April 6, 2024 Weekly Recap & Good Reads
Last week in Random Walk+Good Reads, all in one email
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Last week in Random Walk . . .
👇Here’s what Random Walk published last week 👇
Big Stories of the Week
The stock market wiggles
Markets have become less certain that cuts are around the corner, and now there is disagreement and confusion about what comes next. Is good news actually bad news again? Are jobs too hot such that inflation is right around the corner (and therefore the Fed cannot cut rates), or are they too cold such that distress is right around the corner (and the Fed must cut rates)? Maybe no one is Fed watching at all, and it’s something else entirely?
Now that it’s consensus that the open border had substantial deflationary effects and accounts for the entirety of new job growth, what does it mean for everyone else? If inflation and growth are going to run together, then is that good or bad for stocks? What about commodities? Why are gold and the dollar getting strong at the same time? Oil is making a run too?
From Random Walk’s perspective (such as one can ever be sure about such things, which of course, one cannot), not much has changed, and the set up remains the same. Finance Bros are still in a holding pattern, while the Nursing Home grows apace. All bets are on deus ex machina because AI is the capital cycle now. It’s software, it’s hardware, it’s industrial, it’s energy, it’s real estate, it’s everything.
Analysis & Ideas
Macro & Markets
Blockbuster M&A deals more than double. Continuation of a theme. When investors were sure rate cuts were around the corner, the demand for yield had a ‘let ‘er rip’ effect for some BigCo M&A. I suspect there will be some pullback. See also M&A gathers steam for biotech startups.
Lower rates don’t necessarily improve housing affordability. Obviously, because in the short-run, higher rates just impact purchasing power (and asset prices), and have nothing to do with “affordability.” You’d only write this paper if you were laboring under the bizarre, albeit prevailing, misconception that houses have become “less affordable,” as opposed to less available for sale. RW is exasperated, plainly.
Sasquehanna enters the events prediction markets on Kalshi. Underrated very big news. Kalshi is neat, and for now, is a way to make (small) directional bets without being subject to the quirks and insider gyrations of the capital markets.
Capital Allocation & Investment Strategies
Private Credit funds oil and gas. When banks got back into the game, they reconquered some territory from Private Credit funds. No worry, Private Credit just moved to another place banks won’t go: Oil and Gas.
2023 National Credit Program Report. A look behind the scenes at some of the leverage in PE-backed companies that is operating mostly out of sight and out of mind. More.
Pension funds unload PE stakes at a discount. LPs need liquidity, and PE/VC hasn’t offered any in a while. So LPs are starting to sell out. See also the Buzziest companies trading in secondaries.
Fintech funding slows to lowest level since 2017. The flipside of not returning money to investors, is that PE/VC cannot raise new funds, which means they cannot deploy capital into startups. It’s tough sledding out there.
Great thread on China’s local government financing vehicles (LGFVs). It turns out we’re not the only ones who use off-balance sheet shenanigans.
Real Estate & Migration
Americans love Florida, even if you don’t. The inestimable Nate Silver does a mid-dive on Florida, which is growing stronger and stronger, whether you like it or not.
Texas suburbs on the rise. As per always, shelter preferences are heterogenous, multivariate and complex. But people really like suburbs. Relatedly, more on the subject of density as a fertility-shredder (or not).
AI
Amazon bets $150B on data centers. Is it AI or is it Energy? Are these the same now? AI is the capital cycle. JPM says “it’s not enough.” Others say AI isn’t even the main event (when it comes to the grid).
Infinity AI made an AI-generated YC demo day presentation. On the one hand, it’s miles ahead of even just 1 year ago. On the other hand, it’s like, “so?”
Energy
AI revolution will be a boon for natural gas. See above.
Georgia’s Nuclear plant reaches full power. First new nuke plant in America in decades. Drill baby, drill, or whatever the nuke equivalent is. Split baby split?
Consumer
Tax refunds to the credit card rescue. Lower income folks have higher wages, but they’re consuming those wages in the higher cost of (their) services. So they are getting stretched, trading down (as are higher income folks), and falling behind on their credit cards. Now, tax refunds are here to save the day. See also skipping restaurants.
See also also Olive Garden sales is saying something important. “Here’s how Chief Executive Officer Rick Cardenas put it on the company’s conference call
We’re clearly seeing consumer behavior shifts... transactions from households with incomes above $150,000 were higher than last year. Transactions from incomes below $75,000 were much lower than last year, and at every brand, transactions fell from incomes below $50,000.
People & Culture
How regulators lose the forest for the trees. Great illustration of how regulators fixate on “whether any rules were broken” above all else, and how that makes it so difficult to y’know, actually protect and drive value to consumers. Mercury Bank heroically came to the rescue of depositors after SVB’s run, and all regulators could think of was “but did you break any of our many rules? Are all the processes and procedures set up? What of your compliance manuals? This disclosure is incorrect.” At no point do they consider “was anyone harmed? Are they better off on net for having swiftly arrived at a solution? Do we really want compliance to drive product development?” And regulators convince themselves they’re the good guys when doing this because the rules are their product, and it says “consumer protection” right there on the badge.
Two friends rented a car in Italy and used Book IV of Virgil’s Aeneid to local Sybil’s Grotto. So neat. More please.
Gen-Z is becoming the tool belt generation. Excellent news. There’s gold in them hills, and higher ed is not your friend.
Fertility Roundup via The Zvi. All things fertility and babymaking (or the lack thereof) related.
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I get the feeling that most people buy the most expensive house they can afford the monthly payment on. In theory a mortgage should start low and increase to track rent inflation, but that's not how it works. In a high rate/high inflation environment the payment is too low 30 years out and too high at the beginning.
Everyone who locked their rates in at 3% got a windfall because their payment is going to be a lot less than rent over the next 30 years. This will be more obvious over time when you're paying $2k on a house that would rent for $4k or whatever.
The owner of the 3% mortgage in 5% inflation is the loser. I'm told that is the government and/or entities we all know the government will bail out.
Personally, I think we need some way of buying out people with 3% mortgages. We shouldn't need to freeze up our entire housing stock just so people can cash in on the windfall. If it makes sense for people to move they should be able to move without having to give up the entire windfall (making mortgages transferable minus a haircut would be a hit to mortgage owners, but also encourage people to move rather then sit on their 3% even when they would rather not).