全球债市风暴、法国主权信用危机与美股科技泡沫的裂隙

Hello my friends. Today is October 3rd and this is Markets Weekly. All right, so a lot of random things happened in the market last week. So let's just kind of talk about things by price action, by asset class, and some of the things that happened that would affect them. Let's start with rates. Of course, the bond market has been trading very very poorly. It looks like we're selling off every single day and every time we have a bounce, it seems like there's someone eager to sell. Now, honestly, I think it's super surprising to me that we can have such a large sell-off in rates and yet everything else seems fine. So, it's not just treasuries, but all fixed income, corporate bonds, mortgages, and so forth are seeing some significant decreases in market value. That means that someone, some investor, portfolio manager is having some serious markdowns, right? So, negative wealth effect and that that should have some cascading impacts. So let's say that you were a portfolio manager. You're down a lot on your fixed income portfolio. Usually what would happen is that you would rebalance a bit. So you'd have to sell your equities and other stuff. So it's really surprising to me that we don't really see anything like that. Also recall that the last time we had a big hiking cycle, it was sometime afterwards until we had some issue with Silicon Valley Bank.

So what was driving this sell off in rates? Well, again, we've talked about this too much, so I'm not going to go over it, but to say that, you know, if you look at the correlations between rates and oil, it's really strong. And looking at the Middle East, oil prices continue to kind of trend up and down depending on events. The president of course has reportedly basically threatened the European Union that if they don't release their diesel stockpile, they're going to put on a US export ban for diesel. And it seems like the Europeans have complied and are releasing some diesel. So that provides some short-term relief. But again, this is something that has been going on for some time. It continues to put upward pressure. You don't really need to take my word for it. The central banks are hiking rates and they're telling you straight up that they're hiking in part because there is a global energy shock. Now, one thing I'll note is that this warning with Iran is a political issue. So, there will be people on the internet who try to gaslight you into telling you that oil doesn't matter. But really, I think that this Iran war is really blowing up the global bond market.

But again, it's not just about inflation. Other data matter as well. And we did have employment data. Now, this matters in particular to the Fed because the Fed is a dual mandate central bank. Should employment weaken, then the Fed has a reason to at least soften its stance on rate hikes a little bit, even if inflation is above target. Now, we did get some Fed speak from fairly senior people. So, Vice Chair Jefferson and Vice Chair Williams of the New York Fed. So, one is vice chair of the Fed board, the other is vice chair of the FOMC. Small details, but these two are basically among the most senior people at the Fed and they were all no for October hike. So these guys are dovish and the market priced that in as well. So the market right now is thinking that we could get another 25 basis point hike in December and two more next year. So that did have some impact on the front end but not so much throughout the curve.

On Friday when we got the employment data though it was much weaker than expected but really not bad. So the headline job number of course disappointed, much lower than expectations, and the unemployment rate went up a little bit. It's like at 4.2% right now, still historically quite low. Now at the release of that data you had a pretty big rally in rates. So the entire curve basically shifted lower, but they gave that entire thing back throughout the day. There were additional headlines that the Houthis were hitting Saudi Arabia or Saudi Arabia was about to attack the Houthis, something like that that drove oil up and that seemed to have again strong correlation there. Could be other things as well. Now one thing to think that this isn't too bad of a jobs report is that the increase in the unemployment rate is due to an increase in participation. And of course because we have a slow growth in population even though we didn't create that many jobs it's still okay. One other thing that we should really highlight and this is super important is that you don't see a lot of wage growth. Wages actually decelerated this month. And without strong wage growth, it's really hard to have that classic inflationary spiral that people talk about that we saw in the 1970s where higher wages meant higher inflation, higher wages and so forth. You just don't see that right now. It doesn't really seem that labor has a lot of bargaining power. And of course anecdotally many people report hard to get a job right now, and so in that context it also looks like people aren't getting big raises either.

Now one other thing that happened in the bond market this week that was super interesting of course was what's happening in the European Union. Some people call it the spread, which is to say what French bonds are traded as a spread to German bunds. But today I'll illustrate it relative to the expected path of ECB policy, that is to say through swap spreads. And you can see that French 10-year yields have risen significantly relative to expected path of ECB policy rate. And that manifests in an increasingly negative swap spread. So basically France is the French bond market is under a lot of stress. Now remember France, European Union is different from the US. They are not a monetary sovereign. France can't just print their own currency, have the ECB buy it all. They are only one member of the ECB. So what you're seeing here is legitimate credit stress. There is some chance that France will default and not able to pay their debts.

