Macro thread - Why is the market up/down?

[Spooky]

Just now, Gregmal said:

Ha! I totally forgot about this! Remember all the bs from the first level bears about increased borrowing costs crushing earnings? Then it turned out the real impact of higher interest rates was near negligible for most companies. Why it hardly ever pays to panic or just run with the simplest narrative of the day.

 

Honestly if feels like some of the speculative excess has been cleared out lately. The S&P isn't exactly cheap but it's not crazy expensive either.

[thepupil]

13 minutes ago, Gregmal said:

Ha! I totally forgot about this! Remember all the bs from the first level bears about increased borrowing costs crushing earnings? Then it turned out the real impact of higher interest rates was near negligible for most companies. Why it hardly ever pays to panic or just run with the simplest narrative of the day.

 

agreed. this is one area where I'm basically an absolute permabull.

 

for large cap investment grade corporate america, borrowing cost barely matter at all...some had net interest expense DECLINE with rate hikes as they were making yield on their cash while paying same on their fied rate long term borrowings. . we are 3 years into rate hikes and S&P 500 issuers that are IG still have 10.5 year wgt average maturity at 4.1% tax deductible interest rate. even if rates really really really spike, this will take a LONG time to matter. Not to mention large cap IG corporate america has low levels of gross debt and could always shift from stock repo's to debt repo's if rates really went up and you'd get some nice gains from buying back debt at a discount.

 

anyone who's actually looked at the company data would be hard pressed to find an overly indebted company of consequence / market cap. 

 

of course higher financing costs impact borrowers that are private, housheholds, etc. but those aren't the big companies with a lot of market cap. that could be a concern for overall economy/banks. but the top ~20% of America looks a lot like the large corporations. cash rich with long term fixed rate leverage. so rates going up actually increases their income too. 

 

many people talk about how yellen failed to extend the term of the U.S. borrowings....i'll withold an opinion on that, but i thought part of the whole QE thing of 2010-2022 was to extend private borrowings and that's been gloriously effective. corporate issuers and households have lots of long term fixed rate debt and cash. 

 

Edited April 22, 2025 by thepupil

[Gregmal]

5 minutes ago, Spooky said:

 

Honestly if feels like some of the speculative excess has been cleared out lately. The S&P isn't exactly cheap but it's not crazy expensive either.

Nah I was chatting with @Cod Liver Oil yesterday about just that. Soooo many just kind of classic, nothing special but good enough names out there trading at 5-10+ year lows. I don’t know if I’d say we are in fish in a barrel territory for crazy forward returns, but we certainly are at an attractive point in time if you’re just looking for low effort HSDs.

[Blake Hampton]

I don’t understand how deflationary forces could ever be big enough to offset these levels of deficits and monetary expansion. As Paul Volcker said in his book, serious deflationary events only happen when you’re facing a systemic collapse in the financial system. I think that it’s entirely possible that this could happen, but I also think there are too many safeguards in place to let it truly collapse. The U.S. government can always save the day with more money printing.

[Blake Hampton]

2 minutes ago, thepupil said:

agreed. this is one area where I'm basically an absolute permabull.

 

for large cap investment grade corporate america, borrowing cost barely matter at all...many had net interest expense DECLINE with rate hikes as they were making yield on their cash while paying same on their fied rate long term borrowings. . we are 3 years into rate hikes and S&P 500 issuers that are IG still have 10.5 year wgt average maturity at 4.1% tax deductible interest rate. even if rates really really really spike, this will take a LONG time to matter. Not to mention large cap IG corporate america has low levels of gross debt and could always shift from stock repo's to debt repo's if rates really went up and you'd get some nice gains from buying back debt at a discount.

 

anyone who's actually looked at the company data would be hard pressed to find an overly indebted company of consequence / market cap. 

 

of course higher financing costs impact borrowers that are private, housheholds, etc. but those aren't the big companies with a lot of market cap. that could be a concern for overall economy/banks. but the top ~20% of America looks a lot like the large corporations. cash rich with long term fixed rate leverage. so rates going up actually increases their income too. 

 

many people talk about how yellen failed to extend the term of the U.S. borrowings....i'll withold an opinion on that, but i thought part of the whole QE thing of 2010-2022 was to extend private borrowings and that's been gloriously effective. corporate issuers and households have lots of long term fixed rate debt and cash. 

 

I think a lot of that debt hasn’t rolled over yet at these higher rates. Large-cap equity has some of the best financing terms in the world, and they’re generally smart enough to take advantage of that. 
 

