From the Financial Times:

Vladimir Putin’s investment envoy has called on Elon Musk to build an undersea tunnel connecting Russia to Alaska, a day after US President Donald Trump floated the prospect of resumed trade between the two countries if the war in Ukraine ends.

“Imagine connecting the US and Russia, the Americas and the Afro-Eurasia with the Putin-Trump Tunnel — a 70-mile link symbolizing unity,’’ Kirill Dmitriev, chief executive of the Kremlin’s sovereign wealth fund and a special envoy for investment, said on X on Thursday.

He claimed that with technology from Musk’s Boring Company, the costs of such a project could be reduced from more than $65 billion to less than $8 billion.

Move fast and break things, crypto edition: the nascent stablecoin industry may be getting out over its skis, Federal Reserve Governor Michael Barr said yesterday, warning that supervisors have yet to finalize a regulatory framework governing the typically dollar asset-backed contraptions under the GENIUS Act signed into law three months ago.

“Issuing liquid liabilities redeemable at par but backed by assets – even high-quality ones – about which regulators might have questions, makes private money vulnerable to [bank] run risk,” Barr commented at a financial technology event in the nation’s capital. “Stablecoin issuers traditionally retain profits from investing reserve assets and therefore have a high incentive to maximize the return. . . stretching the boundaries of permissible reserve assets can increase profits in good times but risks a crack in confidence during inevitable bouts of market stress.”

Such risks briefly came to the fore during last Friday’s crypto liquidation event, as Ethena (USDe) broke its dollar peg and fell to as low as 65 cents on the Binance exchange before rebounding back to par minutes later. “Even a brief stablecoin depeg can shake the market,” Rachael Lucas, analyst at digital exchange BTC Markets, told Bloomberg. “Traders rely on them for liquidity, lending and collateral, so any loss of confidence can trigger liquidations and spill into wider crypto volatility.”   

The mishap serves to highlight some salient features of USDe, the third-largest stablecoin with a market value of about $14 billion: The self-described “synthetic dollar” is backed by other stablecoins, including those issued by Tether and Circle, and currently offers hodlers a 5.5% yield funded primarily via basis trades, i.e., capturing price discrepancies between spot and futures crypto products. “When crypto markets are booming and funding rates – the interest paid by bullish traders – are high, the mechanism Ethena relies on can translate to sky-high yields,” Bloomberg notes. “But that [business model] gets tested during massive selloffs.”

PayPal’s crypto affiliate, meanwhile, made its mark in less-than distinguished fashion yesterday, as Paxos mistakenly minted $300 trillion of its in-house stablecoin PYUSD – a sum equivalent to nearly 90% of global debt as of June 30 per the Institute of International Finance – before burning the towering stack of digital ducats some 30 minutes later. “This was an internal technical error,” stated Paxos, operator of the sixth-largest stablecoin with $2.6 billion in market cap. “There is no security breach. Customer funds are safe. We have addressed the root cause.”   

Will the GENIUS Act, designed to bring stablecoins into the financial mainstream, spell trouble for legacy banking players in the form of widespread deposit flight? Perhaps it’s just the opposite. See the analysis “Not so smart” in the Sept. 26 edition of Grant’s Interest Rate Observer for more.

Stocks caught a 0.5% bid on the S&P 500 to wrap up a topsy-turvy week slightly higher, while Treasurys saw some bear flattening with two-year yields rising five basis points to 3.46% and the long bond ticking to 4.6% from 4.58% Thursday. WTI crude remained stuck at $57 a barrel, gold finally pulled back 1% to $4,246 per ounce, bitcoin edged lower at $107,000 and the VIX slipped below 21.

- Philip Grant

From the Financial Times:

The U.S.’s yawning deficit is set to remain the widest among the world’s richest countries despite revenues from Donald Trump’s trade tariffs, with the IMF warning the world’s largest economy needs to put its finances in order “sooner rather than later.”

The IMF’s latest Fiscal Monitor showed the U.S.’s general government overall balance — a measure which includes interest payments on debt holdings — was set to be the highest of any rich nation tracked by the fund for this year and the rest of the decade.

And from Reuters:

The International Monetary Fund could sell a golf course it owns in Maryland, U.S. Treasury Secretary Scott Bessent said on Wednesday, repeating his call for the global lender to focus on its core mission of helping countries in trouble.

"They can sell the golf course," Bessent told reporters, when asked about concrete changes he expected to see at the IMF now that his former chief of staff, Dan Katz, had moved to the global lender as its No. 2 official.

"We're going to refocus," said Bessent, who spoke during the annual meetings of the IMF and World Bank in Washington. "They're going to go back to their core mission. And their core mission is providing liquidity, providing backstops, and being useful as an intervention when. . . countries are in trouble." Bessent said it was time for the IMF to stop "this kind of dalliance in these climate policies or social engineering," but did not elaborate.

