Stephanie Pomboy — Rising Bond Yields Are EVERYONE'S Problem

7:57 July's three records

• Adam frames the month: the worst month for the NASDAQ in 25 years, the biggest July bond-yield spike since 2005, and the biggest July oil-price spike in over 30 years — yet the index is back at record highs the day they talk.

8:40 Worry or euphoria? The market ping-pongs on Iran headlines

• "It's crazy to watch the market ping-pong back and forth" on deal/no-deal headlines — we've been "on the eve of a deal since March." She'd expect people to stand aside until something is actually signed; Adam wonders whether it's even people anymore or just algos (a question for Mike Green).

9:49 "Barn-burning" profits are the bulls' offset — until you peel the onion

• Coming into the year the worry was a tightening Fed plus higher oil and rates; the earnings blowout gave the bulls their counter-argument. But "you don't even have to peel it very far" to find the profit bonanza isn't what it appears.
• Her word for the market's posture: insouciant — glomming onto profit numbers while brushing off powerful headwinds.

11:02 Oil: $76 today, but the direction of travel is higher

• Prices have come down materially, but there's no signed agreement — a week from now it can be back over $85. Long term she thinks oil and commodities more broadly go higher; it's a headwind that isn't going away "contrary to popular perception."

13:09 The Hickey setup: one-time gains and the depreciation wave

• Adam recaps Fred Hickey's deconstruction two weeks earlier: Google's latest earnings leaned on booking gains in its Anthropic stake (one-time, not recurring), and the depreciation wave from data centers hasn't hit the P&L yet — adjust for both and a low-20s PE looks more like 65.

14:31 Amazon's Anthropic mark: $8B → $75B+, half the "growth"

• Her own worked example: the initial investment was ~$8B, the stake is now marked north of $75B, and those mark-to-market gains are booked as other income. In Q1, ~$16B of ~$30B of reported earnings was the appreciation.
• "It's paper gains that they won't realize until they actually sell" — nothing to do with the ability to pay salaries, fund capex or service interest.

15:57 The other headwind: hyperscalers borrowing into widening spreads

• They're "issuing debt like crazy" and it's getting more expensive as spreads on hyperscaler borrowing widen on overinvestment concerns. Interest costs are rising and free cash flow "has actually gone negative for a lot of these companies, if not all of them."

16:57 The ~12 companies that made the S&P look cash-rich — all now FCF-negative

• These were the cash cows skewing the index's cash position so the whole S&P looked flush; it was really only about 12 companies, "all of whom are now free cash flow negative."
• Of ~20% year-on-year Q1 S&P earnings growth, one study she cites put ~12 points down to mark-to-market accounting — so real growth is roughly half what it looks like.

18:49 Credit markets are discerning; equities aren't

• What's visible in credit — widening spreads and a rising cost of insuring against default in the CDS market — has no equivalent in equities, where it "hasn't really become an existential threat in any way, shape, or form" with records being set that day.
• On what happens if the bubble bursts and the stakes get written back down: "These are the pesky details that we're not supposed to think about."

20:44 The big call: corporates are crowding out the Treasury

• "We used to always worry about the reverse." The government must roll $10 trillion this year — $6.7T of T-bills that automatically roll every 12 months plus $2.3–3.3T of notes and bonds.
• On top: the corporate sector needed to roll $1.2T of its own paper, plus munis and agencies — and now the hyperscalers, having burned through free cash flow, are stepping up to borrow more.

21:55 SIFMA: private issuance now matches the federal government

• She went to SIFMA's quarterly bond-issuance data: so far this year the private sector has borrowed the same amount as the federal government — "mind-boggling" given the size of the government's roll. A deluge of paper.

22:25 Buybacks → net equity issuance: the market's biggest bid is gone

• Companies have stopped buying back shares and are now net issuers of stock. For years buybacks (at times the corporate sector was the largest single purchaser of equities) were a massive tailwind alongside aggressive monetary policy — "that is now silently going away and no one's really paying attention."

23:21 Supply of paper vs supply of capital — investors can be choosy

• Record credit issuance plus equity issuance: "is the supply of capital infinite? Where is all this money going to come from?"
• The investor's side of it: "I don't have to buy a Treasury" — if Google is the better-quality credit (or an equal credit at a higher yield), lend to Google instead. That optionality is what the long end is paying for.

24:14 The BoJ tax on the long end — and the punchline

• Japan is supporting the yen by selling dollars, usually by selling Treasury holdings — more upward pressure on the Treasury complex on top of the issuance deluge.
• Punchline: "the higher for longer interest rate environment is very much here to stay, especially if you're bullish on AI" — because the capex boom feeds the crowding-out. Treasuries are the benchmark everyone is tied to, so it's higher-for-longer for everybody; spreads are already about as tight as they can get.

27:43 Warsh's program is the opposite of what the situation requires

• He campaigned on shrinking the balance sheet and possibly raising rates; the fix here is the exact opposite. "Forget about the Fed funds rate" — the last several moves saw the long end go the other way; the Fed's control over the long end is questionable.
• Only the balance sheet has real leverage over markets this levered and this extended — and it would take a substantial increase, i.e. a 2008-9-style credit crisis, to force it.

28:24 The elephant in the room: who is the buyer of last resort?

