers near zero for the past couple of months, but how much longer can that continue?”
The prospect of regime change in the energy complex could complicate that picture. Bloomberg reports this afternoon that the Biden administration is considering purchases to refill the dwindling strategic petroleum reserve “when crude prices fall to around $80 a barrel.” Such a move would follow persistent SPR sales that have whittled those inventories to 442 million barrels, compared to a 629 million barrel average over the past five years and 550 million barrels as recently as May.  In tandem with that stepped-up pace of releases, the price of WTI crude sits 28% below its mid-June peak, while benchmark gasoline prices are off a cool 45% over that stretch. 
Up in the Air
The Hindenburg flies again?
The Hindenburg flies again? China Evergrande Group (likened to the ill-fated dirigible in the July 2, 2017 edition of Grant’s Interest Rate Observer) vowed yesterday to resume construction on all of its stalled development projects, as the stricken mega-homebuilder has faced widespread boycotts from citizens who had prepaid for those unfinished dwellings. 
“We have to work hard and put our nose to the grindstone to ensure the delivery of projects,” Evergrande chair Hui Ka Yan declared in a statement. “Only in this way can we satisfy the homebuyers, resume sales, repay all types of debts and get out of this predicament.”  The company added that it has restarted work on 668 of its 706 pre-sold and uncompleted projects across the Middle Kingdom. 
While Evergrande labors to dig out from under $300 billion in liabilities and Beijing’s ill graces (Hui was reportedly uninvited to this spring’s Chinese People’s Political Consultive Conference after nine straight years in attendance), trouble lurks for another of China’s leading corporate lights. Bloomberg reports today that the Chinese government has ordered local banks and state-owned firms to identify and report their financial exposure to sprawling conglomerate Fosun International, owner of the Club Med vacation business and BioNTech’s Chinese-edition Covid vaccine (how’s that for synergies?), paying special mind to any “liquidity risks.”
Fosun, which showed RMB 118 billion ($17 billion) in cash as of June 30 against RMB 651 billion in liabilities, is “taking steps to dispose of assets for debt payments,” Bloomberg relays. Creditors are getting nervous, with the company disclosing today that all holders of a RMB 2 billion bond originally due next September have requested early redemption, accelerating the maturity date on those notes to Friday. Meanwhile, Fosun’s $500 million of double-B-rated, senior unsecured, dollar-pay notes due 2027 change hands at just under 50 cents on the dollar, good for a 2,082 basis point pickup over Treasurys. 
Recap Sept. 13
A cool 4.3% decline in the S&P 500 marked the broad average’s worst one-day showing since June of 2020, while the Nasdaq 100 endured a 5.5% wipeout to leave its year-to-date performance at minus 27%. Aggressive curve flattening was the story in Treasurys, as the two-year yield soared 17 basis points to log fresh 15-year highs (that yield sat at 0.21% a year ago) while the long bond edged lower to 3.51%.  WTI crude erased afternoon losses to settle at $87.50 a barrel, gold retreated to $1,713 an ounce and the VIX jumped above 27 to build on yesterday’s strength in a then-rising market. 
- Philip Grant
Hello, Goodbye
A one-two punch of headlines from today:
Wall Street jobs are hot again as tech and crypto lay off staff (Financial Times)
Goldman Sachs Prepares for Layoffs as Deal-Making Slows (The New York Times)
Red Letter Day
“Everything’s down this year because dollars are up this year,” declared Sam Bankman-Fried, founder and CEO of crypto exchange FTX, during an investor conference today.  The price of bitcoin has been cut in half this year, while the U.S. Dollar Index has logged a 13% advance. 
Shift Key
We’ve got good news and bad news for the stock market.
We’ve got good news and bad news for the stock market. With the Federal Reserve set to continue its tightening cycle at next week’s policy meeting, Wall Street is expressing growing optimism that the current inflationary dust-up will soon settle down. As Bloomberg relays this morning, the costs to hedge against Consumer Price Index growth of more than 3% over the next five and 10 years have each drifted to their cheapest levels since the early stages of 2022. 
Tomorrow’s release of August headline CPI will show 8.1% year-over-year growth if the economist guesstimate is on point, which would mark the lowest reading since February and a potentially bullish catalyst. “I cannot see any scenario where the market doesn’t decide that CPI is heading in the right direction and that October will be lower than September and so on,” Peter Tchir, head of macro strategy at Academy Securities, writes today. “That [dynamic] should allow markets to continue to enjoy the strength that they saw towards the end of last week.” 