Likewise, the market is just dumb enough to finance them for long stretches at low rates.

[Spooky]

1 minute ago, Blake Hampton said:

I don’t understand how deflationary forces could ever be big enough to offset these levels of deficits and monetary expansion. As Paul Volcker said in his book, serious deflationary events only happen when you’re facing a systemic collapse in the financial system. I think that it’s entirely possible that this could happen, but I also think there are too many safeguards in place to let it truly collapse. The U.S. government can always save the day with more money printing.

 

It's because there is not a direct 1:1 correlation between increasing money supply and inflation. Compare and contrast the two last major market events: a) the global financial crisis and b) the Covid pandemic. Both times government borrowed heavily and stimulated but only one time did it lead to actual inflation (Covid).

 

Also, look at the components of inflation - what is increasing in prices and what is decreasing in prices? Will those trends continue forever? Technology is a huge deflationary force which will, hopefully, lead to higher productivity and better standards of living for all.

[Spooky]

5 minutes ago, Gregmal said:

Nah I was chatting with @Cod Liver Oil yesterday about just that. Soooo many just kind of classic, nothing special but good enough names out there trading at 5-10+ year lows. I don’t know if I’d say we are in fish in a barrel territory for crazy forward returns, but we certainly are at an attractive point in time if you’re just looking for low effort HSDs.

 

I've been noticing this as well. A number of companies are looking interesting and I've been adding to positions. Just want to wait to see if we do get to the shooting fish in a barrel stage...

[Blake Hampton]

1 minute ago, Spooky said:

It's because there is not a direct 1:1 correlation between increasing money supply and inflation. Compare and contrast the two last major market events: a) the global financial crisis and b) the Covid pandemic. Both times government borrowed heavily and stimulated but only one time did it lead to actual inflation (Covid).

 

Also, look at the components of inflation - what is increasing in prices and what is decreasing in prices? Will those trends continue forever? Technology is a huge deflationary force which will, hopefully, lead to higher productivity and better standards of living for all.

Well, I measure productivity increases in GDP, and debt to GDP has been growing at a rapid clip for a while now.

 

I would say that, over time, and adjusted for increases in productivity, there is a direct 1:1 correlation between inflation and the money supply. The problem that the United States is in is that the amount of borrowing is getting to a dangerous point. I believe that debt markets can break in a way that directly leads to inflation. If Treausry market liquidity is expected and it dries up, and the government is still continuing to run these large deficits, the only person who can step in to fill that void is the Federal Reserve. They accomplish this by printing money.

 

2020 and 2008 were not the same. 2008 was about easing, 2020 was a liquidity crisis. We almost had another on April 9th.

[Spooky]

1 minute ago, Blake Hampton said:

I would say that, over time, and adjusted for increases in productivity, there is a direct 1:1 correlation between inflation and the money supply

 

I personally don't think this is correct. But I am a Keynesian.

[thepupil]

28 minutes ago, Blake Hampton said:

I think a lot of that debt hasn’t rolled over yet at these higher rates. Large-cap equity has some of the best financing terms in the world, and they’re generally smart enough to take advantage of that. 
 

Likewise, the market is just dumb enough to finance them for long stretches at low rates.

 

this is precisely my point. 

 

it will take 7-10+ years to roll over

 

 even when it does, current market rates are ~1.5-2% ish higher than the weighted average coupon. you could bearishly phrase this as a 50% increase in coupon, but  leverage is very low 

 

it barely matters. 

 

AAPL has $140 billion of cash and $97 billion of debt. 

MSFT has $70 billion cash and $100 billion of debt. They are expected to make $98 billion 

NVDA has $43 billion of cash and $10 billion of debt

AMZN has $100 billin of cash and $147 Billion of debt. $87 billion of net income for 2025, ~$50B of FCF

META $30B of net cash ($77B cash $50B debt)

Berkshire Hathaway a truck load of cash

Google $70B of net cash

Broadcom has $10B of cash and $66B of debt (this is the first one that could be scary given AI boom and actually levered, but on current financials it's 1.5x ND/EBITDA)

LLY has $30B of net debt and is supposed to make $20B this year.

so that's like 30% of the S&P 500...and maybe 25% of the US stock market. some net cash, most with like 1 years of net income in debt...

 

okay what about the other 70%? well you can use the index stats for that and they tell a similarly low leverage story (not to same degree)

 

I did this exercise with @RuleNumberOne back in 2019...i basically said "there are no overlevered companies in the S&P500...and if they are they're small or REITs"..covid happened...then rates spike...and guess what...barely any defaults...

