A tradition unlike any other. From the New York Post:

Thousands of Kyles will travel for miles to their namesake Texas city this weekend in hopes of smashing the Guinness World Record for the largest gathering of people with the same first name.

The “Kyle Fair A Tex-Travaganza” will need at least 2,326 people named Kyle — with that particular spelling — to break the record, a goal festival organizers have set their sights on for half a decade. . . The Kyle cabal — fittingly taking place at Lake Kyle Park — is looking to dethrone the group of 2,325 Ivans who gathered in Bosnia and Herzegovina in July 2017.

The effort will mark the Kyles’ fifth attempt at topping the record, first starting with 100 people in 2017, when the rules were slightly more lenient and allowed similar names like Kyler and Kylie, or people whose middle names are Kyle, to participate.

When the music’s over, turn out the LED lights: the environmental, social and governance investing phenomenon is on the wane, at least if recent trends in the exchange traded fund realm are any indication.   

Thus, at least 27 ESG-focused funds in the U.S. have wound down in the year to date, Bloomberg analyst Shaheen Contractor relayed Wednesday, representing nearly 30% of all ETF closures and approaching the 36 ESG liquidations seen throughout 2023.  Similarly, only two ESG funds launched during the first quarter, with that pair charging a modest 21 basis point expense ratio on average. For context, 249 new ETFs debuted during 2021 and 2022, with the median expense ratio registering at 50 basis points. 

Total U.S.-listed ETF assets allocated to that theme stood at $102 billion as of March 31 per data from Morningstar, down from $117 billion at year-end 2021. “ESG has become a political lightning rod,” Todd Rosenbluth, head of research at consulting firm VettaFi, noted to the Financial Times earlier this week. “Many asset managers are less eager to offer a broad suite of products as they were in the past. It is less likely that the style returns to be a hot area in the near term.”

Beyond partisan squabbles, increasing scrutiny of puffed-up claims of ESG conformity, i.e., greenwashing, could play a role in that shift. On Tuesday, the European Securities and Markets Authority released guidelines governing the use of sustainability-related terms in investment fund marketing materials. 

Those new strictures come months after New York State Attorney General Letitia James filed a lawsuit against the U.S. unit of JBS SA for violations of local consumer protection laws, alleging that the meatpacking giant made “fake sustainability claims to boost sales,” and “admit[ting] that it made its ‘Net Zero by 2040’ commitment without having calculated the vast majority of greenhouse gas emissions from its supply chain.”

That legal challenge could prove the tip of the melting iceberg. Natalie Runyon, director of ESG content and advisory services at the Thompson Reuters Institute, concludes in a March 5 analysis that a global increase in disclosure mandates pertaining to ESG issues “will drive greenwashing litigation in 2024 and beyond.” 

Shifting financial fashion likewise figures in ESG’s ebbing prominence, as Mr. Market’s infatuation with artificial intelligence – itself a growing source of greenhouse gas emissions owing to copious energy consumption (Grant’s Interest Rate Observer, April 12) – takes center stage. Citing data from Bowmore Financial Planning, London-based business publication City A.M. relayed Tuesday that 560 U.K.-based companies have promoted their AI usage to shareholders over the past year, up 75% from spring 2023.  “There are going to be many use cases that are completely pointless using this technology [and] people just want to be part of the hype cycle,” Lewis Liu, co-founder and chief executive of AI research firm Eigen Technologies, told City A.M.

Such a dynamic may likewise be taking shape on this side of the Atlantic. On March 18, investment advisors Delphia and Global Predictions settled charges from the Securities and Exchange Commission of making false statements concerning their AI bona fides, agreeing to fork over $400,000 in civil penalties and cease the correspondence in question, without admitting or denying guilt. 

“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,’” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. On that score, Grewal and co. could have their work cut out for them: 41% of S&P 500 component companies mentioned AI on their first quarter earnings call, analysts at Goldman Sachs find, up from roughly 10% at the end of 2022. 

From the New York Post:

Mayor Eric Adams on Tuesday suggested migrants should be hired to fill the city’s lifeguard shortage — because “they’re excellent swimmers.”

Hizzoner dropped the comment after being asked during a City Hall briefing about lifeguard staffing at the city’s beaches and pools, which have increasingly had issues in recent years, ahead of Memorial Day.
 

Up, up and away – and then what?  The return of substantive interest rates could spur a long-lasting shift in investor psychology, Trump-era economic advisor Gary Cohn contended in a Bloomberg Television interview Tuesday, as the 5% plus yields on offer in short term Treasurys serve to pry funds from more speculative ventures, such as Silicon Valley startups, which enjoyed a deluge of cash during the bygone ZIRP era. 

