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5 Things to Know in Investing This Week – The Close the * Door Issue

The Close the * Door Issue:

We saw the most entertaining press conference by a Federal Reserve Chairman in decades. Jerome Powell “surprised” Wall Street by saying exactly the same thing he’s been saying for almost two years, then got caught on a hot mike wanting to shut the door on badly-behaved protesters. A Treasury auction goes terribly and is then followed by ratings agency, Moody’s, cutting its outlook on US debt to negative. I’m not sure how much Moody’s is paying the analytical staff there, but a subscription to DKI for the past two years would have gotten them to the same conclusion much faster and at a fraction of the price. Is another “Sovereign Debt Disaster Issue” in our future? Definitely.

If you can get past the first few disastrous “Things”, there are some good money-making ideas later in the piece. Enjoy!

This week, we’ll address the following topics:

  • Jerome Powell slams the door in more than one way.
  • The bond vigilantes draw first blood.
  • Trucking rates don’t match consumer demand.
  • Will Grayscale and the SEC kiss and make up? Relevant for Bitcoin, $GBTC, and $ETH.
  • $COUR vs $TWOU: Why stock analysis matters.

Ready for a new week of unfiltered government commentary? Let’s dive in:

 

1) Jerome “The Hammer” Powell Closes the * Door:

Obviously, I was going to lead with this one. How could I not?! Federal Reserve Chairman, Jerome Powell, spoke on Thursday and SOMEHOW managed to surprise the market my saying the exact same thing he’s been saying for the past year and a half. Powell made clear that further rate hikes are something the Fed is actively considering. He also said that he’s not confident that the current fed funds rate will get us back to his preferred 2% inflation target. Facing a still-hawkish Fed Chairman, the market promptly dropped during the speech.

This is NOT what Powell said.

DKI Takeaway:  During his talk, protesters interrupted and started yelling at Powell. In possibly the most entertaining episode in Federal Reserve history, a hot mike caught Chairman Powell telling security to “just close the * door”. At a time when everything in Washington DC feels scripted, it was nice to catch someone in a candid moment. And for those of you who were surprised by his prepared remarks, we can help you. “Higher for longer.”

 

2) The Bond Vigilantes Draw First Blood:

Also on Thursday, the US Treasury held an auction that had a tail exceeding 5 basis points. That’s a fancy way of saying that in order to match the huge increase in supply of US government debt with the decreasing demand, the Treasury had to lower the price of the bonds offered for sale until the yield went up by more than 5 basis points. It means demand was less than the market had expected. A tail greater than 4 basis points is considered a disaster. Credit to @jameslavish for his thread explaining the details.

This was the worst auction in years. Credit to ZeroHedge for the graph.

DKI Takeaway:  DKI started writing about the Japanese bond vigilantes last year, and about the same issue here in the US starting last month. That point of view hasn’t been popular, and people I respect have politely disagreed with me. I continue to believe that the bond market isn’t looking forward to trillions of dollars of additional bond issuance from the US Treasury. Further, anyone with a calculator can see that refinancing trillions of near-zero rate debt with newer 5% (or so) paper is going to lead to a budget problem. I continue to believe the bond vigilantes are taking control and that this week’s bad auction is early proof. (As I was writing this Moody’s cut its outlook on US debt to “negative”. We could have gotten them to that conclusion much faster.

 

3) A Different View on Trucking Rates:

Finance professionals like to keep an eye on delivery companies as well as trucking and shipping rates. The reason is they are a good proxy for demand for new goods which is a good proxy for the health and spending habits of the American consumer. Trucking rates are now 12% below last year and 34% below 2021. Many analysts are concluding that this indicates the consumer is in bad shape. We’re not so sure…

The blue line at the bottom is 2023 YTD. Graph from Freightwaves.com.

The real issue is net trucking company creation. Freightwaves.com.

DKI Takeaway:  The US consumer is still in good shape and spending robustly. Inflation has increased the dollar price of goods sold, but even that isn’t stopping people from buying both goods and services. That should increase trucking demand and pricing. However, Freightwaves points out that at the beginning of 2020, there were 255k trucking companies. Now, there are 363k. There’s no shortage of demand. There’s an excess of trucking company supply right now.