 

the leverage is in private equity and shadow banking. it's not in large cap stocks. 

 

I challenge you to find 10 companies in the S&P 500 with what you'd regard to be an unhealthy balance sheet whose debt repricing would be a problem. 

 

 

 

 

Edited April 22, 2025 by thepupil

[Gregmal]

I’m still trying to get to the bottom of what happened April 9….rates moved up slightly then down, we had a sensationalist trading day….sure. But still trying to find evidence that the world almost ended or the financial system was on the brink of collapse….at the moment all the evidence points toward this being a completely fabricated thing.

[Spooky]

4 minutes ago, Gregmal said:

I’m still trying to get to the bottom of what happened April 9….rates moved up slightly then down, we had a sensationalist trading day….sure. But still trying to find evidence that the world almost ended or the financial system was on the brink of collapse….at the moment all the evidence points toward this being a completely fabricated thing.

 

I haven't been able to find much substantive either. Just looks like a spike in yields due to mostly forced selling. There could have been a danger of a downwards spiral but Trump backed off with his tariff pause.

[thepupil]

7 minutes ago, Gregmal said:

I’m still trying to get to the bottom of what happened April 9….rates moved up slightly then down, we had a sensationalist trading day….sure. But still trying to find evidence that the world almost ended or the financial system was on the brink of collapse….at the moment all the evidence points toward this being a completely fabricated thing.

 

what do you mean? the leadership of the U.S. threatened its populace with the largest tax increase ever and threatened the world with significant trade  barriers that would significantly impact the global and domestic economy and potentially have an acute impact on a lot of companies. then there was some indication that all that could revers and stocks ripped. it's not like nothing happened. we can debate what eventually happens, but think significant volatility should be expected and it's hardly fabricated. there are numerous threats to various companies' fundamentals and overall economic sentiment and activity presented by the policies. 

 

with regards to bond market, have seen some stuff about volatility blowing out some basis trades, have seen some stuff re canada coordinating sell-off of bonds by Japan and them as retaliation for trade stuff, but i don't know how to weight that stuff. we have seen at least one headline on a fund haveing a -10% on basis trade blow out...(name doesn't come to mind, was in the journal).

Edited April 22, 2025 by thepupil

[Spooky]

2 minutes ago, thepupil said:

 

what do you mean? the leadership of the U.S. threatened its populace with the largest tax increase ever and threatened the world with significant trade  barriers that would significantly impact the global and domestic economy and potentially have an acute impact on a lot of companies. then there was some indication that all that could revers and stocks ripped. it's not like nothing happened. we can debate what eventually happens, but think significant volatility should be expected and it's hardly fabricated. there are numerous threats to various companies' fundamentals and overall economic sentiment and activity presented by the policies. 

 

I think Greg is alluding to the commentary that the bond market was on the verge of breaking down April 9th.

[Gregmal]

10 minutes ago, thepupil said:

with regards to bond market, have seen some stuff about volatility blowing out some basis trades, have seen some stuff re canada coordinating sell-off

Yea I’m just talking about Blakes conspiracy theory relating to the treasury market on April 9. 

[thepupil]

yea that was clearer upon a second read. some people say basis unwind, others say foreign selling. i don't know how to weight all that but would if i had to pick one it'd be basis traders unwinding into a choppy market 

[Spooky]

Article in the FT today that Japanese institutions sold off $20B of US bonds (could be treasuries or agencies). Relative to the size of the bond markets that is pretty small.

[Blake Hampton]

53 minutes ago, thepupil said:

this is precisely my point. 

 

it will take 7-10+ years to roll over

 

 even when it does, current market rates are ~1.5-2% ish higher than the weighted average coupon. you could bearishly phrase this as a 50% increase in coupon, but  leverage is very low 

 

it barely matters. 

 

AAPL has $140 billion of cash and $97 billion of debt. 

MSFT has $70 billion cash and $100 billion of debt. They are expected to make $98 billion 

NVDA has $43 billion of cash and $10 billion of debt

AMZN has $100 billin of cash and $147 Billion of debt. $87 billion of net income for 2025, ~$50B of FCF

META $30B of net cash ($77B cash $50B debt)

Berkshire Hathaway a truck load of cash

Google $70B of net cash

Broadcom has $10B of cash and $66B of debt (this is the first one that could be scary given AI boom and actually levered, but on current financials it's 1.5x ND/EBITDA)

LLY has $30B of net debt and is supposed to make $20B this year.

so that's like 30% of the S&P 500...and maybe 25% of the US stock market. some net cash, most with like 1 years of net income in debt...