“We have changed the whole mentality of the way people think about holding capital, investing capital, recirculating capital,” said Cohn, former president and chief operating officer at Goldman Sachs prior to that D.C. stint and now vice chair at IBM. “A little bit of the natural cadence of capital moving in and out of risk assets has changed both because of fiscal and monetary policy.”

To that point, total assets parked in dollar-denominated money market funds registered at $6.03 trillion as of last Wednesday per the Investment Company Institute, up 130% from the summer of 2017 and 65% from the eve of the pandemic. 

Yet as recent events demonstrate, old habits die hard. Retail investor favorite GameStop logged a 120% intraday rally this morning following a 78% advance during Monday’s session, while peer AMC Entertainment likewise doubled early Tuesday after announcing it had completed a $250 million at-the-market share offering in the wake of yesterday’s 74% upside lurch (the pair finished higher by 60% and 32%, respectively, at the close of regular trading hours).  

Spurring that ebullient price action: a series of cryptic social media posts from Keith Gill, a.k.a. “Roaring Kitty.”  Gill, whose X account had been idle for nearly three years prior to Sunday evening, reportedly turned a $58,000 options outlay into a $50 million windfall during the initial 2021-era meme stonk frenzy. 

Lathered up individual punters likewise search farther afield in search of their next big score.  As CoinDesk documents this morning, a GME-inspired digital token embarked upon a lunar lift-off with its market capitalization jumping to as high as $127 million from less than $4 million as of Sunday evening.  Fellow meme coins Pepe, floki, popcat and mog likewise rose by as much as 30% Monday. 

“[Gill’s] return was perceived as bullish for meme coins because the market remembered that much of the GameStop mania from 2021 spilled over to DOGE and [peers],” mog developer Shisui told CoinDesk. “While we are far from being in a true risk-on environment, the price movements after Roaring Kitty’s comeback hint at which assets will outperform when frothy conditions return.”

Professionals are likewise loaded for bull, if a pair of institutional polls released today are any indication. Thus, the latest Bank of America Global Fund Manager Survey finds that bullish sentiment stands at its most pronounced since November 2021, with 80% of respondents anticipating a rate cut in the second half of the year in tandem with ongoing economic growth.  Average cash levels among that contingent stand at 4%, the lowest level in three years, while equity allocations stand at their highest since the first days of 2022. 

In a similar vein, S&P Global’s Investment Manager Index shows risk appetite at its highest levels since late 2021, with a majority of polled investors anticipating stock market gains over the next 30 days, the first such positive near-term outlook of 2024 thus far.  “Investor sentiment toward shareholder returns has rebounded, with growing optimism about dividend growth despite concerns over higher interest rates,” commented Mohammad Hassan, equities dividend forecasting director at S&P and co-author of the report. 

Indeed, the higher-for-longer backdrop has yet to inflict more than passing duress upon Mr. Market, as the S&P 500 has returned 15% since July 26, when the Fed last hiked rates to the current 5.33%. For context, the broad average has generated a 16.5% annualized total return since the financial crisis lows of March 2009. 

More anything? More everything!

Don Draper, call your office. From Ad Age:

Apple apologized Thursday for a new iPad Pro commercial that was met with fierce criticism from creatives for depicting an array of creative tools and objects—from a piano, to a camera, to cans of paint—being destroyed by an industrial crusher. The tech giant no longer plans to run the commercial on TV.

The spot, created in-house and unveiled Tuesday, was intended as a metaphor to suggest how much creative potential is packed inside the latest edition of its signature tablet, and to promote how thin the tablet is. (At 5.1 millimeters, it’s Apple’s thinnest product ever.)

But many viewers had a more chilling interpretation, seeing the spot as a grim representation of technology crushing the history of human creativity—something the creative industry is already existentially worried about with the rise of AI. . . 

“Creativity is in our DNA at Apple, and it’s incredibly important to us to design products that empower creatives all over the world,” said Tor Myhren, the company’s VP of marketing communications. “Our goal is to always celebrate the myriad of ways users express themselves and bring their ideas to life through iPad. We missed the mark with this video, and we’re sorry.”

Talk about a public nuisance. The potent post-October rally in stocks has yet to awaken moribund new issue markets, as the Covid-era issuance bacchanal and subsequent hangover continue to reverberate.  Domestic IPO proceeds reached just $15.8 billion across 2023 by S&P Global’s count, down nearly 25% year-over-year and a pittance relative to the $287 billion logged in 2021.  

