From CoinDesk:

Moo Deng, a newborn Thai hippo at the Khao Kheow Open Zoo in Bangkok, has captured the hearts of many online through her cute antics. Now, she's the star of a $100 million memecoin.

The Solana token crossed the milestone capitalization earlier Thursday, becoming one of the few to reach that level from zero in recent months, CoinMarketCap data shows. . .

Holder count has zoomed to 12,400 unique wallets, with over $48.5 million in volume traded over the last 24 hours, a fan page for the token said Wednesday.

One trader made millions from the hippo heartthrob, with on-chain data from Lookonchain showing a wallet that turned $1,331 into $3.4 million by correctly timing the market.

Jaywalks the walk: Fed chair Jerome Powell flexed his muscles during the recent Federal Open Market Committee gathering, corralling what had been a divided group into a near unanimous verdict with only governor Michelle Bowman formally dissenting from the 50-basis point rate cut.  Such an abrupt downshift is unusual outside of crisis situations, with 25 basis points representing a more typical increment.

“There is a clear success story in Powell’s ability to get all but Bowman on board, and he is a more powerful chairman now,” Mark Spindel, founder of Potomac River Capital, told Bloomberg. 

Investors likewise expect that demonstrated authority to translate to another lurch lower in borrowing costs, as interest rate futures point to greater than 50/50 odds of another half point rate cut to the 4.75% to 5% funds rate at the Nov. 7 FOMC gathering.  “Given his comments in Jackson Hole, and what we heard from him at [last week’s] press conference. . . I think chair Powell would lean toward cutting 50 basis points again” predicts Deutsche Bank chief U.S. economist Matthew Luzzetti. 

As Powell et al. pivot from the quickly obsolete “higher for longer” mantra, the D.C. spending machine remains at full bore. The federal budget deficit reached $1.9 billion as of August with one month left to go in the fiscal year, up 24% from the same period last year and equivalent to more than 6% of projected gross domestic product. That output-adjusted ratio, which takes place in the context of a sturdy growth backdrop (second quarter GDP printed a 3% annualized pace this morning, rather than the 2.9% economist expectation), is the widest shortfall on record barring World War II, the great financial crisis and Covid. 

Suffice it to say, the imminent presidential election pitting Kamala Harris against Donald Trump doesn’t exactly portend relief on that score. The Wall Street Journal put it this way last week:

The country’s fiscal trajectory merits only sporadic mentions by the major-party presidential nominees, let alone a serious plan to address it. Instead, the candidates are tripping over each other to make expensive promises to voters.

Instructively, the Fed’s demonstrated E-Z money predilection, in tandem with Uncle Sam’s spendthrift ways, evince no particular concern among the political class over a revival in price pressures. “We are in a very good place,” commented IMF managing director Kristalina Georgieva on Bloomberg Television Tuesday in response to an inflation query. “The U.S. has helped the world economy stay afloat in this very difficult time.”  Charity begins at home: The Nasdaq 100 is up some 80% over the past two years, while investment-grade and high-yield credit spreads each reside near decade-plus lows.

Treasury Secretary Janet Yellen struck a similarly sanguine tone this morning on CNBC, responding in the affirmative when asked if she viewed inflation as sufficiently under control. "I always believed that there was a path to a soft landing, that it was possible to bring inflation down while maintaining a strong labor market, and to me, that's what the data suggest has happened," she added.

Might today’s freewheeling monetary-cum-fiscal backdrop provide a profitable opportunity within the Treasury Inflation Protected Securities (TIPS) realm?  Five-year TIPS now yield 1.45% compared to 3.55% for conventional Treasury obligations for that tenor.  

The differential – known as the breakeven inflation rate – now stands at 2.1%, down nearly 50 basis points from the spring and illustrating Mr. Market’s belief that headline inflation will indeed settle near the Fed’s self-assigned 2% per-annum mandate over the next half decade. For context, year-over-year CPI has registered at 4.2% on average since September 2019.

Stocks kept the good times rolling with another 0.4% S&P 500 advance following China’s latest bullish salvo overnight, while short-dated Treasurys gave back some recent gains with the two-year yield snapping seven basis points higher to 3.6% (the long bond ebbed to 4.12% from 4.14% Wednesday). WTI crude tumbled below $68 a barrel, gold rallied again to $2,672 per ounce, bitcoin jumped towards $65,000 and the VIX settled just above 15. 

- Philip Grant

Set them up and knock them down. From the San Francisco Standard:

“Let me get this straight,” John Mulaney said. “You’re hosting a ‘future of AI’ event in a city that has failed humanity so miserably?”

