{"text":[[{"start":5.76,"text":"The writer is a macro and credit strategist and founder of Satori Insights."}],[{"start":10.24,"text":"The two most striking moves in markets this year are the extent of the rise in bond yields and the strength and breadth of the equity rally. The biggest puzzle is why the first has not destabilised the second."}],[{"start":22.44,"text":"Bulls attribute both to the same thing: the remarkable surge in corporate profits. Higher yields, on this reading, are just a reflection of higher expectations for long-run growth on the back of the AI investment boom. If earnings can remain above historical norms, equities are therefore inexpensive. The more optimistic go further still, expecting the growth to reduce future government deficits."}],[{"start":45.86,"text":"This narrative has genuine merit, insofar as the bond move has come in real yields, and not inflation expectations priced into markets. But it fails three tests. It does not account for the strain already visible in the pockets of credit that are funding the AI boom. It does not explain why there has been a revival at the same time in “debasement” trades, which bet on assets expected to benefit from a weakening dollar. And by overlooking how the spending has been paid for, it grants permanence to an arrangement that is anything but."}],[{"start":75.76,"text":"Real yields, and their slower-moving cousin the natural rate of interest, do loosely follow growth. But it would be more accurate to say they are driven by the private sector’s desire to borrow — and on that front the changes over the past three years have been enormous."}],[{"start":90.76,"text":"There are three ways to pay for a data centre. You can spend your own cash. You can lend your credibility so that someone else can borrow. Or you can borrow yourself. This boom has done all three, in that order — and the order and the magnitude go a long way to explaining the price action in markets."}],[{"start":107.68,"text":"Being able to finance an investment boom through your own balance sheet — say, $200bn of spare cash that the four biggest spenders of Microsoft, Alphabet, Amazon and Meta had accumulated by 2020 plus the $650bn a year they now generate from operations — has two enormous advantages."}],[{"start":126.6,"text":"First, your capex decisions can be made relatively independently of the market cost of capital. But in addition, the economy is able to enjoy all the benefits of that spending without any of the upward pressure on interest rates that would normally have resulted from the same spending financed through credit."}],[{"start":142.78,"text":"With the boom translating directly into revenue growth for suppliers, and indirectly into wealth gains for the rest of the economy, investors’ natural tendency is to extrapolate. I estimate hyperscaler free cash flow may now have fallen to zero, but with both profitability and balance sheets still strong, the shift from cash- to credit-based financing to equity investors seems like a footnote. Even now, despite individual bumper bond deals, the scale of tech issuance remains dwarfed by that of government borrowing — leading some to conclude that it is unimportant for interest rates."}],[{"start":178.1,"text":"But what matters is not just the scale, but the price sensitivity. Normally corporate issuance falls away as yields rise, but tech issuance has been doing the opposite. Borrowing on this scale, which is indifferent to the cost it pays, drives up yields for everyone else — homeowners and even governments — and is likely to continue doing so for as long as the equity market keeps validating it."}],[{"start":201.72,"text":"What will eventually stop it is a turn in the current optimism about AI returns: either through concerns about overcapacity and margins, or because of the broader fallout from the rise in yields."}],[{"start":212.92,"text":"Until then, the debate is likely to continue. But inferring that rising yields reflect a stronger economy that will in due course pay for the deficit is to get the causation backwards. Deficits are aggravated by higher interest rates — even when the rate rises stem as much from the private sector’s price-insensitive borrowing as from the governments’ profligacy. This cannot be fixed by buying back the long end and funding even shorter."}],[{"start":236.64,"text":"A rise in real yields of this size has, in the past few cycles, consistently pulled money back out of risk and ended the cycle. This time it has not — at least yet. That is a sign not of a permanently higher plateau in profits, but of the extraordinary way that, until recently, the boom was being paid for."}],[{"start":254.6,"text":"Every bubble is explained twice. In the build-up, the emphasis is on what investors have been buying. Only afterwards do people come to recognise that the more important point is how it was all being financed."}],[{"start":269.6,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1788315490_8331.mp3"}