Why the bond market is spooking investors October 10, 2023 Sign Up | View Online IN THIS ISSUE 7 min read 👻 Spooky bonds 🔁 Stubborn inflation 🧠 Stupid money Who’s the ghoul that’s spooking the football stadium the global financial system? No, it’s not the janitor or the score-board operator but the bond market. Read more below. | Warner Bros. THE WEEK IN MARKETS It's been a harrowing week. Israel, as you likely know, was invaded over the weekend, and the news and images that have emerged in the aftermath have been troubling to say the least. Our thoughts are with the victims of the violence. Meanwhile, much less consequentially: the markets. Autumn has not been kind to investors so far. The major indexes have fallen 4%–6% since early September, and the TSX is now officially negative in 2023. The bond market bears much of the blame. We get into the mechanics below, but what happened is that many pro investors have decided to bet interest rates will stay higher for longer. That makes putting money in cash accounts more attractive than in stocks or bonds, which has driven down both markets (and hurt many investors, who tend to hold a mix of both). On the bright side: pro traders have been predicting a double-digit drop in stocks throughout much of the year, and so far they’ve been wrong. More soon. THE WEEK IN ONE NUMBER $15.7M The amount, in USD, Canadian entrepreneur/Shark Tank guy Kevin O’Leary was paid by Sam Bankman-Fried for 20 hours of work, 20 social posts, one virtual lunch, and 50 signed autographs to promote FTX. WHAT HAPPENED LAST WEEK IMPORTANT The bond market is spooking everyone, and it’s not even Halloween yet. As trader/writer Brent Donnelly put it in his consistently great newsletter, “The only thing people in markets care about right now is the rise in global yields.” That’s because bond yields rise when bond prices fall, and they’ve been falling a lot: Canadian and U.S. 10-year government bonds are both down about 4% over the past month, while longer-term U.S. bonds are down ~10% on the month (and ~40% since 2021). Why does all this matter? It’s complicated, but rising yields (a result of falling bond prices) raise borrowing costs for everyone, and FinTwit is worried that falling bond prices could also hurt, and potentially destabilize, some big banks. Corporate price gouging could create an inflation “feedback loop.” The evidence linking rising corporate profits to rising prices has become so convincing that last week even the Bank of Canada said frequent price hikes seem to explain, at least in part, why inflation remains stubbornly high. If suppliers and retailers don’t stop gouging customers, the BoC’s deputy governor warned, inflation will turn into a snake eating its own tail. We’re the tail. INTERESTING The CRTC pissed off some podcasters. Canada’s broadcasting regulator announced that big streaming and podcasting companies will need to register their names and contact info with the government, a move that sparked a lot of consternation online. By having platforms like Spotify register, the CRTC signalled that it might soon apply CanCon rules — i.e., requirements to broadcast Canadian content — to digital media. There are perhaps well-founded reasons for concern. But Elon Musk, Joe Rogan, et al., have suggested that the government plans to censor podcasts, without evidence to support that. The CRTC still needs to figure out what a podcast is anyway, so any new rule probably won’t take effect for a while. The SBF is getting fried, but crypto is still cooking. To the general public, the trial of disgraced FTX founder Sam Bankman-Fried, which began last week, might seem like a tidy epilogue to the frothy we’re-all-gonna-make-it era of crypto. But crypto is still quietly chugging along. The volume of money moving via stablecoin transactions — remember those? — is now on par with Visa. In fact, Visa and Mastercard are even getting in on stablecoins as a faster way to settle cross-border transactions. Did crypto quietly find a use case? —Sarah Rieger FROM OUR SPONSOR THE FOMO INDEX by Stacey Woods IMPORTANT 🪲 Paris stepping up efforts to battle infestation of bed bugs that so far seem immune to basic rudeness. Source 👶 StatCan finds that raising a kid to age 17 will cost you $350K. And they’re impossible to flip. Source ✈️ Analyst estimates airlines could save millions if passengers lost weight. There’s never been a better reason to get in shape. Source 🥣 Girl Dinner, meet Child Dinner: New Kellogg’s campaign urges you to “Take the Night Off” and just have cereal. Source CRASH & BURN TO THE MOON 🚚 Aurora highway closed after celery truck overturns. Ontario Police requesting everyone’s patience, Caesar mix. Source ⌚ Apple declares its $23K solid-gold watch obsolete and won’t help you melt it down into something better. Source 🍰 Report: A Cheesecake Factory is a good indicator of a mall’s success, not just your dad’s idea of swanky. Source ✒️ Paris crawling with bed bugs, X crawling with Paris: Paris Hilton signs deal to post exclusive content on X. Source WHO CARES WHAT’S UP THIS WEEK StatCan tells us how many new building permits were issued (Wednesday). Canada needs $1 trillion in investment to build enough homes to make housing affordable again. Maybe if September’s building-permit numbers