Unwrapping Global Trends | The Daily Peel | 6/12/2023

The Daily Peel...

June 12, 2023 | Peel #479

 

Silver banana goes to...

PadSplit.
 

In this issue of the Peel:

  • Deglobalizing globe and a shift in U.S-China relationships
  • Positive performance for eVTOL manufacturers and Match Group, while ChargePoint and DISH Network saw declines
  • Speculating a reversal in the secular decline in interest rates
 

Market Snapshot

Happy Monday, apes.

Hope you had a great weekend. Is it just me, or does right about now feel like that time of year when the entry into Summer has been confirmed? I know, 9 days until the solstice (aka, the longest day of the year), but we’re feeling the beachy vibes already.

Hopefully, markets will agree. To close out last week, equities, at the very least, sure didn’t disagree with the ramp-up of summertime energy, gaining slightly on a relatively muted day. Still, we’re officially back in the bull market, and we got another weekly close above what technicians see as a key S&P resistance line at 4,155—let the bottles pop.

In the meantime, bond yields largely rose as traders eye this week’s FOMC meeting and get hyped to hear from JPow, if he has recovered from that rock concert he was at last weekend. The USD rose alongside those yields as treasuries sold off, while BTC managed to remain below $26k while the SEC nukes the industry.

Let’s get into it.

 

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Banana Bits

  • In what we can only imagine was a real-life version of Logan Roy’s big decision, George Soros hands the keys to his $25bn empire over to his younger son Alex
  • Great news for all you renters, grads, and soon-to-be grads, as increases in monthly rate payments are slowing down
  • Observing the SEC-led industry shakedown, Robinhood has decided to delist some…uhh..”problematic” tokens
  • JPow & Co. meet to decide the fate of your portfolio this week, and the effects of a rate pause may not be entirely what you might think…
 

Macro Monkey Says

A De-Globalizing Globe

“Globe” is a great example of one of those words that, when you say or think about it enough, start to no longer seem like a real thing.

That’s less true for the related word, “globalization,” but in this case, we can confirm that this one is, in fact, no longer a real thing. Or, at the very least, we’re certainly heading in that direction.

"... mega VC investor Sequoia Capital announced plans to split up ..."

 

Last week, mega VC investor Sequoia Capital announced plans to split up its global footprint in the latest private-sector example of how much these countries are starting to hate each other.

The game plan driving this move by the big dawg of an industry with the far & away cringiest LinkedIn profiles you’ve ever seen includes:

  • Splitting off its $56bn AUM China division into an individually run and separately owned VC firm called HongShan
  • Splitting off its $9.2bn AUM India and Southeast Asia division into yet another individually run and separately owned VC firm called Peak XV (that’s Peak “15” for you apes)
  • Billionaire founder of Sequoia China, Neil Shen, will remain on top as his ability to invest in sensitive industries, and probably his life as a whole, just got a lot easier

But the real question is—who cares about the corporate actions of one douchey VC firm? It’s a great question, and the answer is usually “no one on Earth,” but when it speaks to a dying relationship between two countries with a combined “total” (that we know about) of 4,118 nuclear warheads, we gotta pay attention.

 

"... but when it speaks to a dying relationship between two countries with a combined 'total' of 4,118 nuclear warheads ..."

And as we know, Sequoia is far from alone. Just to jog your memory (aka, scare ourselves even more), let’s check out some similar examples:

  • The U.S.’s 2020 ban on Huawei and ZTE via the FCC’s designation of these firms as national security threats
  • The U.S.’s 2020 ban on chips from China’s biggest player, SMIC
  • Both voluntary and involuntary delisting of Chinese companies from U.S. exchanges and the CCP’s effort to prioritize Shanghai and Shenzhen as the preeminent IPO destinations for homegrown firms
  • China’s 2023 effective ban on U.S. chipmaker Micron’s products
  • And on and on we go…

At the intersection of macro and geopolitics, many experts believe in something called the Economic Interdependence Theory, which basically states that countries with strong economic ties are less likely to engage in conflicts as this is seen as antithetical to each country’s individual interest. But that only works when the countries in question are purely rational economic actors.

