Short Takes for a Long Weekend

A Tentative Green Light

The ‘most important event this week’ was the earnings report from AI leader, NVIDIA (NVDA) on Wednesday afternoon. The good news is that earnings exceeded expectations once again, the company announced a 10-for-1 split and the stock hit a new high in excess of $1,000.

Despite some intermittent broadening of the stock market, with financials and utilities outperforming at times, the mega-cap technology stocks (i.e., the Magnificent 7) have continued to lead the way. The chart below shows the year-to-date performance of the Magnificent 7 ETF is twice that of the S&P 500 ETF. For a few hours, the NVIDIA news appeared to have given the market a green light to move higher and the setup appeared more attractive than usual.

By Thursday afternoon, the ‘most important event of the week’ had already lost its title. The reason was that S&P Global announced the flash PMI (Purchasing Mangers Index) data for May, which showed the economy picking up steam, not slowing down. In a market expecting lower interest rates, this was not welcome news. To make matters worse, the inflation data released as part of the PMI, showed input prices continuing an upward trend. A stronger economy would be likely to delay any rate cuts by the Federal Reserve, but again, this is just one data point, and frankly the economy is not clearly trending in any direction at the moment.

Initially, markets were not amused. The bond market reacted first, sending the 10 year Treasury yield back up to almost 4.5%. That move higher is far from a disaster, but rates rose materially at a time when the market were convinced that rates were coming down. Stocks followed the bond market down in the afternoon.

It had all the characteristics of a typical ‘sell the news’ moment, but on Friday, stocks rallied again, led by the mega cap tech stocks. The green light blinked back on and it appears the market simply wants to go higher. Let’s see what next week brings.

Talking Heads

There are countless talking heads on financial TV, but very few have the gravitas of David Malpass. Malpass was chief economist at Bear Stearns, has served several administrations in the Treasury Department and topped all that off as President of the World Bank from 2019 to 2023. He has a breadth of perspective that few can match and we think that makes him one of the talking heads deserving of our time. Having left the World Bank, his interviews today are of particular interest because his retirement frees him to speak his mind more forcefully.

Below, we have attempted to transcribe a portion of an interview on Bloomberg Surveillance regarding the national debt, from Wednesday of this past week. For those that prefer to see/hear the interview, it can be found at at this link, which contains the entire 3 hour show. The 8-minute Malpass interview begins at about 51 minutes.

Paul Sweeney (53:30): David, bringing it back to the US, my entire career we’ve been talking about annual deficits and the national debt and now we even have Jamie Dimon, David Solomon of Goldman Sachs talking about the national debt. We’ve even got that silly thing downtown where they tally up the national debt on a daily basis for everybody to see. Is it time to care about that stuff? Like, I’m 60, do I care?

David Malpass: I think absolutely it is time to care. It was one thing when the US economy had a 50% debt to GDP ratio. You could borrow that and not really tax the world’s capital or take all of the world’s capital. We’re the biggest economy and we’re borrowing so much that it changes capital flows around the world and I think it’s doing it in a harmful way. The government gets the first dibs on all capital and then if there’s any left over, big corporations get it through the bond market, and if there’s any leftover, which there isn’t really, small businesses can borrow to fund their inventory, their working capital and countries outside the US have a little bit of capital at the end of the line. That’s not a workable system for the world so I think there has to be both in the US and in the world an urgency that the US government stop growing its spending.

Paul Sweeney: I guess it’s a political issue and again in my lifetime I’ve never seen the political will to address it because it doesn’t sound very popular.

David Malpass: That’s right and I think there’s a big gap in our law. You know the debt limit law is misnamed it’s really the debt increase law so every couple of years Presidents of both parties sign a law to increase the debt limit. We have to replace it with something workable, strong, and it has to hurt Washington, not hurt the people of the country when we have too much debt. They shut the national parks rather than reduce the staff hiring in DC. The swamp gets bigger every time.

Tom Keene: Listen to you. You worked in the swamp. What did you learn working in the swamp?

David Malpass: So Washington is a swamp. All the parts work together to make Washington bigger and more profitable. That’s a risk and the World Bank is part of that. It’s headquartered and centered in Washington. One thing I learned, Tom, was how hard it is to get any other country to do the right thing, It’s just as hard outside the US as in the US. So, if you think of Nigeria, why is this oil rich country so poor? They’ve got a huge, extreme poverty rate. Why is that? The government takes all the profits from oil and wastes it.

Tom Keene: I have to get back to what Paul talked about, the debt and the deficit. Pete Peterson, Paul Tsongas, and many others led the charge on this and you’ve provided real intellectual leadership on this and yet we always grew our way out of the problem. Stiglitz (Nobel prize winner in Economics) has a ‘little g’, which is the growth rate. Are we now at the point where the ‘little g’ won’t get it done?

David Malpass: Yes, and I don’t accept that we always grew our way out of the problem. If you think about what was happening in 2010-11-12 and 13, the Fed was doing massive QE (quantitative easing, or buying bonds in the open market to drive down interest rates), you had this tailwind from yields going down and so it was pumping up big cap stocks, the stock market. But the actual median income growth rate wasn’t good, wasn’t enough. I think we crossed over the barrier or the harmful point, early in that decade and then we haven’t looked back. The government spending growth just keeps accelerating, not slowing down. It’s the governments fault, they keep buying bonds…

Tom Keene: It’s our fault, we make the government…

David Malpass: OK, but there’s not a check and balance on the size of government and we need one. We need to think that politicians are never going to voluntarily choose to limit the size of government. They’re going be part of the swamp that makes it bigger.

Have a great week!

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By: Adam