Similarly, data from the New York Fed show that August consumer inflation expectations fell to 5.7% over the next 12 months and 2.8% for the next three years, down from 6.2% and 3.2%, respectively, in the July survey. Such green shoots are likewise visible at the corporate level. FactSet analyst John Butters relayed on Friday that 412 S&P 500 firms mentioned inflation during their second quarter conference calls, down
from 425 such mentions three months prior. That’s the first sequential downtick since the start of 2020. 
Yet mushrooming concerns over the state of the economy go hand-in-hand with prospectively easing price pressures. As Butters documented, 240 members of the S&P 500 used the term “recession” during their second quarter earnings calls. That is double the first quarter’s contingent and the highest share of firms flagging the risk of contracting output since data began in 2010 (that metric previously topped out at 212 in early 2020 as the bug barged in).  
Perhaps unsurprisingly, considering those phenomena: sell-side analysts have trimmed their expectations for third quarter earnings per share growth by 5.5 percentage points for the S&P 500, now penciling in a 3.7% year-over-year uptick. That’s both the heftiest downward revision and the slowest prospective growth rate since the plague year.
The deteriorating profitability picture and proliferating recession risk looms as investors maintain ample equity exposure. Analysts at Goldman Sachs find that households, mutual funds, pension funds and foreign investors allocated 47% of their capital to the stock market as of the end of July. That compares to about 40% in 2015 and sits not far below the late-1990s peak of just over 50%. 
Recap Sept. 12
Bulls kept the momentum as stocks tacked on a 1.1% rally in the S&P 500 to leave the broad average higher by 4.5% over the past five trading days, though the VIX counterintuitively jumped 5% to near 24 in tandem with today’s rally. Treasurys came for sale in bull-steepening fashion, in a session headlined by a weak 10-year auction this afternoon.  WTI crude climbed to $88 a barrel, gold rose to $1,736 per ounce. 
- Philip Grant
Watch This
“People keep saying, are we going to be in a recession – anyone who thinks we’re not in a recession is crazy,
“People keep saying, are we going to be in a recession – anyone who thinks we’re not in a recession is crazy, the housing market is in recession and it’s just getting started.” That eye-catching assessment comes courtesy of Gary Friedman, CEO of luxury home furnishings outfit RH. Friedman went on to opine that his outlook for the next 12 to 18 months is a “more difficult one” than believed in the prior quarter, and that “it’s not going to be pretty when interest rates go up the way they are.”
Friedman’s view represents a marked contrast to recent experience for purveyors of high-end goods. Couture fashion house LVMH grew revenues by a sturdy 21% from a year ago over the first six months of 2022, while Versace enjoyed 30% top-line growth during the second quarter. Hermès logged 20% revenue growth over the first half of the year while generating a 42% operating margin, the fattest in company history. 
One data point suggests that that cohort may struggle to maintain those gaudy growth rates. A gauge of 30 frequently transacted luxury timepieces compiled by Watchcharts.com finished last week at $17,686, down 22.6% from its late March peak. Contextualizing the ferocity of the preceding boom, the index remains nearly double its pre-pandemic baseline. 
That dynamic is particularly acute in China, the world’s second-largest economy and source of 21% of global luxury demand by the lights of Bain Capital (the consultancy predicts that the Middle Kingdom will become the world’s largest such consumer by 2025). Secondhand Rolex Submariner prices tumbled by 46% from March through mid-August, data from Watcheco show. 
“The boom time is over,” James Wang, a luxury watch reseller in the city of Nanjing, told the Financial Times last month. “We are entering a correction period that could last for a long time.”  Shaun Rein, founder and managing director of the China Market Research Group minced no words in describing the health of the local consumer: “It’s probably the weakest I’ve seen in my 25 years in China.” 
Stateside, the rocky financial markets and the end of the stimulus bonanza have begun to bite, as household wealth sank by $6.1 trillion in the second quarter according to the Federal Reserve, the largest sequential drop on record and leaving that tally at $143.8 trillion, its lowest in a year. Belt tightening is set to follow, as 64% of respondents to Morgan Stanley’s latest Consumer Pulse survey report plans to cut back on discretionary spending. 
