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IN THE NEWS

😁 Has the Market Hit Peak Exuberance?

There are “no longer any bears left.” That’s from Goldman Sachs managing director Scott Rubner, commenting on how enthusiasm around expected Fed rate cuts has driven markets higher in recent weeks.

Yet, this is probably a decent indicator to, in fact, be bearish.

Why? Well, markets are priced on the margin. A stock’s price isn’t the average from a week’s worth of trades. No, it’s just the most recent price accepted by both a buyer and seller.

• So, when everyone is bullish on stocks and has already helped bid prices higher, there are fewer and fewer people on the margins who can step in to keep the rally going.
• In other words, whenever bullish sentiment peaks, it can only go down. And the same is true in the other direction when the crowd becomes overwhelmingly pessimistic.
• Hence, the expression that stocks can ‘climb a wall of worry,’ where the outlook for stocks has become so negative that even the slightest positive news can drive prices higher.

Why it matters:

Looking at today’s market, there’s plenty of evidence that investors are feeling good, maybe too good.

Robert Armstong of the FT outlines a few points:

• The American Association of Individual Investors’ recent survey found that on a four-week average, the ratio of folks feeling bullish to bearish was near the top of historical norms.
• The number of stocks trading above their 300-day average in the S&P 500 has busted through its long-term average.
• Cyclical sectors like banks and industrials are performing well, indicating optimism about the economy.
• Speculative bets like Cathie Wood’s Ark Innovation ETF, Robinhood, and bitcoin have all zoomed higher.

Still, euphoria is probably nowhere near the levels reached in 2021, especially considering that most of this optimistic “risk-on” sentiment emerged in just the last five weeks.

• As Armstrong puts it, “This hasn’t gone on long enough to convince us that we’re seeing irrational exuberance and all the dangers that come with it.”

📱 Behind the Booming Creator Economy

The creator economy isn’t just popular teenagers making six figures on TikTok and Instagram. It’s a marketplace powered by millions of people of all ages who build and monetize their followings, whether it’s via YouTube, podcasts, or a mix of social media platforms.

• By 2027, the sector is expected to reach about $480 billion, per Goldman Sachs.
• “The audience has the power, the creators have the medium and the brands have the means,” Vivian Tu, a financial educator with millions of followers, told The New York Times.

Turning followers into fortunes: There’s virtually limitless content online: Buy this, try that, do this exercise routine, etc.

• Many creators make their money off advertising and partnerships with brands they promote to their big followings. The highest earners on TikTok make tens of millions of dollars per year. YouTuber MrBeast reportedly earns over $80 million per year.
• The median earnings is much, much lower. Many creators barely make $10,000, and only about 4% earn $100,000. But many make real earnings (enough to live on) that complement or replace their full-time jobs.

Not just social media: It’s not just TikTok and Instagram. Many creators wield enormous power, some more than companies. And they “can actually hold brands accountable for the first time in history,” noted one fashion executive.

• A marketing VP added: “The creator economy is anyone making content and making money off of it. It could be someone at home doing Spanish lessons on a subscription platform. It could be doctors selling advice…It’s much larger than influencers on Instagram.”

Why it matters:

The rise of the internet has enabled new career paths and opportunities away from the traditional route: Get a degree, work your way up the corporate ladder, then retire.

• The increase in digital media consumption and the ease with which one can launch a YouTube channel or podcast (in minutes) has lowered the barriers to content creation (whether there’s too much content is a story for another day).
• Most creators earn income through direct brand deals, via a share of advertising revenues from the host platform (Meta, TikTok, etc.), or through subscriptions.

As one influencer marketing agency CEO put it: “This trend is accelerating rapidly.”

Learn more (video)

💬 Is the Treasury Market Broken?

Debt-ceiling brinkmanship, ballooning deficits, and rising interest rates to combat inflation — just a few reasons the U.S. Treasury market looks as vulnerable as ever to turmoil. The “risk-free” bedrock of global finance, bonds issued by the U.S. government, looks shaky.

From a “flash crash” in 2014 to a 2019 spike in rates in the “repo” market — what some refer to as the plumbing of the financial system, to Covid-induced bond market mayhem in early 2020 to a cyber attack last month that disrupted Treasury trading, things have felt anything but “risk-free” in recent memory.

Defining risk-free: Of course, when investors refer to Treasuries as risk-free, they don’t mean you can’t lose money trading Treasury bonds.

• They mean the U.S. government is good for the money and can repay its debts.
• Unlike when you or I take out debt, the U.S. government has a “money printer” at its disposal since it controls the creation of dollars (not completely since the Federal Reserve is supposed to be independent, but the point remains.)
• It’s still important to maintain fiscal discipline, though. But if push truly comes to shove, the U.S. government should always be able to pay back debts denominated in its own currency, at least in theory.

Why it matters:

Trust game: That said, if faith is lost in the U.S. to govern its finances responsibly, investors aren’t obligated to help fund its deficits, especially if they worry that Treasury bonds won’t properly compensate them for inflation.

• So, with everything in finance, the Treasury market functions based on implicit trust — trust that by buying a Treasury bond, the principal will be repaid fully, trust that the Federal Reserve will keep inflation in check, and so on.
• To some extent, volatility in the Treasury market reflects breaches in that trust. Debt-ceiling uncertainty is an obvious example, but the unanticipated spike in inflation that forced interest rates higher represents another ding to investor confidence.

What can be done? In response to Treasury market dysfunction, America’s main financial regulator, the Securities and Exchange Commission, outlined major reforms in late 2022.

One idea is “central clearing,” which would force Treasury market trading through a central counterparty, making “market positions more transparent” and would “eliminate bilateral counterparty risk,” according to The Economist.

• The SEC has also called out hedge funds, something we wrote about recently. And the Treasury hopes to ramp up data collection for monitoring markets.
• It’s also considering bond buybacks, where it might, say, buy back older bonds like ten-year Treasury bonds issued two years ago, replacing them with fresh ten-year bonds more appealing to investors.

Read more (The Economist)

QUICK POLL

Do you think bullish optimism about stocks is peaking?

Yesterday, we asked: Do you invest in, or would you be interested in investing in, Indian stocks?

— If you can’t pick a few winners, why not pick them all? Said a reader, “I believe India’s economy will boom in the next 10 years, especially in technology. I can’t pick a specific company, so I use an ETF. ”

— One reader wisely highlighted the foreign exchange risks: “I have invested in the Indian stock market only to lose money on exchange rates, even if the stocks in India rise in local currency, it’s been a losing proposition when converted back to USD.”

— Another outlined their rationale for investing: “The gap between potential in workforce (both for production and innovation) and actual productivity seems to present a massive upside. Other, more established countries have much less of a gap, meaning there’s less untapped potential and less upside.”

See you next time!

That’s it for today on We Study Markets!

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