Everyone inside the auditorium at the Moscone Center groaned. Any notion that the award-winning comedian would play the corporate gig safe (and clean) were thrown out the window Thursday, when Mulaney, closing the Dreamforce festivities, started roasting his host, Salesforce, and the audience sitting right in front of him.

“You look like a group who looked at the self-checkout counters at CVS and thought, ‘This is the future,’” Mulaney said. . . “Some of the vaguest language ever devised has been used here in the last three days,” he continued. “The fact that there are 45,000 ‘trailblazers’ here couldn’t devalue the title any more.”

Mulaney then shared an anecdote about how he and his son, who is nearly 3, like to play baseball in their front yard.

“We’re just two guys hitting Wiffle balls badly and yelling ‘Good job’ at each other,” he said. “It’s sort of the same energy here at Dreamforce.”

Contingent convertible bonds may be going the way of the dodo bird Down Under, as Australia’s banking regulator has proposed removing the application of so-called additional tier 1 (AT1) obligations toward local lenders’ capital requirements. 

Rather than using those special purpose converts, known as CoCos, banks should seek “cheaper and more reliable forms of capital” by 2032, the Australian Prudential Regulation Authority argued on Sept. 10. A two-month consultation period is now underway. 

Last year’s mini banking crisis informs that regulatory proposal, as some $17 billion of the convertible bonds were wiped out following Credit Suisse’s demise even as the bank garnered a $3.2 billion equity value during a subsequent all-stock shotgun marriage with UBS. Vexed AT1 holders quickly filed suit. “The proposed changes seek to support financial stability at times of crisis with simpler and more certain resolution of banking in the unlikely event of failure,” APRA stated. “They are also aimed at reinforcing confidence in the safety of deposits in times of stress.”  Australia’s four largest lenders have about $26 billion of AT1 securities outstanding by Bloomberg’s lights, representing roughly 10% of global supply

Might the Aussie salvo presage a wider regulatory reassessment of the niche credit corner?  The rating agencies aren’t counting on it, as S&P Global predicted last week that “APRA’s proposal is unlikely to be widely replicated.” Peer Fitch Ratings noted that Australia’s “radical actions. . . may, in part, reflect the unusually high level of retail investor holdings of AT1 instruments in the country,” likewise casting doubt that the Old Continent will follow suit on such an initiative barring an express recommendation from the supranational Basel Committee on Banking Supervision.

Potentially shifting regulatory backdrop and all, CoCos have delivered fine results for risk-tolerant creditors of late: Deutsche Bank’s 10% junior subordinated perpetuals have jumped to near 110 cents on the euro from 92 following a bullish Grant’s Interest Rate Observer analysis (“A kind word for ‘CoCos’) on April 7, 2023, while Invesco’s London-listed AT1 exchange traded fund has generated a near 10% year-to-date return in dollar terms, topping the 7.8% and 6.4% seen from high yield bonds and leveraged loans, respectively.  

Yet, somewhat curiously considering today’s freewheeling credit backdrop, that strong showing has not translated to much attention from the investing public. As Bloomberg pointed out Thursday, Invesco’s ETF has seen assets under management shrink to roughly $1.05 billion, down more than $100 million since the start of 2024. “Flows haven’t really caught up,” Barclays analysts wrote earlier this month. “There was an expectation of higher inflows into the asset class once the Fed started its rate-cutting cycle.” 

Stocks fluttered higher in low-wattage trading as the S&P and Nasdaq 100 each settled green by 0.3%, while two- and 30-year Treasurys rose by two basis points apiece to 3.57% and 4.09%, respectively. WTI crude ticked below $71 a barrel, gold continued higher at $2,628 per ounce, bitcoin edged lower at $63,300 and the VIX finished just below 16. 

- Philip Grant

Amateur hour is over. From CNBC:

The University of Tennessee is raising its season ticket prices by 10% across all its sports to prepare for athletes to start to get a cut of the school’s sports revenue, according to an email sent to football season ticket holders on Tuesday.

Tennessee is calling its hike a “talent fee,” and said it “will help fund the proposed revenue share for our student-athletes,” according to the email. . .

Tennessee already has one of the biggest athletic departments in the country, coming in at eighth overall for total operating revenue in the 2022-2023 seasons in Sportico’s database of public university athletic departments.

One erstwhile crypto giant pushes up daisies, while an evidently thriving peer continues skyward. Here’s a pair of instructive bulletins in the digital currency realm, beginning with a Wednesday report from the Financial Times:

The U.S. Securities and Exchange Commission has charged the auditor of collapsed cryptocurrency exchange FTX with misconduct, saying the firm took on Sam Bankman-Fried’s company as a client without properly understanding the crypto market. 