How to capitalize on the apparent sea change in high end merchandise? How See the May 13 edition of Grant’s Interest Rate Observer for a pick-not-to-click in the luxury “space.” 
Whittle Feat
The fall closeout sale is upon us.
The fall closeout sale is upon us. A trio of bulge bracket banks have secured sufficient demand to place a $4.05 billion loan backing the leveraged buyout of Citrix Systems, Bloomberg reports. The credit is projected to price at 92 cents on the dollar, the low end of a previously cited range and equivalent to an all-in yield of roughly 9%. Formal commitments are due on Sept. 19.
Citrix’s $15 billion total financing package has long represented a lynchpin for clogged primary speculative-grade credit markets, as formerly bountiful supply has ground to a halt. By Bloomberg’s reckoning, banks are sitting on a backlog of $80 billion in M&A financing and absorbed some $2 billion of related losses during the second quarter.  
Things remain a bit dicier across the pond. Bloomberg relays that banks shopping a €700 million ($707 million) term loan backing KKR’s buyout of Dutch bicycle firm Accell Group have opted not to provide initial pricing guidance, instead soliciting feedback from investors. That strategy shift is “unusual for a leveraged loan,” Bloomberg notes. That comes a day after Morgan Stanley and Credit Suisse threw in the towel on marketing paper backing KKR’s purchase of Spanish fertility business IVIRMA Global, instead offloading those €800 million in loans to private credit firms. While trimming risk from their own balance sheets, that move obliges those banks to cough up fees to the direct lenders instead of earning fees themselves.
On the bright side, a long-simmering feud in the loan market winds towards a happy ending for one venerable institution. Yesterday, a federal appeals judge ruled in Citigroup’s favor in the dispute with creditors of Revlon that erupted after the bank mistakenly wired $900 million to a group of hedge funds in 2020, that sum representing the principal amount outstanding of the loan rather than an interest payment that the bank intended to make. The recipients refused to return $500 million, asserting that Citigroup utilized “manipulative” tactics to help the bankrupt retailer raise more debt, shifting valuable intellectual property to a newly formed subsidiary and subordinating existing lenders in the capital structure.  
“While Citi has taken steps to reduce the likelihood of such an error in the future, today’s decision provides welcome stability and upholds the concept of cooperation needed for a well-functioning syndicated loan market” a company spokesperson proclaimed.
You win some, you lose some.  
Recap Sept. 9
Stocks enjoyed a 1.6% rally on the S&P 500 to wrap up the short week with a 3.7% surge. Bear flattening action predominated in the Treasury market, as the two-year yield reached another 15-year high intraday at 3.56% while the long bond edged higher to 3.47%, while gold climbed to $1,727 an ounce and WTI crude rose back above $86 a barrel. The VIX slipped to a two-week low south of 23. 
- Philip Grant
After Midnight
A pair of headlines today:
ECB Goes Big with Jumbo Hike as Lagarde Hints More to Come (Bloomberg)
Ancient Human Bloodsucker? Skeletons of Female ‘Vampire’ Unearthed in Europe During Dig (USA Today)
Coincidence?  Yeah, probably. 
Interest Expense
It's hard to please two masters.
It’s hard to please two masters. Last month’s tentative agreement between American and Chinese officials allowing stateside auditors to review the books of U.S.-listed Chinese companies leaves those firms in a delicate position. Namely, placating Washington (which has threatened to delist non-compliers by 2024) while not running afoul of China’s expansive national security laws mandating that such audit records not leave the People’s Republic.  
How to walk that regulatory tightrope? The Wall Street Journal reports today that scores of such U.S.-listed firms are utilizing a “workaround” to the problem: Namely, permitting smaller U.S. accounting firms to partner with Chinese peers, who conduct the inspections using their counterpart’s computer systems. That would still leave the raw records in American hands under the Public Company Accounting Oversight Board’s purview. “This is too cute by half,” Paul Gillis, professor of accounting at Beijing International Studies University, told the Journal.
That delicate dance shines a renewed spotlight on Chinese firms’ use of so-called variable interest entities (VIE) to list their shares on overseas markets. Utilized by the likes of Alibaba, Baidu and JD.com, VIEs allow those companies to use shell companies – often based in the Cayman Islands – to attract foreign capital without breaching local laws barring foreign ownership of firms operating in politically sensitive industries. In other words, Americans buying VIE shares own no legal claims on the underlying business. 
