宏观通胀回潮与AI交易全链条裂痕：地缘动荡下的美股承压与债券避险

Hello my friends. Today is October 17th and this is Markets Weekly. All right, guys. So, last week was not a good week in markets. The S&P 500 losing its 50-day moving average, the Nasdaq as well. And you had a pretty noticeable flight to safety into Treasury securities, which is showing that the market overall is concerned. So, today let's talk about the macro backdrop. We got big bank earnings, of course, CPI data as well. But it seems like what the market is really concerned about is a little bit further escalation in the Middle East, but more so it seems at some further cracks in the AI trade.

All right, starting with the macro data. So, as you guys know, I think big bank earnings are a really good way to see what's happening in the economy. Everyone has a bank account and of course banks are active in making loans. So, they have their finger to the pulse. Now, across all the big banks, they basically all said the same thing. The US economy is doing well. In fact, uh JP Morgan saying that their year-over-year growth in credit card, debit card transactions 10%. Citi saying something similar, Wells Fargo saying something similar. So, overall there seems to be very strong nominal spending. Now, JP Morgan was pretty explicit in its assessment of the US consumer saying things were were pretty good.

Now, I really like looking at Bank of America's charts. They break it down really well. Bank of America did not show as large an increase in uh transactions. So, let's say 5%, still pretty good. But when you look one layer beneath, you'll see that a lot of the increase in credit card and debit card spending is simply due to gasoline prices. So, it's kind of a mirror for what we see with the aggregate GDP statistics. GDP growing about 2% real, um and there's like say 3 or 4% inflation. So, nominal growth is strong, but a lot of that is inflation.

Taking a step back, looking at the overall banking system, banks continue to make loans at a very healthy pace. So, banking system is saying that, you know, everything's fine, credit continues to flow. Now, it's not as strong as it was it would appear because a lot of that is inflation, but overall it's a solid US economy.

Now, the other really big data we got last week, of course, was inflation. Inflation is what the Fed is caring about. Fed is not worried about employment. Employment is fine and a lot of the and the banks actually say this as well, uh they believe that part of the reason why the US economy is so resilient is because the labor market is fine. People continue to work, earn wages, and so they have money to spend. But, inflation is too high and that was, of course, reflected in the recent CPI data as well. CPI was hotter than expected. And in addition, PPI was also hotter than expected. But, as we all know, Fed does not target PPI or CPI, they target PCE. When you have the two, you can make a pretty good calculation as to what PCE will be. Now, according to the Cleveland Fed, their estimate of PCE is that it is actually trending upwards. So, overall inflation data is moving to the wrong direction is inflecting higher. A lot of that is due to rising energy prices, gasoline, jet fuel. And it doesn't it's not super obvious as well, but there is increasing concern that these higher energy prices are actually flowing through to more broader basics. So, non stuff that's not directly energy related. So, that is a concern.

Now, the market reaction to the hotter CPI and PPI were pretty telling, I thought. The first reaction was, of course, yield screaming higher. I believe on the day the CPI was released, you saw the 10-year yield spike up 10 basis points, which is a huge move, but that was quickly reversed as other concerns dominated. Now, before we go to those other concerns, I also note though that although inflation is hotter than expected, Fed officials, many of them have already strongly suggested that they're not going to hike in October. So, I think quite a few of them have say are saying that, you know, we want to hike, but there is no hurry. So, the market is pricing in a pretty sure hike in December, but not so much in October.

Now, the October skip was kind of cemented by a chair war discussion. So, he had he spoke at the IMF panel in Thailand. And although he of course he did not give guidance, he basically suggested that data is evolving according to his outlook that he talked about in the September. And if that's the case, of course, it doesn't seem to signal urgency and the market took it that way as well. And my own view is that so we already had significant increases in longer dated yields, so that's tightening financial conditions. And of course, October is just a few days before the November election. So, the Fed really has it would be a good idea for them to just not do anything then. And then just, you know, hike in December. At least that is of course unless the equity markets tank until then, which leads us to our next topic.