It’s a gale-force monetary tailwind: Federal Reserve chair Jerome Powell said yesterday that an end of balance sheet reduction is drawing near, flagging “some signs” of funding pressures on account of waning bank reserves. “The committee’s plans lay out a deliberately cautious approach to avoid the kind of money market strains experienced in September 2019,” he added.  Following more than 3.5 years of so-called quantitative tightening, interest bearing assets on the Fed’s balance sheet register at $6.54 trillion, equivalent to 21.4% of annualized GDP as of the second quarter. That compares to a 17.4% output-adjusted portfolio in August 2019 with a layover at 36.6% in March 2022.

A pair of fellow Fed-heads have likewise followed Powell’s lead in characterizing the 4% to 4.25% Fed funds rate as “restrictive,” with Philadelphia Fed president Anna Paulson arguing Monday for “moving policy towards a more neutral stance” and Boston boss Susan Colins contending Tuesday that “even with some additional easing, monetary policy would remain mildly restrictive.”

To be sure, Uncle Sam’s creditors seem copacetic with the Fed’s easing-minded stance: 10-year Treasury yields briefly ticked below 4% this morning for the first time since the April tariffs tumult, while the policy-sensitive two-year note hovers roughly 75 basis points below the overnight funds rate.  

Be that as it may, recent developments on the earnings front make for an awkward pairing with those restrictive policy characterizations.  “Wall Street is firing on all cylinders, fueled by deals and trading,” read a Tuesday headline from The Wall Street Journal, which followed stellar third quarter results from the likes of Goldman Sachs, JPMorgan Chase, Citigroup and Wells Fargo. Banks and brokers are poised for 10% profit growth this year,  Bloomberg strategists led by Michael Casper predict today, which would represent the best such showing since 2021. “If the Fed starts cutting rates, margins could widen fast enough to turn that 10% target into something closer to 20%,” Casper et al. predict.  

“Conditions have been kind of as good as you can hope for,” commented JPMorgan CFO Jeremy Barnum on yesterday’s earnings call, after his bank posted a 53% year-over-year increase in equity underwriting proceeds, a 17% uptick in investment banking fees and a 25% rise in trading revenue. “America’s economic engine [is] indeed still humming” declared Citi CEO Jane Fraser. “That said, there are pockets of valuation frothiness in the market so I hope discipline remains.”

On that score, Bloomberg identified a noteworthy dispersion among the industry’s leading lights. Thus, JPMorgan boosted its provision for loan losses by $3.4 billion from the prior period, the largest sequential increase since the plague year. Meanwhile, the quintet of Citi, Wells Fargo, Goldman Sachs, Morgan Stanley and Bank of Amerca slashed their combined provisions to $4.8 billion from $6 billion in the second quarter. BofA’s 16% downshift took place in the context of a 9% annual growth in its loan book, while Morgan Stanley set aside $0 after earmarking a $196 million reserve three months prior.  

“‘Monetary policy,’ for all its invocation of higher mathematics, is a highfalutin guessing game,” Grant’s Interest Rate Observer contended on Aug. 29.  See that analysis (“Putting the Fed in play”) for more on the potential ramifications of today’s institutional predilections “to whistle past the graveyard of boom and bust.”

Stocks finished higher by 0.4% on the S&P 500 following another volatile session that saw the broad index log an early 1.2% advance before dipping into negative territory in early afternoon. Treasury yields reversed higher by two to four basis points across the curve, WTI crude remained stuck below $59 a barrel, gold continued its eye-watering run to $4,209 per ounce, bitcoin slipped below $112,000 and the VIX settled at 20 and change.  

- Philip Grant

From the Financial Times:

Scores of European parliament members earn income from second jobs in areas that overlap with their lawmaking, according to Financial Times analysis that raises questions about disclosure of potential conflicts of interest.

Parliamentary records show that 59 members of European parliament [MEP] in the 720-strong assembly are sitting on committees or working on policy areas that are related to their paid side activities, the analysis suggests. Only eight lawmakers openly declare potential conflicts of interest relating to laws they are working on.

The eight MEPs are among a total of 202 who have registered a paid job alongside their parliamentary duties, according to data [collected] by the NGO Transparency International. The highest earner receives about €641,000 ($744,000) in addition to his €130,000 MEP salary.

That’s going to leave a mark: Friday’s unruly price action spurred potentially lasting pain in the digital asset realm, with the Trump administration’s renewed tariff threats sending crypto’s aggregate market capitalization to as low as $3.66 trillion, a 12% selloff in just 12 hours. The ducats have since recovered roughly half of that lost paper wealth, but the rebound is little comfort for some washed out speculators.

At least $19 billion in leveraged positions were wiped out across all trading venues according to Coinglass, the largest such single-day rout on record. The data firm adds that “the actual total is likely much higher” as the Binance exchange only reports one liquidation order per second.   

