In this issue of the peel:

• Japan learned from its mistakes and avoided a macro bomb in the form of a potential rate hike. But, much like the Avengers, the BoJ still caused a lot of collateral damage. Find out what happened without all the jargon below.

• The enemy is still trying to force us to eat healthy, and it’s going great, especially for Sweetgreen. Expedia is enjoying the travel boom, and weed stocks got low to end last week. Plus, this golf company’s results were almost as boring as the game itself. 

• The Atlanta and New York Feds are getting bullish while everyone else fears a recession. The numbers might be small, but the optimism is huge.

Market Snapshot

Banana Bits

• Traders are getting antsy in advance of Wednesday’s CPI print.

• Markets are pricing in way more rate cuts than the Fed is guiding for.

• The U.S. Women’s National Team defeats Brazil to bring home a gold medal in soccer at the Paris Olympics.

• VP and Democrat Presidential candidate Kamala Harris voices opposition to executive involvement in monetary policy and plans to drop her own economic policy platform soon, and I’m way too excited for it.

• The U.S. is offering amnesty to (former?) Venezuelan President Nicolás Maduro in an attempt to get him to f*ck off.

The Daily Poll

Previous Poll:

When do you want to buy your first home?

In the next year: 13.5% / In the next 1-5yrs: 32% / In the 6-10yrs: 30% / At least 10yrs from now: 8.5% / I already own my home: 13.5% / Never, renting forever: 5%

Macro Monkey Says

Japan Stopped A Bomb

Fine, since everyone else is talking about it, we will too.

Japan’s central bank narrowly avoided a financial disaster, preventing what could have been a self-inflicted economic crisis.

“To hike or not to hike” was the question, and, for now, we have our answer: definitely do not hike.

Let’s get into it.

What Happened?

In a couple of days leading up to last Tuesday’s open, at least a quarter trillion dollars was wiped off the face of global stock markets.

U.S. stocks led the wealth evisceration. But Japan put up some even more depressing numbers as their Nikkei 225 index (basically the S&P 500 of Japan) went full kamikaze mode and lost more than 12% on Monday alone, its worst day since 1987.

This was caused by the unwinding of the so-called “yen carry trade,” which, following the market rout, reached Taylor Swift-level popularity in financial media.

The yen carry trade is the single largest currency trade in the world. 

According to Deutsche Bank, millions from Wall Street to Japan’s main street, including pension plans, hedge funds, Japanese citizens, and the Bank of Japan (BoJ) itself, have raised the notional value of the yen carry trade to at least $20tn.

To understand what the hell is going on, we have to understand why the unwind of this incalculably large trade was triggered.

Why Happened?

As always in the markets, it wasn’t just one thing. A series of unfortunate events with particularly poor timing led to this severe financial disturbance:

• The U.S. Fed’s decision to hold rates steady, combined with weak labor market reports, caused a huge spike in U.S. macro concerns.

• Earnings data in the U.S. shows that those macro concerns are at least somewhat justified.

• The Bank of Japan considered raising rates to combat inflation but decided to hold off, averting a market meltdown.

All of this amounted to a fall in the bond yields, a rise in Japanese yields, and thus a spike in the value of the Japanese yen compared to the USD.

To use the technical term, this f*cked the yen carry trade’s whole sh*t up because a carry trade is essentially just a form of rate arbitrage. 

Investors borrow money at a low interest rate (like Japan’s 2-year yield of around 0.27%) and invest in assets with higher returns (like the U.S. 2-year yield of around 4%). 

The profit comes from the difference between the borrowing cost and the investment return, but this only works if currency exchange rates remain stable.

Institutions then frequently lever up this trade as it's seen as an almost automatic profit. This creates trillions of dollars in notional value attached to the same trade, with all of those leveraged dollars backed by some kind of collateral, like equities.

So, when the yen spiked against USD, this triggered a global margin call even bigger than the ones I get in my brokerage account. Investors had to dump assets to cover their positions, thus triggering the global selloff.

J.P. Morgan now estimates the unwind of the yen carry trade is 50-60% done. However, the BoJ is now in an impossible position. If inflation remains elevated, they may be forced to raise rates, potentially triggering even more unwinding.

The rest of the unwind would likely take place over a longer period, so don’t expect continued massive selloffs. But, if the BoJ continues its timing history, a repeat of last Monday is certainly plausible.

The Takeaway?

The unwind of the yen carry trade is the perfect example of when not to sell.

Above, this chart highlights the ever-present risk du jour, spooking investors and making many question their investment strategies. But, through all of these worries, U.S. equities have only continued to charge higher.

There’s always a smart-sounding reason to sell. Without risk, there’s no reward. But if history is any indicator, ignoring these perfect-for-headlines risks and events would be much kinder to your retirement account.