New entrants raised a combined $5.7 billion last month, the best such showing since last September, but a more durable pickup in listing activity may not take shape until 2025. “The companies that go public this year will need a strategic reason [to do so], not just as another financing event,” Insight Partners managing partner Ryan Hinkle told Bloomberg last week. “If you don’t need the financing, you shouldn’t do so until there is more activity.” 

Today’s rigid conditions are complicating life in some corners of the private equity realm, as evidenced by a fast-growing backlog of assets waiting to be listed. Citing data from Preqin, Bloomberg relayed Thursday that industrywide holdings of yet-to-be-exited holdings reached $3.2 trillion as of Dec. 31, up 14% year-over-year and far above the $2 trillion logged in 2020.  
In tandem with that portfolio pile-up, outgoing cash slowed to a relative trickle. Buyout firms dished out the equivalent of 11.9% of net asset value in distributions last year per data from Raymond James Financial, far below the 33.9% achieved two years prior and the weakest share of investor payouts since 2009 (see the analysis “Prayers for IPOs” in the March 29 edition of Grant’s Interest Rate Observer for more on the distribution drought and its potential implications).

Yet while conventional sources of public liquidity remain hard to come by, recent developments may provide solace for cash needy p.e. players and their limited partners.  Thus, this week brought the return of special purpose acquisition companies to the fore, as nuclear systems developer Oklo, Inc. – which features AI kingpin Sam Altman as its chairman – merged today with Altman-backed blind pool AltC Acquisiton Corp., completing a deal which valued Oklo at $850 million as of July 2023. 

Mr. Market has duly rolled out the red carpet for that combo, as Oklo (née AltC) stock changed hands at $18.23 as of Thursday’s close, nearly double the $10.41 which shareholders would have received if they opted to redeem their holdings at Tuesday’s merger vote.  

Though shares pulled back sharply on Friday, that transaction marks a noteworthy revival for a listing strategy seemingly left for dead after the Covid-era bubble. Upwards of 20% of the nearly 500 SPACS which came public since 2020 now change hands below $1 by Bloomberg’s count, i.e., down 90% from the typical $10 per share debut price, including half of the components of a Grant’s Interest Rate Observer-compiled gauge of picks-not-to-click (“Short this index,” Dec. 25, 2020).  Nevertheless, the tally of SPAC mergers stands at near 40 in the year-to-date. 

Then, too, animal spirits are on display once more in the private markets following the recent hibernation. Bloomberg reports that Elon Musk’s xAI startup is wrapping up a monster $6 billion funding round, which will value the 11-month-old architect of the Grok chatbot at $18 billion. As one prospective LP relayed to TechCrunch late last month, xAI initially sought $3 billion in capital at a $15 billion pre-money valuation, before abruptly upping the ante: “We all received an email that basically said, ‘it’s now $6 billion on $18 billion, and don’t complain because a number of other people want in.’”

Signed, "HAL"? 

Call it the electric Kool-Aid crypto test. From Columbus NBC News affiliate WCMH: 

The person selected to speak at Ohio State University’s commencement ceremony for its spring graduates hasn’t minced details on how he made the controversial script.

Days before the Sunday ceremony, OSU’s chosen speaker Chris Pan announced on LinkedIn that he had taken the psychedelic drug ayahuasca to write his first drafts. “Got some help from AI (Ayahuasca Intelligence) this week to write my commencement speech for 60,000 grads and family members at Ohio State University next Sunday,” Pan wrote. “Tried ChatGPT but [it] wasn’t that good.”

The resulting speech and an on-stage demonstration with OSU President Ted Carter drew audible booing from the audience in the university’s livestream, as Pan tried to encourage graduates and attendees to buy cryptocurrency. 

“Saving is not enough because inflation exploded after the pandemic which is why everything got so expensive … I see Bitcoin as a very misunderstood asset class,” Pan said. “It is decentralized and finite which means no government can print more at will.”

Off to sea once more: Global trade is on the upswing, as the Organization for Economic Co-operation and Development pencils in 2.3% growth in worldwide commerce this year, accelerating to a 3.3% advance in 2025. Last year, that lynchpin metric expanded at a plodding 1% pace. 

A “cyclical recovery” in international output is responsible for that brightened outlook, OECD chief economist Clare Lombardelli tells the Financial Times, pointing to rebounding activity in east Asia and Europe, as Germany managed a 3.2% sequential uptick in export activity during the first quarter. “We do see some green shoots in global trade,” concurs Neil Shearing, chief economist at Capital Economics, adding that the manufacturing slowdown seen in 2023 has “now run its course.” 

