Sloppy
Doug Nolan
A sloppy end to a sloppy week.
Bubbles faltering.
South Korea’s KOSPI Index was closed Friday, limiting the week’s losses to 6.5% (down 6.4% in Thursday trading).
For the week, SK Hynix sank 16.9% and Samsung Electronics fell 11.5%.
SK Hynix ended the week down 38% from its June 22nd closing high, with Samsung Electronics 30% lower from a June 18th record close.
Friday losses included Taiwan’s TAIEX down 6.5%, Japan’s Nikkei 225 4.0%, and Hong Kong’s Hang Seng 1.8%.
For the week, Japan’s Nikkei sank 6.4%, and Taiwan’s TAIEX fell 5.9%.
Curiously, Chinese stocks were under heavy selling pressure.
China’s Shanghai Composite slumped 5.8% this week, the worst weekly decline since February 2024.
China’s growth-oriented ChiNext Index sank 10.8%, the steepest weekly drubbing since February 2021.
The Shenzhen Composite was slammed 9.0%.
The Shanghai Composite ended the week at an 11-month low.
US technology stocks and indices ended a worrisome week under more moderate selling pressure.
The Semiconductor Index traded 1.6% lower in Friday trading, boosting the week’s losses to a notable 10.0%.
Micron dropped 13.3% this week.
Other notable losses included Intel (13.5%), Applied Materials (12.1%), and ARM Holdings (17.4%).
The NASDAQ100 dropped 4.1% this week.
Nvidia slumped 3.9%, Meta Platforms 3.5%, Netflix 6.0%, and Tesla 6.6%.
The world has changed in a month.
After going public on June 11th at $135 a share, SpaceEX traded to a record high of $225.64 on June 16th, before ending that session at a record $201.80 close.
SpaceEX sank 14.7% this week to end Friday at $123.99.
It must be the most fleeting creation and disappearance of a Trillion dollars of perceived wealth.
The episode is surely also one of the most dramatic wealth transfers ever.
July 16 – Axios (Madison Mills):
“Chinese AI startup Moonshot AI stunned developers on Thursday with a massive new model that may rival the best American systems at a fraction of the cost.
Kimi K3’s early performance is fueling awe across the AI world — and alarm in Silicon Valley and Washington — as China appears to be rapidly erasing America’s lead in advanced AI.
Moonshot says Kimi K3 contains 2.8 trillion total parameters, making it one of the largest open-weight AI models ever released…
In blind testing by AI evaluator Arena, developers preferred Kimi over every leading U.S. model for front-end coding — including Anthropic’s Fable 5 and OpenAI’s GPT-5.6 Sol.”
The bullish AI narrative is under attack from all directions.
July 17 – Bloomberg (Tasos Vossos and Ronan Martin):
“The bonds sold by hyperscalers to fuel their artificial intelligence ambitions have become a drag on investor portfolios from London to Tokyo.
From falling prices and wider spreads to negative total returns, the debt is underperforming on almost every metric.
The bonds are in the red on average…, and rank among the worst performers in indexes this year.
As firms such as Meta Platforms Inc., Alphabet Inc., and Amazon.com Inc. ramp up borrowing to fund data centers and other AI infrastructure, they have tapped pools of capital worldwide.
The wave of issuance has become a test of credit market depth, while growing unease over the scale of AI spending is hammering the shares of chipmakers and cloud-computing giants.”
Oracle bond (5.7%, 2036) yields traded to 6.59% intraday Wednesday, before ending the week 10 bps higher at 6.53%.
This yield has surged 47 bps since June 16th.
Oracle CDS jumped 11 this week to198 bps, up 43 bps from June 16th to a record close.
CoreWeave (8.5%, 2032) yields surged 60 bps this week to a record 9.87% - up 164 bps since June 16th.
Meta Platforms (6.3%, 2056) yields traded to a record high of 6.73% in Monday trading – up 50 bps from the June 16th close – before ending the week at 6.61%.
Meta’s 10-year yield traded this week to 5.68% (closed week at 5.54%) – up 40 bps since June 16th.
Even Apple (4.65%, 2046) yields traded to a record 5.74% on Tuesday (closed week at 5.66%), up 17 bps from the June 16th close.
It’s fundamental to Bubble theory that Bubbles financed by risky “junk” debt have minimal risk of becoming deeply systemic.
Issue enough junk debt, and investors will turn nervous – “Too much risk!
No more junk!”
