Hello my friends. Today is November 22nd and this is Markets Weekly. So this past week was a tremendously exciting week in markets.

We had a lot of volatility in the equity markets. Uh many are wondering whether or not the AI bubble has finally popped and now we're going to see a bare market or maybe even a crash or it could just simply be a garden variety in a correction in a upward trend. After all, it's been some time since the equity market had even a 5% correction, which uh it's finally had.

So, today, let's talk about two things. First off, let's talk about what happened in the equity market the past week, and let's talk a little bit about what's happening in Japan because Japanese bond yields are absolutely surging. Uh but no one seems to care.

All right, starting with the equity markets first. Earlier in the week, the market was looking a bit shaky. We saw the S&P 500 lose the 50-day moving average.

Now, people who trade markets often look at moving averages as a potential signal of momentum. Whereas, when you fall below the 50-day moving average, maybe you are losing momentum. Maybe the trend is changing.

The poo two big things the market was watching was of course the delayed non-formance payroll sprint for September and the allimportant Nvidia earnings. The non-farmms pay peril sprint was actually kind of mixed.

On the surface, the headline number was really good. 100,000 jobs created in September. However, it also came with down revisions such that we actually had job losses the prior month. That would be two months of negative job prints this year. Usually things usually something you see when you were heading into a recession.

Um, also we saw the unemployment rate tick up a bit to 4.4%. So it was a mixed bag but more importantly it was considered to be stale. This is something that happened months ago and between then and now we've had you know private job data and also surveys that suggest um kind of ongoing weakness in the labor market and Fed speakers also dismissed the data as stale.

The much more important print the past week was the Nvidia earnings. So much of the bull market so far has been driven by excitement in AI names and you know the general of the AI movement is of course Nvidia. So it was widely perceived that if we had a bad Nvidia print maybe the AI hype is finally over and we would just implode.

As an aside, I'd also note that sometimes I also try to use AI to um uh help my workload. And uh honestly, it hasn't really been super helpful. So, a lot of the things that I do, of course, is figuring out what the Fed is going to do.

And so, what's very helpful would be to just have AI tell me who is speaking next week so that I know uh who to focus on. So, earlier in the week, I I asked AI, can you give me a table of Fed speakers this coming week? And you know, very impressively, it gave me a table of Fed speakers. All these Fed people that no one really cares about are are speaking.

Um, but what I really wanted to know, of course, was whether or not it could help me with kind of knowing what the really important people are speaking. Uh, for example, Governor Waller, who is one of the more influential policy makers on the FOMC.

Now, before asking the AI, of course, I had to figure out whether or not the AI could do its job. So, I looked at the Federal Reserve's website and I saw under its schedule for the coming week that Governor Waller would be speaking on Monday. And when I asked the AI to give me a table of Fed speakers, uh, it gave me a table, a lot of people, but there was no Governor Waller.

So, you know, AI makes a mistake. Maybe this is a mistake. So, I gave it specifically the Federal Reserve's website and asking to check again. And I asked him whether or not Governor Waller was going to speak. It told me no.

So again, this is kind of confusing to me because I see it on the Federal Reserve's website. So I asked it a third time and this time I prompted it with the specific uh in quotes section of the Federal Reserve's website I wanted to look under. Can you go to this section of the website and tell me whether or not Governor Waller is speaking uh the next this coming week?

And again, the AI and I'm using Grock told me no. And actually, it told me something even more interesting. You know, this website is using Ajax. It's probably out of date. And so maybe this is why we're having confusion here.

I saw that and I was like insanely impressed. Is the AI even smarter than the Federal Reserve's website? Wow. If that's the case, I got to use AI because I'm going to get even better information than the public sector.

And then as the week progressed, Governor Waller did in fact speak on Monday. And so the website was correct. Grock after asking him three times could not even tell me that there was such an influential policy policy maker speaking on Monday.

And so I have to say that AI is useful, but you also it but really I if I have to go check and he can make these big mistakes, it's never something that I'm going to be able to rely on. And so I personally again think that these AI applications are not going to make money.

But that's not really the problem at the moment. The problem of course is that there are parts of the ecosystem that do make money and that is Nvidia. So did Nvidia actually um impress the market.

So I tuned in to Nvidia earnings. It was actually the first big tech earnings I've ever listened to. That's this is not usually something I focus on. And uh the earnings conference was nothing but good news, right? It was everything is firing in all cylinders. We're sold out. Huge huge potential marketplace.