The brightening economic picture is not without its blemishes, however, as geopolitical impediments remain front-and-center. Late last month, Iran-backed Houthi rebels unleashed a drone attack on the Oman-bound container ship MSC Orion in the Indian Ocean, some 375 miles off Yemen’s coast. That broadside, the first such deep-sea assault since the militia began its campaign last fall in response to the Israel/Palestine conflict, demonstrates that the Houthis are capable of striking targets far afield of the Strait of Hormuz, notes the Associated Press. 

Though the MSC Orion sustained minimal damage with no human casualties, April’s development could inflict plenty of commercial pain. Industry bellwether A.P. Moller-Maersk warned Monday that it will accordingly reroute all applicable maritime traffic southbound via Africa’s Cape of Good Hope “for the foreseeable future.”

Thanks to the additional time and expense associated with that circuitous route, which include bottlenecks, traffic congestion, equipment shortages and a near 40% uptick in average fuel costs, Maersk will present customers with “relevant surcharges on [their] latest invoices.” The operator now anticipates that global capacity on the Far East to Northern European shipping market will drop by as much as 20% in the second quarter from its prior outlook.

Prices are duly responding to that one-two punch of percolating activity and tightening supply. “Spot rates are shooting up rapidly,” a U.K.-based shipping coordinator told freight and logistics publication The Loadstar on Friday. “This could be just the beginning as demand is stronger than expected and capacity is absorbed by [Houthi-related] diversions.” A peer likewise groused that “carriers are definitely taking advantage of the situation, and we’ve already seen issues with restricting allocations on our long-term contract deals.”

How might investors profit from the current state of play? See the April 12 edition of Grant’s Interest Rate Observer for a bullish analysis on a NYSE-listed, diversified transport vessel operator sporting strong revenue visibility, a relatively sturdy balance sheet, bountiful cash generation profile and inviting valuation. 

There should be lots to talk about during the next episode, at least. From USA Today:

Milwaukee Bucks guard Patrick Beverley chucked a basketball twice at Indiana Pacers fans with seats behind the Bucks bench late in the fourth quarter of the Pacers’ series-clinching 120-98 victory in Game 6. . .

Beverley's antics did not end on the court. During his post-game media scrum in the Bucks' locker room, according to a video clip posted on social media, Beverley interrupted one question and turned to someone holding an ESPN microphone. 

"Excuse me, do you subscribe to my (podcast)?" Beverley asked. The person replied no. (Beverley has a podcast, "The Pat Bev Show," that airs on the Barstool Sports network.) "You can't interview me then. No disrespect," Beverley said.

Perhaps the intrepid reporter prefers more highbrow audio fare, such as Grant’s Current Yield (advt).

Labor disquiet crosses the border:  Nearly 10,000 employees at Canada’s two largest railroads could walk off the job beginning May 22, after more than 95% of union employees voted to authorize a strike Wednesday following months of fruitless discussions with operators Canadian National Railway and Canadian Pacific Kansas City. 

Safety-related matters loom large in the dispute, as the union contends that carriers mandate unpredictable work schedules, while depriving staffers of sufficient rest between shifts. Negotiators are “seeing little to no engagement from the companies” in contract talks, Teamsters Canada Rail Conference President Paul Boucher said.  

The companies retort that they are offering significant wage increases with scheduled time off provisions in accordance with local regulations, with Canadian National stating that the union has made “very few concessions” during five months of negotiations “and has been unclear on what it is seeking for employees.” 

Merits of that dust-up aside, any extended impasse could mark an ill wind blowing from the Great White North, the United States’ largest trading partner. “We simply don’t have the capacity to replace the movement of goods by rail,” Pascal Chan, senior director for transportation, infrastructure and construction at the Canadian Chamber of Commerce, told The Wall Street Journal. A potential strike at both railways would all but curtail bulk grain shipping, Western Grain Elevator Association executive director Wade Sobkowich likewise warned Reuters: “There is no plan B because, as we’ve said for decades, there are no competitive alternatives.”  

We’re all gonna be rich!  Retirement funds are sniffing around the crypto complex, Fidelity Digital Assets vice president Manuel Nordeste told attendees at a London conference Wednesday, in remarks reported by DL News.

“We’re starting to have conversations with the larger, real money institutional investor types, and we’re getting some of those clients [on board],” he said.  That contrasts with the unit’s 2018 launch, when interest in crypto was largely confined to “family offices, small, specialized asset managers and hedge funds.” Only 7% of pension funds polled by Fidelity Digital Assets have invested in the nascent category, compared to 48% of high-net-worth individual respondents.  