 

4) Grayscale and the SEC are Talking:

The Grayscale Bitcoin Trust ($GBTC) has been in a fight with the SEC for years regarding the request to turn the trust into an exchange traded fund (ETF) that would enable Grayscale to close the current discount to net asset value (NAV). The SEC recently lost a court case on the subject and chose to miss a deadline to challenge that loss. There were widespread reports this week that the SEC and Grayscale are in discussions to find a way to address concerns and approve the filing. The SEC is also considering multiple other Bitcoin ETF applications as well as a new one from BlackRock to start an Ethereum ($ETH) ETF.

Dollar debasement plus a regulatory catalyst has meant a great return.

DKI Takeaway:  We continue to believe that the SEC will approve multiple Bitcoin ETFs at the same time to eliminate any first-mover advantage. DKI re-recommended $GBTC in June at $14.50 to take advantage of this exact situation. As I write this, $GBTC is trading at $29.95. I can’t promise you all DKI stock picks will return more than 100% in 5 months. Still, this feels like a good time to mention we have multiple premium subscription options.

 

5) $COUR vs $TWOU:

Last December, I did an interview on OpenExchangeTV where I talked about why Coursera’s business model was superior to that of competitor, 2U. Coursera is attempting to build a huge audience and bring more than 130MM registered learners education and educational credentials at a huge discount to the price of an on-campus university education. 2U is trying to provide online degrees for the same huge prices as being on-campus. Long-term, it’s unlikely that many people will want to pay full price for an online degree. We concluded the segment by explaining that long $COUR and short $TWOU would be a good paired trade.

Since the interview, $COUR is up 49% and $TWOU is down 86%.

DKI Takeaway:  Since then, Coursera has posted four quarters with revenue growth in the low to mid 20% range. 2U just announced 3Q results with revenue down 1%. 2U management also lowered guidance for the full year citing lack of demand for high-priced programs, the exact issue I raised on-air. Coursera is up 49% since the interview and 2U is now down 86%. Again, we cannot promise that all DKI recommendations will work out this well. If you’d like to learn more about what we’re doing, you’re welcome to subscribe.

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

In no event shall DKI be liable for any costs, liabilities, losses, expenses (including, but not limited to, attorneys’ fees), damages of any kind, including direct, indirect, punitive, incidental, special or consequential damages, or for any trading losses arising from or attributable to the use of this report. 

2 thoughts on “5 Things to Know in Investing This Week – The Close the * Door Issue”

  1. Hi Gary and team, I’d love to play devils advocate on the bond vigilnty narrative a little bit and share this video.

    https://youtu.be/1PzQz3_boAM?si=kvI_eEP0HkKXG9du

    It is an interview with Warren mosler, and the specific section that is interesting to bond yields is the question and answer at 1:02:30-1:08:00. Would love to hear your thoughts, you might be interested in the entire thing I did not watch it all.

    I am by no means in agreement, just wanted to charge how the MMT crowd views this stuff.

    Reply
    • Thanks Darren. I appreciate the thoughtful response and just watched the video clip at the recommended time-stamp. I think Mosler is technically correct, but that his idea doesn’t work long-term. Yardeni is saying that a lack of interest in buying long-term Treasuries from the “bond vigilantes” could lead to massive increases in government interest expense. In this case, while vigilante sounds bad (like a villain), it simply means investors want a higher yield to accept the risk of holding debt against a currency being debased by excess issuance. Mosler responds that the Treasury doesn’t have to sell long-term bonds (10/20/30 years), and that they could instead issue 1-3 month bills that will be closely tied to the fed funds rate.

      This is technically correct, but runs into two problems. First, in this hypothetical example, the reason long-term rates would be about double the fed funds rate is investors expect higher future interest rates. So, you issue today at a little over 5%, but have to keep refinancing while the bond market is pulling rates higher. Second, the US government is issuing trillions of dollars of debt this year and the only reason it’s not more is because much of the debt previously issued was long-term. When the Treasury issues short-term debt, that doesn’t solve the problem; but rather, means more supply in the auctions over the next few months. Play that out for a couple of years (or even quarters), and that simply means constantly growing supply of debt that needs refinancing.

      Reply

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