Legislators on both sides of the aisle are finally taking notice. Last Thursday, senators Chris Van Hollen (D-MD) and Rick Scott (R-FL) introduced a bill designed to put the crimps on VIE usage, including provisions that would require exchanges to identify VIE firms via stock trading symbols and broker dealers to proffer warning labels highlighting “the lack of legal recourse for investors.” 
From Beijing’s perspective, the contraptions have represented the best of both worlds. Writing in the Swiss
publication The Market last summer, J Capital Research co-founder Anne Stevenson-Yang explained the value that VIEs provide the regime:
China's door is closing to inbound traffic - internet content and other forms of media, other channels of cultural influence, many kinds of inbound travelers, and many imports. . .  For capital, the inbound door remains wide open, but the way out is increasingly shut.
Policies around IPO approvals, VIEs, internet control, anti-monopoly regulation, and investment policy have everything to do with capturing and holding on to hard currency.
Citing the VIE structure, Strategas Research Partners chairman Jason Trennert puts it succinctly: “For the long-term investor, China is uninvestible.” Leaving aside the 66% decline for the Nasdaq’s China Golden Dragon Index from its February 2021 highs, recent experience lends credence to that perspective. 
Jianzhi Education Technology Group (ticker: JZ), which utilizes the VIE structure, debuted on the Nasdaq Aug. 26 at $126 and traded as high as $186, briefly valuing the outfit north of $11 billion. Less than a fortnight later, JZ settled at $3.99.  
That’s not to say that VIE-structured firms have a monopoly on peculiar trading activity, or opaque corporate edifices. Earlier in August, investors rolled out the red carpet for the IPO of Hong Kong-based Magic Empire Global Ltd., (ticker: MEGL). After pricing at $4, shares opened at $50 and quickly zipped to $236 to confer a short-lived $4.7 billion market capitalization on the advisory and underwriting firm. The stock now changes hands at $5.11. As the prospectus notes, the company “do[es] not have or intend to have any contractual arrangement to establish a variable interest entity structure with any entity in China.” Even so, “Magic Empire is not a Chinese operating company, but an offshore holding company incorporated in the British Virgin Islands.” 
QT Progress Report
An $8 billon weekly decline in Reserve Bank Credit leaves the Fed’s portfolio of interest bearing assets at $8.79 trillion, or about $135 billion below the late March peak. 
Recap Sept. 8
Stocks remained on the advance with the S&P 500 finishing near session highs with a 65 basis point gain, while Treasurys gave back a portion of yesterday’s rebound with yields rising by three basis points on both the 2- and 30-year maturities. WTI crude rebounded off yesterday’s eight month lows to near $83 a barrel, gold slipped to $1,720 an ounce and the VIX fell below 24. 
- Philip Grant
Reality Bites
Financial regime change is upon us, sort of.
Financial regime change is upon us, sort of. A pair of exchange traded funds tracking special purpose acquisition companies bought the farm last month, a development that “may signal an end to one of Wall Street’s hottest manias over the past few years,” Bloomberg’s Emily Graffeo writes today. 
The Defiance Next Gen SPAC Derived ETF and Morgan Creek – Exos SPAC Originated ETF each shuttered in August after less than two years of existence, managing $117 million and $47 million at their respective peaks. Conversely, the AXS Short De-SPAC Daily ETF (ticker: SOGU), which attempts to track the inverse performance of companies that recently came public via the blank check route, has rallied a cool 54% in 2022 for one of the best performances U.S. among active equity ETFs this year. 
Animal spirits may be on the wane as asset prices retreat and output growth stalls, but vestiges of the Covid-era bacchanal remain. Citing data from J.D. Power, The Wall Street Journal documents today that luxury vehicles grabbed a 17.4% share of the overall domestic auto market this year through July.  That’s up from 14.6% in 2019 and 13.6% in 2017, when luxury autos transacted at an average $50,900 and $48,600, respectively, compared to 2022’s $65,000 price tag.
A-list celebrities, likewise, look to try their hand at the Wall Street game. This morning, reality television mainstay Kim Kardashian announced she will form private equity firm SKKY Partners in conjunction with longtime Carlyle Group partner Jay Sammons. The fund will invest in majority and minority stakes in an array of consumer-focused businesses and is planning to soon commence fundraising from institutional investors. “The exciting part is to sit down with these founders and figure out what their dream is,” Kardashian said.  
