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IN THE NEWS

🤔 Legend Investor Says He Doesn’t Want to Own Bonds

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Ray Dalio bootstrapped the world’s biggest hedge fund, Bridgewater Associates, from essentially nothing. In doing so, his firm mastered trading in many different types of financial markets and is no stranger to the market for U.S. government debt — Treasury bonds.

• When he talks, investors listen. This week, at a summit in Singapore, Dalio told listeners, “I don’t want to own…bonds.” Adding, “Temporarily…cash, I think, is good.”

Why? Record levels of government debt and fiscal spending globally aren’t exactly appealing to investors like him who finance those borrowings and hope to get paid back a positive return after accounting for inflation.

On that point, Dalio is skeptical of whether central banks can truly manage inflation (higher inflation reduces the value of future bond payments, which are fixed.)

But if elevated inflation in the coming years is Dalio’s concern about bonds, isn’t cash even worse?

• It’s a good question, and the answer is both yes, and, no. In the long term, cash is a poor investment because its value gets eroded by inflation ($100 today buys less at Walmart than $100 did ten years ago.)
• On a shorter time horizon, cash provides flexibility, allowing investors to wait until they better understand the trends driving markets or until they see an attractive opportunity to pounce on.

Big debt problems: When asked how he’d address the world’s debt problems, he warned that when debts become too big as a share of the economy, troubles “tend to compound and accelerate” as interest payments balloon. And, “We’re at that turning point of acceleration.

• If outstanding debt levels get large enough, the government may be unable to make interest payments without borrowing more money.
• Wall Streeters call it a ‘debt spiral,’ and they’re very difficult to escape. Investors like Dalio worry that the U.S. and other major economies are on a trajectory for debt spirals eventually.

Why it matters:

Pay the piper: The U.S. is, of course, not that far down the line, but it will need to sell record amounts of Treasury bonds in the coming months to fund deficit spending and pay off past debts coming due.

Like any market, the Treasury market is driven by supply & demand — the more bonds issued to fund government spending, the more the supply of bonds increases, driving down bond prices and raising interest rates, which, ironically, makes new debts even costlier to pay down.

• It’s not just Dalio, though, raising concerns about investing in bonds, threatening how the government funds its spending. Bill Gross, aka the “Bond King,” is also avoiding bonds over similar concerns.
• Dalio closed out his comments with this not-so-ringing endorsement: “I personally believe that bonds, longer term, aren’t a good investment.”

Watch Dalio’s interview

🌎 Inside Exxon’s Strategy to Downplay Climate Change

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For years, Exxon knew about the risks of climate change caused by burning fossil fuels. Yet the oil giant kept operating as usual, strategizing how to mitigate concerns about warming temperatures and muddle science that could hurt its core business.

That’s according to a new report from the Wall Street Journal, which interviewed former Exxon executives and reviewed internal documents.

• Former CEO Rex Tillerson and other execs repeatedly questioned and challenged the severity of climate change, even as Exxon’s very own scientists supported research that the planet has been warming due to humans burning fossil fuels.
• Now, Exxon is a defendant in lawsuits that accuse it and other oil companies of deception over climate change. Prosecutors aim to collect billions in damages from the lawsuits, which could go on trial next year.
• From 2006 to 2016, Exxon execs internally tried to push back against the idea that humans need to limit oil and gas use to help the planet. But publicly, the company said climate action was critical after its climate modelers mostly attributed the changes to humans.

Bad for business: For decades, Exxon’s researchers have warned executives about the dangers of its business to the planet, but the company looked the other way. In 1988, the company’s head of corporate research sent an ominous memo to colleagues:

“If a worldwide consensus emerges that action is needed to mitigate against Greenhouse gas effects, substantial negative impacts on Exxon could occur.”

Why it matters:

In other words, Exxon has for decades prioritized its bread-and-butter business in fossil fuels despite knowing about its harmful effects. That has some scientists drawing comparisons to the lies spread by the tobacco industry.

• Both large oil and gas companies and tobacco companies, they argue, doubted the science because it could damage their business model, then worked with consultants to develop deceptive communications strategies to mislead.
• But unlike the tobacco industry, climate change has far greater implications, including public health and funding: The U.S. just set a record for billion-dollar weather disasters.

Exxon said it has committed to spend $17 billion over five years on emissions-reducing technologies and renewable energy, but that’s a lower-return business than its staple of oil and gas, which has posted strong earnings growth in recent years, buoyed partly from Russia’s invasion of Ukraine.

Last week, the United Nations warned that countries are far from meeting long-term climate goals, which Exxon has known about for years.

• Wrote one Exxon leader in a 2009 email: “Global emissions continue to rise throughout the outlook timeframe — that’s clearly a cause for concern.”

Read more

🚧 Citigroup Sets Sweeping Management Changes

Photo by Declan Sun on Unsplash

Citigroup’s CEO Jane Fraser has revealed a corporate restructuring plan. OK, yawn.

In English: Fraser is making moves — money moves, if you will — by reducing managerial layers and speeding up decision-making.

Citigroup, one of America’s biggest banks, is undergoing a large reorganization that includes eliminating regional management roles outside North America.

The goal: provide Fraser with more direct oversight and streamline the Wall Street behemoth. Fraser revealed that Citigroup will be organized into five primary business sectors, all of which will report directly to her.

• It’s a change from the former structure, where the company had two major divisions serving consumers and institutional clients and a framework in place for two decades.

The old organizational structure at Citigroup led to managerial conflicts and a lack of accountability, per current and former employees.

• Said Fraser: “These changes eliminate unnecessary complexity across the bank … and strengthen our ability to benefit from the natural linkages amongst our businesses.”

Why it matters:

It’s a tough nut to crack for Fraser, who’s approaching her third year as Citigroup’s CEO. Fraser wants to rejuvenate the company that’s been grappling with a dip in its stock value for years.

Investors don’t seem convinced by Citigroup’s potential for a turnaround, as the company has the lowest valuation among large U.S. banks. Its stock price, hovering around $42 per share, is about where it was in 2008.

Citigroup stock has languished since 2008 (From CNBC)

• Despite a presence in over a dozen markets, Citigroup’s stock has plunged roughly 40% since Fraser assumed her role in March 2021. That’s the worst performance among major banks.

Against the grain: While competitors have cut jobs due to a slowdown in Wall Street activity, Citigroup has increased its workforce to meet regulatory requirements.

• The bank’s employee count stood at 240,000 as of June, a 4% increase compared to 2022.

Read more

See you next time!

That’s it for today on We Study Markets!

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