🎙️ No Time to YOLO

Mobile apps are a dime a dozen these days, catering to various niches. You may use some of the biggest daily without having heard of others.

Such is life in the digital economy. But TikTok stands head and shoulders above the rest in terms of downloads 📲

We find inspiration in seeing Duolingo — the language-learning app with the green owl, make the cut for most downloaded apps globally.

💭 Maybe there’s hope for the world after all. See our Chart of the Day below for more.

— Matthew & Shawn

Here’s today’s rundown:

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

• Why risk assets are back in style, baby

• Banks might be the biggest soft-landing beneficiary

• Hedge fund tycoon is the world’s greatest shipwreck hunter

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

😎 Risk Assets are Back in Style

In just two weeks, the Nasdaq 100 index of big-tech companies has erased three months’ worth of losses. And bitcoin is at its highest level since May 2022 as risky investments return to favor.

In Wall Street parlance, the vibes lately have shifted from “risk off” to “risk on.”

No time to YOLO: Still, we aren’t back to 2021’s frenzy yet, as downloads and Google searches for day traders’ favorite app, Robinhood, languish well below their peaks.

It’s a similar story at the crypto exchange Coinbase, with digital asset prices rising without a surge in interest from the masses.

• But, the prospect of the nearly two-year battle with inflation being almost over, meaning that the Fed may loosen the chokehold on financial markets imposed by higher interest rates, has investors feeling euphoric and more willing to speculate on riskier bets.

Why it matters:

Whether this risk-on sentiment can carry through the rest of this year will shape how markets behave in 2024.

• And while investors pile back into familiar bets, economic risks continue to simmer beneath the surface.

Revenge of the real economy: On Thursday, continuing applications for U.S. unemployment benefits rose to two-year highs, reflecting the challenge unemployed workers are increasingly having in finding new jobs.

• These recurring jobless claims jumped to nearly 1.9 million earlier this month, capping eight straight weeks of increases.
  

• Elsewhere, U.S. factory production fell off more than expected in October, driven by strike-related activity declines at major automakers.
  

• Homebuilders, one of the best gauges for where the economy is trending, reported the lowest sentiment of the year in November, as elevated mortgage rates continue to suppress housing demand.

In perspective: This isn’t to say a recession is incoming; we can always point to economic data that raises concerns.

• However, there’s been a stark contrast this week, as new data about the economy indicates weakening in important areas while markets churn higher, driven primarily by inflation data and shifting expectations for when the Fed will begin cutting rates.

Read more

TOGETHER WITH

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🏦 Banks may be the Biggest Soft Landing Beneficiaries

In the above article, we discussed a bounce amid tech and risky assets broadly, despite some economic vulnerabilities rearing their head.

Now, let’s consider that the economy stays intact for another year, hitting the perfect Goldilocks blend of not being too hot or cold — what should we expect in markets?

• In a Goldilocks scenario, a soft landing per se, the FT’s Robert Armstrong muses on whether it’s finally time to buy bank stocks.

Banks as economic proxies: Since banks’ deposits shift in line with changes in folks’ total savings, and they make their money through profitable loans to businesses & individuals, banks’ business models are more tightly correlated with the economy’s overall health than many others.

• Armstrong adds, “Bank stocks have been under pressure and look cheap” after several regional bank failures rippled across the industry earlier this year.
  

• More recently, investors have felt optimistic, bidding up stock prices for the 30 largest U.S. banks by an average of 6% on speculation the Fed is done hiking rates with “still no recession in sight.”

Pros and cons of rising rates: Banks can be a tricky sector to invest in. Intuitively, higher interest rates mean banks can lend at higher rates (good for business!).

• Still, higher-interest loans are harder to pay back, especially if the economy turns down, which historically means a spike in defaults (bad for business!), and higher lending rates also mean banks must pay more interest to depositors/savers (bad for business!).
  

• As Armstrong puts it, “The relationship between rates and the profitability and stability of banks isn’t simple.”

Why it matters:

Since banks collectively invested so much in U.S. Treasury bonds and other bonds when bond prices were at record highs in 2020 & 2021, investors have worried about the losses hidden in banks’ balance sheets as rates have risen, driving the value of existing bonds much lower.

• This, regional bank failures and the pandemic have caused bank stocks to underperform the broader stock market by “an epic margin over the past five years.”

Since banks collectively invested so much in U.S. Treasury bonds and other bonds when bond prices were at record highs in 2020 & 2021, investors have worried about the losses hidden in banks’ balance sheets as rates have risen, driving the value of existing bonds much lower.