Count some stateside politicians as among the vanguard. Earlier this year, the Arizona State Senate advanced a resolution “encouraging” the Arizona State Retirement System and Public Safety Personnel Retirement System, which collectively control some $ 70 billion in assets, to evaluate the newly minted suite of bitcoin exchange traded funds for potential investment. The measure, which awaits review from the state legislature, received the full-throated endorsement of blockchain advocacy group the Chamber of Digital Commerce: “the potential for portfolio diversification and returns is too significant to ignore,” the firm wrote. 

One of biggest fiduciary fishes of them all may likewise be nibbling. Japan’s Government Pension Investment Fund, the world’s largest such outfit with $1.4 trillion in assets under management, declared on March 19 that it will conduct due diligence on a suite of relatively exotic assets including bitcoin. That announcement came weeks after Japan’s Cabinet approved a bill adding crypto to the list of approved destinations for investment by state-affiliated entities. 

With the crypto category enjoying a $2.29 trillion aggregate valuation per Coinmarketcap.com, up some 100% over the past year, the prospect of wider institutional adoption further tantalizes the bull crowd. Demand from pension funds could foment “a constant uptake” of digital ducats, Darius Tabai, former global head of metals trading at both Merrill Lynch and Credit Suisse, told DL News.

Call it the eternal bid. 

To paraphrase Alan Greenspan, you can’t identify a bubble until after the fact. From the New York Post: 

Perrier, which has been marketed as French mineral water for more than a century, is actually soda — and can therefore be taxed, a Pennsylvania court ruled. 

Perrier’s classification has been under fire since 2019, when thirsty patron Jennifer Montgomery was taxed 24 cents on a 16-ounce Perrier bottle at a Sheetz convenience store in Pennsylvania, Fortune earlier reported.

Montgomery then filed two petitions with the Pennsylvania Department of Revenue Board of Appeals seeking a refund for the sales tax since mineral water was not supposed to be taxable in the U.S. 

Bottled water has traditionally been exempt from sales tax because water is necessary for survival. However, when manufacturers start adding sugar or other flavors and sweeteners, water goes from an essential to an optional item, and can therefore be slapped with a tax.

Talk about silver linings. Tuesday’s sentencing hearing went about as well as possible for crypto magnate Changpeng Zhao (CZ), with U.S. District Judge Richard Jones levying a four-month stay as a guest of the government for violations of the Bank Secrecy Act. That’s comfortably below the three-year stint requested by prosecutors and a 12- to 18-month term under federal sentencing guidelines. 

As CoinDesk notes, a barrage of more than 160 written testimonials in support of the Binance boss helped pave the way for that lenient ruling, as Jones declared that “I don’t think I’ve ever seen [such] a volume of letters,” adding that “everything I see about your history and characteristics [are] of a mitigating nature.” 

Though CZ must fork over $50 million in personal fines with Binance obliged to cough up a further $4.3 billion to settle allegations pertaining to the anti-money laundering statutes, the executive prepares for the hoosegow with an estimated $43 billion fortune, a sum that Bloomberg deems “likely to grow even further as Binance business accelerates amid crypto’s latest bull run.”  The exchange reports that it added 40 million users worldwide in calendar 2023. 

Will another fixture of the digital asset boom prove as fortunate?  The Department of Justice announced yesterday that crypto investor Roger Ver – a.k.a. “Bitcoin Jesus” – was arrested over the weekend in Spain on charges of mail fraud and tax evasion, with prosecutors set to request extradition to the U.S. to stand trial. Ver allegedly failed to report ownership of some of his 131,000-stong bitcoin stockpile back in 2014, when the early adopter renounced his U.S. citizenship and hit the bricks for the Caribbean nation of St. Kitts and Nevis.  Over that decade long stretch, the value of those ducats has swelled to some $7.5 billion from about $112 million. 

Render unto Caesar what is Caesar’s…

No soft landing spotted in this verbal smackdown. Treasury Secretary Janet Yellen took the gloves off in Tuesday’s House Ways and Means Committee hearing, dismissing speculation from predecessor Lawrence Summers that still-higher interest rates may be required to beat back the seemingly relentless post-pandemic inflation surge. 

“He’s a person who’s been wrong in the past,” she said, adding that Summers “said that it would absolutely take a recession to bring inflation down, and that turned out to be a serious misjudgment.” Indeed, price pressures will presently recede without undue tumult in the labor market, Yellen predicted. 