“During this crash, [market] depth evaporated and liquidation engines got overwhelmed,” Justin d’Anethan, head of partnerships at advisory firm Arctic Digital, told Bloomberg. Automatic deleveraging (ADL) systems, or risk management protocols designed to protect exchanges by automatically closing out certain positions during mass-liquidation events, “poured gasoline on the fire,” he added. “It felt less like a market and more like a trap snapping shut.”  

With the White House subsequently dialing back its pointed trade-related rhetoric, will last week’s episode prove a one-off blip in an ongoing bull march?  One potentially well-placed player isn’t counting on it: Citing data from HypurrScan, CoinDesk reports that a trader who scored a $192 million windfall by a “perfectly timed” short position ahead of President Trump’s market-disturbing social media post, reloaded with a fresh $163 million short position – leveraged tenfold – yesterday evening.

But for now, at least, “business as usual” remain the watchwords in the crypto complex, if a Monday press release is any indication:

House of Doge Inc., the official commercial arm of the Dogecoin Foundation, today announced it has entered into a definitive merger agreement with Brag House Holdings, Inc. (NASDAQ: TBH), the Gen Z engagement platform operating at the intersection of gaming, college sports, and digital media. 

Pursuant to the terms of the agreement, Brag House will acquire House of Doge in a reverse takeover transaction. The proposed merger, which has been unanimously approved by both Boards of Directors, will advance mainstream Dogecoin adoption and institutionalize Dogecoin’s utility.

Stocks snapped back by 1.6% on the S&P 500 to recoup a bit more than half of Friday’s losses, while the bond market was closed for Columbus Day, or whatever it’s called now. WTI crude bounced towards $60 a barrel, gold legged higher by more than 2% to $4,108 per ounce with silver eclipsing the $50 an ounce threshold for the first time. Bitcoin levitated north of $115,000 while the VIX retreated three points to 19.

- Philip Grant

Crashing symbols, via the Financial Times:

Europeans are at risk of cold showers after materials critical to hot water tanks were not included on an E.U. list of authorized substances, which was revised as part of the bloc’s sprawling environmental legislation.

Applia, the home appliance lobby group, has estimated that more than 90% of hot water storage tanks would no longer be marketable in the E.U. if hafnium, a highly heat-resistant metal, and its sister element zirconium are not recognized as safe for household use. The two elements were not listed in the bloc’s rules for drinking water, which enter into force in 2027 and aim to protect consumers and improve water quality standards.

The European Commission appears to have overlooked the fact that hot water tanks also hold potable water, with manufacturers warning they risk fines if they do not comply with the list of authorized substances.

Who else wants to be a millionaire?  More than 24 million U.S. households sported a seven-figure net worth by the end of 2023, Bloomberg reports today, citing data from the U.S. Census. The share of households at or beyond that wealth threshold approached 18%, up from 12.3% in 2017, with the subsequent levitation in asset prices surely doing little to reverse the trend.

Of course, bounding inflation and eroding purchasing play their own, malevolent role in that dynamic. “The word ‘millionaire’ once implied automatic affluence,” Ashton Lawrence, director at Mariner Wealth Advisors, observed to Bloomberg. “The goalposts have shifted. It’s still a meaningful milestone, but for most people it’s no longer enough.”

Ready access to cash, meanwhile, presents a challenge for large swaths of that fast-growing cohort. Liquid assets (including bank accounts, stocks, mutual funds and bonds) compose only 17% of total wealth for the 12 million households worth $1 million to $2 million, with that share rising to 22% for the 8.5 million households worth $2 million to $5 million and 24% for the 3.5 million at $5 million-plus. The Federal Reserve’s Survey of Consumer Finances likewise finds that home equity and age-restricted retirement account balances have grown as a share of millionaire net worth from 1989 to 2022.

On that score, Thursday brought a potentially instructive sighting from an avatar of conspicuous consumption. Shares of Ferrari sank as much as 16% after the automaker forecast 6% annual growth in earnings before interest and taxes through 2030, downshifting from the 10% pace presented during their prior capital markets event held three years ago.  Ferrari generates nearly $500,000 of revenue per vehicle, sold, compared to $313,000 a decade ago.  

Keep your eyes on the prize: Toronto-based, Nasdaq-listed Quantum BioPharma (ticker: QNTM) laid down the gauntlet via a Wednesday press release, offering up to $7 million in cash “to any individual or entity who can provide definitive and verifiable proof that they were asked, instructed, hired or otherwise induced to manipulate the company’s stock.”

In order for whistleblowers to cash in, such information must “contribute significant evidence” towards a victory or settlement in Quantum’s $700 million lawsuit against CIBC, RBC and other lenders filed last fall. The firm alleges that the banking cabal artificially suppressed its shares via spoofing, i.e., “the submission and cancellation of buy and sell orders without the intention to trade in order to manipulate other traders.” 

