Stephanie Pomboy: The Higher Yields Go, The Higher The Odds The Market Cracks

Oracle

Across the shows: 3 speakers in other episodes, 0 bullish and 2 bearish calls, past 30 days

• Stephanie Pomboy · MacroMavensBearish

  Oracle's downgrade to junk is imminent, given its BBB- rating and the data center problems.

  S&P cut Oracle from BBB to BBB- in early July, one notch above junk. S&P had held off a junk move because it expected Oracle to take steps to bolster its investment-grade rating, and none of those steps have happened. Oracle then had a New Mexico data center hit by force majeure, with one or two other data centers reportedly having problems since. Pomboy calls Oracle the poster child for the BBB tier, which is now the majority of the investment-grade universe. A junk downgrade would force high-quality investment-grade funds to sell and could prompt reviews of other BBB credits, a risk she thinks markets are not yet pricing.

  “I've been waiting. I think it's imminent, the downgrade of Oracle to junk.”at 14:17

US stock market outlook

• Stephanie Pomboy · MacroMavens

  Extreme S&P vs equal-weight divergence mirrors a K-shape that makes the market's setup precarious.

  Charts show the S&P 500 diverging from the equal-weighted S&P 500 to extremes never seen before. Pomboy reads this as the same K-shape seen in the consumer and corporate sectors, where a few large companies do very well and the rest lag. She cites the fact that the top 10 companies hold more cash than the bottom 400 combined. She argues the market's whole structure rests on sustaining the AI trade, which is why the setup looks precarious.

  “these charts going around about the divergence between the S and P and the equal weighted S and P, you know, when we're hitting extremes we've never seen before is sort of a reflection of this k shaped economy as well.”at 13:32

• Stephanie Pomboy · MacroMavens

  Stocks are ignoring higher rates now, as in 1987, so a forced repricing is likely soon.

  Pomboy admits she expected higher rates, with the 10-year yield now above 5%, to have hurt the economy or market long ago, but the stock market keeps hitting record highs. She compares this to 1987, when Greenspan raised rates after taking over, the market ignored it for ten months, and then crashed in October when the pain of higher rates became too much. She expects a similar repeat and believes evidence of profound damage will come soon. Stress is already visible in credit, which she says tends to lead equities.

  “I feel like the echoes to 1987 are deafening right now... And the stock market thumbed its nose at him for ten months until October '87 when finally it had to concede that the pain of higher rates was too much. And I feel like we're gonna have a repeat of that today.”at 33:39

• Stephanie Pomboy · MacroMavens

  A stock market crack would be the cataclysmic event for the economy, possibly abrupt like 1987 or 2018.

  Pomboy sees echoes of 1987: the stock market is too complacent about rising rates, and the whole AI trade depends on an endless supply of credit. Credit is already tightening, with spreads and CDS rising. She expects the break to be dramatic rather than a slow drift like 2022, possibly similar to 2018. She says the stock market is the cataclysmic risk to the economy because consumer spending is propped up by equity gains and corporate taxes and capital-gains receipts depend on the AI-driven rally.

  “I think the cataclysmic event for the economy is the stock market for all the reasons we talked about earlier.”at 43:56

US rates & the Fed

• Stephanie Pomboy · MacroMavens

  The Fed is likely done hiking, since further hikes to lower long yields look like a fool's errand.

  Pomboy thinks the Fed raised rates once and will stop there, because she expects data to become friendlier to the Fed. She sees further hikes as a fool's errand, since the last hike pushed long yields higher instead of lower. She believes Warsh and Bessent hoped that bringing down inflation expectations would drag nominal yields lower, and that failed, so they may need a new approach. She hedges, saying she may end up eating these words.

  “I may end up eating these words, but I think it was one and done. I don't anticipate that they're gonna continue to raise rates.”at 35:22

• Stephanie Pomboy · MacroMavens

  Warsh has reversed his campaign plan: QE continues, the balance sheet isn't shrinking, and rates are rising.

  Warsh campaigned on cutting rates while shrinking the balance sheet to ease pressure on the long end. Pomboy says the opposite is happening: QE started in December continues as roughly $40 billion a month of T-bill purchases, the Fed is raising rates, and Warsh has said nothing about the contradiction. She reads this as the new chair being forced into the policies he criticised, because the situation left him few options.

  “They're still doing the QE that was started in December, the non QE QE that people forget about, but that's 40,000,000,000 a month of t bill purchases.”at 39:01

• Stephanie Pomboy · MacroMavens

  Warsh's reaction to a market break will be slow, as he tries to unwind the Fed's market-rescue put.

