Electing Inflation

🚀 Yields are on the rise, and I’m so scared I’m about to call my mom. This can only mean a few things, and you’re not gonna like what they are.

October 29, 2024

Silver banana goes to…

In this issue of the peel:

  • 🚀 Yields are on the rise, and I’m so scared I’m about to call my mom. This can only mean a few things, and you’re not gonna like what they are. 

  • ✅ Robinhood gets in on the election betting game while Boeing is finally trying to fix itself… but the market isn’t liking it. Nio shares are on a lonely rise in China.

  • 💣 War is brewing, but not where you think. Combatants, including MBAs and PhDs, are going to war across all of Corporate America. Who’s gonna win?

Market Snapshot

Banana Bits

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Macro Monkey Says

A Postcard To Inflation

After living with someone for so long, it’s hard not to miss them… no matter how many Britas they neglected to refill.

And it seems that the United States is about at that point with our old roommate, inflation. For a bunch that claims to hate inflation more than Joe McCarthy did communism, we sure don’t act like it.

In fact, we missed inflation so much that we’re about to vote it into office—and financial markets smell it already.

Let’s get into it.

What Happened?

I hope everyone enjoyed last week and Monday.

Over the next 9 days, we have the busiest week of Q3 earnings with 5 of the Mag 7 reporting, a Fed rate decision on November 7th, and the coup de gras smack in the middle, a Presidential election on November 5th.

And in anticipation of all that, yields are back on the rise. 

Haters will say it’s cherrypicked, but take a look at the chart of the U.S.’s daily yield curves above. I selected random dates from the last FOMC meeting through yesterday and set the Y-axis minimum at 3% to best show exactly how on the rise they are.

This isn’t like equities by the way—a 50bp move in the Treasury market is like when a stock reports a beat and raise on earnings. But this isn’t necessarily good news.

Bond yields are effectively a function of three things: growth, term premium, and inflation expectations. Let’s take them one by one.

According to the Fed’s Summary of Economic Projections and the Atlanta Fed’s GDP calculator, GDP is expected to remain healthy in the short and long term but is also expected to decline. So, there is likely no hope for a huge growth surge driving the rise in yields.

Meanwhile, the term premium reflects the additional compensation required from investors for locking up their principal for longer than otherwise. That could certainly play a role, especially given the decline in shorted dates yields.

But, what’s likely playing the biggest role here is Door #3, inflation expectations.

Consumers can see it already as we reflect on the latest sentiment report from the University of Michigan that I berated last week. 

In case you weren’t taking notes (as you should be), American’s inflation expectations for the next 3 and 5yrs have jumped 0.5% and 0.2% in the last two months, respectively.

And based on historical trends, it seems like financial institutions see it as well.

Generally considered an inflation hedge, gold prices—sorry, I mean, *physical BTC prices—have made a historic run in 2024. Speak of the devil, BTC—allegedly an inflation hedge—prices have posted a nearly 60% rise YTD, touching $70k yesterday.

Plus, Wall Street greats like Stan Druckenmiller and Paul Tudor Jones in recent days have come out warning of an extreme bout of inflation to come. Druck is so sure he’s actively short U.S. Treasuries, meaning he benefits from yield rises as prices fall.

The Takeaway

When consumers and financial institutions—enemies as natural as a gazelle and a lion—agree on something, we start paying attention.

Institutional investors appear to be preparing for a return of inflation, driven by the coming election. I wouldn’t say Trump and Harris have much in common, but both are certainly nostalgic for some good ol’ inflation.

Trump, with his economic plan, hinged on tax cuts and tariffs without compensatory spending cuts, and Harris, with spending increases planned despite lacking an equally compensatory tax hike, both look primed to increase the deficit, leading to inflation.

The deficit drives inflation because of the additional government spending in the short term, creating excess demand and currency debasement in the long term.

So, regardless of which esteemed, honorable, non-divisive candidate wins a week from today, at least we’ll (probably) get to see our old roommate again.

Career Corner

Question

Hi mentors. When an application for a program asks you to detail your individual experiences, is it okay to copy and paste the role description from your resume, even when it asks you to also submit the resume?

Answer

It’s fine, but I think the better approach is to rephrase a bit so you can use the space to your advantage, highlight your biggest achievements, and write in prose instead of bullets.

But in the end, it probably won’t make a huge difference either way, so if you’re tight for time, it’s ok.