Pre-revenue Quantum, which posted a $18.5 million net loss over the six months through June, sports a $59 million market capitalization, up some 50% over the past five years even as the stock price has declined 92% thanks to persistent dilution. Might a favorable court ruling deliver relief to beleaguered shareholders? Management announced plans in June to distribute up to 50% of any net proceeds from the litigation via a special dividend.

Stocks came under modest pressure to the tune of 0.3% on the S&P 500, continuing this week’s see-saw price action, while Treasurys flattened a bit with two-year yields ticking to 3.6% from 3.58% Wednesday and the long bond staying at 4.72%. WTI crude again fell below $62 a barrel, gold pulled back nearly 2% to $3,976 per ounce, bitcoin ebbed to $121,000 and the VIX stayed at 16.

- Philip Grant

From The Guardian:

Deloitte will provide a partial refund to the [Australian] government over a $440,000 report that contained several errors, after admitting it used generative artificial intelligence to help produce it.

The Department of Employment and Workplace Relations confirmed Deloitte would repay the final instalment under its contract, which will be made public after the transaction is finalized. It comes as one Labor senator accused the consultancy firm of having a “human intelligence problem.” . . .

University of Sydney academic, Dr Christopher Rudge, who first highlighted the errors, said the report contained “hallucinations” where AI models may fill in gaps, misinterpret data, or try to guess answers.

Move over, artificial intelligence: the rip-roaring rally in gold and bitcoin has reached a new crescendo in recent days, with the yellow metal topping $3,900 for the first time on Monday as year-to-date gains approach 50%. That’s far above the 18% return for the Roundhill Magnificent 7 exchange traded fund and nearly matches the 53% advance for Goldman Sachs’ basket of unprofitable technology stocks.

“It’s gold-plated fomo,” Pictet Asset Management chief strategist Luca Paolini put it to the Financial Times Monday, referring to the fear of missing out. “There becomes a level where it is impossible not to own it.”  Underscoring that sentiment shift: strategists at Morgan Stanley now advocate a 60/20/20 portfolio allocation rather than the conventional 60/40 split, with gold attaining equal weight to fixed income. Gold-themed ETFs attracted $13.6 billion in net cash over the past four weeks per the World Gold Council, a substantial chunk of the $60 billion inflow for 2025 which already represents the highest full-year figure on record.  

So-called digital gold enjoys its own season of abundance. The price of bitcoin punched through $125,000 for the first time over the weekend to leave the leading cryptocurrency with a near 30% advance so far this year, while bitcoin backed ETFs enjoyed $3.5 billion of inflows last week according to CoinShares, the largest on record.  

On Friday, analysts at JPMorgan categorized those moves as “the familiar pattern of dollar debasement against alternative reserve assets amid Washington dysfunction,” referring to the ongoing government shutdown. Of course, the U.S. has no monopoly on political chaos, underscored by today’s resignation by French Prime Minister Sébastien Lecornu after less than a month on the job, marking the shortest term since the Fifth Republic was established in 1958.  

French President Emmanuel Macron, who now seeks his fourth PM since summer 2024, oversees a government which is running a fiscal deficit equivalent to 5.4% of projected GDP for this year. “The governability of France is declining,” Jean-François Robin, global head of research at Natixis CIB, told the FT. “No caretaker prime minister will have the majority to cut significantly into public spending.” Creditors are voting with their feet as 30-year bond  yields hover at 4.4%, up 100 basis points from early December to exceed the 4.27% paid by Greece.

Freewheeling fiscal policy likewise looks to be on the menu in Japan following the election of Sanae Takaichi, a noted proponent of fiscal and monetary stimulus, to leader of the ruling Liberal Democratic party.  That development spurred a 3% rally in the Topix index and outsized gains from defense industry firms poised to benefit from increased government largesse, while 30-year Japanese government bond yields vaulted 14 basis points to 3.31%, easily the highest of this century.

“We can already guess that she won’t bring inflation down, because if she’s going to double down on Abenomics of the past, which means a sharply weaker yen, which means more government spending, that arguably means more inflation,” commented Tokyo-based journalist William Pesek on CNBC this morning.

Whither global interest rates in this era of synchronized fiscal profligacy?  “The transition to software from smokestacks changed the nature of capital and may have contributed to the length and power of the post-1981 bond bull market,” contended the June 16, 2023, edition of Grant’s Interest Rate Observer (“Return of the tangible”).

A lasting reversal of that trend could similarly reverberate: See the analysis “Bond markets on edge” in the current issue dated Sept. 26 for more.

Stocks caught another bid with the S&P 500 and Nasdaq 100 advancing by 0.4% and 0.8%, respectively, while Treasurys saw a bear-steepening move with 2- and 30-year yields rising two and five basis points, respectively. WTI crude rebounded towards $62 a barrel, gold settled near $3,960 per ounce, bitcoin stayed just above $125,000 and the VIX ebbed toward 16.

