Morning Briefings
Expert market analysis delivered every morning. Stay informed with comprehensive research and data-driven insights.
Geniuses Of Stablecoin
Now that the GENIUS Act has established a framework for stablecoin issuance with safeguards for consumers, we expect stablecoin usage to proliferate. Because stablecoins are backed by liquid assets such as Treasury bills, their proliferation is likely to affect bond market dynamics. Because stablecoins can be used for transactions, they’re likely to shrink the markets for other cryptocurrencies that can’t be, like bitcoin. Because stablecoins are a new M1 component, they’re likely to reduce the Fed’s control over the money supply. How stablecoin’s uptake will alter monetary policy, interest rates, and the federal debt is hard to predict. Stephen Miran theorizes that stablecoin proliferation will lower the neutral interest rate, requiring the Fed to ease accordingly. We aren’t convinced. ... Also: Dr Ed reviews “House of Guinness” (+ + +).
On Semis, Leading Stocks & AI Designed Proteins
The S&P 500 Semiconductors industry is rapidly growing earnings, buoyed by lofty demand for chips that enable artificial intelligence. But its valuations are lofty as well. Today, Jackie compares and contrasts the earnings prospects and valuations of two industry leaders, AMD and Nvidia. … Also: Semi stocks don’t top the list of the S&P 500’s best ytd performers, but several makers of the tech equipment AI runs on do. Like the semis, they sport historically high valuations reflecting their heady earnings prospects. ... And: How AI is being used to create proteins that will digest hard-to-degrade chemicals, like polyurethane.
On AI & Earnings
The first wave of AI adoption was about making work more efficient. The coming wave will be about redesigning work itself, says Melissa. AI is likely to transform the labor force by eliminating humans’ grunt work and creating new human-in-the-loop roles. … Also: Joe reports that Q3 earnings season is looking like one for the record books: The S&P 500 companies that have reported to date collectively have record-high EPS and double-digit y/y earnings growth. Plus, they’re collectively beating estimates by more than 10%.
Central Banking Is Challenging
Central banks around the world have lost control over their economies amid an unprecedented array of challenges, William reports. In several nations, political forces threaten their independence, and central banks have been making monetary policy decisions that don’t reflect economic fundamentals. As a result, trust in central banks is eroding. When central banks lose credibility, global macroeconomic stability is put at risk.
Powell’s Swan Song
The data-dependent Fed is operating as well as possible without the usual economic data releases from government agencies during the shutdown. The shutdown is the latest in a series of unusual challenges Jerome Powell has navigated admirably as Fed chair. When his term ends in May, he’ll no doubt be replaced by a Trump loyalist, who undoubtedly will push the FOMC’s other voting members to provide easy monetary policy. If the chair is outvoted, the resulting internal dissension would be unprecedented and seriously detrimental to the Fed’s credibility. … For now, Powell’s statements during his recent presser suggest that a December rate cut is far from certain.
On Consumer Spending & China’s Leading Humanoid
Consumer spending is being buffeted by countervailing winds—with heady financial market returns potentially lifting spending even as deportations, the government shutdown, and the effects of AI on employment potentially depress it. Jackie examines the recent earnings reports of consumer discretionary companies to extrapolate how these effects are netting out. … Also: A look at Unitree, the Chinese robotics company likely to give Tesla’s robotics division a run for its money, and Unitree’s visionary young founder Wang Xingxing.
On Trade Truce, Global Financial Stability & Quarterly S&P 500 Earnings
It’s great that Presidents Trump and Xi are coming to the table, but William argues that markets’ jubilance at the prospect of a US-China trade deal may be inflated. Much still could go awry, and tensions between the two proud leaders could flare anew, with global collateral damage. … Also: Melissa recaps the IMF’s worries about global financial stability as discussed in its newly updated report on the topic. Worrying about a crisis is a healthy way to prevent one, so we’re not overly concerned. … And: Joe shares takeaways from his data on how earnings and revenues estimates have been changing as Q3 earnings season proceeds.
Japan Agonistes
Japanese stocks surged after the election of Sanae Takaichi as prime minister, but investors’ enthusiasm may be premature. Japan’s first female leader is all for continued easy monetary policy, which puts her at odds with the Bank of Japan. Takaichi may be prioritizing “short-term sugar highs” over the supply-side reforms that Japan’s economy sorely needs, William warns. Her desire to prolong the weak-yen era is risky at a time of accelerating inflation, disappointing wage growth, gigantic public debt, and the need to wean Japan off exports to mitigate US tariff pain.
Inflation: 3.0% Is The New 2.0%
The Fed Put is back. Given the likelihood of two more reductions in the federal funds rate before year-end, we’re reducing the odds of our bullish base-case Roaring 2020s scenario from 55% to 50% and raising the odds of an even more bullish stock market meltup from 25% to 30%. Indeed, the stock market jumped Friday in reaction to a cooler-than-expected inflation report, since it buoys the case for Fed ease. Today, Dr Ed explains why further rate cuts are not needed now with both parts of the Fed’s dual mandate, unemployment and inflation, close to Nirvana. The Fed’s attempt to achieve the “neutral” FFR rate by easing is more likely to drive stock prices higher than to help the labor market. ... Also: Dr Ed pans “The Woman In Cabin 10” (- – -).