  Given how Warsh has described his own views, Pomboy expects him to respond more slowly to a stock-market break and to try to repeal the Greenspan-Bernanke put. If a break happened before the November 3 midterms she thinks the Fed would act faster for political reasons. If it happened after, he would have two years to recoup lost ground and could tolerate the pain. A slower response would mean a deeper, more painful correction.

  “given the way he has characterized his own views and other people have characterized him, that he would be slower and would be trying to repeal this Greenspan Bernanke put that's been in place for so long.”at 46:00

US inflation

• Stephanie Pomboy · MacroMavens

  Inflation has slowed, but prices keep rising, so the cost of living is more unaffordable than before.

  Pomboy separates the rate of price increases from the price level. Inflation has come down from 9.2% to 3.4%, but the prices of everything consumers buy keep rising, only at a slower pace. Because prices never fell back, things that were unaffordable in 2022 are even more unaffordable today. The administration and Republican commentators are wrong to say consumers are missing how much inflation has improved, and this gap explains the affordability backlash.

  “the price of everything that they buy has just keeps going higher and higher at a slightly slower pace. So if things were unaffordable in 2022, they're even more unaffordable today.”at 5:21

• Stephanie Pomboy · MacroMavens

  Asset deflation from a stock correction would quickly quash goods inflation.

  Pomboy says a market correction would deflate asset prices and that this would slow the economy and cure goods inflation immediately. The mechanism is that asset deflation reduces demand and so pulls goods prices down. This is why she expects the long end of the curve to rally in a correction.

  “Nothing cures goods inflation like asset deflation. You know, that'll quash goods inflation immediately.”at 51:05

Credit markets

• Stephanie Pomboy · MacroMavens

  Credit stress is building: BBB debt dominates investment grade and spreads are widening, though not yet in panic.

  BBB-rated debt, which she calls the high-quality tier of investment grade, is now the majority of the investment-grade market, at roughly 55-60%. That makes the market vulnerable to a cascade of downgrades. Triple-C spreads are above 1,000 basis points, and both junk and investment-grade spreads have moved meaningfully higher. No high-profile name has yet stumbled in a way that would cause greater alarm, and risk repricing is modest rather than panicked. Pomboy notes that credit usually shows problems before equities do, so she sees the spread widening as an early warning.

  “it is probably the poster child for triple b rated investment credit, which is now the majority of the investment grade universe.”at 15:22

• Stephanie Pomboy · MacroMavens

  Credit conditions are starting to tighten, with credit spreads and CDS rising.

  Pomboy says credit conditions are beginning to tighten, shown by rising spreads and rising CDS. She links this to her wider worry: the AI trade relies on a steady supply of credit, so tighter credit threatens it and raises the chance that equities crack.

  “And you are starting to see some some tightening of credit conditions, as you mentioned, with the spreads rising in the CDS.”at 43:26

US deficit & government debt

• Stephanie Pomboy · MacroMavens

  Interest expense now drives the deficit higher, and rate hikes make the fiscal problem worse.

  Pomboy argues that interest expense is now the main driver of the rising deficit. The average rate the Treasury pays is around 3.5%, while the 12-month bill yields about 4.5%, so even if Bessent shifted all financing to the front end, borrowing costs would still rise by about 100 basis points. Every basis point increase in short rates adds to the deficit. She is skeptical of a Fed-Treasury accord in which Congress agrees to spending restraint, citing Reagan, who cut taxes but could not slow spending. She calls the fiscal situation the most important danger and says a leftward political shift would make it far worse.

  “what's driving the deficit higher right now is interest expense.”at 25:22

• Stephanie Pomboy · MacroMavens

  A stock correction would double the deficit to about $4 trillion a year, forcing a higher term premium.

  Pomboy argues the deficit is already supported by equity gains, corporate taxes and capital-gains receipts that depend on AI-driven profits. In a correction those supports would vanish. After the dot-com bust and the GFC the deficit rose by six or seven points of GDP. She thinks leverage is much greater now, so the expansion would be multiples of those episodes. She expects bond vigilantes to conclude the roughly $2 trillion deficit becomes about $4 trillion and demand a higher premium.

  “Once the vigilantes then sit down and do the math and realize, okay, you know, this just means that the $2,000,000,000,000 deficits are gonna become $4,000,000,000,000 deficits.”at 51:32

US Treasuries & yields

• Stephanie Pomboy · MacroMavens

  Long yields are rising from Treasury crowding out, oil-driven foreign selling, and failed Fed attempts to lower them.

