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The credit market continues to offer some warning signs, and unless things change, we might be close to a turning point. The chart below shows the avegare price of bonds that have split rating by agency, in the riskier frontiers of the credit spectrum. You can see that for BBB/BB and BB/B, there is still some stability, after the liberation day shock. But the B/CCC price difference has sinked below the April lows, which is an indication that investors are demanding more yield

The Fed has started to understand they might need to lower interest rates irrespective of their views on the economy. So they have started to document their epiphany. In the chart below, you can see a study by the Federal Reserve of San Francisco, where the review 150 years of tariff data an conclude that tariffs are in fact deflationary, and they end up increasing unemployment. The top part of the chart refers to the period where tariffs are enacted, and the bottom part show

Private funds are a hot topic today. After the episode of First Brands and the “cockroaches” comment from Jamie Dimon, they are being subject of an increasing scrutiny. At the center of that scrutiny is their valuation policies. How do you value a private asset that by definition is not subject to market forces? It besomes an art, particularly in times of stress. The chart below is a good example of how subjective valuations can be, and the dangers associated with private ass

With the government shutdown, the US has not had an official source of goods pricing for the economy. Private sector measures and other indicators have been used in their absence and all of them seem to indicate that inflation is starting to show up on the numbers again. As you can see in the chart below, more than half of the goods in the CPI basket have experienced a price increase of at least 3%, while the Fed’s official target continues to be 2%. This is due to tariffs a

New all time high for the Dow Jones Industrial Average, the least tech heavy index of the three majors (18%). The Nasdaq 100, with almost half of its components in the the sector, is still hustling to regain its peak from 2 weeks ago. Is there any value left to support the push for new highs? It’s getting more difficult to answer yes to that question, both in absolute and relative terms: on one hand, earnings continue to come strong, although their quality has decreased sign

Bond investors are starting to see the actual cost of building the AI infrastructure in the U.S. in the chart below, you can see the 5 year Credit Default Swaps (CDS) for the Banking sector and the Tech sector. Despite the fact that banks are going through a tough period, with low liquidity levels in the short term market, the perception of risk by bond investors is mostly muted. For the tech sector, however, the fact that organic cash flow can only satisfy half (if at all) o

We start the week with the good news about the reopening of the U.S. government, which has been closed for a record 40 days. But there is a full laundry list of items that are problematic for the Trump administration. Among them: The SCOTUS decision on tariffs, which doesn’t look good at this point, inflation and high short rates, which are squeezing the middle class, and housing affordability. In the chart below you can see two charts that would indicate the American dream i

The current market concentration phenomenon has been discussed extensively. Concentration at company level, with the mag 7 wonder, at sector level, with the AI related companies responsible of 75% of the S&P500 gains since the introduction of chatGPT on November 2022, and concentration at country level, where the U.S. dominance has been exceptional over the last 15 years. These companies have created an unprecedented level of dependency for the world. To the point that the wo

Central banks are combining different levers to manage the current economic environment. On one hand, they are cutting rates at an unprecedented rate for a non recessionary period. On the other, they have been reducing their balance sheets (mostly G7), which suffered a staggering expansion during the pandemic. In the chart below, you can see the Fed’s balance sheet and how it went from 35% of GDP to the current 22%. As a consequence of that, liquidity might’ve been running a

It looks like the art of the deal is becoming challenging these days. After a victory lap last week where President Trump announced a set of agreements on the White House website regarding a potential sealed agreement between him and President Xi, information is coming out that challenges if in fact the deal is seen the same way by both parties and, more importantly, if they’re going to honor it. China is imposing conditions to a president that doesn’t want to be told what to

As of today, the government shutdown we are currently suffering has been the longest in modern history. 37 days and counting, where thousands of government employees are furloughed, until Congress authorize the treasury to fund it and reopen it. As you can see in the last column on the right, in the table below, the market seems to be numb to the fact that we don’t have a functioning government, which begs the question of the need to have a big government. Perhaps also the ma

The Supreme Court is holding oral arguments today in cases like Learning Resources, Inc. v. Trump , challenging whether the president can use IEEPA to impose broad tariffs by declaring a national emergency. Although no final decision is expected today, the importance of today’s hearing is clear, since the president is using tariffs as the core of its negotiating tactics with China, one of our biggest trade counterparts, and the major contender for establishing the word order.

AI is starting to disrupt the economy. You would hope that it would do it by increasing productivity first, which in the end, it’s what is intended for. But it looks like first is going to dislocate the job market, and the efficiency, at least initially, will be achieved at the expense of human labor. The chart below shows corporate layoffs announced by year, and 2025 is already showing more layoffs than any other year since 2010, with the exception of 2020, due to COVID. The

The month of November has started, and the U.S. equity market continues to show incredible resilience. 16.6% YTD return, after correcting 20% on liberation day due to tariffs. Corporate earnings are coming out solid, albeit with plenty of help from buybacks, on the back of substantial debt issuance. Warren Buffett, however, doesn’t seem to like this market. The chart below shows his massive cash position, which is $384Bn, a signal that he doesn’t find companies with attractiv

Big tech firms are going all in when it comes to funding data centers destined to train AI models. It is expected that just the big hyperscalers (Meta, Amazon, Google and Microsoft) will invest $400Bn in infrastructure. Where will that money come from? It does come primarily from earnings, of course, but earnings are already being used to fund dividends, buybacks and other projects. At this scale and with rates still relatively low, and with IG spreads at historical minimums,

The financial pipes got a tempeorary fix yesterday. Banks used $50Bn in REPO to get the liquidity they needed to close the books for October, decreasing the need to tap other Banks through SOFR, pushing the rate down from 4.3% to 4%. As you can see on the chart below, is not common for banks to take that amount of money in the REPO market. In fact, it’s unusual, and typical of crisis, like COVID. Perhaps banks have dodged this bullet, but the problem is still there, whether i

The silent tension in the financial system continues, even after the rate cut from the Fed on Wednesday. In the chart below, you can see the time evolution of the difference between SOFR, the rate at which banks lend to each other, and IORB, the rate at which the Fed pays bala on reserves. With the cut, IORB went down, and in a normal market, that should pull from SOFR down too, but not in today’s environment. SOFR remains elevated and if this tension continues, th Fed might

The Fed concluded its two-day meeting on October yesterday, with the expected 25 basis point cut to the federal funds rate, bringing the target range to 3.75%–4.00%. the highlights of Powell comments were: (1) Job gains have slowed, with unemployment holding steady but risks to employment increasing. (2) Inflation has eased but remains somewhat elevated, with recent CPI data showing a rise to 3% year-over-year in September (up from 2.9% in August). (3) Balance Sheet Policy:

Today the Fed is expected to lower rates 25 bps. The chairman would probably feel more comfortable keeping rates intact, due to potential inflation pickup as a consequence of tariffs and government spending. But his world is not that simple (neither is ours). US labor market is deteriorating, and several big corporations are already announcing big layoffs. The real employers of the majority of the labor force, the small businesses are suffering and lower rates will help a lot

China just unveiled the 15th 5 year plan which will govern the country’s future froln2026-2030. The plan outlines seven core targets, which are: (1) High-Quality Development : Shift from scale to productivity, with domestic demand driving ~86% of GDP growth (up from prior periods). Boost consumption (targeting 56% contribution to growth) through expanded social security, rural revitalization, and regional coordination. (2) Scientific and Technological Self-Reliance : Achieve