Welcome to another Inside Solution One blog post. On today’s agenda: strong demand for Japanese bonds (I’ll tell you in a moment just how strong), demand for US bonds, weaker results from OpenAI, suspicious gains at Renault – even though the whole sector keeps falling – and Elon Musk entering the mobile carrier game. I really, really like that last piece of news and I want to share it with you.
The Japanese bond market and the yen
At the latest auction of Japanese bonds – the ones I’ve been bashing so much lately – demand exceeded supply 3.9 times, compared with a 12-month average of 3.56 times. In my view this is no great news at all. It simply shows how bad sentiment had become – and we’re talking about 30-year bonds, so with yields above 4% it’s no surprise that someone found that level attractive. One-off data points like this don’t reverse trends. Quite the opposite: it’s an opportunity to jump in. On the 10-year, yields have dropped to 3% per annum – and I think that’s precisely the opportunity for the Japanese carousel to keep turning.
And what is this carousel all about? Normally, rising bond yields mean a falling stock market and a stronger currency – and all of that holds. Except that the biggest reshuffles happen on the pullbacks. We have a retreat in yields: 10-years down to 3%, 30-years down to four and a bit – and what does the Nikkei do? It reports in at almost an all-time high, 74,000. That’s how it works: a pullback to levels that were unimaginable a year or two ago, and the stock market is already in euphoria because bonds have stopped getting cheaper. The bond “cheque” races towards zero, the Nikkei goes up, the yen goes down.
An interesting observation on the yen: it has, admittedly, been fairly strong recently – but this large drop in yields translated into its weakening. That means the earlier strengthening was, after all, linked to rising yields. At the same time, such strong demand for bonds may largely stem from the fact that investors don’t really believe the central bank will keep raising rates – in my view it will be forced to – and they assume it will simply let the yen weaken. Everything fits into one puzzle: the yen has started to weaken again.
Either way: I absolutely don’t believe in Japanese bonds. I think yields will keep going up, the yen will keep sliding, and the central bank is unable to stop this avalanche. I keep repeating the same thing – and you can see it best on the dollar–yen. The dollar has been very strong recently, but investors are clearly afraid to approach 160 once again, because two central banks have already announced they will defend that level – as you know, the Americans came to the Japanese’s aid. It’s getting very interesting.
The US bond market and the dollar
In the States, demand at the 30-year auction was also considerable: 2.5 times against an average of 2.4. No wonder – the yield is higher than on the 10-year, and the dollar is in a much more stable position than the yen. It is, after all, the world’s settlement currency: commodities and contracts are settled in it, so it would be hard for the dollar to go bankrupt – it’s much, much easier for the yen. Add to that a dollar that has been strengthening recently and high yields – what more could you want in order to buy US bonds?
The thing is, with US bonds you also get central bank interventions that push yields down. So it doesn’t change the long-term message. Although frankly: I’m not sure there’s any point dealing in US bonds when we have Japanese ones at hand – in my view the risk-reward on shorts is far more favourable on the Japanese ones.
A strong dollar, and the stock market couldn’t care less. Why? Because bond valuations are depressed relative to market equilibrium – we keep getting interventions and I think they will continue. And capital that is looking for cheaper bonds (i.e. higher yields) and doesn’t get them, because the central bank is distorting the market, goes elsewhere: previously a little into crypto, now into equities. Hence rising indices despite high interest rates. As I often repeat: what matters is not the level of rates, but the level of rates relative to inflation – or, as I’ve been saying lately, relative to the equilibrium level set by the clash of supply and demand at a given cost of money. It’s a first-year university mechanism: if someone is willing to buy 10-years at a 5.4% yield, and the central bank jumps in ahead of them, snaps up the bonds from under their nose and 5.2% is left – that someone is left holding cash, doesn’t want bonds at 5.2% and looks for an outlet in other assets. For example in US equities. Or maybe they’ll buy a bit of crypto too.