• Her long-standing problem with the Warsh plan. The "ideal" scenario is a crisis big enough to send risk appetite into Treasuries but not catastrophic — except then corporate spreads blow out and you're back to a government-as-marginal-producer economy of handouts. She'd rather see organic capex and employment drive growth, but valuations have reached "bubble unsustainable levels."

30:18 The balance sheet is already expanding; Bessent stuck on bills

• Despite the hawkish talk, the balance sheet is up over $200 billion since the "non-QE QE" started back in December — "he hasn't done anything so far."
• Bessent campaigned on not relying on T-bill issuance, then "sat down at his desk the first day and sharpened his pencil and realized there was no way to get around" it.

31:08 The secular leg: deglobalization reverses 1980–2020

• Everything above is cyclical. Secularly, deglobalization gives a multipolar world less reliant on the dollar and by extension US Treasuries — China and Japan already buying less or selling.
• "Just as the fall of the Berlin Wall and the onset of globalization pushed rates steadily lower from 1980 till a few years ago, so will deglobalization beget the reverse" — rates grinding higher year after year. Reshoring is inflationary because local labor costs more.

32:27 The tub: an inflationary economy siphons liquidity from financial assets

• Picture a tub filling with water each day. When inflation and rates fall, the economy consumes less of each dollar of liquidity and the rest overflows into stocks and bonds — the great financial-asset bull markets.
• Run it in reverse: with costs of goods, labor and capital rising, the economy sucks in more of the marginal liquidity, siphoning what would have gone into financial assets. "The days of easy money… where you could throw a dart at a dartboard" are behind us.

34:09 Fundamental analysis comes back

• The long-term trajectory is a return to "actually analyzing the fundamentals of companies" and finding who performs best when capital, goods and labor cost more than they have in decades. (Adam: "you used a word I'm not familiar with — funda-what?")

35:17 Hard assets over paper — the Tavi Costa chart

• If the economy takes the marginal dollar, the assets that perform are the inputs it needs: hard assets and commodities. Adam points to Tavi Costa's commodities-vs-S&P chart still bouncing around secular lows; she agrees the relative trend should reverse — "absolutely."

36:11 The supply argument for hard assets

• "We're just issuing stocks and bonds hand over fist." Hard assets "can't be manufactured out of thin air" — limited and increasingly so, while paper printing is "hitting hyper scale kind of levels." Scarce supply against infinite supply is the whole trade.

37:54 Pensions: ~$4T underfunded at record market highs

• Public and private pensions are underfunded by ~$4 trillion — better than the ~$6 trillion of a few years ago, but that whittling happened with markets at all-time highs, which is "fairly terrifying." A run-of-the-mill bear market undoes it.
• Worse, they piled into alternatives — private equity and private credit — where marks of 50 cents on the dollar or less are already showing up (she credits Ed Siedle's work on the topic).

39:33 The bailout nobody will refuse — and a $15–20T balance sheet

• "This is where the bailout comes." After the outcry over bailing out banks in 2008, the appetite to not bail out pensioners in 2027-28 will be very low — even without a left-leaning administration.
• She agrees with Michael Pento that the next recession's deficit is enormous (his $6T vs today's ~$2T) and adds the corollary: the Fed's balance sheet goes "well over 15 trillion," possibly 20 — because the money comes from the printing press.
• The zero-rate era is what put pensions in the $6T hole in the first place: "a function of really poor policy decisions, to which the solution will be more bad policy decisions."

48:29 Warsh as king of the sandcastle; the "run it hot" endgame

• Adam's image: Warsh can beat his chest about hawkishness, but when the wave arrives he'll be forced to repeat the sins of the past. She extends it to Bessent — smart men facing an "effectively impossible" task: cut borrowing costs while rolling $10T and competing with the private sector.
• On Darius Dale's paths, the administration is committed to "run it hot" — grow out of it. She agrees with Dale that they can't: capex is booming, growth is fast, and the deficit isn't shrinking at all (another $75B wanted for munitions). The fallback is print.

54:54 What she's actually waiting for: catharsis

• "I'm looking for that catharsis where we do finally cleanse all of these bubble excesses" — built up since 2000, not just COVID, through serial bailouts and the Fed put, leaving markets "so far distended from the economic fundamentals that they can't even see them."
• Get back to reasonable valuations and "we would be setting the table for a phenomenal next several decades."

55:56 Reshoring is the right idea at the wrong valuation

• She likes the direction — reshoring pharmaceuticals and munitions, protecting the food supply (she'd like a rule that only Americans can own farmland), employing people at home rather than exploiting cheap labor abroad. It's expensive and the adjustment won't be painless, but worth it.
• The problem is the starting point: such extreme valuation and leverage that the excesses have to be cleansed first. Faster growth and more capex just "pull that reckoning forward."

59:07 Her book: unchanged — gold, added energy, dry powder in bills

• No major portfolio changes: "hanging on waiting for gold to recover its footing," having previously increased exposure to the energy sector. Status quo otherwise.
• No material bets in the Treasury market yet — "there will come a point when there'll be an opportunity to buy there, but you've got to wait to see a little bit more agita." A little dry capital sits in T-bills.
• Earlier framing (42:51): energy is how you own the AI capex boom and stay in protected hard assets — "if you're an AI bull, you kind of have to be a bull for energy and copper." Self-described at 42:27 as a "commodity bull, paper-asset bear" who would "rather be early to this than late."