 

okay what about the other 70%? well you can use the index stats for that and they tell a similarly low leverage story (not to same degree)

 

I did this exercise with @RuleNumberOne back in 2019...i basically said "there are no overlevered companies in the S&P500...and if they are they're small or REITs"..covid happened...then rates spike...and guess what...barely any defaults...

 

the leverage is in private equity and shadow banking. it's not in large cap stocks. 

 

I challenge you to find 10 companies in the S&P 500 with what you'd regard to be an unhealthy balance sheet whose debt repricing would be a problem. 

 

I don't know how accurate this figure is, but GuruFocus says the total liabilities for the S&P 500 total about $36 trillion.

https://www.gurufocus.com/economic_indicators/5751/sp-500-total-liabilities

[thepupil]

the US corporate bond market is 11 trillion, so assuming data issue or bank liabilities are interfering that. of course there are other liabilities, but usually those are things like working capital (offset by current assets), or things like pension (corporate pensions very well funded).

 

again, I'd encourage you to go bottom up. just go down the list of S&P 500 companies. I've done 1-10 for you.

 

keep going and tell me when you find some overlevered companies, tell me what % of the stock market those are, and why i should care. or take a look at the IG market stats as a proxy. 

 

 

Edited April 22, 2025 by thepupil

[rogermunibond]

[Blake Hampton]

Yeah I just thought about it for more than 2 seconds, and $36 trillion is an insane amount. That was way wrong.

 

Edited April 22, 2025 by Blake Hampton

[rogermunibond]

FRED is a great resource for this data.  US non-financial corporate debt is $21.6T, which includes all US business SP and Russell 3000 and SME.

 

https://www.federalreserve.gov/releases/z1/dataviz/z1/nonfinancial_debt/chart/

[Blake Hampton]

I don't understand why it's so difficult to get ahold of good S&P 500 data, considering that it constitutes a large amount of every single person's retirement account.

[thepupil]

1 hour ago, Blake Hampton said:

I don't understand why it's so difficult to get ahold of good S&P 500 data, considering that it constitutes a large amount of every single person's retirement account.

 

you can google around for statistics on the IG bond market. 

 

Again, 33% of the S&P 500 is 10 companies (summarized above). 

 

Google AI tells us  4% of the S&P 500's market cap is junk rated. 

 

So if you know that 4% looks like  HY issuers (and probably on the higher quality end of those, you know what 33% that's the top 10 looks like and for the other 60% just assume they look like the IG market. 

 

you will likely conclude that the S&P 500 is not overly levered. 

 

I have bloomberg so I can just download every company and look at each one's ND/EBITDA, which i did a while back and came to a similar and slightly more robust/comprehensive conclusion. 

 

another way would be to consider the S&P 500 bond inde has $6.4 trillion outstanding bonds. this is relative to $44T of market cap. So if the S&P 500 were a house it'd be like one that trades for $50T with a mortgage of $6.5T....13% LTV. that probably understates it because banks are far more levered, but i regard US banks to generally be in good health (you are free to form/articulate an opposing view). 

 

there's simply lots of data whether it be aggregate / market level or just looking at the large companies that points to very strong capitalization and high credit health. 

 

Edited April 22, 2025 by thepupil

[thepupil]

median IG company is 2.7x

https://www.spglobal.com/market-intelligence/en/news-insights/articles/2024/12/total-debt-for-rated-us-companies-reaches-new-high-86683893

 

as an imperfect swag: we know that the S&P 500 is mostly IG. We know that a large swathe of the S&P 500 has net cash, particularly at the top. We know that IG companies have 2.7 turns of debt and pay a 4.1% coupon. we know that wgt avg maturity is 10.5 years. so for those with debt that are IG if you just slap 6% instead of 4% on to 2.7 turns than you go from paying 11% of EBITDA in interest to 16% (2.7x & 4% = 11% 2.7x * 6% = 16%). 

 

So over a period of 10 ish years, ceteris paribus, you'll see a low single digit % of EBITDA go to bonds instead of equity. and that's before any offsetting factors (debt buybacks just as one example, nominal inflation decreasing real value of long term debt, etc)

 

again...who cares? it's a complete nothingburger unless you think EBITDA/EBIT/NI is going to massively contract in nominal terms.