How Will Tech Be Regulated?

In this issue of the Peel:

• Since at least July 2022, the treasury yield curve remains inverted as the 2-year yield has held above the 10-year yield, showing signs of a recession.
• McDonald's and SoFi Technologies had a ripe day, whereas ON Semiconductor and Tesla suffered a share price decline.
• Yesterday, the Joe Biden Administration released new guidelines in the form of an Executive Order to begin federally regulating this new wave of artificial intelligence.

Market Snapshot

Happy Tuesday, apes.

And most importantly, Happy Halloween. We got a whole lot of treats for you despite the macro environment’s constant tricks on us, but there’s no need to be spooked unless you’re a Lions fan after last night’s game, of course.

Equity markets sure weren’t spooked on Halloween Eve, to say the least. Every one of the 11 S&P sectors was up on the day, with communications leading by a wide margin thanks to the likes of Amazon, Alphabet, and Meta. Gains were broad across market caps as well, with all 4 of the major U.S. indexes rising on the day and reminding us of how much fun it was 2-years ago when this happened every day. Maybe we mix in a pandemic or two to save us from the “looming recession”?

Yields followed a similar path, rising for more of the day with a whole lot more on those down below. But today is also the BTC Whitepaper’s 15th birthday, so HBD to BTC, which is trading right around $34.5k after gaining ~28% so far this Uptober. ETH is posted around $1,810, as you may expect, following right in the big dawg’s tracks.

Let’s get into it.

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Banana Bits

• Everybody’s been worried about government borrowing, deficits, and all that jazz, but we have good news—you were right. It’s bad.
• Scum Bag-Fraud testified in front of his trial jury despite the fact that the judge gagged him from saying anything he actually wanted to (thank god).
• A “rogue researcher” at elite hedge fund Two Sigma is coming under fire and SEC scrutiny for making $450mn yet losing $170mn in the process.
• Elections in India are potentially shifting global food exports to near-crisis levels once again and causing the FT to miss a great pun in their headline.

Macro Monkey Says

The Introverted Inversion

We know a few things about anybody with two thumbs and a WSJ subscription.

One, they can (ostensibly) read. Two, they probably pronounce finance as “fih-nahnce” to make sure you know they’re better than you, and three, they’ve been slapped in the face daily with news about sky-high treasury yields for way too long.

Unfortunately for them, here comes another slap.

All of 2023, we’ve been watching yields on U.S. treasuries spike to levels higher than your college roommates after smoking a fat one, most notably seeing 10-year yields reach levels not seen since the pre-GFC days.

We also know that this process began nearly a year prior to every media organization freaking out about not only the levels reached but the speed and presumed forward direction as well. Thanks again for those rate hikes, JPow.

"... we’ve been watching yields on U.S. treasuries spike ..."

Within that sphere of rate hikes, treasury yields, and all the nonsense that comes with it, one prevailing statistic that was at first at the forefront of investors' minds and has since seemingly moved to the back (but still there) is the ongoing inversion of the 2-year and 10-year treasury yields.

Quick explainer: Yields on bonds should get higher as their maturities get longer. There are a lot of reasons for this, but the basic idea is that the more time it takes for you to get your money back, the more risk you’re taking, and therefore, the more you should be paid for that risk. So, when longer-dated yields from the same issuer (the U.S. government) fall below that of shorter notes, this indicates high uncertainty in the short term, particularly through the lens of higher inflation and recession odds.

Source

Since at least July 2022, the 2-year yield has held above the 10-year yield. This is what economists call the yield curve inversion and, as you probably know, has been one of the most consistent predictors of recession in the U.S. throughout history, up there with the likes of the Men’s Underwear or Hot Waitress indexes.

But as of now (and forgive me if I jinx us all), we haven’t fallen into that recession yet, at least according to NBER, the official doctor of recession diagnoses. Generally, the yield curve’s inversion is interpreted as a sign of recession within ~18 months from the time it begins.

"... we haven’t fallen into that recession yet ..."

July 2022 was 15 months ago (as of tomorrow), and the inversion is gradually becoming less and less extreme… but that might not be a good thing.

Most of the time, yield curves un-invert (or is it just “vert?”) when the Fed is cutting rates to support a slowing economy, as this causes shorter-dated yields to plummet. But this time, the un-inversion is coming from the opposite side—rising long-term rates.