We have all these legacy guys who are going to go moving on to uh GPU compute. Everything is great. Uh we're generating tremendous amounts of earnings and growth cannot be higher.

And that's all true. Nvidia continues to generate tremendous tremendous amounts of cash. They're inking new deals. For example, with Saudi Arabia, everything is nothing but blue skies. And the market perceived that as well.

You had Nvidia stock up 5% after market. And that's basically a gain. It held all through market open the following day. The following day uh it seemed like everything was going really well and uh market was surging, maybe even potentially overtaking the uh 50-day moving average,

but then out of nowhere everything just tumbled. It was a very very ugly day to see uh such a positive opening. uh tumble down into basically despair with the S&P 500 even losing the 100 day moving average. There was tremendous fear in the markets and you can see and through the volatility structure where fixed strike volatility was was basically surging higher.

A lot of people were buying protection in fear of maybe this AI thing it's really all over.

On Friday though things did get a little bit better. Um, so it what seemed to happen was that well again if you have volatility so high you just can't it's hard to sustain a little bit of a V crush but also we had go uh Fed President Williams of the New York Fed one of the most influential policy makers on the FOMC basically tell you that he wants a December cut which in my view makes a December cut given uh the other speakers um very very likely event and that seemed to suit the market as well.

Now, what caused this is actually kind of a mystery. It's not super clear why. I mean, Nvidia did beat and there wasn't really obvious bad news on that day that would cause this to happen.

Now, one thing that's been happening in the background, of course, was that Bitcoin has been basically imploding. Now, it's been trading very poorly for the past few weeks, but this more recently just basically absolutely tumbled, imploding uh to about $80,000.

So, if I were to guess what was happening behind this, it's just that a lot of the speculation, well, I would say that it's a kind of a massive retail deleveraging. So, a lot of the AI names and a lot of tech stock is driven by retail participation.

They've been buying calls, just pouring in, and it's been working spectacularly. And of course, this is also the investor base that's bought a lot of crypto stuff. And with crypto imploding, I have to imagine that that's been uh hitting their portfolios a lot, maybe prompting the leveraging, hear news flashes about crypto investors who often times invest in tremendous leverage, basically getting margin calls.

And I imagine that if that's happening uh they may be retrenching also in the risk space here as well in tech stocks. So maybe that that is kind of just a shakeout over there. Now if that's the case then you know this is I would assume that this is something that uh could be recoverable after all you have some deleveraging totally normal uh after such a good run and maybe we just go back higher and I think that's probably what I'm going to write about.

I view this probably as more of a more likely to be a correction uh given than a beginning of a bare market or implosion uh given a a lot of things that are other things that are happening in the policy and political space.

Uh in any case, we're also heading into a more seasonally positive time. It could be that Santa is not coming or maybe Santa is giving us a huge lump of coal. But again it's it's early and we are just heading into the off into the holiday season. So um let's uh let's see what happens.

Uh the second thing that I want to talk about of course is what's happening in Japan. So quietly quietly seemingly uh ignored by the market. Japanese bond yields were absolutely surging.

Now, usually this would be kind of a big news because when Japanese bond yields are rising, that usually drags up bond yields globally and you know if you have bond yields rising, you would see uh usually it's a negative reaction in the risk market. But if you look at treasury yields, the 10-year yield has been steadily declining in part of course due to expectations of cuts and also um you do have kind of a riskoff episode in the equity market.

And in addition to that, usually when you see Japanese bond yields rising, you would see the yen strengthening and that could have some kind of disruption in the yen carry trade. Whereas people who are uh borrowing yen and and buying risk assets elsewhere in the world would uh retrench uh sell risk assets say uh equities in the US, take those dollars and repay yen. So that means the yen would strengthen.

But that's not happening either. So what's going on in Japan?

So first off, I think it's it's basically um a lot of the what's happening in the US is also happening in Japan. So in the US, we have again big fiscal deficits, tremendous fiscal stimulus and also concerns of a loss of monetary policy independence. That's a concern in the US. It's actually a concern in Japan as well.

So the newly elected Prime Minister Tekkashi, she is uh promising to have more fiscal spending. She wants to address some of the cost of living concerns that Japanese citizens have had and are offering things like u uh subsidies or stemmies to to people who are suffering from cost of living crisis.

