🎙️ America’s Borrowing Binge

For the most part, Netflix has continued strengthening.

The streaming giant reported earnings this week, saying it ended the second quarter with 277.65 million customers globally after adding 8 million more subscribers last quarter and raising the low end of its forecast for full-year revenue growth.

Netflix’s changes to pricing and lineup, limited password sharing, and expanded advertising are all coming together. Shares have risen ~33% in the past 12 months.

Meanwhile, the S&P 500 just finished its worst week in three months, though many investors remain fairly optimistic that the bull market is still fully intact as rate cuts draw near.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• How Wall Street keeps absorbing America’s borrowing binge

• Major outage disrupts businesses and banks

This, and more, in just 5 minutes to read.

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In The News

🇺🇸 How Wall Street Keeps Absorbing America’s Borrowing Binge

We all know the U.S. fiscal outlook is deteriorating by now, yet Wall Street appears unfazed by this development. 

Despite the Congressional Budget Office's recent projection of a $1.9 trillion budget deficit for fiscal year 2024 — up from previous estimates — U.S. government bonds have rallied.

The rally has pulled Treasury yields down from their 2023 highs, even as the government conducts large debt sales to cover the gap between spending and revenue. The situation has surprised some analysts who expected the growing debt to cause more market disruptions.

Several factors contributing to the Treasury market's resilience are worth a quick look:

Safety and liquidity: When held to maturity, Treasuries offer a reasonable return with virtually no risk. Their large market size makes them highly liquid and easy to trade, attracting global investors.

Federal Reserve policy: Treasury yields are closely tied to expectations of short-term interest rates set by the Fed.

Global demand: U.S. Treasuries are considered the world's dominant reserve asset, with foreign central banks and governments holding them as part of their reserves.

Relative attractiveness: Treasuries often offer higher yields than other safe government bonds, ensuring steady demand from overseas investors.

Mounting concerns

Concerns about the mounting supply of Treasuries persist. The 2023 selloff demonstrated that demand can fluctuate, and some analysts worry about future investor appetite.

• Yet many market participants believe forecasted deficits may already be reflected in current bond yields. The Treasury issuance process is viewed as a gradual, long-term phenomenon that markets have time to digest.
  

• The U.S. fiscal situation continues to deteriorate, with no signs of improving. And even though there are projections of increasing deficits and debt levels, the bond market's current stability suggests that investors are not (yet) all that alarmed.

Why it matters:

The current fiscal situation is unusual in peacetime. Large deficits are typically associated with major crises like world wars or pandemics. The fact that we're seeing such high deficit levels during relative stability in the U.S. is noteworthy and concerning to some economists.

Term premium: Economists use models to estimate the "term premium"—the extra yield investors demand for holding longer-term bonds. Some models suggest the current term premium is slightly negative, implying that factors like demand for safe-haven assets are outweighing supply concerns.

• And, while the U.S. deficit is large, it's important to view it in a global context. Many other developed nations are also grappling with high debt levels. The U.S. still benefits from its status as the world's reserve currency and the perceived safety of its debt.
  

• Market dynamics are also at play. The Treasury market is enormous and highly liquid. In 2023, about $190 trillion worth of U.S. Treasuries were traded — more than seven times the total market size. That liquidity is a key factor in maintaining demand.

Forward look: Now, there are worries about long-term sustainability. If interest rates remain high, the cost of servicing the debt could become a significant burden on the federal budget. Unsurprisingly, the growing deficit and debt levels will likely be major topics in upcoming political debates and elections. 

• Despite the high deficit projections, many investors still view Treasuries as a haven, especially during economic uncertainty, like today. That perception continues to support demand for U.S. government debt.

Read more

More Headlines

✈️ Business travel is booming back, could surpass pre-pandemic levels

📈 Berkshire Hathaway shares soared to another record high on Thursday

🛒 Amazon Prime Day drives U.S. online sales to record $14.2 billion

🗣️ Bill Gates on AI, Elon Musk, and 2050 climate goals

🍻 Bud Light keeps going flat, slipping to No. 3 in America

🌍 Major Outage Disrupts Global Businesses and Banks

A global technology outage on Friday caused widespread disruptions to airlines, banks, media outlets, and various businesses worldwide. The outage grounded flights, knocked banks offline, and disrupted operations at hospitals and public transit systems. Companies big and small, at home and abroad, were impacted. 

What to know: The outage's root cause was traced to a software update from cybersecurity firm CrowdStrike, which affected Microsoft Windows devices globally. 

• CrowdStrike's Falcon sensor, used to monitor security threats, caused crashes on Windows operating systems. CrowdStrike acknowledged the issue and deployed a fix, noting that it wasn’t a security incident or cyberattack.

Airport trouble: Major U.S. airlines, including American Airlines, Delta Airlines, and United Airlines, ordered ground stops due to communications issues. The airline disruptions led to thousands of flight cancellations and delays worldwide. In Europe, airports in Berlin, Amsterdam, Zurich, and Rome reported issues with check-in procedures.

Bank trouble: The outage's impact extended beyond air travel. Banks in multiple countries experienced service disruptions, affecting ATM and card payment systems. Charles Schwab, the financial broker, told customers not to “place trades twice, as duplicate trades may be created.”

Media & healthcare trouble: Media outlets, such as Britain's Sky News, faced broadcast interruptions. Healthcare systems in the U.S. and elsewhere, including Israel's hospitals and Britain's National Health Service, were also affected, leading to the use of handwritten prescriptions and patient records.

Government & transit trouble: Government services were not spared, with some 911 and non-emergency call centers in the United States experiencing problems. Public transportation systems, like New York City's subway, reported issues with information displays.

Why it matters:

The widespread outage highlights the fragility and interdependence of global digital technology.

Tech consolidation: It also demonstrates how a single update from one provider could majorly impact numerous companies and services across various sectors, underscoring the risks associated with technological consolidation.

• “This will happen and keep happening as long as everything is built around fragile supply chains where the same companies turn up time and time again,” noted a professor of law and technology at the University of Cambridge.

By lunchtime Friday, many services were being restored, but the full recovery is expected to take weeks.

Read more

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Quick Poll

On Wednesday, we asked: Which aspect of the likely Wiz acquisition do you find most interesting?

— About one-third of respondents find most interesting the company’s rapid growth in four years from zero to $500 million in annual recurring revenue.

— On the $23 billion valuation, a reader noted: “And the impact on Google Cloud business. They must be anticipating a huge positive given the price they will pay.”

— Another said, “That's an awfully rich value. Is this a sign of FOMO from the tech companies?”

See you next time!

That's it for today on We Study Markets!

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