Now this is something that the market has seen before and if you weren't around over a decade ago there was a European sovereign debt crisis. And at that time what people thought of as the weaker sovereigns, so like say Greece, Portugal, Italy and so forth, their interest rates exploded higher and there was significant stress in the Eurozone. And people weren't really sure what happened because there was some possibility that hey, maybe the stress would be so large that some members would actually quit the European Union. So there was what the ECB referred to at that moment as redenomination risk. Basically when you leave the European Union maybe your debt becomes the Italian lira or something like that, and then that creates a lot of risk for investors and so they demand higher yields. Now ultimately though that was resolved after a long long time through basically the European Union getting together, providing some backstops and also forcing the weaker sovereigns to take very punishing fiscal reforms. At that time the powers that be, they were called the Troika, that was the IMF, the European Union, and the ECB, they basically descend upon smaller countries like Greece and say that we could help you with your debt, but in exchange you have been spending too much money, you have to do austerity. And that's what they did and you can see the impact on Greece's GDP was severe. They basically have not yet recovered. Their GDP today is lower than it was over a decade ago. So the fiscal reforms worked in the sense that Greek sovereign bond yields are relatively low compared to say France for example, but it also came at a very high social and political cost at that time. There were Greek political parties that wanted to leave the European Union, but the Troika they put the fear of god in them and they basically bent the knee.

So France though of course is a whole another level because France is core Europe. You can't have a European Union without France. So what are they going to do to solve this problem? Now again if you have a sovereign debt problem, many solutions, right? Well of course you can print, have the central bank buy it all, but that's not available. Or you could raise taxes. We've talked about this before, really can't do that for France, they're super highly taxed already. You could cut expenses. That's never going to happen. You have tremendous amounts of popular revolts. Now, what happened this past week is that you had revolts by high school students in a couple cities in France basically burning things. And I think that really hurt public sentiment and highlights to the market that any type of benefit cut is basically politically impossible. And of course next year I think it's widely perceived that there is a very good chance that Madame Le Pen will take power and take France towards another direction. France has no growth either, so they can't grow out of it. So it is very much a tricky issue. So the market rightly of course is perceiving higher risk. I mean I would imagine it would be easier for a French politician to just default. Not to mention, not too long ago some of the intellectuals in France, more of the left-leaning, were dreaming about just having the central bank cancel their debt that they bought, but I think they at the moment at least have stepped back from that.

So the ECB actually has a special tool. It's called the transmission protection mechanism, something like that, TPI or TIP. What that does is that the ECB basically views sovereign debt spread widening relative to German bunds as a transmission mechanism problem. So for the ECB to use this tool, they would have to perceive some kind of plumbing malfunction such that when they are setting rates, it's not passing through to the rest of the euro member states. And so they could come in and they could buy up some of the sovereign debt to close the spread, police the spread as they would say. That is a tool that the ECB could use to make the French spreads a bit narrower. But according to the official description of the transmission protection tool, to use this the member state has to have good fiscal order, right? They're not having a big deficit and so forth. France would not qualify. But again, when there's an emergency, these guys would just waive all the rules. Ultimately, what happens with France is going to be a political decision by the European Union, by the ECB, and of course by the French government. There is no market solution to this. This could potentially be some sort of sovereign debt crisis. But remember, we don't want to fight the last war. These guys have fought the last war, so they have tools to solve this. It's just a political will question. One possibility is that they could wait for Madame Le Pen to become president and then use this as pressure to control her the same way that they controlled the smaller European countries to force them to do painful reforms. So we'll see. But that is something that is a notable risk factor and will get worse. Remember this energy crisis hits Europe much harder than it hits the US. They were reliant on Russian gas, Russian diesel. We don't like the Russians anymore, began to buy it from the Middle East. Then there's the Middle Eastern war, so they began to buy it from the US. And the US needs it itself as well. So they are under severe energy strain basically from all sorts of energies.

So okay, now the second thing of course let's talk about the equity markets. Now the equity markets again surprisingly resilient this whole week. The NASDAQ basically around all-time highs. Honestly, just looking at this, there's just so many people I think just think that it's going to moon and this position for some sort of resolution in the Middle East that could set it higher. And again, I believe that if we do have some resolution there, it will just surge in a dotcom-like fashion. So, a few things that I thought were interesting the past week, again, just focusing on the AI trade is that we got Nvidia announced a big buyback. Again, that sent Nvidia stock higher. Stock is hovering around all-time highs. Although, if you zoom out a bit, it really hasn't done that much over the past few years.

Now, in addition to that, we had really, really interesting leak of Anthropic's financials. Anthropic, the latest news suggests they want to IPO sometime next month, maybe before Thanksgiving. So that could be an additional supply of stock that could weigh on the market. So the interesting thing about Anthropic's financials is that well it loses tons of money, like 40 billion last year. But more alarmingly though, when you have a company like this, what people sell is growth. So revenues from Anthropic, and I use Claude, I think Claude is wonderful, but the revenues looks like they've stagnated. So that's really alarming if you're a company that loses money and is not growing, and if you want a two trillion valuation as they want, it's going to be quite difficult to get that. And of course as we know, the cheaper competitors, open weight Chinese models, they are improving significantly. They're not as good as Claude, not as good as OpenAI, but honestly, you don't need a rocket scientist to make pretty graphs or make Excel or even code for you. So, the open weight models are really good enough for basically whatever anyone else does. So, it is something that I think will continue to be felt in the market. So, really equities continue to surprise me as to how resilient they are. I honestly find it to be unbelievable, but we are, as I've discussed many times, I continue to believe to be in a very dotcom-like boom and maybe the only way through is to just zoom higher than you ever expected and kind of be like the culprit. But we'll see in the coming months. All right, so that's all I prepared for today. Thanks so much for tuning in. Talk to you guys next week.