• This, regional bank failures, and the pandemic have caused bank stocks to underperform the broader stock market by “an epic margin over the past five years.”

Consequently, bank stocks are “historically cheap” based on price-to-book value and price-to-earnings measures.

A few soft-landing tailwinds for banks:

Bond portfolios — The bond investments from banks that lost value due to rising rates could recapture much of those paper losses as the Fed begins cutting rates.

Deposit rates — As the Fed has hiked short-term interest rates this year, longer-term borrowing rates have risen more slowly.

• Because banks “borrow short” and “lend long,” meaning they pay depositors short-term interest rates and make loans, like mortgages, on multi-decade horizons, higher deposit costs have offset gains from higher-interest loans at many banks.
  

• A Fed pivot to cutting rates in 2024 would normalize things.

Credit risk — Most importantly, lower rates without a recession would mean less credit risk, or in other words, fewer defaults.

• To sum up, Armstrong argues, “The crucial thing for banks, then, isn’t rates peaking; it’s rates stabilizing without a recession…If there’s not a recession next year, bank stocks are too cheap.”

Read more

MORE HEADLINES

❌ The Pentagon fails financial audit for the 6th year in a row

📈 Walmart tops earnings estimates as e-commerce drives 5% sales jump

💼 Maryland has the lowest unemployment in American history at 1.6%

🤳 About a third of U.S. adults under 30 regularly get their news through TikTok

📱Apple plans to make it easier to text between iPhone and Android

☕️ Starbucks union plans largest-ever strike for Red Cup Day (today)

🤝 Senate passes a short-term government funding bill, averting government shutdown

🚢 Hedge Fund Tycoon Is the World’s Top Shipwreck Hunter

Right here on the ocean floor

Such wonderful things surround you

Under the sea

Under the sea

Who queued “Under the Sea,” from the 1989 film, The Little Mermaid?!

That song accurately describes one hedge fund executive who has battled governments over the possibility that he’ll one day find billions of dollars of gold (or other valuable items) on the ocean floor. 

Why? Well, there might be more treasure at the bottom of the world’s oceans — which cover 70% of Earth’s surface — than in all of our museums combined. 

• Anthony Clake, a 43-year-old hedge fund executive, kept his identity private until now: He’s financing a lengthy, costly search for deep-sea treasure. 

• “I don’t do it for a living,” Clake, who earned about $75 million from his hedge fund in 2018 alone, told Bloomberg. “I find it interesting to use technology to solve problems under the sea.”

Clake isn’t alone. Wall Street elite and other wealthy people are pouring millions of dollars into technology, mostly robots, that scour the ocean floor. 

• Before we all quit our jobs and start our treasure-seeking adventures, we must understand that nearly everyone scanning the ocean floor is getting poorer by the minute. The ocean is enormous; many parts are mountainous, deep, and dark. Few explorers find anything. 

• But adventure is core to the human spirit, and there have been about 3 million wrecks in human history. Someone’s bound to find at least a few jackpots, right?

Why it matters:

Advances in underwater technology and artificial intelligence could one day help explorers find gems, cultural treasures, rare minerals, oil, gas, and creatures unknown to scientists.

• Clake works for Marshall Wace, one of the world’s top hedge funds with $62 billion under management.
  

• He became rich after developing a portfolio system that reviewed stock recommendations from 1,000-plus analysts to generate trading ideas. So, he was always into tech and data, which he brought to shipwrecks. 

Not so fast: Governments stand in the way. At least 73 countries have tried to prevent commercial exploitation of shipwrecks. And academics believe nobody should be allowed to touch historic treasures like the Titanic.

• “You don’t go to the Louvre and stick your finger on the Mona Lisa,” said one marine biologist. 

• There’s also the question of what happens when you find a treasure with a legal owner? Though there are now companies specifically to recover and sell valuable cargo from shipwrecks, years of litigation have followed past shipwreck discoveries. 

Clake has succeeded, including discovering a Scottish-owned cargo ship with 50 tons of silver coins, which were melted down and sold for an undisclosed amount. 

One thing is certain: As technology improves, the battle for the ocean-floor marketplace will only intensify. 

Read more

QUICK POLL

Yesterday, we asked: How much credit card debt do you have?

—Most readers are debt-free. “I repay the money monthly so as not to incur charges” and “always pay when due” were common responses.

— One said, “Just typical items. Not paying any fees or late penalties.”

— Another wrote, “I think it's important to distinguish between long-term and short-term debt here. I always pay off my credit cards before interest is due, so while I do have debt, I'm not impacted by the rising rates.”

See you next time!

That's it for today on We Study Markets!

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