As we know, despite economic theories’ inability to accept this, humans are not always rational creatures and are, arguably, rational only in rare instances.

"That whole Interdependence Theory could be entirely irrelevant soon enough, particularly as ..."

 

So, it’s clear that the U.S. and China are both taking their respective balls and going home. That whole Interdependence Theory could be entirely irrelevant soon enough, particularly as U.S. firms continue to re-shore their supply chains between those two shining seas.

In case that low-key forewarning doesn’t arouse images of storming Taiwanese beaches and gray, nuke-clouded skies enough for you, keep in mind this wasn’t the only scary U.S.-China news of the week.

For starters, the U.S. and Japan inked a deal with Taiwan to basically engage in a joint drown program in the South China Sea. From their perspective, that would be like if China engaged in a military alliance with Puerto Rico or some sh*t.

Speaking of which, it turns out China does have a cozy relationship with one of Puerto Rico’s (and the U.S.’s) neighbors in Cuba, as the American public last week learned of China spy operations out of the historically not-U.S.-friendly island.

As usual, place your bets now. And you’re welcome for the fun start to the week!

 

What's Ripe

Sky Taxis (JOBY, ACHR) ↑ 11.18%, 6.21% ↑

  • You know that meme that’s like “the world if…” and then it shows a perfect utopia with sleek buildings, parks, and most importantly, flying cars? Yeah, that’s exactly what these firms are trying to do.
  • The makers of eVTOLs (or electric Vertical Take-off and Landing aircraft) named above popped off to close last week as fresh coverage of both names from Canaccord was initiated with a “Buy” rating.
  • There wasn’t much of an argument to be made given how nascent the industry is, but apparently, they’re “positioned for the long term,” which was more than enough. Moreover, the fact of simply having a non-horrifically-negative view from a sell-side institution is a blessing in itself.

Match Group (MTCH) ↑ 6.50% ↑

  • Probably like your profile on this firm’s apps, Match Group shares have been chilling around an all-time low lately.
  • The normally high-flying, tech-growth name reached a closing low of $30.86 on May 12th and cemented a monstrous >80% drawdown from its peak. The last earnings came just about a week prior to that low, and with decently strong numbers, it looks like the market took its sweet time with this reaction.
  • Or, maybe investors have suddenly had the re-realization that dating apps are basically the only way we socially awkward, screen-savvy Zoomers meet each other.
  • Obviously, people like you and me aren’t meeting anyone, but apparently, it works for some people. Definitely works for platforms like Tinder and Hinge’s advertisers.
 

What's Rotten

ChargePoint (CHPT) ↓ 13.22% ↓

  • No, ChatGPT hasn’t gone public (yet), despite this ticker looking just about perfect for it. Anyway, let’s take a look at how Tesla is ruining the lives of EV charging companies this week.
  • As you’re all aware, GM and Ford have both recently announced plans to adopt Tesla’s charging stations—the most expansive in the U.S.—as effectively the standard in North America.
  • Off the top, that’s tough news for charging competitors like ChargePoint and EVGo (EVGO, -11.72%). But according to Barron’s, retrofitting existing plugs to the new standard shouldn’t be too costly, especially given that Tesla last year publicly released the schematics of its technology.

DISH Network (DISH) ↓ 11.84% ↓

  • Despite almost becoming besties with Amazon when it was invited to the cool kids’ table earlier this week with plans to potentially provide cell coverage to Prime subscribers, DISH has been having a tough year.
  • Shares are down well over 50% YTD, and Friday’s garbage performance only fueled the flames.
  • News that DISH is looking to raise cash in order to fund its 5G rollout, which is supposed to cover 70% of Americans by the end of the month, tanked shares as no help could be found in getting the service up and running from rivals like AT&T and TPG.
 

