Hello my friends. Today is April 18th and this is Markets Weekly. All right, so this past week was full of uh interesting developments. On one day we blockaded the blockade and at the end of the week we were moving towards a peace deal and now Saturday morning it seems like that's not happening. So I really have no idea what's going on. But today, first let's talk about what we learned from bank earnings reports last week about the state of the US economy and how that contrasts sharply with the much more downbeat qualitative data we're getting. And secondly, let's talk about the historic historic crazy rally in the stock market and why I think that's very concerning. All right, starting with the macro data. So, as we all know, one of the best ways to understand what's going on in the US economy is to listen to what the big banks are saying. Everyone has an account at a bank. Banks monitor spending, make loans, and so forth. So, they really know how the consumer, how businesses are fairing. Now, JP Morgan, the biggest bank in the US, is always asked this question. And this time around, they've responded basically the same way that they've been responding for the past several quarters. according to them and they've looked at this data in many ways that the US consumer is fundamentally healthy and this seems to be supported by data from Bank of America that shows that consumer spending really is pretty healthy on a year-over-year basis. We see pretty healthy growth. Now, one thing worth noting is, of course, the rise in gas prices. The biggest impact from the Middle East on the US consumer so far has been higher gas prices. And you can see from this chart that they've absolutely surged to about average about $4 a gallon nationwide. However, though, the bigger picture is that consumer spending is is still pretty healthy. So, it it really does seem that the data suggests that, you know, things are okay for the consumer. Zooming out, looking at the baking sector on an economywide basis, what's been surprising to me is how strong credit growth has been. You can see that notwithstanding all this volatility, uh, banks continue to make lots of loans. Now, if you look into the data, you'll see that a lot of the loans are being made to what's called non-bank financial institutions. And those are just shadow banks, let's say mortgage companies, private equity, private credit, and so forth, auto auto lending companies. That's more of a reflection of a change in the structure of the US financial system. Whereas banks are not able to take up as much risk as they used to. So what they do is they farm it out to these other entities and uh so the bank would make a loan to say an auto financing company. The loan would be highly secured and the auto financing company will then make a loan to a consumer. So this indirect thing makes rates a little bit higher for the consumer because there's an extra middleman but it protects the banking sector more since the banking sector that loan is not to the consumer but to the auto financing company. So there's that extra layer of security and so far things to be seem to be okay. Now in the Bank of America presentation, you can also see that credit performance has been pretty strong. Consumer credit performance looking at this has basically been in line with how it's been over the past decade. A similar thing can appear when you see uh commercial performance as well. So again, looking at defaults, looking at credit growth, looking at consumer spending, everything seems to be honestly totally fine, which is really surprising because the anecdotal data that we're getting is that the consumer is not doing well. Now, the University of Michigan consumer sentiment data printed at all-time lows last month. All-time lows. So now there's been changes in methodology of all this and this has not correlated very well with consumer spending but it is surprising to see such a big contrast that has been taking place for some time between the hard and the soft data. Now looking at the Fed's beige book last week a line that really caught my eye was that Fed districts are reporting a notable increase in the number of people going to food banks and other um social services. So, you know, it's hard to square the two. Whereas anecdotally, you hear so many people that are not doing well and you hear people getting fired and so forth. Uh, but the hard data, the hard data is just clearly okay. It could be in part due to what people call the K-shaped economy. But, um, you know, even of if there were meaningful deterioration that you would see in soft data, you should see some of that in hard data. the upper part of the K is really not enough to overcome the vast majority of the population. So it's something interesting that we should keep in mind of

okay the second thing of course is we have to talk about the historic rally in the US stock market. So if you look at this chart, it's just comical now. So there's interesting work done by Warren Pies of 3F research that shows that uh and he did this I think on Wednesday. So this at that time the 10day rally was in the 99th percentile of all 10day returns uh in the history of the S&P 500. So it was very much an outlier. Now that rally continued into Friday. And so I'm going to guess that this rally that we've seen over the last two weeks is probably the most uh aggressive one in the history of S&P 500, just basically going straight up. And it's really hard for me to explain why that is. Now, of course, everyone buys and sells for different reasons. So one reason is that there really are a lot of people who are basically Dgens that are gambling in the market. Now, there's this interesting data from Spot Gamma showing that there's been a surge of call volume buying. So, uh like we've seen many times in the past, a lot of people go and they buy a lot of calls that squeezes the market higher. So, that's definitely playing a role here. Now, the news flow has been positive. Now, on Friday, we did have what appears to be some sort of peace deal, and the oil markets uh reacted very strongly to this. Looking at dated Brent, which is spot oil prices, you can see that it absolutely imploded where spot oil is for the first time in some time below $100. And that could change very quickly if um headlines that we're seeing this morning, Saturday, show that maybe uh peace deal or some kind of negotiations are not as sure as uh as we would think. Now, one other thing to note is that last week we also had Allirds, which is a a company that makes sneakers, and I own a few Allird sneakers. I I really like them. Uh that but they were they make sneakers that are basically made of marino wool. They were a company that did very well in the past, but have basically done very poorly since. And you can see that in their stock price. It looks like they're basically going bankrupt. So what they did though is that all birds uh they sold all their sneaker business to someone else and are taking the money plus some credit borrowing some money and moving to the uh GPU business where they're going to provide basically uh some some sort of cloud computing AI computing as a service to people and that business transation of a sneaker company going to buy GPUs and then uh farm them out to people let their stock to surge uh like 600 700% uh on that day. It's come down a little bit, but really I think what that tells you is that there really is a large degree of speculative euphoria in the market. You have a large participation in the market. You have a lot of people buying calls. You have these meme stocks surging. We are again in one of these speculative moments that historically speaking uh tend to occur before we have very large declines. you know, I don't know when this will happen, but I think all the conditions are set, especially since from my read, it does seem like this uh blockage in in the Middle East, it's not over yet.