Defense, Auto Loans & Local LLMs
With wars ongoing, the federal government’s weapons purchases haven’t let up during the government shutdown. Investors have been bidding up the stocks of US defense contractors as a result, and the S&P 500 Aerospace and Defense industry has impressively outperformed the broader market. But investors liked what they heard in the earnings reports of just two out of four recently reporting companies. … Also: Jackie shares trends in consumer and auto finance after the recent bankruptcies of two subprime lenders. … And: Will the massive buildouts of AI infrastructure be rendered unnecessary if AI systems reside not in the cloud but locally on users’ equipment?
On AI, Earnings & France
Is AI really the jobs disrupter it’s chalked up to be? Melissa distills the research on how much AI has displaced human work, which industries are most affected, and which worker populations are out of luck. … Also, Joe notes a surprising trend: Early Q3 earnings reports for S&P 500 companies have pushed analysts’ aggregate Q4 consensus estimate up, instead of down as usual. … And: William takes us to France, where President Macron’s ambitious economic reforms are unraveling. His deficit-reduction plan seems unlikely to pass, and the Bond Vigilantes are circling.
On Reckonings For China & The UK
US/China trade-war brinkmanship has reached the brink: China’s President Xi hasn’t budged on the rare-earth-minerals export controls that will severely curtail the world’s ability to produce electronics. Numerous nations think China has gone too far this time, William reports, and are joining forces to formulate a solution. But China’s trade strategy may backfire on it if a reputation for petulant law-making drives away foreign companies. … Also: The UK economy is struggling with high inflation, weak domestic demand, and rising risks of a hard landing. Some fear a debt reckoning as the UK bond market reacts to mounting signs of distress in credit markets.
Halloween Is Coming
Investors’ panic attack Thursday was another of many short-lived frights that haunt bull runs. Our economic analyses help us spot the difference between panic-generated minor pullbacks and scarier downturns like corrections and bear markets. Corrections tend to occur when investors fear a recession that doesn’t happen. Bear markets tend to be caused by recessions. Currently, the economy remains resilient, and a recession is unlikely, in our opinion. Plenty of frightening scenarios have been floating around in recent years, but our confidence in the resilience of the economy has helped us to expose them as phantoms. ... Also: Dr Ed reviews “Eddington” (++).
On The Fed, The BOJ & S&P 500 Earnings
Fed Chair Powell came across as hawkishly dovish in his latest public remarks, observes Melissa. He noted risks to the labor market, the near completion of the Fed’s quantitative tightening, and inflationary pressures that are only temporary—all dovish points. But he warned of risks in whatever action the Fed takes. Other Fed officials speaking recently echoed Powell’s measured approach. … Also: William discusses the risks posed by the yen carry trade, a strategy that gains appeal as the yen falls. If this speculative trade fails, it puts markets everywhere at risk. … And: Joe analyzes S&P 500 companies’ estimate revisions data, which he finds to be impressively strong for most sectors.
Gold Is The New Bitcoin
The surging gold price has already exceeded our year-end target of $4,000 per ounce. Risk-off investors may be concluding that gold offers greater protection from geopolitical risks than bitcoin, which is more like a risk-on speculative vehicle and has been weak recently. Bitcoin has been described as “digital gold,” but we see gold as “physical bitcoin.” We now think the gold price could reach $5,000 an ounce by year-end 2026 and possibly $10,000 by the decade’s end if not before. … Also: While the government shutdown has shut off many of the usual economic data spigots, we can tell from other sources that the economy remains resilient.
Banks, Auto Loans & AI Surveillance
The big banks likely earned big bucks during Q3, with several winds at their backs. But their Q4s should be more problematic, Jackie explains. … And: Several big banks were lenders for a used car dealer serving illegal aliens, Tricolor Holdings, which now has gone belly up. While the banks’ writedowns won’t be large, the issue highlights the effects on the auto industry of the Trump administration’s mass deportations. … For all its benefits, AI can also be means to undesirable ends. Our Disruptive Technologies segment highlights allegations that Oracle’s tech solutions facilitate the Chinese government’s surveillance and control of its citizenry.
Trump Trade Turmoil, Again
The latest US–China aggressions have the financial markets worried about the high stakes of a trade war between the globe’s biggest trading nation and its largest economy. William observes that a disruption to global supply chains would have adverse consequences for earnings, economic growth, and central banks’ pursuit of their mandates. But given the severity of the consequences, we expect a quick de-escalation of the tensions, with both sides willing to negotiate. … Also: The German economy is contracting, with weak industrial production, exports, employment, and consumer sentiment. Yet the government’s stimulus measures do little to address the underlying structural causes.