Prager Metis, an accounting firm that ranks outside the top 50 U.S. firms by revenue, gave a clean bill of health to FTX’s financial results for the two years before it collapsed in November 2022 with an $8 billion hole in its balance sheet.

And here’s CoinDesk Tuesday:

Tether’s USDT, the largest stablecoin [i.e., tokens purportedly pegged to the dollar one-to-one], is not only growing larger, it’s also cementing its dominant position and now accounts for almost 75% of stablecoin market value, up from 55% two years ago. 

An eye-watering windfall accompanies Tether’s ascent. As Blockworks pointed out last week, cumulative reported net profits from the fourth quarter of 2022 through June 30 stand at $12.72 billion, comfortably eclipsing BlackRock’s $9.83 billion bottom line over the same stretch. For context, Tether has 125 employees by employment site Zippia’s count, compared to nearly 16,000 for Larry Fink’s outfit per the BlackRock website. 

By way of allocating that firehose of cash, Tether has gone into the venture capital business, with CEO Paolo Ardoino detailing plans to Bloomberg in June to allocate $1 billion to startups over the following 12 months. On the agenda are firms focused on “alternative financial infrastructure for emerging markets,” along with artificial intelligence and biotech.  

“We can offer AI computing to all the companies we have invested in,” Ardoino declared in that interview.  “It’s all about investing in technology that helps with disintermediation [of] traditional finance. Less reliance on big tech companies like Google, Amazon and Microsoft.”

British Virgin Islands-based Tether may be orbiting outside the Silicon Valley constellation, but the stablecoin giant looks to exert its own gravitational pull in the halls of power. The firm announced Friday that it has hired Jesse Spiro as head of government affairs, writing in a blog post that the former PayPal and Chainalysis executive’s “extensive background in the legislative and regulatory arenas makes him exceptionally well-suited to help advance Tether’s mission of building a future-proof financial and technological ecosystem.”

Yet Tether’s mushrooming profits and towering industry stature haven’t translated into much respect from financial statement sleuths. Ardoino told digital news site DL News that neither Deloitte nor PwC, EY or KPMG are willing to inspect his outfit, putting it thus from the auditor’s perspective: “So you are a big four accounting firm, and you have the entire banking industry that is your customer. Why would you risk 100,000 customers for a couple of stablecoins?”  Ardoino added that he and his colleagues continue to lobby the celebrated quartet to take on the job.

Big four or otherwise, The Wall Street Journal notes that Tether has promised a complete audit of its books that “since at least 2017,” while general counsel Stuart Hoegner told CNBC in July 2021 that such an inspection would be completed “within months.” 

Instead, Tether hired BDO Italia just over one year later to conduct a what it trumpeted as a monthly review of its reserves beginning by the end of 2022, though those attestations have since taken place on a quarterly basis.  BDO Italia’s most recent analysis, which identifies $11.3 billion in overnight reverse repurchase agreements, $1 billion of term reverse repurchase agreements, $6.5 billion in secured loans, $6.4 billion in money market funds and $3.5 billion in “other investments” among Tether’s $118 billion in assets, likewise includes the following disclaimer: “The reporting date is limited to a point in time as of June 30, 2024. We did not perform procedures or provide assurance at any other date and time in this report.” 

E-Z money aficionados got their 50-basis point rate cut Wednesday, but that wasn’t enough to keep the party going as the S&P 500 dipped 0.3% to snap its seven-session winning streak after jumping nearly 1% in initial response to the move. Treasurys in turn ended the day in the red, as two-year yields rose two basis points to 3.61% and the long bond jumped to 4.03% from 3.96% Tuesday. WTI crude pulled back to $69 a barrel after approaching $71 at lunchtime, Gold briefly touched $2,600 an ounce post-FOMC before reversing to $2,554, bitcoin retreated below $60,000 from a post Fed perch near $61,000 and the VIX settled north of 18, up three-quarters of a point on the day. 

- Philip Grant

Almost Daily Grant’s will resume Friday 

Not all side-hustles are created equal. From The Wall Street Journal:

Two former New York City fire chiefs were charged Monday with accepting tens of thousands of dollars in bribes in exchange for expediting safety inspections—marking the latest corruption case to hit the administration of Mayor Eric Adams. 

The Manhattan U.S. attorney’s office alleges that Anthony Saccavino and Brian Cordasco fast-tracked required safety-plan reviews and inspections of hotels, apartment buildings and restaurants. 

A third official, Henry Santiago Jr., a retired Fire Department of New York chief who pleaded guilty and is cooperating with the government, ran an expediting business and told customers he could help fast track their projects in exchange for payment. Saccavino and Cordasco were secret partners in the expediting business as well, according to federal prosecutors. Santiago would give the defendants cash payments for their help, sometimes over steakhouse dinners or in their FDNY offices, prosecutors said.