Thought Banana

Bonds: To Buy or To Bye?

Over the past year, we learned two things about Fed Chair JPow, including:

  • He’s crazy
  • He’s got nuts

With the way this man raised rates through the roof despite a dying stock market and the literal deaths of a few of the nation’s largest regional lenders, both of those facts are hardly debatable. But there was once an even crazier and ballsier guy in the Chair’s chair: Paul Volcker.

Volcker to Jerome Powell is, in a word, his idol. When JPow took the Fed Chair job in 2018, he started carrying around a Volcker memoir with the rest of his usual Fed Chair materials, whatever the hell those may be.

And back in the 1980s, Volcker went to war with interest rates in a way we couldn’t even fathom today. Geopolitical and macro bullsh*t of the post-Vietnam War era drove inflation rates sky-high for nearly a decade in the late 70s and early 80s. To quell this beast, Volcker jacked up the effective fed funds rate to a peak of 19.08% in January 1981.

"Semantics aside, the impacts of this trend have been more expansive than most imagine ..."

 

This was 1) absolutely unheard of in American history, even compared to Civil War interbank lending rates, and 2) the only way to stop the inflationary virus. It worked, but it took its time and carried side effects that Volcker may not have exactly been excited about.

Since then, rates have been in what experts and pseudo-intellectuals alike have called a “secular decline.” Of course, there have been periods of rate hikes since the mid-1980s, but all this “secular decline” describes is the general trend of the decline over a “saeculum” (secular), the Latin word for “generation” or “age.” Semantics aside, the impacts of this trend have been more expansive than most imagine, with some impacts including:

  • Lower borrowing costs leading to increased consumer spending and business investment
  • A lower hurdle rate for risk-investments, leading to rate-induced asset price inflation as investors search for yield
  • Less incentivize to hold savings in cash as interest earned on savings deposits plunged
  • Creative monetary policy solutions as the U.S. has historically maintained a 0% floor on the fed funds rate

It’s a generalization, not an exact science (welcome to econ!). But now, investors are starting to kick the tires of our new environment since JPow went full-Volcker last year. It’s early days, but according to Barron’s again, word on the Street is that industry experts are calling for a direct reversal in that trend.

Now, in our 247-year history as a thing, the United States has pretty much tended to hold base interest rates around 5%. Obviously, data pre-computers and especially pre-Fed is tough to find, so doing our best, using gross averages, and trusting the experts indicates that the environment we’re in right now is actually one of the perfectly normal rate levels.

 

"Continuing to storm higher past these levels could trigger a secular trend of rising rates in our collective future."

After a decade of ZIRP, it sure doesn’t feel like that, but it’s true. Continuing to storm higher past these levels could trigger a secular trend of rising rates in our collective future. That could mean higher bond yields, higher savings rates, lower equity returns, lower consumer spending, etc., etc.

Obviously, it’s pure speculation, but the bull market in bonds of the past 40 years on the back of secular rate declines could well be over. When they say 2022 and 2023 could have ushered in a “new environment” for investors, we’re not just talking about compared to the last couple of years; this is like going from the Eastern Roman to the Byzantine Empire: the game has changed.

As we said above, place your bets now.

The big question: Will we see a reversal in the trends seen over the past 40-odd years during the secular decline in interest rates? If not, what major trends will become apparent? And most importantly, how can I make money off of it?

 

Banana Brain Teaser

Friday — What three-letter word best completes the words below?

  • SW...
  • ...Y
  • AL...
  • F...
  • W...

Arm.

Today —

Surrounded by hills,
I rest on an isle
Known for its castles
And "baggy" music style

I can hide a monster
At least some think
But for what it's worth
I'm one of nature's sinks

What am I?

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser”.

 

Wise Investor Says

“The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.” — George Soros

 

Happy Investing,

Patrick & The Daily Peel Team

Was this email forwarded to you? Be smart like your friend.

 

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