- Philip Grant

From Sports Illustrated:

As the Seattle Mariners gathered for their first scrimmage of the week on Wednesday, a familiar face was roaming the outfield at T-Mobile Park. A little older and a little grayer, 51-year-old Ichiro Suzuki still looked great in action, as the Hall of Famer continues to support the franchise [for which] he played the majority of his career. . .

Approximately 5,000 fans attended today's event at just $10 per ticket. Not only did the admission money go to charity, but those who attended the event were treated to a bonus when they saw Ichiro trot out with the team. He even flashed the famous 'No-Fly Zone' gesture made by All-Star centerfielder Julio Rodriguez. . .

“I mean, he knows I'm the center fielder,” Rodríguez said, jokingly, when asked if he would call Ichiro off of any fly balls. “I don't think age really matters a lot between the lines. But I'm still going to let him catch one... probably.”

Everything’s bigger in Texas, data center edition: behold the blockbuster debut of Fermi, Inc. (FRMI on the Nasdaq), with shares enjoying a 55% rip yesterday to leave the nine-month-old firm with a $19 billion market capitalization.  

Fermi, which counts former Texas governor turned Trump 1.0-era energy secretary Rick Perry among its cofounders, plans to construct the world’s largest energy and data facility, which could generate 11 gigawatts of energy – twice that currently serving New York City – by 2038 per CEO Toby Neugebauer.   

Tenant revenues are unlikely to take shape prior to 2027 according to the prospectus, a noteworthy detail considering the firm is structured as a real estate investment trust, which must earmark 90% of taxable income towards shareholder dividends. Neugebauer told the Financial Times that Fermi has snagged a deal with “one of the most valuable and respected technology companies on the planet.”

In any event, Wednesday’s closing price confers a $6 billion paper windfall on Neugebauer, the son of former Texas congressman Randy Neugebauer and who previously helmed the ill-fated, “anti-woke” banking startup GloriFi, which filed for Chapter 7 liquidation in 2023 alongside a torrent of investor litigation. Perry and his son Griffin, who holds no formal role in the company, reaped some $3 billion in paper wealth from their combined stakes. The deal “speaks to the gold rush happening in AI infrastructure right now. It's a cash geyser," Matt Kennedy, senior strategist at Renaissance Capital, told Reuters.

Considering those facts, it is little surprise that investors continue to roll out the red carpet for the AI revolution’s avatar. OpenAI has completed a $6.6 billion secondary share offering to institutions including T. Rowe Price and SoftBank which values the ChatGPT startup at $500 billion. That’s up some 60% from a March funding round to establish a new private markets valuation peak, surpassing the $400 billion figure achieved by SpaceX in July.

OpenAI had authorized employees to sell up to $10.3 billion of shares, the FT relays, but many bulled-up staffers opted to hang on to their stakes in anticipation of further price appreciation. The firm projects $20 billion in annual recurring revenue by year-end but also pegs cumulative cash burn at $115 billion through 2029, an increase of $80 billion from its first quarter forecast (see the Sept. 12 edition of Grant’s Interest Rate Observer for more on the troublesome unit economics in force for OpenAI and other industry players).

Last week brought a telling signpost regarding returns on investment, via a report from The Information that Meta is negotiations with Google “about the possibility of using Google’s AI models to improve Meta’s ad business.” 

That bulletin is remarkable in several respects, as advertising accounts for nearly all of the Facebook parent’s revenue, while Meta has regularly splashed out huge sums in its AI ramp-up, including doling out several $100 million-plus signing bonuses to coax senior staffers from Sam Altman’s outfit.  Meta’s capital expenditures are set to vault to $97 billion next year from $37 billion in 2024 if the sell-side consensus proves accurate, with free cash flow poised to drop to $28 billion, half that achieved last year.

Notably, those outlays do not include the monster four million square foot Hyperion data center, which Meta will occupy under a 20-year lease. A Pimco-led $26 billion debt financing will underpin the project, which is structured as a joint venture and remains off the social media giant’s books.

A $16.8 billion weekly decline in Reserve Bank credit leaves the Fed’s portfolio of interest-bearing assets at $6.544 trillion. That’s down $12 billion from the beginning of September and is 26.7% below the March 2022 peak.

Stocks traded just above flat on the S&P 500 in a low-wattage session, with Treasurys flattening a bit as the long bond dipped three basis points to 4.69%. WTI crude fell below $61 a barrel, gold logged a modest pullback to $3,857 per ounce, bitcoin ripped above $120,000 and the VIX ticked towards 17.

- Philip Grant

Your headline-cum-subhead of the day, from the Financial Times:

Switzerland agrees with U.S. not to manipulate its currency

Rare joint statement with U.S. Treasury seen as ‘green light’ for further currency intervention by Swiss central bank

President Trump took to Truth Social to trumpet waning mortgage costs on Saturday, after Freddie Mac’s 30-year, fixed rate figure ticked to 6.3% last week from 6.75% in mid-July and just over 7% on inauguration day.  