Fifty basis points is for pikers. Rate cuts are front of mind for the political class ahead of this week’s gathering of the Federal Open Market Committee, as a trio of lawmakers penned a Monday missive urging a super-sized, three-quarter percentage point downshift to the benchmark funds rate. “If the Fed is too cautious in [easing policy], it would needlessly risk our economy heading towards a recession,” wrote Sens. Elizabeth Warren (D-MA), John Hickenlooper (D-CO) and Sheldon Whitehouse (D-RI). “The Committee must consider implementing rate cuts more aggressively upfront to mitigate potential risks to the labor market.” 

Mr. Market has likewise been expressing his preferences, as interest rate futures now price 64% odds of 50 basis point move Wednesday (with 25 basis points representing the remaining 36%) – triple the chances of that outcome discounted five days ago – while guesstimating a sub 3% funds rate by mid-2025. The policy sensitive two-year Treasury yield now sits nearly two percentage points below the funds rate’s upper bound, easily marking the largest such spread of the post-crisis era and more than double the 80-basis point discount seen as recently as early July.

That abrupt shift ripples far and wide, including in the foreign exchange realm. Thus, the Japanese yen changed hands at fewer than 140 per dollar this morning, its strongest reading in 14 months and up 13% from the multidecade lows logged in mid-July. The Bank of Japan, which pushed benchmark borrowing costs to a 16-year high of 0.25% in July following a near decade-long experiment below zero, likewise convenes on Friday, with interest rate futures pricing a near 1% overnight call rate by next June. Ebbing rate differentials from the U.S. duly pressure carry trade positions, in which investors borrow in yen terms to invest in higher-yielding assets stateside and beyond. 

“I still think that there is a lot of [carry trades] that can unwind, especially if you look at how undervalued the yen is,” Richard Kelly, head of global strategist at TD Securities, commented on CNBC last week. “That’s going to have spillover effects.” 

ING strategist Chris Turner articulated one of those potential spillovers to Barron’s on Monday: 

When forex volatility rises, it increases a metric called value at risk [which measures potential losses for a given trade]. Risk managers will then tell traders to downsize their portfolios. It’s the volatility channel that can really trigger shrinking position sizes.

Could such a dynamic manifest in a risk aversion reprise of the early August episode? Unwinding carry trades “could be a volatility factor that’s not on everybody’s radar because they think we went through this already,” added Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions. “We think investors should have some exposure to products that benefit from volatility.”

On that score, some punters expressing concern on the state of the economy are taking a flier on an even swifter rate cut cadence than is widely expected. Thus, analysts at Goldman Sachs relay that the “bond market has significantly adjusted its recession probability over the past three months,” as rate futures now price near 25% odds of the Secured Overnight Financing Rate tumbling below 2% by December 2025 from the current 5.33%. As of June, those odds stood well below 10%.   

Treasurys remained on the front foot with the long bond edging lower by four basis points to 3.94% and the two-year note marking another fresh 2024 low at 3.56%, while stocks painted a mixed picture with the S&P 500 slightly higher and the Nasdaq 100 lower by a bit less than half a percent. WTI crude continued its rebound at $70.50 an ounce, gold managed another green finish at $2,583 per ounce, bitcoin ticked below $58,000 and the VIX stayed above 17. 

- Philip Grant

Behold an instructive pair of headlines – posted within minutes of each other on Wednesday afternoon – from Reuters and Bloomberg, respectively, regarding questionable personal account transactions by Atlanta Fed president (and current FOMC voting member) Raphael Bostic: 

Atlanta Fed's Bostic violated trading rules, U.S. central bank watchdog says

Fed watchdog found no proof Bostic traded on inside information

Better safe than sorry. One of Warren Buffett’s top lieutenants cashed out in a major way on Monday, as Berkshire Hathaway vice chairman of insurance operations Ajit Jain liquidated 200 Class A shares for roughly $139 million in proceeds. That sale represented 55% of Jain’s stake in the conglomerate by CNBC’s count, the largest such decline since the 73-year-old joined Berkshire in 1986. 

“I think, at best, it is a sign that the stock is not cheap,” Bill Stone, chief investment officer at Glenview Trust Company (a BRK shareholder), told the business news channel. “At over 1.6 times book value, it is probably around Buffett’s conservative estimate of intrinsic value. I don’t expect many, if any, stock repurchases from Buffett around these levels.” 

