JD Straight Up - 28Sep26 - Debasement Danger
Debasement Danger
Drulard Family Capital Fund
Fortnightly Macro View
JD Straight Up:
S&P 500 at 7674 – up 1% from 7620 two weeks ago
VIX at 17 – flat from 17 two weeks ago
10yr Treasury yielding 5.26% (up 5% from 4.98% two weeks ago)
Agg (US Aggregate Bond Index) at 94.57 – down 2% from 96.08 two weeks ago - lowest in nearly 3 years
Gold at 4146 per oz (down 4% from 4322 two weeks ago)
Silver at 61.38 per ounce (down 4% from 63.69 two weeks ago)
Crude Oil (WTI) at 95 per barrel (down 9% from 104 two weeks ago)
Bitcoin at 83k (up 6% from 79k two weeks ago)
JPM shares at 339 (down 4% from 352 two weeks ago)
Deutsche Bank shares at 35.93 (down 10% from 39.53 two weeks ago)
Truist shares at 47.21 (down 7% from 50.48 two weeks ago)
Blackstone shares at 115.11 (down 12% from 128.59 two weeks ago)
Magnificent 7 Index at 462.38 (up 3% from 450.93 two weeks ago)
US unemployment: at 197,000 in latest claims – down 5% from 206,000 two weeks ago
EUR at 1.14 USD (down 2% from 1.16 two weeks ago)
GBP at 1.33 USD (down 2% from 1.35 two weeks ago)
Macro Environment
US inflation is at 3.4% while GDP growth is 1.5%. US Fed raised target by 25bps to 3.75 - 4 in a unanimous vote. EU inflation is 3.2% and GDP growth is 1.2%. ECB raised by 25bps to 2.5%. War continues in Ukraine. Ceasefire and negotiations continue in Iran and Hormuz. Energy prices remain elevated. China and US presidents meet. AI safety tops headlines.
Macro View
The bond market is telling us that the US cannot afford to live as it does. Or that it is going to cost a lot more to live that like if it continues to behave as it does. The riskier the US behaves, then the more bond investors will demand for financing that risk. There is no mystery or higher finance or magical algorithm there. If you want to lever up and ignore the bills that are coming in, you can continue to live high on the hog, but you are going to have to pay for it. If you want to carry on adding to your $40trn in debt and running multi-trillion-dollar deficits and funding wars with unclear rewards and initiating tariffs with unclear outcomes, you will pay for that added risk.
The guy at the end of my street growing up had a Rolls Royce, a cigarette boat, and (even in Miami) a full-length fur coat. His boat had orange flames down the side and was named Obscene Gesture. The kids on the street all thought it was cool. My Dad emphasized to me that the guy did not own any of those things, but just borrowed them all from the bank and at some point they would take them all away again. The kids all nodded and said how cool it was to get to play with all that stuff while the fun lasted. Eventually the toys all went away and the guy went to prison.
Relevance
The US is too proud and too strong to default and there is nobody around to put it in prison. Hence, it will quietly print enough money to continue living its extravagant and risky lifestyle and its currency will inevitably be debased. The bond market, just like someone selling life insurance, knows if you are a law-abiding, clean-living, low risk, home-body policy or if you are a drinker, smoker, base jumping, knife-fighting junkie and prices your risk accordingly.
Head Scratchers
1 - Why is the equity market still at all-time highs given the noise in the bond market?
The reason the market is still strong despite increasingly competitive and also alarming increases in bond yields is that the bulk of the $70+trn of capital in the equity market belongs to "rich" people that have nothing better to do with the money and risk falling behind on a normalized basis if they sit in cash making 3% pre-tax while inflation is at 3%. The $10-20trn of monetary and fiscal stimulus that was flushed through the system to save us all from the pandemic flowed like water through eagerly reaching hands, but only the rich folks were there with buckets to catch it. Even if only half of that stimulus crept its way towards equities, that is enough to account for much of the post-stimulus gain given the inelastic markets multiplier in effect. What keeps the market trading at 230% of GDP (record level) is not necessarily profound belief in AI, but merely inertia and a lack of viable alternatives. If there is danger of debasement, you do not want to sit in the cash of that currency. Instead, you hold your nose, look for stats that make the market look reasonable at its current value levels, and continue to stay deployed in equities.
Drulard Family Capital Fund
Drulard Family Charitable Fund
#52 - 28Sep26
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