So, in looking at what happened in the bond market and in the stock market, it seemed pretty clear to me that the bond market in the past of course trading very closely to higher oil prices. It continues to have that. So, when oil prices spiked on Friday for example, the impulse was for yields to go higher longer dated yields to go higher, but that was increasingly mitigated by it seems greater concerns about the AI trade.

So, looking at oil prices you can see that oil futures continue to surge higher. It's not just about what's happening in the Strait of Hormuz, but there is further escalation between the Saudi Saudi Arabia and Yemen. So, that seems to be scaring the market a bit because the Yemen the Houthis uh which is a rebel force there, so they say um are able to very easily strike energy infrastructure in Saudi Arabia, and Saudi Arabia just doesn't seem to have uh the capacity to defend that. Now, historically speaking, they basically relied heavily on the US to provide security guarantees, but the US is occupied and maybe is not as strong as many of them assumed. So, it seems that there's a huge vulnerability there that's causing oil prices to spike.

Again, we don't consume oil, we consume refined products like gasoline, diesel, and jet fuel, and gasoline prices remain very elevated. So, all of this is showing that there's continued inflationary impulse, and that is of course going to trigger more rate hikes, and is not good for economic growth, not good for the markets.

But, what the market seemed to focus a lot more on this week was just further cracks in the AI trade. Now, GDP growth is about 2% and there are estimates that show that maybe as much as uh half of that is just due to the huge AI build-out. So, any wobbles to the AI trade is not just going to impact say asset inflation, but it's going to impact real economic growth as well.

So, there's a couple I guess I would say like three cracks that are happening in the AI trade. One is that there's news that there are technological breakthroughs in China that suggests that, you know, maybe the Chinese are are, you know, catching up faster than the market expects in both in say RAM technology and also in uh their capacity to produce things like GPUs, technological breakthroughs, something like floating logic or something like that. Again, China is an engineering superpower, the workshop of the world, and also a leader in many technologies. So, they of course are going to advance and um you know, maybe catch up. They definitely did so in the electric vehicle realm. Uh if you look at the statistics, you'll see that uh Chinese electric cars are really uh being sold very well throughout the world. Many YouTube car reviewers have also looked at them and say they're really good very good products. So, yeah. They they seem to be catching up faster and that of course is going to be not good for say uh Micron, SK Hynix, Samsung, all these guys that have been reaping huge huge bonus profits on RAM. And of course, it will also impact uh GPU sellers like Nvidia as well.

Now, if you look at the Cos B, which of course has been a leader in the AI trade, you can clearly see that the Cos B had this parabolic blow-off top and now more recently seems to be doing very poorly. And that is of course uh raising some red flags. A lot of people were piling into this and now they are underwater.

In addition to that, I I think it's also worth noting that a lot of the say one step above the uh just the producers of RAM and GPUs are the neo clouds and these are the guys who borrow a ton of money and then go and sell compute. Now, one of the big neo clouds is a company called Coreweave and they are super super highly levered. I believe they've borrowed say $35 billion and use that to buy a lot of compute and make money by leasing out compute.

Now, there's a lot of risk to this uh because of course the what they can get for their compute is truly they have contracts, but of course the future of that is uncertain. A lot of that will determine about demand from say uh demand from say the from the model builders like Anthropic, from user demand. Basically, how well this AI stuff pans out. And of course, it's going to depend upon competing products from GPUs and RAM. Maybe you have technological innovations such that these RAM prices and GPU prices collapse. That's going to hurt their asset values. And of course, as they've been spending more on their build-out because of inflation these prices, they've been actually buying less. And of course, because they're so highly levered, they're also exposed to higher interest rates as well.

So, the market is really concerned about this business model. And if you look at the stock of CoreWeave or even their CDS, which is how much market CDS is basically insurance on their debt. So, you can see that CDS prices are spiking. And that suggests the market is basically demanding a high insurance premium to ensure their debt, higher default probability. So, the higher rates, uncertainty in the AI trade is all putting pressure on this layer of the AI trade. Also, note that there was another neo cloud that wanted to go a public from Australia. Seemingly, it was a big deal over there. They had to pull their IPO because they didn't feel that market conditions were well. And of course, they were asking for a very very lofty um valuation.

