The business cycle is dead.
Joined December 2021
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MUTUALLY ASSURED ECONOMIC DESTRUCTION
Large-scale tariffs are the "big red button" that closes the US capital account off to the world.
The US has had to mirror China's closed capital account to protect itself from a system so good at giving it what free markets want.
1/
Love seeing people discover the magic of the "terms of trade" in commodity based economies. It's hidden and irrelevant in most balanced economies but then you see blow out examples like this
Count Draghula retweeted
This is a tough market. It's hard.
Not "spreads are a little wider" hard. Over the last month, CCCs have widened about 5x as much as BBs. The 10-year is above 5% and oil is over $100. Lots of smart, well-run funds are having humbling years.
This isn't 2008 though. Nothing systemic is breaking, but there are lots of specific problems showing up at once:
- software loans marked at par that wouldn't clear anywhere close
- multi-year AI builds being funded with one-year bridge financings
- a struggling macro environment with dispersion amongst consumer behavior
- a CCC cohort trading like the debtor is at the courtroom steps
- semi-liquid funds selling what they can, rather than what they want, when redemptions come
The index is meaningless. The dispersion underneath proves nothing is contained, even if the headline suggests it is.
That is what makes this so painful. You can't hedge it with one trade and owning "the market" doesn't save you. You have to know what you are investing in, read the documents, and know exactly where you sit when the music stops and things change.
Everyone who has been doing this long enough knows that history rhymes. This isn't the GFC, this isn't 2018, and this certainly isn't 2020 or anything we've seen since. What this is, is an unrelenting tape. Volatility creates uncertainty.
Looking back, I remember exactly where I was and what I did during each real period of volatility in my career. It is hard to go through it, but how you act internally, externally, and how you handle it says everything about you and your skill set. Everyone is a genius in a bull market. Nobody is a genius today.
Three things matter today.
- cash, because whoever still has it when they need to deploy it will set the terms
- relationships, because when the liquidity disappears what you have is the LPs who trusted you for not reaching for yield at the top, sponsors who engage, and partners who pick you up
- credit selection, because the market has stopped paying anyone for beta
Every great credit vintage has started like this. Forced sellers, good assets on bad balance sheets, and prices that assume the worst with actions first, questions later. The tide turns. It always does. The patient people with dry powder will get paid.
This too shall pass.
The circularity of the AI capex problem
If you are worried about supply of fresh equity, why are those companies who benefit from the spend of this new capital being sold?
Why is everyone worried about dilution? Don't these projects have good margins with utility like demand than meta's business as a whole? There is a gap of a few years but tech investors have rarely been worried about things like that before.
The only proper sense bearish take to explain a day like today is that there will be insufficient demand for compute in the future and that all this spending is on a white elephant. I haven't really heard many make this case.
But I think it's the only thing that underlies these sort of moves. People doubt AI fundamentally and when they get asked to make a sacrifice for it (handing out capital), they flinch. It's not going to work, there's not enough demand. This makes selling across the AI supply chain rational.
Companies like coreweave are the ultimate expression of this. Individually unimportant in the whole scheme of things being opportunistic extremely highly leveraged (not just financially either, but to input pricing and execution risk) players that will just have their supply absorbed by someone else if they fail. There pricing offers a barometer in the belief in this future demand.
So, it's all just sentiment. And this makes sense. It's an enormous bet on something that is doubted by and is frightening to many and is many years into the future. Much harder than selling ads now.
AI has to generate enough economic productivity to pay for itself and the margins that justify these capital raises in the first place. I think it will. I don't think most agree and they are just getting pulled along as beta.
Even if it is successful in generating enough productivity to pay for itself (plus some juicy inference margin) you have many that are frightened of it in addition to doubting it. The corporate factory line worker is at risk just like they were to machines in the industrial revolution. This will prompt a response from government. How do you price that? By discounting the ROI on these investments?
This would get you to the point of being worried about dilution. The trade is just too uncertain and needs so much capital that the only realistic way it fails in the medium term is that we become forever compute constrained and AI has a small percentage of the effect it could've had, taking down the labs with it.
The only thing they hate more than having to provide a backstop is Le Pen
HSI has been properly hammered the last few sessions, down more than 2.5% today
AI has been hit hard today, with the bulk of the move being CATL on lower battery orders due to slower China EV demand
It's usually Korea doing the dirty work on the nasdaq, but not today
We've turned a corner for risk here that's been pretty crappy for the last 2 weeks
Oil rally is faltering
Euro equities rallying even with oats off this morning
Solid breadth yesterday in SPX
Can really charge into month end of we get good results today
A racing series with just this car would be epic. It would bring back the awesomeness of 90s British touring cars again
I don't understand why anthropics ARR is a good proxy for AI demand as a whole. How do you know if they are/aren't compute constrained, or losing to a competitor, or just have uncompetitive models?
Will infra capex return to investors? I'm not sure if this gets anywhere close to being able to answer this question.
2s not rallying with the oil sell-off makes sense (growth has been the dominant driver through reals)
but is probably wrong (Fed pretty clear that it will hike for inflation not growth)
Yeah, look, I don't really know if this time is the same as the other
Yields needed to go higher - but the catalyst here has an obvious growth downside if it gets too much worse
The only growth downside in 22/23 were the rates themselves
All of this bond doomerism is really getting on my nerves
We've moved to pricing 4 hikes. Like why is this such a catastrophic thing?
Can bonds ever really again?
The summary is that:
The bad news is that there really isn’t a reason for the sell-off to stop;
The only way it could is if the Fed/ECB guided to a few hikes only;
This means that the long end just won’t rally, but bull steepeners are the “bullish bond” play; and
The out of consensus view is that it just doesn’t matter to risk assets at all.
macroisdead.com/p/can-bonds-…
Count Draghula retweeted
China’s interests are brutally straightforward. It needs Hormuz open. It needs Bab el-Mandeb open. It needs Saudi oil, Iranian oil and Gulf trade. It does not want an ideological crusade in the Middle East because wars interrupt commerce. Beijing is not doing this out of charity. It is protecting China.
Seriously losing your premium on these is a harder thing to explain to your investors than what happened in July
What is he doing
Wasn't much in that presser to justify the move in 2s imo
The answer is that the market is learning that without forward guidance it can push the Fed around. This works until the day when they don't move against a 90% priced meeting
Then we'll really see some fireworks
Current situation is no where near as bad as at end of March.
At that point we thought we had near zero oil flow and oil infra was being blown up left and right
Red lines have been adhered to on both sides. Will be difficult for war premium to last.