Luckily, I can’t read, so I can easily ignore fear-mongering headlines. But the literates among us take lessons from the ostrich burying his head in the sand.

Hope you used it as a buying opportunity—especially all you youngblood apes out there. 

What's Ripe

Sweetgreen (SG) 33.37%

• As the enemy continues to try and stop me from eating my way to an early death, healthy eating establishments are holding up well as restaurant spending falters.

• Exhibit A: Sweetgreen’s Q2 report. Revenue grew 21% to $184.1mn, beating estimates, while losses narrowed to $0.13/sh but missed estimates.

• The company raised guidance on expectations of higher same-store sales growth in the range of 5-7% while planning to open 25 new locations. 

• Traffic grew, and margins expanded, giving investors confidence that the higher-income consumers Sweetgreen targets aren’t cutting discretionary spending.

Expedia (EXPE) 10.21%

• The boom in escaping from our families may be waning as Expedia expects “a more challenging macro environment and a softening in travel demand.”

• Q2 was solid, beating estimates across the board as the firm’s main brand, Expedia, held up well. Gross bookings and revenue each grew 6%.

• Other brands like Hotels.com and Vrbo slowed slightly, but popularity in the firm’s One Key loyalty program kept margins elevated and arguably saved the day.

What's Rotten

Canopy Growth Corp. (CGC) 7.95%

• As their products have done damage to nearly all my brain cells, Canopy Growth shares are killing investors. A continued sales decline led to a bad Q2.

• The 2nd largest Canadian weed dealer (legally) reported a 13% sales decline to C$66.2mn, missing by 5.5% and registering declines in nearly every geography.

• Losses widened, growing to C$1.60/sh, more than double that of last year. Check out our Tilray Sell report from July for our full thoughts on this overhyped sector.

Topgolf Callaway Brands Corp (MODG) 6.35%

• There’s a looming bear market in discretionary spending as the nation’s largest golf company reels after reporting earnings on Weds.

• Shares are down 6.35% since the release of the Q2 numbers. The company beat earnings but missed on sales thanks to a 1.9% YoY revenue decline.

• Soft traffic at Topgolf locations was the primary detractor. Yet again, we see symptoms of a reduction in discretionary spending from U.S. consumers.

Thought Banana

Bullish Bank Branches

Atlanta is a unique place.

It’s the only city in the country where I’ve seen people playing basketball on the side of the highway. At least 71 streets have the word “Peachtree” in their names, and the Atlanta Federal Reserve is located there.

Much like the city itself, the Atlanta Fed likes to be cool, quirky, and different. Zigging while everyone else zags, this branch of the central bank just upped its GDP growth estimate for Q3.

Let’s dive in.

The Numbers

At the start of the month, the Atlanta Fed was anticipating 2.5% annualized growth via its GDPNow forecast. As of the end of last week, however, that estimate has been brought up to 2.9%.

The primary drivers of the increase include lower expected imports, higher residential investment, and, best of all, increased personal consumption expenditures.

Oh, and I almost forgot, the New York Fed had something to say too.

The bank branch from a much more forgettable city similarly increased its Q3 GDP estimate last week. The change wasn’t quite as large, going from 2.11% to 2.24%, but the increased GDP estimate is equally as notable.

Again, international trade was the primary driver, with imports now expected to come in lower while exports are expected to move higher.

The weaker U.S. dollar, driven by declining bond yields and anticipated rate cuts, could be behind the more optimistic trade outlook, but it almost doesn’t matter. What does matter is…

The Takeaway?

Increasing estimates by roughly 10 and 50bps isn’t exactly a monumental change.

But, as always, it’s the direction that matters—not the level.

Financial media is now nearly ubiquitously calling for increased recession odds or an outright recession, especially now that the Sahm “rule” has been triggered.

The divergence on display in these forecasts gives us more optimism that the U.S. economy remains in a good place, even if not as absolutely phenomenal as it has been (on paper) in recent years.

Regardless, we have about a month and a half left in Q3. Make sure you do your part to donate to the economy. 

The Big Question: Should we all be more optimistic about near-term GDP growth? How could this impact interest rate expectations?

Banana Brain Teaser

Previous

Each machine at a toy factory assembles a certain kind of toy at a constant rate of one toy every 3 minutes. If 40% of the machines at the factory are to be replaced by new machines that assemble this kind of toy at a constant rate of one toy every 2 minutes, what will be the percentage increase in the number of toys assembled in 1 hour by all the machines at the factory, working at their constant rates?

Answer: 20%

Today

The annual interest rate earned by an investment increased by 10% from last year to this year. If the annual interest rate earned by the investment this year was 11%, what was the annual interest rate last year?

Send your guesses to [email protected]

How Would You Rate Today's Peel?

Happy Investing,
David, Vyom, Jasper, Ankit, & Patrick

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