Yup of course as a former swaps monkey it seems obvious
But the confusion I saw on people’s faces when I tried to explain why higher yields made NVDA and co more expensive, suggests maybe not.
Great article explaining a topic that’s obvious to some and voodoo to others… we need more of this writing on substack and less navel gazing or back patting!
That said I’m not sure “duration” is a super clean concept. As I was reading I was thinking about something like Berkshire…. what do we make of a business that has high duration (no dividend, minimal buybacks) but doesn’t have high embedded growth assumptions, rather its shareholders prefer management to hold onto the capital and not return it? Feels like a corner case where high duration doesn’t imply an aggressive terminal value posture (or maybe it does?)
The scarcity argument eating itself is the part worth sitting with, the bottleneck that justifies the multiple is inflationary, the inflation pressures the discount rate and the discount rate compresses the NPV of the cash flows the multiple was pricing.
Duration is a property of the price you paid, not the quality of what you bought. Best semiconductor company on earth still carries 20 years of rate sensitivity at 35x. The fundamentals and the math are answering different questions simultaneously.
Although hard to quantify, financial repression seems a high likelihood given this admin and how much the economy is tied to the stock market.
Of course, sequencing matters. Does YCC only appear after a significant drop in the stock market? Or is it already being considered as a preventative measure.
Love it, 100% agree, higher yields and bond vol additionally hurts equities more short term through collateral/leverage chain (for example multi strats ability to lever up)
Great post, no one learns anything from 2021-2022 is the lesson!
I love your Bob Prince and Oxford stories! :-)
Thank you Campbell. One of the best write ups ever!
For too long people haven’t been watching credit, equities can keep getting drunk off narratives but credit will force people to sober up…
Smartest guys in the room are the bond guys…
Always have been. Equity tells you a story, rates tell you the price of believing it.
Great post, thanks.
I suspect in this case, the wedge IS the victim.
If the hopium is that ai productivity will keep inflation down…whoopsie.
bond vigilantes they’re called for something!
Yup of course as a former swaps monkey it seems obvious
But the confusion I saw on people’s faces when I tried to explain why higher yields made NVDA and co more expensive, suggests maybe not.
Great article explaining a topic that’s obvious to some and voodoo to others… we need more of this writing on substack and less navel gazing or back patting!
Keep it up sir.
great piece!
Helpful and provocative.
That said I’m not sure “duration” is a super clean concept. As I was reading I was thinking about something like Berkshire…. what do we make of a business that has high duration (no dividend, minimal buybacks) but doesn’t have high embedded growth assumptions, rather its shareholders prefer management to hold onto the capital and not return it? Feels like a corner case where high duration doesn’t imply an aggressive terminal value posture (or maybe it does?)
Is this analysis based on trailing or forward numbers for semi space? Will have vastly different conclusions based on this choice..
Awesome; how do you tell a story according to BP?!
For an article about the risks in AI investment it really reads like AI
The scarcity argument eating itself is the part worth sitting with, the bottleneck that justifies the multiple is inflationary, the inflation pressures the discount rate and the discount rate compresses the NPV of the cash flows the multiple was pricing.
Duration is a property of the price you paid, not the quality of what you bought. Best semiconductor company on earth still carries 20 years of rate sensitivity at 35x. The fundamentals and the math are answering different questions simultaneously.
Although hard to quantify, financial repression seems a high likelihood given this admin and how much the economy is tied to the stock market.
Of course, sequencing matters. Does YCC only appear after a significant drop in the stock market? Or is it already being considered as a preventative measure.
Love it, 100% agree, higher yields and bond vol additionally hurts equities more short term through collateral/leverage chain (for example multi strats ability to lever up)