Heat Check
Time for a “power” outage in the Land of the Rising Sun?
Time for a “power” outage in the Land of the Rising Sun? Persistent strength in the U.S. dollar has taken a particularly acute toll in Japan, where the yen briefly ticked to near 145 to the dollar, marking its weakest level since the 1998 Asian Currency Crisis with a whopping 20% year-to-date depreciation. 
That development duly spurred some jawboning commentary from the political class. “We are concerned that the yen’s depreciation has been one-sided,” finance minister Shunichi Suzuki declared today. “We will take necessary action if this continues,” he vowed. 
Yet the government’s rhetorical defense left some observers underwhelmed. “The comments today were intended to signal intervention, but markets still do not think that they will take such an action,” Kenta Tadaide, senior foreign exchange strategist at Daiwa Securities, told the Financial Times.  “The Ministry of Finance and the Bank of Japan probably believe the current phase is clearly the dollar’s strength and not the yen’s issue,” Mari Iwashita, chief economist at Daiwa Securities, added to Bloomberg. “That means there unfortunately is no sense of urgency about intervention or the need for the BoJ to tweak policy.” 
To be sure, a broad greenback bid has spurred reciprocal weakness in other major currencies including multi-decade lows in the British pound and South Korean won. Yet the Bank of Japan has aggravated yen weakness via its continued regime of near-zero rates and ample asset purchases in hopes of greasing the wheels of commerce with just a bit of inflation. Chief among BoJ governor Haruhiko Kuroda’s “powerful easing” initiatives: so-called yield curve control, in the form of unlimited 10-year Japanese government bond purchases to maintain a yield of no more than 0.25%. 
As sovereign debt comes under broad global pressure, the BoJ is sticking to its guns. Yesterday, the central bank announced it will purchase ¥550 billion ($3.8 billion) of five- and 10-year government bonds, instead of a previously planned ¥500 billion, in response to a 10-year yield that continues to bump up against its 25 basis point line in the sand. 
Against that backdrop, business conditions are heating up. Tankan’s second quarter survey showed that Japanese businesses plan to raise prices by 2.9% on average over the next year. That the highest reading in the data series’ eight-year history, up from 2.1% during the quarter ending in March and just 0.5% in the prior year period. Capital spending across the corporate sector increased by 4.6% from a year ago, the finance ministry found last Thursday, blowing past consensus guesstimates of a 3% spending uptick. 
More broadly, Japanese CPI advanced at a 2.6% annual clip in July, comfortably above the central bank’s 2% goal.  Yet the monetary mandarins remain unbowed. “Headline inflation may reach 3% [in coming months] but the rise will be driven mostly by higher raw material prices,” Kuroda told Reuters today, in arguing that current policies are appropriate.   
Former colleague Goushi Kataoka puts it even more emphatically. “It would be a terrible idea for the BoJ to raise interest rates just because inflation briefly hits 3%,” the BoJ board member turned PWC Consulting chief economist opined to Reuters. “Real interest rates are falling, giving capital expenditure a boost. If yen falls persist next year and beyond, that could change corporate behavior, including drawing investment back to Japan. All of this is exactly what yield curve control is for.”
The band plays on. 
Recap Sept. 7
The bulls strike back:  Stocks ripped higher by 1.8% on the S&P 500 for the broad index’s best day in nearly a month, while Treasurys also caught a bid in bull-flattening fashion with the long bond falling seven basis points to 3.42%.  Gold reversed early losses to finish at $1,728 an ounce, WTI crude continued lower for its first-sub $82 a barrel finish since January and the VIX tumbled two points to settle just under 25. 
- Philip Grant
Purple Rain
Their modesty is second to none.
Their modesty is second to none. The folks behind Tether, the world’s largest so-called stablecoin, penned a blog post today featuring some eye-catching rhetoric, terming their digital ducat “an important and powerful tool for the United States in maintaining the dollar’s role as the most stable, most used, and most sought-after currency in the world.”  
What’s more, “Tether has not only created a way for people to access dollars as a tool for financial freedom, it has created a system that strengthens the U.S. dollar. Previously, the global demand for dollars could only be satisfied with actual U.S. dollars,” the authors argue.  