Head Mentor, WSO Academy

What's Ripe

Nio Inc (NIO) 10.46%

  • It wasn’t hard for Nio investors to get charged up on Monday morning. Macquarie woke ‘em up with some good news.

  • The Australian investment bank upgraded its rating from Neutral to Overweight on Monday, citing strength in the EV maker's Onvo L60 orders.

  • Shares have plummeted YTD, down over 40% before Monday, as weak demand in China was ostensibly priced in already. Now, anything that may change that narrative will pump the stock like the CCP is trying to pump the economy.

Robinhood (HOOD) 3.03%

  • Like the degenerate gamblers they are, Robinhood saw the rest of us betting on the Presidential election and said, “Yeah, I think I’ll take some of that.”

  • The online brokerage platform launched on Monday the ability for users to trade Kamala Harris or Donald Trump contracts through its derivatives unit.

  • The firm is leveraging Interactive Broker’s ForecastEx, which already runs these contracts, to do so. Robinhood is expected to report earnings today, but we won’t see this impact until Q4 earnings szn.

What's Rotten

Koninklijke Philips (PHG) 15.95%

  • The only company in healthcare whose name is harder to pronounce than their products, Koninklijke Philips, flatlined on a lower revenue outlook for 2024.

  • CEO Roy Jakobs blames weak demand from Chinese consumers and hospitals specifically for the weakening expectations at the medical device maker.

  • Comparable product sales declined 2% annually in Q3, missing sales and earnings expectations. Add another to the list of companies pointing fingers at China for their down bad numbers.

Boeing (BA) 2.79%

  • I really hope I don’t have to talk about—or fly in—anything to do with Boeing for a long, long time. Already, I’m worried about their planes, I don’t need to get added to their hit list too.

  • Thankfully, yesterday’s crash was limited to the stock. Boeing is actually taking steps to fix the absolute mess they’ve created, but step one is always hard.

  • The firm announced plans to sell 90mn common shares to raise $14-17bn along with $5bn in depository shares representing 5% ownership of newly issued mandatory convertible preferred securities.

  • Investors dumped shares on the threat of dilution… and the fact that none of this matters until the company starts to pump out more planes.

Thought Banana

MBA vs. PhD

There are smart people, and then there are smart people. And if you’re asking yourself which one you are, like I am, well, my fellow ape, I think we have our answer.

Maybe diplomas, degrees, and designations don’t automatically make someone big smart, but according to corporate America, they sure do.

And a lot of people are catching on. Let’s dive in.

The Numbers

According to our one-sided friendship friends at Sherwood News, the number of students applying for Master’s of Business Administration is through the roof in 2024:

We saw some declines as all our future bosses went off to trade NFTs for a few years, but the Master’s in B*llshit Arts is back in style. 

It seems that Team MBA is amassing troops for war. According to Bloomberg, MBA holders are going to battle with another distinguished designation in depressing offices all across corporate America—PhD holders.

In the MBAs vs PhDs wars, nowhere is the firing stronger than within the credit investing space.

As automated trading grows in the fixed-income market, PhDs are starting to replace MBAs as captains of the ship in what seems to be a basic replacement of the qualitative with the quantitative.

The Takeaway?

After undergrad, the natural next question is, “Where can I go spend more money to avoid getting a job?” Well, you have a few options.

Pursuing advanced degrees such as the MBA and PhD or designations like the CFA, CPA, CFP, etc., can be great ways to take that next step. But having a plan of what you want to do with that next step before taking it is crucial.

Each one has its place and can be advantageous in certain instances, but knowing what you want to do with your career as early as possible is growing in value.

No pressure, by the way. Worst case scenario, I’m pretty sure the MBA has the most coloring books.

The Big Question: Which of these advanced degrees and designations are best suited for roles in financial services? Are you thinking about going for any of them?

Banana Brain Teaser

Previous

In a certain lottery, the probability of winning is 1/1000. If a player buys 10 tickets, what is the probability that they will win at least once?

Answer: 0.995%

Today

A company sells radios for $15.00 each. It costs the company $14.00 per radio to produce 1,000 radios and $13.50 per radio to produce 2,000 radios. How much greater will the company’s gross profit be from the production and sale of 2,000 radios than from the production and sale of 1,000 radios?

Send your guesses to [email protected]

❝

The business schools reward complex behavior more than simple behavior, but simple behavior is more effective.

Warren Buffett

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Happy Investing,
David, Vyom, Ankit & Patrick