OpenAI’s results and the AI sector
OpenAI’s weaker results dragged down, among others, Nvidia – 231 dollars. The point is that annualised revenue came down to 50 billion dollars, while around 70 billion had been expected. Except that those 70 billion were calculated on the basis of forecasts modelled on Anthropic, which books revenue differently. OpenAI reports it in a much fairer way: if part of the value sold is the cost of services or computing power delivered by other companies, it only shows its own surplus value in revenue. Otherwise you can go round in circles – selling services to one another and artificially inflating revenue, which these companies have in fact been accused of. OpenAI doesn’t do that, so some say the market reaction is simply overdone. OpenAI isn’t listed, so other companies take the ricochet – like Nvidia, because perhaps things aren’t quite as good as the market expected.
I think things will be fine anyway. You know my approach to AI: progress is exponential, and AI prices are still too low. The usefulness relative to price is so high that we at the company would probably be willing to pay several times more for such subscriptions. I wouldn’t worry about costs – there’s always the option of raising prices on the horizon. So every dip in AI, especially given the stage of the Kitchin cycle we’re in – the last phase of the bull market – is more likely a moment just before some crazy, highly volatile rally that will ultimately end this bull market. But that frenzied period, when the last ones will be turning off the lights and piling in, hasn’t happened yet in my view. I suspect the final stage will come when central banks treat us to far more massive bond-market steering – to prevent a global debt implosion – and debasement of money on an even greater scale. Then some crazy last gasp of the bull market. Or perhaps the complete ruin of paper money altogether.
The automotive sector and the Renault situation
Speaking of dark visions: automotive companies. As you may remember, I’m one of the biggest haters of this sector – since January last year I’ve been in the camp warning that automotive would collapse. Largely thanks to my friend Grzegorz, who runs the company kangur.pl – you probably recognise those rental cars with the kangaroo logo, they drive all over Poland and practically all over Europe. He was the first to draw my attention to it.
And here’s a digression: the best analyst isn’t the one sitting in a brokerage house going through papers, but the guy who runs a business, deals with counterparties and sees invoices. Sometimes even a shop assistant at Żabka may know more about Żabka’s prospects than the analysts at brokerage houses – well, maybe not every one of them, but some are more switched on. Someone who is close to the business always knows it best. That’s why I really like listening to information from the very bottom.
And indeed: automotive went down the drain. Stellantis has fallen 50% since May, BMW from 80 to 50 euros, Volkswagen from 90 downwards – and if you widen the time frames, since that January it’s been a real waterfall. But Renault caught my attention: everything is falling, and Renault is rising. And Grzegorz says that in Renault’s case it actually makes sense – I’m not sure I can reveal everything he told me, but I would keep an eye on this company.
It reminds me of “Reminiscences of a Stock Operator” – if you haven’t read it, I recommend it. Jesse Livermore reportedly had the habit that even with inside or first-hand information, he always watched how the market behaved. If the price didn’t move in line with the rumours – it meant something was wrong, that it was fake. But if the price confirmed the suspicions of people on the ground, working at the companies and on the projects – that was confirmation for him that he was doing the right thing. And there’s something going on with Renault. Why is it the only one in the sector going up? Interesting.
SpaceX enters the telecoms market
Finally, a topic that fascinates me as a former entrepreneur from the ISP industry – I once had a company (which I later sold) providing internet via fibre and wirelessly, on the 5 and 10 GHz bands, with radio links and even a data centre. So I know this business a little.
SpaceX announced that it has bought 800 MHz spectrum in the States. That’s the old frequency from before the 5G era – in Poland and Europe used, I believe, for LTE. It has a longer wavelength, so slightly lower quality, but in return less signal attenuation and greater range. And the goal is to deliver the signal from the satellites SpaceX is launching into space – and wipe out the competition in the form of mobile carriers. An incredible play, simply fascinating. The only thing that puzzles me is that the market didn’t realise earlier that this would be possible any moment now.
Look at the reactions: Verizon down almost 7% after hours, AT&T similarly sharply lower – so they’re scared. SpaceX can stir things up without much risk, although I think the company itself was somewhat overvalued.
Thank you for your attention and see you next week. Take care!