And while that’s great for lenders, depositors, etc., it’s mostly terrible for everyone else. Further, we don’t really have a clue as to why long-dated yields are ripping like GameStop and AMC. The most prominent current theories include:

• The “Higher for longer” narrative may have caused expectations for rates to go higher, leading to the selling of bonds so that investors can take advantage of higher rates, while that selling itself gradually increases yields anyway.
• An oversupply of U.S. debt in the form of Treasuries, as the Federal gov’t is increasing issuance to meet budget demand while its credit rating falls, likely suggesting there may be too much supply and/or too little demand.
• Inflation sticks with the U.S., pushing up bond yields as Treasury yield levels are mostly a function of inflation and growth expectations, current Fed rates, and the bond’s respective term premium.

And while each of those sounds like a reasonable explanation, the broader economy isn’t gonna be happy if any of them turn out to be true.

Moreover, the 10-year yield is the base rate for the U.S. and much of the global economy. Lenders of things like mortgages, credit cards, and more use this yield as their starting point, so homebuyers can take up their frustrations with JPow and his bff JYell, aka Treasury Secretary Janet Yellen.

Again, we don’t have any answers for you. Hopefully, this helps us to start asking the right questions, but as long as this inversion stays introverted and doesn’t do too much, we might make it out of this alive. In the meantime, we might as well load up on some CDs and sh*t while yields are 5.5%.

What's Ripe

McDonald’s (MCD) ↑ 1.72% ↑

• McDanks often likes to point out and/or brag about their “billions and billions served,” but lately, with these deals on the company’s mobile app, we (and especially me) have been the ones serving them. Take that, capitalist pigs!
• Anyway, it doesn’t seem like my fleecing McDanks for free McChickens is hurting them at all. The company behind the best architecture in America—the Golden Arches—reported a nice $6.69bn in sales for the quarter vs the $6.58bn expected, representing a huge 14% growth.
• Same-store sales grew 8.8% globally while earnings of $3.19/sh beat the $3.00 expected. Basically, everything came out better than expected, largely thanks to recent price hikes like this should-be-nuked franchise in Connecticut charging $18 for a damn Big Mac. Wait—maybe that’s why they’re letting me fleece them so badly??

SoFi Technologies (SOFI) ↑ 1.02% ↑

• I know, I know, crazy to have to sub-2% moves in What’s Ripe today—it’s lame, but don’t blame me. Blame Mr. Market for not being able to make up his damn mind.
• In premarket trading, shares in the digital bank SoFi surged upwards of 15% in response to earnings. But, when 9:30 am ET came around, they were slammed down to a ~2.5% loss. Then, needless to say, they finished the day with a pipsqueak little gain. Investing is fun!
• And based on this revenue beat, the gain seems to have been the move. SoFi crushed sales expectations thanks to a higher rate of student loan originations last quarter (now that we actually have to pay those back), leading to revenue of $531mn vs expectations for $512mn.
• The really exciting part, however, was CEO Anthony Noto claiming that the firm is on track to achieve its first-ever non-adjusted quarterly profit. Moreover, revenue and EBITDA (aka BS earnings) expectations were boosted as well, causing meaningful gains in everything except the company’s share price.

What's Rotten

ON Semiconductor (ON) ↓ 21.77% ↓

• It’s definitely on between shareholders and ON Semiconductor after this earnings report. We don’t have any reports of fists flying just yet, but with returns like this, it’s gotta be only a matter of time.
• The Scottsdale, AZ-based chipmaker reported earnings to kickstart this glorious week, and needless to say, investors weren’t impressed. If we want to talk about “unrealistic expectations” in society, this might be the perfect example, as ON’s income of $1.39/sh on $2.2bn did beat the $1.34/sh on $2.1bn in sales, but Wall Street threw up anyway.
• That said, investors do tend to like to see growth in their companies (or, at least not contraction), so given that during the year-ago quarter, ON pulled in $1.45/sh on $2.2bn, traders might have the right to throw hands.
• Plus, guidance was not-so-hot as well, with the range’s higher-end pegged at $1.27/sh while the FactSet Street consensus had their sights set on $1.36/sh.