Indeed, Jain’s employer is taking chips off the table across its own portfolio.  Berkshire Hathaway sold a combined 5.8 million shares of Bank of America over the three days through Tuesday per SEC paperwork, cashing in some $230 million to push total sales since mid-July to roughly 175 million shares and $7.2 billion (the firm still holds a near 860 million share position, equivalent to an 11.1% ownership stake). BAC shares have ranged from roughly $36 to $44 over that near-two month stretch, compared to an effective $7-and-change cost basis for warrants which accompanied Buffett’s initial $5 billion preferred stock outlay back in 2011. 

Berkshire has likewise been trimming fruit from its investment diet in 2024, pruning over 500 million shares of Apple – equivalent to more than half its holdings – between January and June.  The bulk of those sales took place during the second quarter at a Barron’s-estimated $186 per share average price, multiples of the roughly $34 a share cost basis logged between 2016 and 2018. 

That lucrative outcome duly spurs the most welcome type of financial headache: a hefty bill from Uncle Sam. New York-based tax and accounting analyst Robert Willens pegs combined state and local AAPL-related tax payments at $15 billion during the second quarter alone, telling Barron’s thus: “I guess Mr. Buffett felt that the investment case for unloading the Apple stock was so compelling that he was willing to endure the tax consequences of the sale of such highly appreciated stock.”

To be sure, planet Earth’s foremost value investor doesn’t seem to be seeing much of it these days. Berkshire’s pile of cash, near cash and Treasury bills topped $270 billion as of June 30, equivalent to 88% of the firm’s equity portfolio, and up from 40% in mid-2023. Two years ago, the ratio stood at 31%.  What to make of that high-profile retrenchment?  See “Warren Buffett’s money fund” in the brand-new issue of Grant’s Interest Rate Observer dated Sept. 13 for a closer look at today’s state of play following a stellar decade-plus run for U.S. equities. 

Green energy was abundant Thursday, as stocks staged an impressive rally with a near 1% advance on the S&P 500 to leave the broad index in shouting distance of its mid-July highs, while WTI crude snapped higher by 3% to $69 a barrel, bitcoin rose to $58,300 and gold logged a fresh peak near $2,460 an ounce. Treasurys came under some modest pressure to leave the long bond at 4% even, and the VIX settled near 17 after testing 24 less than a week ago. 

- Philip Grant

From Bloomberg:

Credit losses are rising as U.S. consumers shift spending to basic needs and away from purchases that aren’t vital, according to Citigroup, Inc. Chief Financial Officer Mark Mason.

“The nature of spend is evolving,” Mason said at a conference hosted by Barclays Plc Monday. “It’s going from discretionary to a more staple type spend.”

Net credit losses have climbed in Citi’s large cards business and payment rates have started to “come down a bit,” he said, adding that it’s within ranges previously discussed by
the firm. Meanwhile, more affluent customers are driving much of the spending growth.

Is Europe’s centrally imposed electric vehicle drive stalling out?  Stockholm-headquartered Northvolt AB announced a partial production halt at its primary manufacturing facility this morning, likewise tabling expansion plans and preparing layoffs as a series of production snags, darkening demand backdrop and persistent cash burn force Europe’s largest homegrown battery manufacturer into course correction. “We are having to take some tough actions for the purpose of securing the foundations of Northvolt’s operations to improve our financial stability,” commented CEO Peter Carlsson.  

Northvolt’s downshift comes five days after fellow Swedish concern Volvo Car ditched ambitions to feature a 100% EV vehicle lineup by the end of the decade, instead planning to offer so-called mild hybrid models with electric power supplementing an internal combination engine. "We are resolute in our belief that our future is electric," Volvo CEO Jim Rowan stated. "However, it is clear that the transition to electrification will not be linear, and customers and markets are moving at different speeds."

The current cadence is unmistakably slower. EV registrations on the Old Continent numbered 102,705 units in July per the European Automobile Manufacturer’s Association (EAMA), down 10.8% year-over-year to leave market share for that category at 12.1%, compared to 13.5% in the same period last year.  Total market share across the first seven months of 2024 stands at 12.5%, down 50 basis points on an annual basis. 

That series of setbacks for the formerly mushrooming industry is not lost on the mandate-minded political class. The Financial Times reports that European Union commissioner Thierry Breton was set to “berate” regional automakers over the sluggish pace of EV adoption during a Monday gathering, as the bloc’s Green New Deal, which includes strictures on sales of fossil fuel emitting new vehicles by 2035, makes for an uncomfortable pairing with the current backdrop. 

Indeed, one prominent industry player anticipates looming trouble from the regulators. Referencing rules capping average CO2 emissions on new vehicles at 94 grams per kilometer beginning next year from the current 116 g/km limit, Renault CEO Luca de Meo told French public radio over the weekend that automakers may be obliged to curtail production of more than two million vehicles to comply or face the prospect of billions of euros in Brussels-levied fines. 

