JD Straight Up - 30Sep24 - New Peaks

New Peaks

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 5741 – up 2% from 5615 two weeks ago - testing all-time highs

VIX at 17 – flat from 17 two weeks ago

10yr Treasury yielding 3.75% (up 3% from 3.65% two weeks ago)

Agg (US Aggregate Bond Index) at 101.41 – up 1% from 101.94 two weeks ago

Gold at 2658 per oz (up 2% from 2606 two weeks ago) – all time high – up 29% YTD

Crude Oil (WTI) at 69 per barrel (down 1% from 70 two weeks ago)

Bitcoin at 63,629 (up 10% from 57,940 two weeks ago)

JPM shares at 210 (up 2% from 206 two weeks ago)

Deutsche Bank shares at 17.25 (up 6% from 16.23 two weeks ago)

Truist shares at 42.67 (up 2% from 41.99 two weeks ago)

Blackstone shares at 153.11 (flat from 153.49 two weeks ago)

US unemployment: at 218,000 in latest claims – down 5% from 230,000 two weeks ago - continued strength in labor market

EUR at 1.11 USD (flat from 1.11 two weeks ago)

GBP at 1.34 USD (up 2% from 1.32 two weeks ago)

Macro Environment

Central banks are finally easing.  US Fed cuts by 50bps and signals additional cuts coming.  ECB continues cuts.  China flowing stimulus.

US inflation still at 2.5%, but trending towards 2% target.  EU at 2.4% on downward trajectory.  Employment strength continues.  Strikes at major manufacturers and transportation hubs threaten supply chains and production.  Ukraine war persists and Israel expands its war beyond Hamas in Gaza to Hezbollah in Lebanon.

Macro View

Central banks are betting that they tamed inflation and that economic forces require fuel to avoid recession.  It will take time for the 50bps to flow through and it is hard to believe that 50bps is going to save many of the companies that ended up over-levered with floating rate paper raised when base rates were a mere 50bps.  Does anyone really think the 50bps or another couple of 25bps cuts over the next quarters is going to save the commercial property market or jumpstart the stalled residential market?  Considerable parts of GDP rely on a liquid and healthy property market as property investments drive additional growth in materials and transportation.

Relevance

Companies are not raising capital outside of those that are hitting maturity walls, yet governments are raising record capital.  Is this a market or a controlled economy?  Governments and central banks are driving direction and liquidity.  The absurdly named Inflation Reduction Act has more power to determine capital allocation than investors do.

Head Scratchers

1. Truist [TFC] up 29% from 35 to 45 from June to July.  Deutsche Bank [DB] up 29% YTD and 24% in the last month.  This kind of run-up in damaged second-rate players in the financial sector can only be attributed to a prior view that TFC would not survive a coming downturn and now stands a chance and that DB will end up in a deal now that Orcel put Commerz in play.  The likelihood that either skates away from the commercial real estate reckoning and a bloated private capital party unscathed is very low.

2. S&P and Gold up 21% and 29% YTD, respectively.  A flight to what?  To everything.  Is it indicative of the everything rally just being a sign of universal inflation?  Prices of everything go up including houses, natural resources, and companies.  Or is there truly this much optimism in everything?  It seems its simply excess fiscal and monetary stimulus that has to flow somewhere so it flows into the prices of all things.  It is hard to see how 50bps of easing is going to help get this thing get back in the box.  On the other hand, witness the power of stimulus in the chart of the S&P below between Paulson and his $800bn bazooka to get out of the GFC to the tens of trillions and running with the Fed still maintaining a $7bn+ balance sheet facilitated by the US Treasury.

   
   

There have been 10 years in the last 100 where the S&P 500 and gold both appreciated more than 10%.  It is easy to cluster these into four groups:

1.  Roaring 20s: '26, '27, '28 leading to the catastrophic crash of '29

2.  WW2: '35, '40

3.  Opec: '78, '79, '80, oil crisis leading to the hammering of '82

4.  GFC: '09, '10, where the Greenspan/Bernanke put, Paulson Bazooka, and Geithner rescue denied the stigma of moral hazard and went all-in

We can almost certainly add 2024 to that illustrious listing, so when is the reckoning?

Drulard Family Capital Fund

#1 - 30Sep24