  Pomboy sees several forces pushing yields higher. Heavy Treasury supply is crowding out other buyers, a risk she flagged about ten months ago. Higher oil prices have forced foreign governments, such as Turkey, to sell Treasuries to pay for oil. Inflation worries add to the pressure. The Fed's rate hike did not persuade bond investors that inflation would be controlled, since the long end moved higher after the hike. The Treasury and the Fed have not been able to convince bond vigilantes that the debt will be repaid in real terms. Adam Taggart raised the possibility that oil could fall if the Iran conflict ends, but Pomboy's point is that this does not address the other forces.

  “I think the other one, obviously, has been this increase in oil prices, has forced foreign governments to liquidate their treasury holdings to buy higher priced oil.”at 27:21

• Stephanie Pomboy · MacroMavens

  A near-term long-end Treasury rally after a stock correction would be a selling opportunity.

  In a severe stock correction, the long end could rally for two reasons. Flight to safety and goods disinflation from asset deflation would push yields down. Short covering would be amplified by a massive speculative short position in the 10-year. Pomboy expects this rally to be short-lived and would sell into it, because once bond vigilantes reckon with the deficit they will demand a higher term premium and yields will climb again.

  “you could see, you know, a very meaningful rally in the long end near term, and I would sell the hell out of that rally because of the deficit situation.”at 51:10

US consumer

• Stephanie Pomboy · MacroMavens

  Consumer spending is being funded by drawing down savings and credit, signaling distress rather than strength.

  Headline spending growth of 4% year on year looks solid, but Pomboy's analysis looks at what is bought and how it is funded. Spending is concentrated in transportation and home insurance, funded by drawing down savings and running up credit card debt. A JPMorgan survey found a record share of households moving money from brokerage accounts into checking accounts to pay bills, which she compares to the pre-financial-crisis consumer. She sees this as distress and as evidence that consumer spending depends on continued financial asset gains. Pomboy expects the next step to be drawing on the assets themselves.

  “You could say consumer spending is up 4% year on year, and that's a solid number. But if you go through and you discover that all of the spending is on transportation and home insurance and that they're funding those expenditures by drawing down saving and running up credit card debt, it's a very different picture”at 6:35

AI infrastructure & data centers

• Stephanie Pomboy · MacroMavens

  The AI buildout trade is already showing strain in hyperscaler credit default swaps.

  Pomboy argues the AI bonanza trade that the stock market and consumer rely on is already showing cracks. She points to the credit default swaps on the hyperscalers as evidence that credit markets are pricing rising risk for the companies funding the AI buildout. Combined with the Oracle data center problems, she sees this as a sign that the trade is fragile.

  “which already is taking on water if you look at things like, you know, the credit default swaps on the hyperscalers.”at 14:11

US elections & politics

• Stephanie Pomboy · MacroMavens

  The midterms will be highly consequential, and polls look bad for Republicans on affordability.

  Pomboy says the midterms matter greatly. Republicans' main advantage is the alternative, a Democratic platform she calls socialist. She argues it promises free housing, rent control and free medicine, and that voters who have not lived through such policies are drawn to the affordability message. She says the polls do not look good for the midterms and expects a lame-duck period if Congress splits. A leftward shift would make the fiscal situation far worse.

  “I know the polls don't look good for the midterms. And I do think that it's hugely consequential”at 19:52

AI bubble & tech valuations

• Stephanie Pomboy · MacroMavens

  The AI trade is circular, credit-dependent and propping up profits, consumer spending and tax receipts.

  Pomboy argues the stock market is too complacent about rising rates because the AI trade depends on endless credit. She describes AI investment as circular and phantom. That spending supports corporate profits and the taxes companies remit, and the equity gains support consumer spending. If AI-driven equity gains reversed, those supports would go with them, which is the mechanism behind her view that a correction would hurt the economy and the deficit.

  “the whole AI trade is really contingent on endless supply of credit.”at 43:12

Private equity

• Stephanie Pomboy · MacroMavens

  Pension funds' heavy alternative-asset allocations will be hit hardest in a market correction.

  Pomboy says pensions have moved heavily into alternative assets, with about 40% of pension assets in some cases now in illiquid alternatives. Those holdings will be hit hardest in a market correction, which would be a disaster for fiscal conditions. She presents this as one more reason a correction would be severe.

  “all these pensions have plowed into all the highly liquid alternative assets... 40% of the pension assets in some cases now are in these illiquid alternative assets that are going get hit the hardest.”at 47:38

Gold & precious metals

• Stephanie Pomboy · MacroMavens

  Gold's recent decline makes no sense; she would buy more if she had cash.

  Pomboy was surprised that gold was down, calling it insane and without logic. She says she would love to buy more but has committed most of her cash. This is a weak, short view with no detailed case, offered in response to Adam's point that gold is a good parking place when central planners inflate.

  “why the hell is gold down? It's insane. It makes no sense. And I would love to buy more, but I just have committed so much cash.”at 50:12