“The speed of the electric ramp-up is half of what we would need to achieve the objective that would allow us not to pay fines,” warned de Meo, who likewise serves as president of the EAMA. “Everyone is talking about 2035. . . but we should be talking about 2025 because we are already struggling. We need to be given a little flexibility. Setting deadlines and fines without being able to make [them] more flexible is very, very dangerous.” 

Stocks caught a strong updraft with the S&P 500 gaining 1.2% to recoup a chunk of last week’s losses, while Treasurys flattened a bit in mixed action as the two-year yield rose two basis points to 3.68% and the long bond edged to 4% from 4.03% Friday. WTI crude bounced towards $69 a barrel, gold ticked higher at $2,505 an ounce, bitcoin advanced to near $57,000 and the VIX settled at 19.5, down nearly three points on the session. 

- Philip Grant

Everyone’s a critic. From the New York Post: 

An allegedly drunk plane passenger caused midair chaos and terrorized others onboard an easyJet flight, forcing the pilots to divert course and make an emergency landing. Flight U28235 took off from London Gatwick Airport in the UK just after 3:30 p.m. Tuesday heading for Kos International Airport in Greece.

The Airbus A320 flew through some turbulence during the scheduled four-hour flight, which didn’t sit well with one passenger, who had gotten intoxicated from whiskey. The allegedly drunken passenger said the captain was “rubbish” and stood up to disrupt the flight as the plane cruised at over 30,000 feet. . .

An emergency landing was made at Munich International Airport an hour and 44 minutes after takeoff, according to flight tracker FlightAware. . . As police sorted out the incident, passengers taunted the disruptive flyer by chanting lyrics from rapper KRS-One’s “Sound of da Police.”

It’s a wrapper’s delight. The bourgeoning exchange traded fund category attracted $75 billion in net assets last month in the U.S., Bloomberg-compiled data show, a five-fold increase from the same period last year. That follows a $122 billion July influx, the second-largest single month tally, and places year-to-date flows at $609 billion, which already eclipses full-year 2022 and 2023 and approaches the record $911 billion logged during the 2021 bacchanal. 

“It was an unusually eventful summer,” Bloomberg analyst Athanasios Psarofagis commented Tuesday. “You had investors piling into bonds, buying the dip in stocks, rotating into small caps – it’s a recipe for strong flows.”  

Yet those dynamics only serve to accelerate the industry’s seemingly inexorable expansion. ETFs controlled nearly one-third of total fund assets at the end of July, double that seen in 2015, while the total domestic tally of those vehicles reached 3,337 according to the Investment Company Institute, up more than 50% over the past five years and compared to just 123 in 2003.

That proliferation includes an array of increasingly complex and exotic contraptions, as illustrated by the fact that average fees on funds launched this year stand at 61 basis points, among the highest figures of the post-crisis era.  For context, the average weighted expense ratio of all U.S.-listed funds stands at about 17 basis points. 

A collection of 110 derivatives-focused ETFs tracked by Bloomberg collectively traded 29.7 million shares on average in July, up 26% year-over-year and 166% above the same month in 2022. Those funds, typically engaged in income-generating or buffer strategies (e.g., covered calls) designed to offer a measure of downside protection, saw 67% of July turnover take place on off-exchange venues such as so-called alternative trade systems (ATS), far above the 45% average for the market at large. “This suggests strong retail participation in option strategy ETFs as their order flow is typically routed to wholesale market makers off-exchange,” Bloomberg’s Jackson Gutenplan wrote yesterday. 

The growing prominence of so-called single-stock ETFs following SEC approval in 2022 likewise looms large. Witness the GraniteShares 2X Long Daily Nvidia ETF, which saw assets balloon to nearly $5 billion late last month as Jensen Huang’s outfit continued to captivate Wall Street with a mesmerizing share-price run-up. The leveraged fund, which charges a 115 basis point annual expense ratio, continues to boast nearly $4 billion in assets following NVDA’s recent 18% pullback. For context, a reciprocal vehicle attempting to generate minus 200% of daily moves in the lynchpin AI name holds less than $100 million. 

“Nvidia is the most important stock in the world right now, so therefore it stands to reason that. . . there’s going to be big demand,” GraniteShares CEO Will Rhind told CNBC last week. “That’s just the zeitgeist of 2024. But, yes, it does surprise me in terms of the strength of inflows, just from a business perspective.” 

The benefits to the average investor are less clear, particularly those unversed in leveraged ETFs’ daily rebalancing mechanism, which yields substantial performance drag over time. Thus, the London-listed GraniteShares 3X Long MicroStrategy Daily ETP, which sports a 99-basis point expense ratio, has posted year-to-date results of minus 88%, even as the Nasdaq-listed shares of Michael Saylor’s unprofitable enterprise software firm-cum-bitcoin speculation vehicle have nearly doubled since the start of 2024.