Bubbles fueled by perceived safe and liquid stores of (nominal) value - “money-like” debt instruments - are so much more dangerous. Insatiable demand for “money” promotes (as we’ve witnessed) protracted affairs, which ensure deep structural financial and economic maladjustment.
The global government finance Bubble has been fueled by tens of Trillions of government debt and central bank Credit (“money”).
This unprecedented government debt inflation has been instrumental in inflating system incomes and earnings, no more so than with the big tech oligarchy (today’s “hyperscalers”).
A unique dynamic took hold.
Massive cash holdings afforded the big tech companies the wherewithal for hundreds of billions of arms race AI capital spending, along with fortress balance sheets with the capacity to borrow hundreds of billions more.
But financial excess is no free lunch.
Monetary inflation always comes home to roost.
Historic AI arms race spending has dramatically inflated the cost of semiconductors and servers, AI-related talent, power and cooling infrastructure, electricity, electricians, copper, steel, and virtually all things data center construction.
Meanwhile, arms race dynamics ensure intense competition, certainly including the enterprising Chinese AI operators.
There are already indications that corporate managements are pushing back against rapidly inflating AI-related expenditures.
For general use, AI could evolve into a highly price-competitive commodity business.
The past few months of manic excess have solidified the problematic dynamic of a spectacular inflationary cost spiral in the face of rapidly deteriorating hyperscaler AI earnings prospects.
And this is where Bubble dynamics turn really fascinating.
The hyperscalers, committed to Trillions of AI investment, have begun to see their liabilities lose “moneyness.”
At the “periphery,” the marketplace has turned on Oracle and CoreWeave bonds.
Even Alphabet/Google yields (5.65%, 2056) - trading at 5.50% before the war and 5.73% on June 16th - traded to 6.09% in Wednesday trading.
Microsoft (3.45%, 2036) yields traded to 5.08% Tuesday, up from 4.36% before the start of the war.
It’s been one historic boom, but financing the AI arms race turns much more challenging going forward.
Peak Wall Street?
July 14 – Wall Street Journal (Gina Heeb and Ben Glickman):
“A Wall Street boom fueled by red-hot stock-market debuts and volatility that kept trading floors bustling is leading to surging profits at the nation’s biggest banks.
JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo collectively earned more than $49 billion, a 39% jump from a year ago and above analyst estimates.
Their combined revenues rose by more than a fifth.
The results were also strong across consumer businesses, showing the U.S. economy continues to benefit from resilient households and optimistic boardrooms.”
July 14 – CNBC (High Son):
“American megabanks on Tuesday gave evidence that the global artificial intelligence boom isn’t just benefiting tech giants and chip makers.
Goldman Sachs and JPMorgan Chase each posted record quarterly revenue hauls, fueled by massive gains in equities trading and investment banking.
Behind the surge in activity — Goldman revenue jumped 39% to $20.3 billion, while JPMorgan saw it rise 27% to $58 billion — is the fact that AI is ‘everywhere in financial markets,’ JPMorgan CFO Jeremy Barnum told reporters.
‘These are booming environments with a ton of activity, big IPOs, big index rebalancing, a lot of activity in Asia,” Barnum said...
‘A lot of it is downstream of the AI theme, writ large on a global basis.
It’s just a very, very, very active environment.’”
Eight times a year Bubble analysis is on the receiving end of major data deluges.
There are four quarterly Fed Z.1 reports and four quarterly earnings reporting periods for the major financial institutions.
This week’s Q2 earnings reports certainly confirmed the historic nature of this boom.
JPMorgan Q2 earnings rose 41% y-o-y to a record $21.2 billion.
Net Revenues were up 15% y-o-y to $58.0 billion.
Corporate & Investment Bank revenues were up 27% y-o-y to $24.9 billion.
Total Trading Revenue rose to record $12.1 billion, with Equities Sales & Trading a record $6.03 billion (up 86% y-o-y).
Investment Banking Fees were 30% higher y-o-y to $3.28 billion.
Total Assets expanded another $115 billion, or 9.3% annualized, to a record $5.015 TN, with y-o-y growth of $463 billion (10.2%).
Net Loans expanded at a 10.5% pace to $1.516 TN (up 9.3% y-o-y).
Goldman Sachs reported earnings of $6.63 billion, up 78% y-o-y.
Net revenues were 39% higher to a record $20.3 billion – 24% ahead of estimates.
The Global Banking & Markets division achieved record revenues of $15.5 billion.
Asset Management revenues rose 20% y-o-y to $4.6 billion.
Total Assets expanded $67.8 billion, or 13% annualized, during the quarter to a record $2.128 TN - and surged $343 billion, or 19.2%, y-o-y.