Now, we've been talking about how this is a slowmoving thing because it takes several weeks for uh tankers and so forth to leave the Middle East and arrive at their destination. So even though we had this event happen several weeks ago, a lot of the economy is not yet fully fueling this big big big air bubble that's occurring right now. The most obvious part that's being felt obviously this has impacted the economy of course is through oil prices and refined products like jet fuel. So the oil analysts say that for crude oil there's a lot of cushion in the system. You have barrels that are held in the SPR. You have barrels that are held uh floating barrels that are held in in tankers abroad. Uh the US for example has been giving waiverss to Russia to allow them to sell oil and those waiverss have been renewed once again. But for the refined products like jet fuel there's much less of a storage if any storage at all. And so you're already seeing jet fuel prices surge and outright shortages. So the airlines across the world are reporting either increases in prices say fuel search charges or outright cancellations. So that is the very very very very tip of this huge air pocket that is moving through the global economy and that's not even talking about things like fertilizer as we all know uh fertilizer if we don't have enough fertilizer we won't have enough food but that's not going to show up until say next year and at that time it will show up in higher food prices. So the macro data is is very clear that there is something coming that's not going to be good. And that is basically the unanimous opinion of everyone who looks at this. And so it seems to me that the market pricing, the stock market euphoria and so forth is very much out of step. And again, the market and the economy are different things. We don't always expect them to be in step. And sometimes they are really really out of step. But uh that makes me a lot more cautious given all the euphoria that we see here that this may not be very good. Now there is a there is a possibility that you know this hiccup that we see in the Middle East is just going to be resolved straight after news resumes traffic and I think if that happens that we can really the air pocket even though it's it's not good uh I think the market will be able to look through this but um if there's still concern about this then then I think a couple things will happen. First is that I think there's going to be a big change in the stance of monetary policy. Now, we heard from Governor Waller on Friday that, you know, if the straightup harm is resolved, he's going to be able to look through this. So, we could still get rate cuts and the market is basically pricing in some degree of a rate cut possibility through this year. But he has also I think subtly subtly hinting that if this doesn't resolve and we get too many supply shocks because we've already had COVID we have the tariffs and we have this again uh that there is some possibility that he may not be able to look through this and in that context it is possible that we could get outright rate hikes and if you look at how the stock market behaves historically when we have these euphoric moment moments. What pops the bubble is basically always okay. So maybe it's not causation, maybe there's correlation, maybe it plays a role, but higher interest rates always play a role. You saw that in the 1929 bubble, you saw that in the docom bubble, and you saw that in 2022 as well. So higher interest rates again seem to always correspond with the popping of the big bubble. So that that that is a potential possibility if we don't have the straight of our moves resume. One thing that would highlight that is that if we don't have the straight of our moves resume in the coming months, we will probably get inflation data that is going to be surprisingly high. And if we don't have a clear resolution, the central bank will not be able to look through that. I think that again we have a we have dovish members but I think they will have trouble looking through this as well until they can credibly say that the straight of our moves is going to open in the near term. So there is this clear mechanism here that could act as something that would have uh very be very risk negative. So that's something that we should we should keep in mind of and of course uh if the tradeoff moves is really open and everything is okay uh that I think that it's not as clear to me what could actually pop the bubble because in that case the Fed would not be hiking rates and probably be cutting rates by the end of the year. All right. So we'll see what happens. I continue to think this is a very dangerous time and I know many of you will tell me that nothing ever happens. you should just, you know, don't be a stupid bear and so forth. But, but this is something that we've seen over and over again through history. I I think we should be thoughtful and that we should be cautious. All right, so that's all I prepared for today. Thanks so much for tuning in. I'll talk to you guys next week.