Might a more suitable option for discerning one-stop shoppers soon be in the offing?  Research Affiliates founder Rob Arnott unveiled his firm’s maiden foray into the exchange traded realm yesterday, in the form of the Deletions ETF (ticker: NIXT), which will invest in firms recently ejected from major indices in anticipation of mean reversion, a dynamic which has led to historical outperformance per the firm’s in-house research. 

“Everybody likes underdogs,” Arnott told the Financial Times. “Why not buy the rejects? Especially given historical evidence that they win by 5% per year for the next five years, at least.”  The fund will debut with a nine-basis point expense ratio during its first year of operations per regulatory filings, with annual charges subsequently rising to 39 basis points.  

Stocks were unable to hold early gains but likewise bounced off mid-day lows to leave the S&P 500 modestly weaker ahead of tomorrow’s August payrolls print, while Treasurys continued their stellar recent run with 2- and 30-year yields finishing at 3.75% and 4.02%, respectively, down one and four basis points on the day. WTI crude stayed at $69 a barrel, gold rallied to $2,516 an ounce, bitcoin slipped to $56,100 and the VIX pulled back below 20. 

- Philip Grant

Apparently, some politicians are too honest. From Scotland's Daily Record:

Health Secretary Neil Gray has been branded shameful for admitting he was trying to buy Oasis tickets during a panel discussion on Alzheimer’s disease during the Scottish National Party conference.

After an impassioned speech from Glasgow University’s Terry Quinn on how medical advances were giving new hope in the fight against dementia, Gray looked up from his phone and said: “I’m in the queue to buy Oasis tickets... on multiple devices. Hope is very important... that I get these tickets.”

Call it the American dream, reimagined: Citing estimates from JPMorgan, The Wall Street Journal relays that U.S. households have allocated 42% of their total financial assets to the stock market, the highest share on record dating to 1952. Nearly half a million 401(k) retirement accounts at Fidelity Investments were valued at $1 million or above as of June 30, a record figure and up 31% year-over-year.

Largely persistent price appreciation over the past 10 months likewise coaxes a further influx of cash into the fold. Domestic equity funds have attracted net inflows for eight straight weeks through Aug. 28, EPFR-compiled data show, maintaining that streak during last month’s brief but violent post-BoJ rate hike convulsions. Small-cap funds gathered $12.7 billion of assets on balance in July, the best monthly showing for that economically sensitive cohort on record. “This melt up is exactly what any investor should be waiting for,” Springfield, N.J.-based dentist William Bohrod told the WSJ. “The most conservative approach is ‘all in, all the time.’”

More broadly, the stellar returns seen in the post-2008 epoch leave Uncle Sam in rarified air.  Verdad Capital partner Brian Chingono points out in Tuesday commentary that U.S. stocks have generated 13.4% annualized returns over the past 15 years, more than double the 5.9% per-annum returns for other developed market equities. 

As a result, the U.S. now accounts for nearly 70% of developed market allocations as measured by the market capitalization-weighted MSCI All Country World Index. For context, American firms generated 55% of aggregate net income across the developed market realm over the 12 months through July, with investor expectation of outsized future growth helping explain the valuation premium.

“While the U.S. market has dominated over the past decade [plus], an encore may not follow,” Chingono cautions. “Growth narratives that previously seemed inevitable can quickly change when faced with reality.”   

Witness the evaporating growth narrative surrounding electric vehicles, illustrated by S&P Global slashing its full-year production growth forecast for the category to 14% last month from a 38% bogey issued 12 months prior. That rapid downshift has caught Tesla investors off guard, spurring a 15% year-to-date decline and arguably thinning the so-called Magnificent Seven’s ranks by one. Accordingly, Chingono raises the possibility of a reprise within a driving force of the recent bull run: “We believe a similar reality check could occur with current expectations for artificial intelligence.” 

On that score, a potential inflection point looms next Monday, in the form of Apple’s scheduled launch event for the iPhone 16. Thanks in large part to percolating anticipation of embedded AI capabilities in its next generation device, Apple shares have jumped 35% from their mid-April lows, accounting for nearly one-quarter of the Nasdaq 100’s total return over that stretch and leaving the firm valued at 31 times forward earnings, a 50% premium to its 10-year average valuation.  Yet as Bloomberg documents today, previous iPhone launch dates have often disappointed the well-represented bull crowd, with AAPL shares dropping on 12 of the 17 prior occasions. 