Total Loans rose $28 billion, or 24% annualized, during Q2 to a record $493 billion, with one year growth of $89.8 billion, or 19%.
Citigroup reported Q2 Net Income of $5.8 billion, up 45% y-o-y.
Net Revenues expanded 14% y-o-y to $24.8 billion.
Markets revenues were 17% higher to $7.01 billion, with Equities Trading surging 45% to a record $2.3 billion.
Banking revenue jumped 34% to $1.92 billion, with Investment Banking up 44%.
Total Assets expanded $117 billion, or 16.8% annualized, to a record $2.895 TN, with one-year growth of $272 billion, or 10.4%.
Total Loans rose $23.6 billion, or 11% annualized, to $877 billion, with one-year growth of $87.6 billion, or 11.1%.
Bank of America earnings surged 27% y-o-y to $9.1 billion, with net revenues rising 15% to $31.6 billion.
Sales & Trading revenues rose 33% to $7.2 billion, with Equities Trading surging to a record $3.62 billion.
Investment Banking revenues jumped 50% y-o-y to $2.14 billion.
Total Assets were marginally higher at a record $3.499 TN, with Total Loans expanding at a 3% pace to a record $1.224 TN (up $71.7bn, or 6.2%, y-o-y).
July 15 – Bloomberg (Hannah Levitt):
“Morgan Stanley’s stock traders set another quarterly record, with $6.3 billion from equity trading, a 69% jump from its previous all-time high.
The firm pulled in $148.1 billion in net new assets in its wealth-management business, with over half related to IPOs, and net revenue at the wealth business was $8.86 billion.
Equity underwriting fees were $851 million, up 70% from a year earlier, and total investment-banking fees were $2.44 billion, with mergers-and-acquisitions bankers and debt underwriters generating $798 million and $788 million, respectively.”
July 15 – Bloomberg (Silla Brush):
“BlackRock Inc. pulled in $192 billion of net client cash in the second quarter, with investors pouring money into exchange-traded funds and pushing total assets above $15 trillion for the first time.
Investors added $53 billion to actively managed funds on a net basis and revenue rose 31% from a year earlier to $7.1 billion…
BlackRock pulled in record net inflows of $321 billion for the first half of the year…
Net flows to long-term investment funds were $199 billion…
BlackRock’s ETF business took in $178 billion, accounting for the vast majority of new money flowing into the firm, while cash and money-market funds lost $7 billion in net money.”
July 14 – Bloomberg (Paul J. Davies):
“US banking is on a roll in pretty much every department, but it’s hard to look past stock trading for the kind of exuberance that should trouble almost anyone.
Given the amount of borrowed money that hedge funds and retail investors are using to bet on shares right now, there is good reason to worry about how unstable markets could become if, or when, a correction begins.
Each of the four big investment banks reporting earnings on Tuesday smashed revenue expectations on their equities desks.
For a sense of how surprising the numbers were, take the example of Goldman Sachs Group Inc.
The debate before the results was about whether it could produce more than $5 billion in stock trading revenue for a second time this year, after a record first quarter.
That was more than any US bank had ever made.
Well, the last three months’ revenue was $7.4 billion, up 72% from the same period last year.”
Financial conditions have been ridiculously loose, while inflation has been above target for over five years.
July 14 – Associated Press (Christopher Rugaber):
“Federal Reserve Chair Kevin Warsh said… the Fed will make high inflation ‘a thing of the past,’ yet he provided no signal about the central bank’s next steps.
Fed policymakers ‘have no tolerance for persistently elevated inflation,’ Warsh said... ‘And we share a resolute commitment to restoring price stability.’
Still, Warsh heads a sharply divided rate-setting committee, with about half of the 19 policymakers penciling in higher interest rates by the end of the year in forecasts released last month.”
Chair Warsh’s first Congressional testimonies went off without a hitch.
He’s certainly a smooth talker.
Warsh:
“Now, at the Fed, our number one objective is getting monetary policy right.
That’s our clear and constant aim, the star we steer by.
And if we get policy right, and I can assure you we will, the inflation surge of the last five years will be a thing of the past.”
“We have the commitment, the power and the responsibility to deliver on the mandate that this committee gave us, and we will.
We’ve got full ability to do it, so you will not hear me blaming anyone else.”
“Our number one objective is getting policy right, and if we get policy right, we can deliver lower prices.”
“Our number one objective is to get policy right.”
“But inflation’s a choice.
We monetary policymakers need to choose lower prices.
And that’s the commitment my colleagues have made.”