As Bianco Research founder and eponym Jim Bianco pointed out on X, placid bond market conditions have helped drive that downshift: the ICE BofAML MOVE Index – a VIX type volatility gauge for fixed income – has ebbed to its lowest reading since early 2022,  helping drive compressing mortgage spreads relative to Treasurys. On that score, Bianco writes, the E-Z money loving commander in chief may be tempting fate after firing off another not-so-subtle message to put-upon Fed chair Jerome Powell:

Prospective buyers need all the help they can get. Previously owned homes fetched a median $422,600 sales price in August per the National Association of Realtors, up 1.8% from the same period last year to mark the 26^th consecutive month of annual price gains.  “Record-high housing wealth and a record-high stock market will help homeowners trade up and benefit the upper end of the market,” commented NAR chief economist Lawrence Yun. “However, sales of affordable homes are constrained by the lack of inventory.”

Indeed, the annual income needed to afford the median-priced home, assuming a 31% housing debt-to-income ratio and a 30-year mortgage with a 3.5% [sic] downpayment, reached $126,700 last year per a June analysis from the Joint Center for Housing Studies of Harvard University, up from less than $80,000 in 2021.  Meanwhile, single family and apartment affordability now lag their respective historical averages in 99% of the 580 national regions surveyed by ATTOM, the property data firm relayed Friday. Housing related expenses consume 33.3% of the typical American wages, up from 32.2% at this time last year.

Today’s potent political impulse towards lower interest rates, in the face of measured inflation rising above the Fed’s self-assigned 2% annual target for 54 months and counting, may spell little relief on that score. 

Fed governor Michelle Bowman, a voting member on the rate-setting Federal Open Market Committee, offered some instructive commentary  at the Forecasters Club of New York Luncheon Friday. After flagging a sluggish pace of housing transactions on account of “very low. . . affordability,” Bowman added thus: “I am concerned that declines in house prices could accelerate, posing downside risks to housing wealth and inflation in the years ahead.”

Treasurys saw a bull-flattening move with the long bond dropping a half dozen basis points to 4.71% and two-year yields holding at 3.63%, while stocks fluttered higher by another 0.3% on the S&P 500. WTI crude tumbled nearly 4% to $63 a barrel, gold continued its rampage with a near 2% advance to $3,829 per ounce, bitcoin rebounded above $114,000 and the VIX jumped back above 16.

- Philip Grant

From The Art Newspaper:

The billionaire philanthropist, financier and collector Thomas S. Kaplan is in advanced discussions to fractionalize his Leiden Collection, the world’s largest private collection of Dutch Golden Age paintings, and launch it as an IPO.

“I'm looking to see whether I can take the entire collection public,” he tells The Art Newspaper: “I think assets, such as really great art, are going to multiply manyfold because they are truly scarce, and there's so much money sloshing around that will need a home and this is a great value proposition. To my mind the best way to evangelize for Rembrandt is by giving millions, maybe tens of millions, of ordinary people the opportunity to own a Rembrandt.”

Pretty soon you’re talking about real money: Mr. Market’s insatiable enthusiasm for all things artificial intelligence has kicked into another gear in recent days, as Bloomberg points out that Nvidia’s recently-announced $105 billion of combined investments in OpenAI and Intel spurred a $320 billion, three-day updraft in the chipmaker’s own market capitalization. Yesterday, Alibaba enjoyed a 10% share price bump – tacking on $35 billion in market cap – after saying it would exceed its prior $50 billion AI spending bogey, without specifying a new figure.

“The market has been super friendly to allow these companies to go on this investment spree, [on the belief that] AI presents a foundational opportunity not only for these companies but for the broader economy,” Tejas Dessai, director of thematic research at Global X Asset Management Company, told Bloomberg. “The biggest risk right now is underspending, especially if you are a category leader.”

Freewheeling conditions in corporate credit do little to dissuade that impulse, with option-adjusted spreads on ICE BofA’s investment-grade gauge hovering at 75-basis points, near the lowest since 1998. Domestic high-grade issuance reached $57 billion on Monday and Tuesday alone, relays Bank of America credit strategist Yuri Seliger. That two-day tally already approaches the $70 billion figure logged the week after Labor Day, which is typically the year’s busiest period. September supply is on pace to tip the scales at $230 billion, which would mark the month’s heaviest output on record.

An AI darling stands as Grand Marshal of that issuance parade, as Oracle Corp. raised $18 billion yesterday in a six-part bond offering, the second largest single transaction in the year-to-date. Demand for the deal was five times oversubscribed per Bloomberg, well above the 3.8 demand-to-supply ratio seen on average in 2025. That allowed Oracle to tighten pricing by 25 to 30 basis points across each of the half-dozen tranches, with the longest-duration issue due in 2065 sporting a 137-basis point option-adjusted pickup.  