In addition, Anthropic had another investment day. Now, the FT is leaking that, you know, they're showing great revenue growth, but of course, revenue growth that is lower than investors expected. Now, this is again moving one step higher in the AI trade to the model layer. So, you got again competition on the hardware layer from Chinese vendors. You got the neo clouds on top of that that are, you know, facing some business difficulties due to the high interest rates due to shaking uh shakiness in consumer sentiment. And one level higher, again, the model builders who of course use a lot of this compute, uh they're seemingly not growing as much as the market would like. Some rumblings from Anthropic investors. They were seeking a $2 trillion IPO valuation. Hey, maybe they'll do 1.5, but of course, if you're losing money and you're not growing as quickly, maybe even that is difficult as well.

So, again, a lot of shakiness in the AI trade that is impacting um sentiment. And if the equity market tanks, if the AI build-out is, say, slowing down, that is going to impact the US economic growth. There we could very much be in a recession, and if that's the case, you have a very strong flight of quality to the bond market.

So, uh all of this is creating a an atmosphere that was not good for the stock market. What What's surprising to me is that we are in monthly op-ex, so usually this is a supportive time, and yet we still sold off. Now, one thing that really caught my eye the last week was a spike in vol. So, even though the S&P was only down 1% on Friday, you have VIX soared above 20, and that is, of course, suggesting that there are a lot of people buying options. Fixed-rate vol was high, skew uh steepened. So, people are buying puts, that's market concern, of course, in addition to buying Treasuries.

Now, I take special note of that because we are in this window where we're heading into midterms where you could have heightened geopolitical risk. Now, people that I follow are seeing very different things about this. So, Professor Pape, of course, world-renowned expert on geopolitical conflict, is highlighting that, you know, this is a window of period where maybe the US would strike or maybe the Iran could strike right before midterms. And uh so, I subscribe to his newsletter, he's putting uh probability of a 66% that the Iranians could strike first in this window as a way to further disrupt energy prices and and hurt the uh the president's election chances. So, that's one thing.

And the other is that one thing that we've noticed about this administration is that they do a lot of trading, right? So, there's this story where the CFTC was investigating suspicious oil trades put earlier this year right ahead of the president's U-turn on the Iran war. According to the CF According to analysis, about 15 minutes before Trump did his big U-turn, a whole bunch of people bought stocks and sold oil. Again, that was a very, very profitable trade. And the timing suspicious because it suggests that someone knew that the president was going to do this big Truth Social post that I sparked a huge rally earlier in the year. Now, there's reporting that suggests that people from the White House told the CFTC to stand out, to not investigate this. So, again, we kind of already know that the president and his friends are making a lot of money off the presidency. And so, that suggests that this is a president This is a a very leaky administration. And if that's the case, do they know Do insiders know something such that they're beginning to protect themselves ahead of of the election?

And that That's uh you know, that's that'd be very bad news. I was hoping and thinking that maybe the president would just kind of take the L and just do something with the Middle East, make the stock market go up. Uh maybe try to protect the Senate, but you know guys, it looks like there's maybe there's no taco. And if that's the case, things could get pretty messy because we do have higher interest rates, higher energy prices, cracks in AI trade. And maybe if the Democrats sweep, they don't like AI infrastructure buildout. That That is a very populist position. People don't like having data centers drive up energy costs, cause noise for for whatever reason. So, I think we could be in our in a kind of a shaky place. Again, this this could all change at a flip of the hat by some kind of, you know, presidential elect action to try to calm things down, but hasn't been coming so far.

Uh one of the things that I like, again, I've been talking about rates is that So, if you have big risk off, we're already seeing that uh the you're going to get a bid for for rates, for bonds, right? So, that's uh that means rates will come lower. And if we do have a resolution here, that means oil prices will come down, and that would also mean fewer Fed hikes, and and that'd also be good for rates as well. So, I I personally continue to think that uh you know, bonds are are the big uh good hedge going into this kind of a dicey period.

All right, so that's how I prepared for today. Thanks so much for tuning in. Talk to you guys next week.