Mr. Market offered shareholders a rude greeting following the long weekend, as the S&P 500 and Nasdaq 100 lost 2% and 3% respectively in the worst one-day showing since the Aug. 5 mini-meltdown, though bonds were little troubled with Treasury yields lower by three to seven basis points across the curve and the iShares iBoxx $ High Yield Corporate Bond ETF losing less than half a percent. WTI crude was hit by 4% to $70 a barrel, gold settled modestly lower at $2,492 per ounce, bitcoin settled near $58,200 and the VIX jumped to near 21, up more than five points on the session. 

- Philip Grant

Your headline of the day, from Bloomberg Businessweek:

Private Equity Sets Sights on $30 Billion Youth Sports Industry

Thus paving the way for a cake and ice cream buy-and-build. 

Nothing stops this train: Thursday’s round of sturdy economic data – featuring an upwardly revised 3% second quarter GDP print (20 basis points north of the prior iteration) and 0.8% sequential rise in July retail inventories, alongside a modest downshift in initial weekly jobless claims which leaves that labor market indicator at a 231,500 four-week moving average, its lowest since early June – make no dent in investor assessment of easier money ahead. 

Thus, interest rate futures continue to point to 101 basis points of rate cuts to the 5.25% to 5.5% Fed funds rate by year end, while pricing benchmark borrowing costs below 3.5% by August 2025. Meanwhile, the policy-sensitive two-year Treasury yield has dropped more than one percentage point since June 10, settling Thursday at 3.83%, 164 basis points below the upper end of the overnight rate.  That’s the largest such discount of the post-2008 era and compares to sub-100 basis point nadirs in both early 2019 and spring 2020, as the Fed teed up easing cycles from the respective 2.25% to 2.5% and 1.25% to 1.5% ranges. 

That course correction loudly reverberates across the credit complex. As Bloomberg’s James Crombie pointed out last week, just 40% of investment-grade index components now yield at least 5%, down from 90% at this time last year.  The share of junk bonds with a 7% plus yield has likewise shrunk to 30% of constituents from 75% 12 months prior.  

Mr. Market’s aggressive response to today’s mostly sanguine picture leaves some observers scratching their heads. “We have many indicators showing that the economy is not falling into recession,” Guillaume Rigeade, co-head of fixed income at Carmignac, told Reuters this morning. “It’s not justified to us, this acceleration to a cutting cycle so quick.”  

November’s presidential election, with budgetary restraint not exactly underpinning either candidate’s agenda, likewise looms large. “Whatever the outcome may be, it will result in still-high fiscal spending and large. . . supply of U.S. Treasurys,” added Capital Group investment director Flavio Carpenzano. 

Yet in any event, Fed chair Jerome Powell’s expressed concerns over the health of the labor market at last week’s Jackson Hole conclave rule the day, underscored by a recent triggering of the Sahm rule recession indicator, i.e., a 0.5% increase in the three-month rolling average unemployment rate compared with its prior 12-month low. 

To that end, Bloomberg highlights visible employment strains at a quintet of regional Federal Reserve bank surveys in August, with full-time payrolls in the Philadelphia region shrinking by the most in more than four years, alongside consecutive months of contracting employment in the Kansas City and Richmond districts, stagnation in the Dallas metro area and the first sequential downshift in New York area employees since the start of 2024. 

“There is an elevated risk that weak labor demand pushed the U.S. economy towards recession, an outcome that would produce a cumulative Fed rate cut of at least 300 basis points,” analysts at JPMorgan wrote on Tuesday. “At the same time, a growth boost from an early dose of easing to offset risks that didn’t materialize could combine with positive supply side outcomes to generate reaccelerating labor demand next year.” 

How to position one’s portfolio for today’s particularly muddled backdrop?  See the analysis “The grand hotel of Treasury bills” in the July 5 edition of Grant’s Interest Rate Observer for the bull case on Uncle Sam’s short-term obligations even in the face of E-Z(er) money ahead, along with “When 5% goes poof” in the brand-new issue dated Aug. 30 for a look at a smorgasbord of income-generating securities potentially well-suited for a lower rate regime.  

A flat finish belied wild trading action that featured the averages erasing overnight losses and pushing higher by nearly 2% on the Nasdaq 100 before completing the round-trip by day’s end, while Nvidia logged a 6.4% post-earnings pullback, settling near its lowest levels of the session. Treasurys came under modest pressure as 2- and 30-year yields rose to 3.87% and 4.15%, respectively, up four and two basis points on the day, while WTI crude rebounded towards $76 a barrel and gold rose to $2,521 per ounce. Bitcoin finished slightly higher at $59,500 and the VIX retreated below 16, down a point and change. 

- Philip Grant