Right? We see we see this in the US as well. One answer one popular answer to cost of living problems that politicians have everywhere in the world is to just give other citizens more money. And of course that obviously is not a very good solution, right? uh stim checks are not a good solution to inflation.

But in any case, they're politically popular and it looks like they're about to embark upon the largest uh fiscal spending that fiscal stimulus package uh they've seen since the pandemic. And in addition to that, there are also concerns that maybe the Bank of Japan is going to be subject to political pressure and not able to raise rates as as at least at the pace that they were expecting.

there's some commentary from the government there to you know Bank of Japan can you you know kind of hold off on this or maybe slow down and so in that respect that's kind of weighing on currency and also uh it's also making inflation expectations a little bit concerned if you look at inflation in Japan the CPI is 3% which is the same it's been same as it is in the US so inflation continues to be a problem in Japan and as it is in the US 3% of course higher than their 2% target.

So the combination of this is you're basically having a government that is purposely uh doing some uh pretty uh I guess nominal growth positive policy big spending controlling the central bank to not hike rates.

So the combination of this is obviously you have a weaker currency, higher bond yields and a much more buoyant stock market which is what we see in the Nicay basically surging again. It's having a little bit of a tumble in line with US markets but over the past few months it's absolutely surged. This is basically what you would expect in a in a country that's um reflating.

So, one concern is that as Japanese bond yields gradually rise, is that going to create disorder globally and is that going to end the yen carry trade? And so far, the answer to those two questions is no.

Because although Japanese bond yields are rising, they're still far below inflation. Japanese bond yields are very negative in real terms and only becoming slightly less negative.

So, that does not seem to be enough um enough of a pull enough of a pull to draw money back. It seems like what investors in Japan are doing is that they're still rushing out as you can see by the massive depreciation of the yen almost touching that 160 point which many think that will prompt intervention by the ministry of finance.

One other thing to note is also historically speaking demand for Japanese government bonds comes from uh life insurers, comes from pension funds and those guys seem to be um not that interested in bonds at the moment. Part of it because they've already purchased a lot of bonds but part of it also is demographic.

One of the interesting things globally and we see this in the US market as well is that traditional buyers of bonds are are are entities that have longdated liabilities and are seeking longdated assets to match them.

So life insurance, pension funds and what's been happening is due to demographic trends you know the huge huge big boomer population it's uh you know they they are they their life expectancy is is reducing and so the actual demand for duration by from these entities is not as large as it used to be and the newer generation of course is smaller than the past and of course a lot of them don't even have um defined benefit benefit pension funds.

And so that structural bid from pension funds and life insurance companies, well, more pension funds than life insurance companies may not be the same uh due to aging populations and also smaller uh new generations.

So, so far it does not seem that the what's happening in Japan is impacting risk markets. And at the end of the day, if it ever does become disorderly over there, we know the Bank of Japan is more than willing to step in and uh have an iron grip on the bond market.

We saw them do yield control, curve control before, worked perfectly then, will work perfectly again.

One other concern is that do these rising bond yields uh create solveny issues for current entities like we saw in Silicon Valley Bank whereas when higher yields in the US cause Silicon Valley bank to basically be um at least on a marktomarket basis insolvent.

So when you look at the holders of Japanese government bonds, one thing that stands out is that over half of Japanese government bonds are held by the Bank of Japan.

So that means that a lot of the losses are going to be socialized by the government. They don't really I mean Bank of Japan has infinite has a money printer. It doesn't really matter for them whether or not they're solvent.

The other entities, you know, insurance companies, pensions, uh the these guys, I'm going to assume that the regulators are watching them and making sure that they have enough um uh their books are hedged enough and and if not, of course, the government could always fix that as they did uh in the US.

So, you never really want to bet on a bond market implosion because bonds and ultimately at the end of the day, they're just numbers uh numbers in a database and the government in a fiat system can can always control that.

What's less likely to be controlled is the currency. Um, and so far uh looks like the Japanese yen is in almost freef fall. Um, okay.

So, that's all I prepared for today. Next week is Thanksgiving week. So Thanksgiving week there will be no videos because in the US that's a very very sleepy day, very sleepy week.

Uh mostly a holiday week. So there's not probably not going to be much to talk about. But again, watch closely the equity markets. Are we just going to implode or is this a correction? All right, talk to you all uh in December.