Data released shortly prior to those remarks may complicate Washington’s quest for pain-free disinflation. Thus, the Employment Cost Index registered at a 1.2% seasonally adjusted sequential advance over the first three months of the year according to the Bureau of Labor Statistics, accelerating 30 basis points from the fourth quarter and well above the 1% FactSet consensus.  Year-over-year wage gains remained at 4.2%, topping the 4% economist guesstimate to remain only moderately below the 5.1% cyclical peak logged in mid-2022. 

There may be more where that came from. A Tuesday Haver Analytics analysis from Joseph Carson, former director of global economic research at Alliance Bernstein, highlighted the Employer Costs for Employee Compensation (ECEC) gauge, a separate BLS-compiled wage indicator that incorporates job changes among occupations and industries, data which fall outside the ECI purview.  Accordingly, employment migration towards higher-paying positions will generally push the ECEC above its peer metric, and vice versa. 

To that end, the proportion of private-sector job openings to unemployed workers stood at 1.3 in March, the BLS finds.  Though that’s well below the early 2022 peak of 2.1 openings per idled employee, that reading remains well above its pre-pandemic norm, which included a sub-1:1 ratio from the turn of the century to 2017.  

“Based on the still-high number of job openings and low jobless rate, the first quarter rise in the ECEC index should exceed the ECI, adding to current fears of higher labor costs feeding into inflation numbers,” Carson concludes.  That data point is set to be released on June 18.

From The Wall Street Journal:

Disney said it spent almost $800,000 for Bob Iger to use company aircraft for personal trips in the last fiscal year. Taking similar trips at his own expense would have cost the chief executive more than $2 million, a Wall Street Journal analysis found.

The same is true for other executives. Netflix co-founder Reed Hastings took personal flights on company aircraft in 2022 that would have cost him about $2.2 million by Journal estimates; the company reported spending about half as much. Chief Executive David Calhoun’s personal flights on Boeing’s tab would have cost him $1.25 million, more than double what the company said it spent. . .

“It’s one of the few status symbols you don’t get tired of,” said Christopher Hewett, a retired public-company executive who helped draft flight-perk disclosures as a corporate attorney and enjoyed his own trips on company planes.

Spending on the perk has doubled since 2019 at companies that reported providing it last year, outpacing the overall growth in business-jet travel.

Let’s see how this sausage gets made.  Pending legislation in the Empire State could carry major implications for the global bond market, as New York lawmakers are set to weigh the Sovereign Debt Stability Act upon the legislature’s return next week.  

That bill could usher in material changes to future restructurings by limiting private creditor recoveries to what the U.S. government would receive “under the applicable international initiative.” In other words, pandemic-era agreements under the International Monetary Fund and World Bank umbrellas designed to mitigate the debt burden of emerging market borrowers. The tally of outstanding EM dollar-pay debt covered by New York law stands at some $800 billion, roughly half the global total. 

The plan enjoys vocal support in some quarters, as Bloomberg relays that a group of 65 public figures penned an open letter to Governor Kathy Hochul and lawmakers urging the law’s passage. Signatories including Nobel Laureate economist Joseph Stiglitz and actor Marc Ruffalo (who portrayed the Hulk in the Marvel comic book series) argued that the change would “protect the most vulnerable around the world from abusive and unfair lending practices.”  

Taking the other side of that debate, a March 26 whitepaper from Cleary Gottlieb Steen & Hamilton LLP, warned that the proposed statute “assumes that jurisdictions outside of New York could enact similar laws, and purports to apply across such jurisdictions, although it is unclear how this would work in practice.  Instead, the effect could be a migration of sovereign debt away from New York.” 

Borrowers may likewise find such an arrangement to be sub-optimal, contends the multinational law firm, which has advised both sovereigns and bondholders in prior restructurings: 

Market participants may require that sovereigns issuing new debt (or seeking relief under existing debt) do so under the laws of non-New York jurisdictions.  The out-of-pocket costs of making such a switch could be considerable and are likely to hit sovereigns who have never defaulted on their debt, as well as others that may be more vulnerable to future defaults.

One way or the other, Albany’s decision will reverberate. Total sovereign issuance is projected to reach $11.5 trillion this year per a Feb. 27 analysis from S&P Global Ratings, up 8% from 2023 and more than 50% above the pre-pandemic baseline.  Similarly, the worldwide stock of sovereign debt will reach 67.8% of GDP this year, down from the 74% peak in the plague year but well above the sub-60% readings logged in 2018 and 2019.  Some 14.8% of worldwide sovereign obligations are short-term in nature, up from a 9.5% share five years ago.  