Tesla (TSLA) ↓ 4.79% ↓

• When Tesla shares are down, there are a few things we can’t help but consider as to why. Elon commit borderline securities fraud again? Did he sell shares to buy damn OnlyFans now or something? No. Somehow, this has the potential to almost be worse.
• EV demand is down, way down, according to [*checks sources*] everyone. I mean, just take a look above. ON Semi produces chips to control electrical systems that almost every EV maker uses. Their weak performance and even worse numbers expected hit the industry hard.
• At the same time, we’re seeing clear reactions from companies that suggest a slowdown in the space. Ford is delaying a $12bn investment in an EV factory while GM made a similar move, and Volkswagen announced slowing demand for their EV lines.
• Now, it’s not like they’re going anywhere. Sales this year are still growing 30%-40%, but compared to 50% last year, that’s a tough decline. Plus, EV stocks trade at high multiples, making them extra-susceptible to any bad news. Now, don’t you wish Elon committed a (borderline) federal crime again??

Data Peel

Thought Banana

Artificial Intelligence Meets Low Intelligence

Alright, nerds and haters of the U.S. government—get excited because you’re going to love this.

Yesterday, the Joey B Administration released new guidelines in the form of an Executive Order to begin federally regulating this new wave of artificial intelligence. It only took them 11 months to do so after ChatGPT was released, which ironically is about the same amount of time it takes the average politician in the U.S. gerontocracy to make the walk from the Capitol to the White House.

Anyway, there’s a lot going on here. To break down some of the highlights, the Order includes:

• Use of the Defense Production to require testing and approval by the Federal government for AI systems that “pose a serious risk to national security.”
• Establishment of the “AI Safety and Security Board” by the DHS to ensure AI systems on “critical infrastructure” meet standards to be set by the National Institute of Standards and Technology.
• “Content authentication and watermarking to clearly label AI-generated content” by the Department of Commerce.
• Investing in further new institutions to maximally advance the U.S.’s geopolitical competitiveness through the encouragement of collaboration between private and public developers and data sources.
• A whole lot of worker protection guidelines to minimize any negative economic impacts felt by workers hit by the disruption/displacement caused by AI.

"... there’s good, there’s bad ... there's no shortage of opinions ..."

And that’s just to highlight some of the most relevant here, but this White House Fact Sheet goes deeper (obviously).

Anyway, there’s good, there’s bad, and as always, there’s no shortage of opinions out there.

On one hand, it’s probably good that this technology has at least some clear oversight and guidance. Red lines telling researchers when their creation might destroy humanity and protection from the sure-to-be-coming epidemic of hyper-realistic deep fakes will hopefully keep society from falling apart sooner rather than later, but…

Some industry experts are disturbed. Not necessarily by the regulations themselves, but concerns floating around yesterday centered on what was described as a “rushed” process to get this bill in place.

"... it seems like waiting is gonna be the scary part this time."

Plus, setting these guidelines from an Executive Order rather than from Congress was a cause of concern for many as well.

The idea is that nobody—the government, industry experts, or anyone in between really has the knowledge to know how best to regulate this thing. The White House has had regular meetings with AI leaders like Elon, Sam Altman, Satya Nadella, etc., but there are plenty more scheduled down the line, suggesting the U.S. might be jumping the gun on this one.

Usually, we’d say something here like, “Oh, but we’ll see what happens.” With AI, however, it seems like waiting is gonna be the scary part this time. The government simply cannot keep up with next-gen technological developments… just ask Germany in 1517 when the printing press allowed one Martin Luther to post his 95 theses.

The big question: How will AI regulations look 5, 10, 50, 100 years from now? Will there be any? Should AI be regulating us? Let me ask ChatGPT what questions I should be asking.

Banana Brain Teaser

Yesterday —

Which would be worth more, a pound of $10 pure gold coins or half a pound of $20 pure gold coins, or would they be worth the same amount?

Answer

A pound of gold is always worth more than half a pound of gold.

Today —

Grandpa Jones says:

“My son Adam is 24 years younger than me and 35 years older than my grandson, Joey. Together, our total ages add up to 100.”

Can you figure out the age of each one of them?

Shoot us your guesses at vyomesh@wallstreetoasis.com.

Wise Investor Says

“Our favorite holding period is forever” – Warren Buffet

How would you rate today’s Peel?

All the bananas

Decent

Rotten AF

Happy Investing,

Patrick & The Daily Peel Team