come in strong, we’ll need only $999 billion? DON'T BE A TLDR HOG 🐷 Like TLDR? The first five million people to click this link can share it with a friend for free. (You can share it with enemies too but only if you’re ready for them to love you.) THE BIG IMPORTANT STORY #TOTHEMOON What’s the Legacy of the $GME Mania? We Asked the “Dumb Money” Writers to Weigh In In January 2021, the world discovered that stocks are memeable. What began as a Reddit-fuelled trend of buying GameStop shares ($GME) quickly snowballed into a cultural phenomenon, as individual traders — sometimes referred to as “dumb money” by Wall Streeters — piled in to screw over hedge funds that shorted, or bet against, the retail chain, convinced it was going to fail. $GME soared by something like 1,700%, costing one hedge fund nearly US$7 billion, before the stock crashed back down to earth. The movie Dumb Money, out now in wide release and starring Paul Dano, America Ferrera, and Seth Rogen, recounts the memestock mania, following both $GME to-the-mooners and the fund managers they short squeezed. TLDR’s Ben Mathis-Lilley spoke with the film’s co-writers, Rebecca Angelo and Lauren Schuker Blum, about how they turned the memestock saga into a funny, well-reviewed movie, and about what some pro investors get wrong about the “dumb money” crowd. What about the $GME frenzy made you think it needed to be a movie? Who’s the hero? Angelo: It’s about regular people. Lauren and I met when we were reporters for The Wall Street Journal, so we have experience telling stories about money. We knew that finance movies, like The Big Short or Wolf of Wall Street, are typically about geniuses or mavericks who are part of the industry. Our interest with $GME was piqued when we learned that what at first seemed like a curious footnote in stock-market history was actually a very human story about people who felt shut out of the financial industry. How did you balance telling an entertaining or inspiring story about these regular people with the reality that some of them lost a lot of money? Schuker Blum: We worried over this tremendously. GameStop has this complicated legacy where, yes, some retail [or non-pro] traders got rich, but a lot of people were left holding the bag. There’s a character in the movie who loses big, and it’s heartbreaking. At one point, there’s a chyron on-screen that says — and economists have studied this — that the more individual traders trade, the more they tend to lose, and it was important to mention that. What did Wall Street fail to understand about retail traders before $GME? Angelo: In talking to retail traders, we learned that many of them wanted to make money, sure, but they also thought there was a principle at stake. They didn’t think it was Wall Street’s place alone to dictate the value of a stock, a company, or even a human life. The $GME squeeze was a way for retail traders to send a message to Wall Street that it doesn’t hold all the power. On that note, characters in the movie talk about the system being rigged against the little guy. As proof, many of them point to Robinhood’s decision to halt trading on $GME, which, depending on who you’re talking to, was either done to maintain capital requirements or to help the hedge funds. Has anything changed post-$GME that was perhaps contributing to that rigged feeling? Angelo: We haven’t seen major changes yet, but there have been some moves to make hedge funds more transparent when it comes to their short-selling positions. Schuker Blum: Wall Street likes to say it’s back to business as usual. But the big guys are certainly paying more attention to the little guys than they did before. Hedge funds talk about shorting less openly now, and all the big firms monitor Reddit message boards. So the invisible players — the retail traders — are more visible now. Did either of you ever own GameStop? Angelo: Still holding! Both of us. We’re proving, as the film shows, that retail traders often lose! Schuker Blum: It’s definitely below what we got it for. But we’re holding. This interview was edited for length and clarity. OTHER VERY GOOD READS 🐟 What will it take to make traditional foods thrive again? How First Nations are bringing ancestral foods back from the brink | The Narwhal ☕ Why Your $7 Latte Is $7 Your expensive coffee habit is about to cost even more | Vox 🤑 TFSA vs. RRSP vs. FHSA? Figure out which tax-sheltered account is best for you | Wealthsimple Magazine B-I-N-G-O As we reported last week, there’s almost no telling what this quarter holds for markets. So, instead of stressing about it, we decided to play bingo. THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Ben Mathis-Lilley (writer), Devin Gordon (writer), Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Nikki Holmes (copy editor), Sara Black McCulloch (fact checker), Mohini Tailor (senior LifeCycle specialist), Jared Sullivan (senior editor), Peter Martin (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Correction: Last week, we mistakenly reported that the Bank of Canada didn’t raise interest rates in the third quarter of this year. It did — twice, in fact. We regret the error. Wealthsimple Media Inc. 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. 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