JD Straight Up: 14Oct24 - Peak Money

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 5815 – up 1% from 5741 two weeks ago - repeat all-time highs

VIX at 21 – up  24% from 17 two weeks ago

10yr Treasury yielding 4.10% (up 9% from 3.75% two weeks ago)

Agg (US Aggregate Bond Index) at 99.81 – down 2% from 101.41 two weeks ago

Gold at 2693 per oz (up 1% from 2658 two weeks ago)

Crude Oil (WTI) at 71 per barrel (up 3% from 69 two weeks ago)

Bitcoin at 67,047 (up 5% from 63,629 two weeks ago)

JPM shares at 222 (up 6% from 210 two weeks ago) - testing all time high

Deutsche Bank shares at 17.24 (flat from 17.25 two weeks ago)

Truist shares at 43.91 (up 3% from 42.67 two weeks ago)

Blackstone shares at 156.32 (up 2% from 153.11 two weeks ago)

US unemployment: at 258,000 in latest claims – up 18% from 218,000 two weeks ago - Hurricane Helene impact, but also showing signs of weakening

EUR at 1.09 USD (down 2% from 1.11 two weeks ago)

GBP at 1.30 USD (down 3% from 1.34 two weeks ago)

Macro Environment

War in Ukraine persists while that between Israel and Hamas and Hezbollah escalates with growing tension with Iran.  Oil price volatility increases in response.  Inflation continues on a trajectory towards 2% target for Europe and US, but still remains well above target at 2.4%.  Sizable base rate cuts in EU, Canada, US commenced but are questionable going forward.  Tech (largely AI-related) and Finance continue to rally to all-time highs and drag indices higher.  UST yields start to climb again and yield curve steepens slightly.  Gold continues to log new highs.  US hit by two major hurricanes likely resulting in hundreds of billions of insured losses within a matter of weeks.  Less than three weeks to go until US election.

Macro View

There are not many historical periods to compare this rally to and its backdrop.  The mountain of stimulus on both the fiscal and monetary fronts has few precedents outside of wartime economic activity.  The varying ways in which additional money was pumped into the system is also relatively unique (see below headscratcher for example).  In addition to all of the money supply is the high degree of leverage.  The IMF just reported global public debt will exceed $100trn by end of year, but more importantly that debt to GDP will hit 93%.  The US is on target for 126% debt to GDP.  The combination of extremely loose, prolonged easy monetary policy with additional fiscal stimulus with the highest levels of non-war debt on record is a unique set of circumstances.  Consumer, corporate and sovereign debt is all at or near record levels.  There is a huge bet that additional easing will come along to make this debt affordable.  The impact of further easing is surely further inflation.  This is formulaic.  Once again, the question is how much debt is the right amount of debt and can be safely managed.  Heightened levels of debt are very tempting as that debt provides considerable leverage to build, invest, and compete.  If a competing company or country is levered through a growth period and you are not, you will inevitably fall behind.  The same drives over-leverage in the consumer space.  The society built around consumption and envy will inevitably lead to over-leverage.  The question is when does it hit the tipping point and what is the result.  Then the question will be how long and how painful the reset will be.  This is certainly coming, but no one would have guessed that this prolonged easy money period and everything rally would have gone as long as it has.

Relevance

Countries, countries, and consumers all need to figure out how much risk they can accept in their drive to exceed peers.  It is a strange conundrum but is embedded in our capitalist society.  Everyone is out to compete and excel and in the periods of growth, the levered entities are the ones that move to the front and pull away from the more conservative pack.  The leverage works both ways and in the devil take the hindmost aspect, the most highly levered will be the first to crack when the dynamic shifts.

Head Scratchers

1. What was the Fed doing buying hundreds of billions of MBS through the pandemic and beyond even after implementing QT?  Why keep easing in the housing market and driving a widespread housing bubble with one hand while presumably tightening with the other hand?  How does that resolve itself when so many extremely low interest 30yr mortgages are locked?

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#2 - 14Oct24