Automating Automation | The Daily Peel | 4/24/2023

Apr 24, 2023 | Peel #446

Silver banana goes to...

Market Snapshot

Happy Monday, apes.

And welcome to the big week. Earnings szn has been fun already, but this week is really where the action's gonna be. Hope you saved room after last week’s appetizer because this main course is gonna be a lot to handle.

Coke reports today, but Microsoft and Google’s numbers dropping on Tuesday will really get the people going. We just don’t know which direction just yet. Amazon, Meta, Snap, and others come later in the week, but we’ll have to wait until next Thursday to get a peek at the big dawg Apple.

Despite heavy trepidation around earnings in both nominal and real terms, markets have managed to hold up well thus far, with the S&P almost completely flat last week. It’s boring for sure, but it’s a lot better than the August-October vibes of last year. With expectations as low as they’ve been, however, it’s not exactly a high bar to cross.

Let’s get into it.

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Banana Bits

• Experts and analysts increasingly expect another geriatric throwdown for the Oval Office in 2024
• This website has an awesome name and also reported on Coinbase CEO Brian Armstrong’s arm-strong-words for SEC Chair Gary Gensler
• Bed, Bath, and Bankrupt finally kicked the bucket after several miserably idiotic failed attempts to save itself; at least something that makes sense is occurring
• This Twitter account has been tweeting some phenomenal stats related to population growth from recent international reports, for those interested in the single most important underlying economic force

Macro Monkey Says

Janet Yellen Has Bad Credit

Given the fact that Treasury Secretary Yellen’s academic background is like the economist version of Pablo Escobar’s rap sheet, spending time at just about every school your parents wish you could’ve gotten into, that title probably isn’t true.

But for her government agency, it’s certainly far from the best it’s ever been.

And it’s no secret why. The build-up to the inevitable debt ceiling debacle ain’t slowing down, and Wall Street is paying a whole lot of attention, most clearly seen in the cost to insure government debt.

Credit default swaps (CDS) are essentially insurance plans for lenders. Imagine you’re an actually responsible investor, and you buy a bond, but you’re worried it might not get paid back with full principal and interest:

• You go to X Bank and voice your concerns. They say, “Yeah, we got you,” and arrange a CDS contract
• You agree to periodically pay them a small amount, called the “premium,” over the term of the bond you bought
• In exchange, X Bank agrees to pay you a predetermined amount in the event that the borrower defaults on your bond
• The amount of the payout can vary, along with the interest rates and a lot of other factors, but you get the point

That “small” amount the buyer of a treasury CDS contract pays isn’t so small anymore. CDS rates, which are quotes on $1mn principal into a given treasury bond, have ballooned to 0.96% as of Friday, more than 6.5x the 0.14% we saw at the start of the year.

So, buyers of insurance on US government debt now pay $9,600/yr for that insurance, an arrangement that ran you only $1,400/yr in January.

A creeping debt ceiling crisis is the obvious and primary driver of this record-setting CDS rate spike. JYell and her gang at the treasury hit the $31.4tn borrowing limit back in mid-January, instituting “extraordinary measures” that allow for obligations to be paid until sometime around mid-June, or whenever the notorious’ X Date” truly is.

No one really knows what day X Date will fall on, but two things remain certain: 1) We’re getting closer to it every day, and 2) Not much is being done about it.

Generally, the market for treasury CDS is wildly small because if US government debt is “risk-free,” why would you need to insure it? Banks will do it to get regulators to chill tf out from time to time, but otherwise, it’s a surprisingly illiquid market.

That lack of liquidity means one paranoid buyer can cause sizable gyrations in CDS rates that don’t truly reflect the broad market view of the odds of a US default. But still, a move like this certainly isn’t nothing, especially with the showdown of the century between Uncle Joey B and House Speaker Kevvy Mac only getting hotter.

Both parties have laid out their demands for battle. Republicans in Congress, like McCarthy, have voiced unwillingness to raise the debt ceiling without spending concessions. The White House and congressional Democrats, on the other hand, have voiced opposition to considering spending cuts before raising the debt limit again.

Hopefully, that was written unbiasedly enough for y’all to stay out of my DMs, but I guess we’ll see. Either way, it won’t help the intransigence on both sides here. Some kind of compromise is going to be required here unless the Federal government wants to completely destroy the bedrock of the global financial system in the US’s “risk-free” debt status.

Not sure if anyone out there could even get Congress to agree on a restaurant for dinner, so this won’t exactly be easy. Luckily, we won’t have too long to wait before we see what happens. Maybe just keep your fingers crossed in the meantime.

What's Ripe

Lyft ($LYFT) ↑ 6.10% ↑

• Bad news is still good news in the tech world as Lyft announces plans to lyft ~1,200 people away from their livelihoods, naturally sending shares rallying for their best day in a while.
• That’s about 30% of the company’s overall workforce, sending a clear sign to the Street that the company is committed to the cost-cutting fad taking over 2023. Per internal memos, as reported by the WSJ, management is all too aware of just how much Uber has been eating (or, more accurately, delivering) Lyft’s lunch since C-19 showed up.
• Lyft’s decision to focus on core ride-hailing and mobility services during the pandemic turned out to be dead wrong, as hindsight shows. Uber’s strategy to diversify its offering and go global has granted the big dawg even more market share.
• The hope is that job cuts will (allegedly) allow the company to offer cheaper rides. Probably a solid move considering no one on Earth even opens the app unless Uber is more than $20 or 10-mins away.