Meanwhile, a growing share of sovereign borrowers rated single-B-minus and below “pose contagion risk for other emerging markets and [could] affect their borrowing costs,” S&P warned, noting that the likes of Egypt, Pakistan, Sri Lanka and India (which continues to enjoy investment grade status with a triple-B-minus rating) each face annual interest expenditures equivalent to more than one-third of government revenues. “For countries with large debt stocks and reliance on foreign currency borrowing, high interest bills represent a noteworthy risk,” the rating agency wrote. 

In more ways than one, perhaps. 

“Broadly speaking, the effects of higher rates have been quite good,” Stripe president and co-founder John Collison told CNBC yesterday. “The period where money was free was not a healthy time in Silicon Valley. . . [It’s] not good for dynamic capital allocation in the broader economy. You want people to be working on the most valuable ideas, and not on the marginal ideas.”

The privately held online payments firm, which garnered a $95 billion valuation in 2021, nearly triple that seen a year earlier, agreed to cash out some employees at a $65 billion price tag earlier this year according to The Wall Street Journal. “Valuations are a product of interest rates,” Collison commented to the financial news network regarding those fluctuations. “We’re not losing sleep over it.” 

This corporate fanbase seems to live in perpetual disappointment.  Boeing Co. suffered a blowout-related loss yesterday, reporting that first quarter free cash flow registered at minus $3.9 billion in the wake of January’s harrowing in-flight fuselage breach of an Alaska Air-operated 737 Max aircraft.

Though that’s marginally better than the company’s March guesstimate of a $4 to $4.5 billion first quarter deficit, management noted “sizable” cash use over the three months through June, piling the pressure onto the back half of the year to reach last month’s prediction of “low single digit” billion in positive free cash flow generation for 2024. 

To date, the bond market has evinced only modest concern with the situation. Boeing, the subject of a bearish credit analysis in the Jan. 19 edition of Grant’s Interest Rate Observer, saw its senior unsecured 5.15s of 2030 change hands at a 162-basis point pickup to Treasurys this morning, wider by 53 basis points over the past three months and change. During that stretch, the ICE BofA U.S. Corporate Index has tightened to 92 basis points over Treasurys from 101. 

Somewhat muted price action aside, Boeing’s position in that high-grade cohort is an increasingly tenuous one. Moody’s downgraded the company one notch to Baa3 – the final stop before junk – alongside a negative outlook Wednesday, citing the “inadequate performance” of its commercial aircraft division and darkening cash generation picture. 

Boeing, which faces $4.3 billion in maturing debt next year with a further $8 billion due in 2026 and which saw cash and cash equivalents shrink to $7 billion at the end of March from $16 billion three months earlier, likely requires new debt issuance to meet those obligations, the rating agency believes. 

A return to business as usual surely wouldn’t hurt, but the timetable for such an outcome is anybody’s guess. Global 737 Max deliveries numbered 24 last month, down from 52 in March 2023 and well below the 38 aircraft ceiling imposed by the Federal Aviation Administration in the wake of the Alaska Air incident. Boeing will present a “comprehensive corrective action plan” to the regulators at the end of May.  In the meantime, “we’re not going to let them [increase production] until they have satisfied the FAA that they can do it safely,” Transportation Secretary Pete Buttigieg said yesterday. 

On that score, industry players are tapping their feet.  Southwest Airlines now expects to take delivery of only 20 of the 737 planes this year, instead of the 46 previously anticipated.  Thanks in part to that disruption, the carrier will cease operations at a quartet of U.S. airports and part ways with 2,000 staffers by year end.  Peers United and Alaska, meanwhile, have reduced their mid-year global capacity outlook by 6% relative to January projections. “I suspect a lack of 737 Max [supply] is a key driver of that,” Fitch Ratings analyst Joe Rohlena told the Financial Times. 

“Lower deliveries can be difficult for our customers and for our financials,” Boeing CEO Dave Calhoun acknowledged on yesterday’s earnings call, adding that “safety and quality must and will come above all else.” Calhoun, who will vacate his post at year’s end with a successor yet to be named, maintained a $10 billion free cash flow target for 2026, a bogey which will require some 50 737 jet deliveries per month, double the current pace. “That’s the bet we’re making and I’m confident we can get there,” he said. 

Some observers take that optimism with a grain or two of salt. “If there is one thing that has been consistent about Boeing over our many years of covering the company, it has been its hopelessly optimistic timetables for improvement,” warned Vertical Research Partners Rob Stallard in a Wednesday missive. “We think this will again be the case. . . with management seemingly nonchalant about the regulatory, legal, contractual, customer, competitive, supply chain and internal employee pressures that it faces.” 