To be sure, Larry Ellison’s corporate brainchild is the toast of Wall Street these days. Shares are up 77% so far this year, far ahead of Nvidia’s mere 33% advance, with the bulk of that move following news that Oracle inked a monster $300 billion, five-year agreement with OpenAI to sell computing power to the ChatGPT parent beginning in 2027. It’s one of the largest cloud contracts ever signed according to The Wall Street Journal.  

Yet the lunar bound stock price hardly moves the needle for creditors, who share no AI-related upside beyond the return of principal and contractually-stipulated interest payments.

To that point, Moody’s Ratings warned of substantial “counterparty risk” from that deal with OpenAI, which disclosed a $10 billion annual revenue run-rate in June, still a fraction of the $60 billion average annual sum it intends to pay Oracle. Peers at S&P likewise warned in July that Oracle’s capex is set to ballon to 40% of revenues in fiscal 2026 from 17% two years ago, with “weak” cash flow generation imperiling its credit profile “if the company needs to fund rising capital spending with new debt issuance.” Both of those agencies rate Oracle at the equivalent of triple-B, the last full stop before junk, alongside a negative outlook.

So goes the AI boom, so go the credit markets? Worldwide data center capital spending will total $2.9 trillion through 2028, analysts at Morgan Stanley estimated over the summer. Hyperscaler cash flows will cover less than half of that bill, with other funding sources including corporate debt issuance and private credit needed for the remainder.

“Two things everyone has to acknowledge,” Michael Gatto, head of direct lending and restructuring at Silver Point Capital and author of The Credit Investor’s Handbook, told the audience at the Grant’s Interest Rate Observer private credit event in spring 2024. “When there’s a lot of capital and the emotion is greed and there’s fear of missing out, bad deals get done. When there is a lack of capital and the emotion is fear, great deals get done.”

Reserve Bank credit remained near $6.56 trillion for a fourth straight week, with the Fed’s portfolio of interest-bearing assets down $9 billion from late August and 26.5% from its early 2022 peak.

Stocks came under moderate pressure for a third straight day, leaving the S&P 500 lower by 0.5%, while the Treasury curve flattened with two-year yields jumping seven basis points to 3.64% and the long bond ticking to 4.75% from 4.76% Wednesday. WTI crude ticked above $65 a barrel, gold rose to $3,750 per ounce, bitcoin fell below $110,000 and the VIX approached one-month highs near 17.

- Philip Grant

From Reuters:

China's securities watchdog has advised some local brokerages to pause their real-world asset (RWA) tokenization business in Hong Kong, said two sources, signaling Beijing's concerns of a euphoric drive towards a booming digital assets market offshore.

The RWA tokenization process usually converts traditional assets such as stocks, bonds, funds and even real estate, into digital tokens traded on a blockchain. A raft of Chinese firms, including brokerages, have launched RWAs in Hong Kong over the past few months.

At least two leading brokerages have received informal guidance from the China Securities Regulatory Commission (CSRC) in recent weeks to refrain from conducting RWA business offshore, said the sources with knowledge of the matter.

Newly minted Fed governor Stephen Miran continues to put his dovish bona fides on full display, declaring on CNBC Friday that “I don’t see any material inflation from tariffs” after logging a dissenting vote for a 50-basis point rate cut.   

Speaking before the Economic Club of New York this morning, Miran advocated for a benchmark funds rate in the mid 2% range (more than 150 basis points below current levels and south of the 2.9% year-over-year headline reading for August CPI), adding thus with respect to President Trump’s trade levies: “relatively small changes in some goods prices have led to what I view as unreasonable levels of concern.”

Of course, “relatively small” and “unreasonable levels of concern” are in the eye of the beholder. Goods sector inflation ticked to a 1.49% year-over-year clip in August from zero this spring, the Bureau of Labor Statistics finds, with the three-month annualized pace accelerating to 2.77%.

As Bianco Research points out today, privately-compiled metrics paint an even starker picture: Data sifted by Truflation show a 1.98% rise in the price level since April 2 “Liberation Day,” equivalent to a 4.22% annualized rate.  Then, too, price data from four major U.S. retailers show a 3.7% annual uptick in imported goods impacted by tariffs over the same period per research firm PriceStats, while products originating from China are tracking at a 5.1% annual rate of inflation. “This is a problem,” Bianco concludes.

Recent developments in the Treasury complex may reflect those concerns, with 10- and 30-year yields levitating towards 4.15% and 4.76%, respectively, from 4% and 4.6% immediately following last week’s rate decision.  Uncle Sam’s long-dated creditors “don’t want the Fed to be cutting interest rates,” OnePoint BFG Wealth Partners CIO Peter Boockvar contended on CNBC Friday, as such easing suggests the central bank is “taking [its] eye off” inflation risks.   