Procter & Gamble ($PG) ↑ 3.46% ↑

• Brush your teeth, wipe your ass, and get ready to party with P&G, as one of the world’s largest consumer packaged goods (CPG) companies is still killing the game.
• Unfortunately, we haven’t seen boomers go to blows for the last pack of Charmin Ultra Soft since the good ol’ days when the pandemic started, but sales for these products are still booming. EPS and sales beat healthily and managed to still grow sizably from heights reached last year.
• It wasn’t all pearly whites and Old Spice-style horseback riding, however. Inflation gave P&G an excuse to sell at higher prices, leading to a 3% decline in sales volume but still giving enough sauce to drive the outperformance.

What's Rotten

Albemarle ($ALB) ↓ 10.00% ↓

• It’s 1984 again in Chile as the nation’s Federal government announced plans to nationalize its lithium industry.
• As Chile holds the largest lithium reserves in the world and is one of the largest exporters of this mineral that’s absolutely vital to things like battery storage and green energy, lithium producers like Albemarle had their days ruined.
• Alongside Albemarle, homegrown lithium player SQM got massacred, too, losing nearly 20% on the day. The fear isn’t whether or not the industry does get nationalized (that ship has pretty much sailed already) but whether or not the government pays market prices for the assets.
• Spoiler alert: they probably won’t. Best of luck, though!

Truist Financial ($TFC) ↓ 6.00% ↓

• Looks like Trusit kept things a little too true on its last quarterly report released late on Thursday, sending shares down the toilet to end the week.
• But then again, it wasn’t just Truist getting hated on. Fellow regional and mid-sized banks as a whole continue to confirm customers ran to larger players in the wake of the SBV meltdown. For one, Truist saw deposits lose 2% for the quarter and 5% compared to Q1’22.
• Earnings of $1.05/sh missed expectations as well, but not by much. The day likely would’ve been much worse if a lot of this wasn’t already priced in, as shares have already been bullied more than 25% lower YTD.
• Still, top line revenue put up big numbers with almost 15% growth for the year, but safe to say traders were far from impressed. For depositors and management, however, they’re probably just glad they’re not SVB.

Thought Banana

Automating Automation

Oh, you still use ChatGPT? Psh, get with the times, boomer.

What if I told you that ChatGPT is already outdated? You’d probably say, “That’s not true,” and you’d be mostly correct, but probably not for too long.

Technological development is an exponential curve once it gets going, and recent developments with things called AutoGPTs are the perfect example of this occurring today.

OpenAI’s most advanced large language model (LLM) was released about 5-weeks ago, and already we have this thing called AutoGPT that appears to be capable of a whole lot more. Essentially, reports allege you just have to give it a prompt, and it will not only give you a response but fulfill a task. It actually does something instead of just telling you what to do.

To paraphrase Neil Armstrong, it’s a small change in language but a large change for mankind, potentially. Everything in cutting-edge AI seems to get replaced like 2-weeks later, but the potential here is crazy.

We’re talking everything from personal assistants to running entire departments at companies, again, allegedly. Sound ridiculous, but we are at literally the very beginning, and if the past year, decade, and/or century have taught us anything, it’s that wild stuff can and will happen.

Applications are already abundant for these things, something that infuriates crypto bros waiting for the same from most of the sh*tcoins out there. Here’s a solid synopsis of a few examples, but we can also see a dramatic pullback in VC funding correlated with the launch of all these things.

Of course, the rest of the economic environment has gone insane as well, thanks largely to JPow, with rates and inflation being the most obvious and impactful, but even segments like seed funding are getting wiped, which wasn’t the case for most of 2022.

Some VCs / pseudo philosophizers pontificate that this could be a result of an increase in bootstrapping, as anecdotally evidenced by applications like Midjourney, which currently employs “around 10” people while having millions of users.

The future is gonna be really weird, it seems. And it’s coming faster than you may expect. Run with it or run from it, I guess.

The big question: What the hell is going on in AI? What is possible, practical, viable, and sustainable, and what’s not? What kind of timeline are we talking for these AI assistants? Because that sounds pretty sweet.

Banana Brain Teaser

Friday — You start with 1000, then add 40. Add another 1000, then add 30. Add another 1000, then add 20. Add one more 1000, then add 10. What is your answer?

4100.

Today — It’s 150 bananas off the Venture Capital Course for the first 3 correct respondents. LFG!

It is in the rock, but not in the stone; it is in the marrow, but not in the bone; it is in the bolster, but not in the bed; it is not in the living, nor yet in the dead. What is it?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser” or simply click here to reply!

Wise Investor Says

“Waiting helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger

Happy Investing,

Patrick & The Daily Peel Team

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