On Data Centers, Semis & Stablecoin
The rapid revenue growth of cloud providers that meet AI data storage needs has enticed lots of players to build new data center capacity. Some, like Amazon and Open AI, are doing so to meet their own AI needs and others to farm out storage capacity to others. With capacity buildouts so enormous, Jackie asks, will there be enough juicy profits to go around? … Also: Nvidia is still the undisputed AI semiconductor chip leader, but alternatives to Nvidia’s chips are proliferating. … And: The Genius Act prohibits the paying of interest to investors, but not the paying of “rewards.” What’s the difference? None, say banks, fearing lost deposits and demanding rule revisions.
On Japan, France, Europe & S&P 500 Earnings
Investors in Japan’s stock and bond markets aren’t likely to welcome the policies of Japan’s probable new prime minister. William explains why. … Also: Political and fiscal crises in France are rocking that nation’s financial markets as investors wonder about the need for an IMF bailout. … And: Melissa discusses the economic data that have been coming out of Europe, where the stock market has been forging ahead even as the overall economy limps along. … Finally, Joe has cheery news about the prospect for Q3 S&P 500 earnings beats.
China & India Diverging
Chinese stocks are rallying on AI exuberance and a leap of faith that governmental reforms will bear fruit, with little fundamental support for their ascent from earnings or economic data. William likens it to a similar runup a decade ago, which preceded a sudden plummet. The government’s team of investors can swoop into the stock market with buying support at critical times, but that does nothing for China’s underlying structural problems. … Also: Record outflows from India’s stock market reflect concerns about the economy’s ability to shoulder 50% US tariffs, which will imperil labor-intensive sectors that don’t generate enough low-end jobs as it is. The economy needs a fiscal stimulus jolt.
Still Roaring
Sunshine during my tour of the West Coast and in the stock market last week. But everyone's on the lookout for signs of an AI bubble. Jeff Bezos has a positive take on bubbles that makes sense to us: They accelerate funding and hasten AI’s tremendous benefits. Revisiting the BRAIN Revolution and our long-standing confidence in technology and its positive impact on the economy. ... Also: Pandemics, tangled supply chains, and tariffs are no match for the resilient US economy in the Roaring 2020s. … And: The labor market is weak, but productivity is strong. … Dr Ed reviews “Downton Abbey” (+).
On The Shutdown, Travel & Bank Blockchains
On the first day of the government shutdown, stock markets stayed calm and carried onward and upward. But modest reactions in the bond and gold markets as well as the dollar were registered. … Also: Canadians feeling slighted by Trump and angry over his tariffs have stopped visiting the US in the usual droves. Jackie examines the impacts on US tourism. … And in our Disruptive Technologies segment: Traditional banks are modernizing their traditional services using blockchain technology, making them cheaper, faster, and more resilient. JP Morgan’s Kinexys division is the trailblazer. And Swift is at work developing a blockchain-based international transaction settlement system.
On Japan, Australia & Earning
Japan is at an economically precarious time, William reports. GDP is barely growing, yet the BOJ is bent on monetary tightening. A new prime minister is likely to roll out fiscal stimulus measures, but Japan has the heaviest debt of any developed nation; the prospect of fiscal loosening has already roused the Bond Vigilantes. Might Trump renegotiate Japan’s trade deal? … Also: Australia’s productivity growth problem can’t be solved by monetary policy; what’s needed are government leaders willing to make bold fiscal reforms. But reformist energy is in short supply in Canberra. … And: Q3 estimate revisions data for S&P 500 companies suggest to Joe yet another quarter of impressive y/y growth.
On Argentina’s Woes & China’s Policies
Argentina’s failing economy was buoyed by IMF intervention in April, but since August the floor has fallen out. President Milei’s austerity plan is slamming consumer confidence, and foreign investors are rushing for the exits. Trump’s controversial $20 billion bailout won’t help, William predicts. It simply buys more time for a (MAGA loving) president whose shock-therapy plan is failing spectacularly, and it could set off a 1980-style downward spiral. … China’s stock market has been riding high on the government’s commitment to 5% annual GDP growth. But prioritizing the GDP targets warps economic incentives and comes at the expense of getting China’s fiscal house in order.
Meet Bonnie
Our Roaring 2020s outlook has been on target since the beginning of the decade. Over the past two quarters, GDP growth and consumer spending have been robust, and the recession widely anticipated for three years and as recently as April never showed. The Fed’s September interest-rate cut—made proactively in response to weak payroll stats—was probably a mistake that could stoke price inflation and financial speculation. While unemployment is low, AI is disrupting some areas of the labor market. The Fed’s rate cut won’t help former tech workers now driving for Uber. … The good news: Consumer spending should remain strong as Baby Boomers work down substantial nest eggs and support the spending of their adult progeny. ... Also: Dr Ed reviews “Audrey’s Children” (+ +).