Recent developments crystallize that risk. Last Thursday’s auction of $20 billion in 10-year Treasury Inflation Protected Securities priced at a yield of 1.734%, some five basis points north of its when issued levels seen just prior to the sale.  Total investor demand ebbed to $42.8 billion from $52.1 billion at the prior auction in late July according to Bloomberg, leaving the bid-to-cover at just 2.2:1. Outside a single auction during the post-Covid inflation spike in summer 2022, that’s the weakest ratio for 10-year TIPS in more than five years.  

Stocks ripped off another chunky gain with the S&P 500 logging fresh highs, up nearly 15% in the year-to-date and 35% above its early April nadir, while Treasurys remained under pressure with 2- and 30-year yields rising four and two basis points, respectively, to 3.61% and 4.77%. WTI crude remained stuck near $62 a barrel, gold again legged higher to $3,748 per ounce and bitcoin sank below $113,000.  Bucking the bull market vibes, the VIX popped higher by nearly a point to settle at 16 and change.

- Philip Grant

From the Financial Times:

The European Central Bank has sold more than €150 million [$177 million] of bonds of Worldline SA, an embattled payments processor that was recently accused of turning a blind eye to fraudulent customers, according to people familiar with the sales.

The ECB, which acquired the bonds as part of its quantitative easing program a number of years ago, began sounding out credit investors towards the end of last week and sold the debt on Monday. It was still marketing some of the company’s bonds to investors on Tuesday and intends to sell its entire stake, the people said. . .

The ECB purchased the bonds when they were rated as investment grade as part of its massive asset purchase program. Chunks of a €500mn bond due in 2027 and another €600 million note maturing in 2028 remained on the central bank’s books immediately after the allegations were made against the French company in June.

Après nous, le déluge? Cryptocurrency aficionados will soon enjoy a supersized menu of digital delicacies, after the Securities and Exchange Commission rubber-stamped a proposal from the NYSE, Nasdaq and Cboe permitting the bourses to adopt streamlined listing standards for spot commodity ETFs.

Reuters relays that yesterday’s ruling “removes the last remaining hurdle for dozens” of new products tracking the likes of dogecoin and solana, while truncating the filing-to-launch period to no more than 75 days from the current 240-plus day wait. “This is a watershed moment in America’s regulatory approach to digital assets, overturning more than a decade of precedent since the first bitcoin ETF filing in 2013,” declared Teddy Fusaro, president of Bitwise Asset Management.

Washington’s wholesale embrace of all things crypto has certainly proved a boon for hodler’s, with the industry’s collective market value now topping $4.1 trillion, up nearly 80% since Donald Trump won re-election last fall. 

Yet the air has come out of one high-profile category of late, with investors suddenly turning up their noses at the formerly-celebrated crypto treasury complex pioneered by bitcoin evangelist Michael Saylor.  Shares of Strategy have ebbed by some 22% over the past two months, while Japanese and British players Metaplanet and Smarter Web Co. have each absorbed a near 70% drawdown since mid-June.  For context, 331 firms around the world have opted to stockpile the pre-eminent cryptocurrency per Bitcointreasuries.net, up from 131 in mid-June (see “Bitcoin goes corporate” in the June 20 edition of Grant’s Interest Rate Observer for a closer look at the then-burgeoning phenomenon). 

“This whole thing is starting to show big cracks,” Eric Benoist, tech and data research specialist at Natixis CIB, told the FT last week. “The weaker players are going to be basically wiped out by the market, most likely.”

One Nasdaq-listed entrant is taking that “only the strong survive” mantra to heart. On Tuesday, FG Nexus (ticker: FGNX) announced shareholder approval for plans to issue one trillion (with a “t”) new shares to further its designs on “becoming the largest corporate holder of Ethereum by an order of magnitude,” as the company, which sports a current share count of just over 35 million, put it in an SEC filing.

Notably, those bold ambitions elicited little more than a golf clap from Mr. Market. Shares of Nexus, which sank below $7 Monday from $38 in early August, have subsequently ticked to $8 and change.

Reserve Bank credit stands at $6.559 trillion, little changed from a week ago.  The Fed’s portfolio of interest-bearing assets is down $18 billion from the middle of August and stands 26.5% below its early 2022 peak.

Buy the rumor, buy the news: stocks enjoyed another push higher following yesterday’s widely anticipated rate cut, with the S&P 500 gaining 0.5% and the Nasdaq 100 rising 0.9%. though Treasurys came under some pressure with 2- and 30-year yields jumping five and six basis points, respectively, to 3.57% and 4.72%. WTI crude dropped retreated towards $63 a barrel, gold slipped to $3,644 per ounce, bitcoin climbed to $117,500 and the VIX stayed slightly below 16.

- Philip Grant