Fuzzy math may lurk behind those sweeping assertions. Today’s blog post asserts that stablecoin purchasers “accounted for” more than 2% of the Treasury market in May, a figure which would sum to just under $500 billion (total debt held by the public is $24.3 trillion).  Though it’s unclear whether the post refers to stock or flows, total assets among all ten stablecoins larger than $1 billion stand at $340 billion, data from Coinmarketcap.com show. 
What’s more, assets beyond Uncle Sam’s obligations figure prominently in that mix. To wit, Tether’s reported Treasury holdings of $28.9 billion as of its June 30 attestation, less than half of its $66.4 billion in total reserves and down from $39.2 billion on March 31. That detail aside, the blog post contends that “Tether represents a significant buyer in the U.S. Treasurys market.” 
Today’s communique likewise trumpets last month’s news that Tether hired audit firm BDO Italia to conduct monthly proof of reserves analyses, in hopes of calming persistent questions regarding the exact composition of its reserves. 
On that score, the jury is still out. Tether’s decision to switch auditors “yet again” is a “questionable” one, Securitize Capital partner Joseph Edwards told Reuters on Aug. 19, “given that it’s to a division with no exist[ing] presence in English-language markets. They’re within their rights to do so, but it’ll do little to silence critics.”
Living Single
Mr. Market goes back to school.
Mr. Market goes back to school. Wall Street marked its return from the three day weekend in style, as the corporate bond market saw a barrage of activity featuring 20 domestic borrowers coming to market, by Bloomberg’s count, raising roughly $35 billion. 
Concurrent with that supply dump: yet another lurch higher in Treasury yields. “The [busy] issuance calendar will keep pressure on rates,” predicts Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities.  
Apart from a fresh 52-week low for the highly traded iShares 20 Plus Year Treasury Bond ETF (ticker: TLT), today’s bond market selloff ushers in a new bear-market marker within the investment grade category. Yields on the ICE BofA Corporate Bond Index briefly topped 5% this morning, up from 2.01% a year ago and the highest borrowing cost since October 2009. 
Bounding interest rates could, in turn, complicate life for the cadre of speculative-grade borrowers, particularly within the heretofore mushrooming floating-rate category. Issuance of leveraged loans reached just $334 billion over the first eight months of the year, compared to $532 billion over the same stretch in 2021, on its way to a record $640 billion full-year tally. The total loan market now stands at some $1.4 trillion, double its size in 2015.
Meanwhile, leveraged loan downgrades outpaced upgrades by a ratio of 1.89:1 last month according to LCD. That ratio held at less than 0.5 for the bulk of 2021 and remained below one as recently as this spring. Defaults in the loan market ticked to $4.46 billion in August, LCD finds, the busiest such stretch since July 2020 and more than the past 17, stimulus-soaked months combined.
That uptick in trouble colors the steady fundamental deterioration in loan composition during the post-crisis era. Roughly a quarter of leveraged loan issuers are rated single-B, Frank Ossino, fund manager at Newfleet Asset Management, relays to The Wall Street Journal, compared to an 11% share of the market in 2010. More than 40% of last year’s vintage was rated single-B. 
As the Federal Reserve moves to contain raging inflation, large swaths of the loan market could be vulnerable in stormy financial seas. Portfolio managers at Pimco concluded in a May blog post that single-B-rated credits typically generate annual Ebitda equal to two times interest expense. Accordingly, a 300 basis point increase in the benchmark funds rate would inflate those borrowers’ interest costs by as much as 70% annually, a development that would “materially erode debt servicing capacity and challenge companies’ ability to generate free cash flow.” 
That unhappy day may soon be upon us:  The current 2.33% effective funds rate is up by 225 basis points since March, with interest rate futures now pricing 74% odds of a 75 basis point hike at the Sept. 21 meeting of the Federal Open Market Committee. 
Recap Sept. 6
Imagine if they weren’t “super safe.” Treasurys endured another brutal day across the curve with the long bond ripping 14 basis points to 3.49%, its most elevated yield since 2014, though still south of the 3.5% on offer for two-year notes.  Stocks remained on the back foot with the S&P 500 losing another 40 basis points, as the broad average slipped below 3,900 on an intraday basis for the first time since late July. Gold fell to $1,712 an ounce, WTI crude held at $87 per barrel and the VIX settled at a seven-week high near 27. 
- Philip Grant
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