“My broader definition of price stability is a change in prices, such that households and businesses don’t have to worry about it, don’t have to think about it.”
“And the longer that prices have been above the inflation target, it’s usually a bit harder to dislodge them and get them lower.
Our job, my commitment to you, is to take sticky prices and to unstick them.”
“A bit harder to dislodge them and get them lower?”
History argues quite hard.
And the issue I and others have quickly developed with Warsh is that he has nothing to share about how he plans to rein in now well-entrenched inflation.
If his commitment to return to price stability is sincere, he should begin preparing the markets and American population for the unfolding challenge.
The U.S. and world are at peak Bubble.
Chair Warsh speaks repeatedly about the “right” policy.
There is no right policy that miraculously stabilizes either Bubble excess or consumer prices.
The term “trapped” refers to the Fed’s predicament that reining in inflation would require a significant tightening of financial conditions.
But tightening would begin the highly destabilizing process of bursting Bubbles.
The Fed and Treasury are determined to hold Bubble collapse at bay, which only accommodates ongoing Bubble inflation.
It’s interesting that Warsh is determined to change the Fed’s communication strategy.
I share his aversion to “forward guidance.”
Stability would be well served if markets could stand on their own.
Warsh:
“I can be more broadly than that, we do not want to be in the bailout business, full stop.”
But I guess the forward guidance moratorium doesn’t apply to signaling to the markets that the Warsh Fed will be ready to aggressively respond to market crisis.
It appears many changes will be forthcoming for our central bank.
The Fed “put,” so fundamental to market speculation and leverage excesses, is safe, secure, and off limits.
Warsh’s first major mistake was failing to signal a much-needed rethink of Federal Reserve crisis policy dynamics.
Warsh:
“In periods of crisis, when markets aren’t clearing, I am willing to be quite aggressive in what the Fed does with its balance sheet, the assets that we buy as necessary in unusual and exigent circumstances.”
“So, I like interest rates as the dominant ways to make monetary policy, and I’d prefer all the things being equal to use balance sheets when the crises are real.”
Representative Ritchie Torres:
“Quantitative easing.
Do you believe quantitative easing is inherently inflationary?
Yes or no, and then...”
Warsh:
“That question I can answer simply.
I don’t think it’s inherently inflationary, especially if we adopt quantitative easing in the depths of a crisis.
It can often provide liquidity to markets that need it.”
Noland follow-up:
“How about when it’s early in the crisis and the forces of inflation are in full force?”
Warsh:
“If you’ve seen one financial crisis, you’ve seen one financial crisis.
So, I’m careful about extrapolating.
More generally, I would say the response to the 2020 pandemic had some very similar areas with respect to monetary policy.
That is, the central bankers in 2020 took some of the toolkit that we innovated on in 2008 or 2009, and they provided overwhelming liquidity.
That’s in our remit in crises, not in more normal times.”
“But we have to be prepared for shocks that are unanticipated.
We have to be open-minded to things that might happen.
So, while it might not be common for the economics profession, we have to show a lot of imagination.
My general view, again, coming out of the 2008 crisis, is we need to think ex ante about what we might do when the shocks happen.”
I am reminded of the “Bagehot Rule.”
In his 1873 classic Lombard Street, Walter Bagehot argued that a central bank (Bank of England) facing a financial panic “should lend freely, at a high interest rate, against good collateral, to stop a crisis without encouraging future recklessness.”
There’s a fundamental and catastrophic flaw in contemporary “QE” crisis management.
Instead of lending at a high punitive rate, the Fed and global central bank community offer unlimited liquidity at basically no cost.
There is nothing to discourage aggressive speculation and leveraging.
Moreover, the greater the degree of Bubble excess, the more confident market operators become of an immediate and powerful liquidity response.
The current system promotes self-reinforcing speculative excess.
This is today’s greatest issue in central banking.
It’s a very sensitive, incredibly tough issue.
The “Fed put” is fundamental to precarious asset inflation and Bubble dynamics.
If Chair Warsh is content to ignore this issue, he lacks the courage so desperately needed today at the Federal Reserve.
July 14 – Bloomberg (Max Abelson and Hannah Levitt):
“At the top of JPMorgan..., weather metaphors are out and geology is in.
‘Several risks are shifting below the surface like tectonic plates, including geopolitical tensions and wars, sticky inflation, large global fiscal deficits and elevated asset prices,’ Chief Executive Officer Jamie Dimon said… as his bank reported yet another record profit.
‘They may remain manageable, but they could also cause meaningful disruptions when they shift or collide.’”
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