Weekly Research Briefing: The Architecture of Autumn

Bondaleros. Yield on the 10 yr. Hasn’t done much in two weeks. Get that yield under 5.20% and it should change the chart. Also my mother asked about interest rates on my visit with her.

The Federal Reserve has a conundrum on its hands as it tries to tame elevated inflation. One of the primary drivers of today’s growth, and the price pressures that have followed in its wake, appears nearly immune to the higher interest rates that the central bank has begun to impose on the economy.

Companies’ seeking to expand their artificial intelligence abilities have been undeterred by not only U.S. borrowing costs that have recently reached multidecade highs, but also soaring costs for electricity, high bandwidth memory and other inputs that are crucial to continued growth.

The implications for the Fed are vast, if price pressures do not ease as many policymakers expect in the coming months. To return inflation to the Fed’s 2 percent target, the central bank might need to tighten the screws on the economy more than otherwise would be the case to sufficiently slow down activity. The brunt of that adjustment will fall predominantly on industries more sensitive to higher rates, such as housing and the automotive sector, and in turn the people employed by the companies in those fields. Depending on how much the Fed ends up needing to choke off demand, the labor market, which is already starting to cool, could start to crack…

A growing share of [the AI] investment is being paid for with borrowed money, which in theory should make it responsive to rising interest rates. So far, however, there is little sign that higher borrowing costs are doing much, if anything, to slow the boom.

“If it’s a real transformational technology that potentially is going to define the tech space for years to come; if you have the balance sheet capacity to borrow to make these investments; and if you think the investments are going to be profitable and generate double-digit returns on invested capital, then it doesn’t actually make a huge difference if you’re borrowing at 5.5 or 6 percent,” said Andrew Sheets, global head of fixed income research at Morgan Stanley. “That 50 basis points is not the limiting factor in whether or not the math works.”

While bonds have not been able to provide a hedge for equities, equities have been able to buffer higher rates owing to strong earnings growth. While equity/bond correlations remain high on a high-frequency basis, equities have been more resilient owing to underlying strong earnings backdrop – as a result global equities have been rangebound. Also, equity volatility has been relatively anchored due to high dispersion within equity indices – this also makes equity exposure via call options more attractive. As Exhibit 14 shows, historically equities performed well despite rising yields, as long as earnings growth was strong.

AI-related stocks (defined by the JPM basket) now make up 49% of the S&P 500.

Those same 41 companies account for about two-thirds of the S&P 500’s year-to-date market cap change.

Firmus began formally gauging investor demand for its IPO late September. At up to $5.5 billion, it was already a lot larger than expected, showing the company was looking to convince investors to pay up for results that had not yet materialized.

Prospective investors, though, saw a business that was still in its early stages, with a lot of execution risk: Of its 912 megawatt pipeline, just 46MW had been built. They were being asked to value the company on future earnings contingent on the data centers being successfully delivered.

Firmus pitched an enterprise value-to-earnings before interest and tax multiple, used by neocloud peers such as CoreWeave Inc. in the US. Even if at 13 times it was at a significant discount to CoreWeave, it was based on EBIT forecasts two years down the line. The US company has both a longer track record and revenue that’s several orders of magnitude greater than Firmus’.

“For many shipowners, the current market is generating revenues at levels rarely seen in the industry’s recent history,” said Dimitris Maniatis, founder and chief executive of maritime-risk company Marisks.

Ferrying oil directly from the Persian Gulf to global markets is also more expensive than ever, contributing to the appeal of shuttle runs. The cost of hiring an oil supertanker to sail from the Persian Gulf to China topped $1.2 million a day in late September. On the eve of the war, that cost was about $231,400 a day, according to maritime data provider Clarksons Research. In early January, it cost less than $40,000 a day.

The shuttle-run bonanza is trickling down to individual sailors. Those willing to perform the war-zone trips—many from India, the Philippines and China—are being lured with payouts worth two or three times their typical monthly salary. One Shandong-based ship-staffing company is even offering as much as $25,000 for a round trip as reward, according to seafarers and recruitment advertisements seen by The Wall Street Journal. For oilers and cadets, the $25,000 could represent more than a year of wages.

@SquawkCNBC: “Whether you're talking about diesel or crude oil as well as gasoline, all of these markets are getting more thinly stretched,” says Jeffrey Currie

@KevRGordon: The unemployment rate for those with less than a high school diploma has fallen back to its historical low of 4.3%

@TheTranscript_: $COST Costco CEO Ron Vachris: Younger members are becoming a materially larger part of the membership base. “Our member base under 40 has grown nearly 60% since COVID, increasing our total penetration of members under 40 to more than 1/4 of our total base....While these younger members start out spending a little less with us, over time, they grow into higher spending members.

Prediction markets are very well calibrated as measured by the relationship between the implied probability and the outcome. A closer look reveals that the win rate is slightly above average for high contract prices and slightly below for low prices. This is the “favourite-longshot bias,” which is underestimating the winning rate for high-probability bets and overestimating the winning rate for low-probability bets.

The high degree of calibration means that contract prices are a reliable source of information about the likelihood of future events in the aggregate. Prices in the stock market, on the other hand, do not offer such a clear signal. This makes sense. Prediction markets forecast a definitive outcome that is often revealed in relatively short order. Stocks generally lack a similar settlement, allowing narratives and herd thinking to emerge and persist.

For the same reason, price manipulation in a prediction market is difficult to sustain. Such attempts have a long history, including on political contracts in the 1800s. But economists who studied the phenomenon concluded “that the speculative attacks initially move prices, but these changes are quickly undone”.

Wine, which had flowed freely in the US from bachelorette party to book club to the woman at home in a T-shirt proclaiming “A Day Without Wine is . . . Just Kidding I Have No Idea”, has slowed to a trickle. In 2025, global wine consumption plunged to the lowest level since 1957. The French government and the EU have invested hundreds of millions of euros paying farmers to rip up vines, reducing Bordeaux’s wine acreage by about 25 per cent. In 2023, Australia had two years’ worth of wine sales sitting in storage, and MPs were pushing for a study into the feasibility of turning wine into the world’s most expensive biofuel. Last year, 7 per cent of all California grapevines were pulled out, and half a million tonnes of fruit were left unpicked, like a version of John Steinbeck’s The Grapes of Wrath where the capitalists suffer.

There’s a bunch of causes: a post-Covid-19 hangover, younger people preferring canned cocktails, GLP-1s, legalised marijuana, inflation, a collapse in sales to China, a drop of more than 75 per cent in Canadian demand for US wine after Trump’s tariffs, someone finally saying something about that “A Day Without Wine” T-shirt.

Napa Valley does not care about 99 per cent of those drinkers. More than anywhere in the world, Napa is the luxury destination for wine tourism. A tiny region, packed with gorgeous wineries, resort spas and Michelin-starred restaurants, it has become the Saint Moritz of detecting notes of blackberry compote, cocoa nib and toasted vanilla. Unlike Burgundy, where most people can’t visit the high-end wineries, Napa democratically invites everyone to leave their $1,000-a-night hotel to sample a $400 Cabernet Sauvignon for a $100 tasting fee.

The K-shaped economy may have thus far kept Napa floating above the forces that decimated the sub-$12 bottle market, which makes up about two-thirds of American wine sales. But if Napa gets wrecked too, we’ll know that the wine business isn’t at the bottom of a cycle. If Napa becomes another California town abandoned after a gold rush, then an economy based on wealth inequality and thousands of years of enthusiastic alcohol consumption might be over.