Stocks rebounded from early losses to leave the S&P 500 weaker by only 0.4% on the day, with the broad average poised to rally Friday following stronger-than-expected post-market results from Google and Microsoft. Treasurys absorbed moderate selling across the curve as 2- and 30-year yields settled at 4.96% and 4.82, respectively, up seven and four basis points on the day, while WTI crude broke higher at nearly $84 a barrel and gold advanced to $2,332 per ounce. The VIX settled south of 15.5, two points below its highs. 

- Philip Grant

It is not just the elastic that stretches. From Bloomberg:

Kimberly-Clark Corp., owner of the Huggies brand, is changing up its advertisements after Procter & Gamble Co. challenged the brand’s claim to be the best-fitting diaper. . . Pampers and Luvs owner P&G recently disputed those claims through the National Advertising Division of BBB National Programs, a nonprofit that helps industries with advertising self-regulation and accountability.

Dallas-based Kimberly-Clark later agreed to remove or alter its advertisements, including a video in which a narrator states: “Only Huggies is the No. 1 fitting diaper, with a curved and stretchy fit.” A Kimberly-Clark spokesman confirmed the company is complying with the NAD’s ruling. P&G declined to comment.

Information that Kimberly-Clark provided on different studies used to support its best-fitting claim showed flaws, rendering it unreliable, according to the NAD’s final decision, viewed by Bloomberg News. . . The company also didn’t provide the raw data from the studies, or any statistical analysis of the results. Kimberly-Clark didn’t immediately respond to a request for comment on the studies.

Big doings are afoot in the labor market, as employees at a Volkswagen-owned production facility in Chattanooga, Tenn. opted to join the United Auto Workers Friday evening.  The National Labor Relations Board will certify the result in the coming days, assuming neither side files an objection. 

Friday’s milestone, marking the union’s first successful organizing drive outside of Detroit’s big three automakers, was reached in emphatic fashion, with nearly three quarters of the 3,600-plus voters saying “yes” to the proposal, which required a simple majority to pass. The UAW had previously failed in 2014 and 2019 to organize the Volkswagen plant, with last fall’s series of strikes against Ford, General Motors and Stellantis – which yielded a 25% wage hike on average with starting pay upsized by more than 65% – helping to flip the script. 

“The real fight begins now,” UAW president Shawn Fain told the prospective new members late Friday. “The real fight is getting your fair share, the real fight is the fight to get to spend more time with your family, the real fight is to fight for our union contract.”  

Geographic nuances underscore the significance of that result, “as companies like VW have a long legacy of going to the South to chase. . . lower wages,” Columbia University associate professor of international and public affairs Alex Hertel-Fernandez told CBS News, referencing the region’s  right to work laws giving employees the choice to opt out of paying union dues. “I’ve interviewed workers who thought it was illegal to unionize in the South,” he added. 

The UAW’s fruitful membership push underscores today’s state of play for U.S. labor markets, as median wages rose at a 4.7% annualized pace over the three months through March per data from the Atlanta Fed, down from a mid-2022 peak of 6.7% but still far above the 2.8% average reading logged during the decade through February 2020.  

As the course of compensation growth looms large for broader inflation and monetary policy, recent findings indicate that further progress may prove harder to come by. Thus, the New York Fed relayed last month that trend wage inflation – an in-house metric based on industry level data from the U.S. Census Current Population Survey – rapidly pulled back towards a 5% annual pace early last year from the 7% logged in late 2021.  

However, that indicator has subsequently levelled off near 5%, a figure “consistent with a still-tight labor market,” and leading the New York Fed researchers to conclude that “it cannot be ruled out that wage growth will continue to be markedly higher in the near-term than it was before the pandemic.”

Particularly pronounced price pressures are on display for job seekers, as an April report from the New York Fed found that U.S. workers would accept no less than $81,822 to switch positions on average as of last month, up a hefty 11.5% from a prior poll conducted five months prior.  Will Corporate America play ball with those increasingly ambitious demands?  Average starting wage offers stood at $73,668 in March, the Fed finds, well below from $79,160 figure logged in the November survey.

Let the negotiations begin.

Stocks enjoyed a strong bounce ahead of earnings reports from the likes of Tesla, Meta, Apple and later this week, with the S&P 500 gaining nearly 1% to snap a six-session losing streak, though the broad average did finish some 40 basis points off its mid-afternoon intraday peak. Treasurys finished unchanged nearly across the curve, while WTI crude remained at $82 a barrel.  Gold pulled back sharply to $2,330 per ounce and the VIX retrenched nearly two points to 17. 

- Philip Grant