Transcript of THE 10% DEBT SQUEEZE: Why a Massive Bond Dump Just Threatened Stocks!
Wall Street Truthbombs
0:00While everybody spent the last 48 hours0:02celebrating the NASDAQ near all-time0:04highs, a giant credit dump hit the0:06corporate bond market just yesterday. 110:10billion of debt, testing yields near0:1310%. By the end of this video, you're0:16going to understand exactly why an 110:18billion junk bond offering squeezes the0:21entire fixed income plumbing. How it0:24transmits directly into multiple0:26compression on equities sitting in your0:29very own 401k and the 72-hour fuse on a0:33collateralized margin loan that nobody0:36nobody is talking about on cable0:38television. If you've ever spent time on0:41a primary trading desk in lower0:43Manhattan, you know the rule. Equities,0:46well, they're the glamour squad. They0:49get the TV chirons. They get the guest0:52anchors. They get the bell ringing0:54ceremonies at 9:30 every single morning.0:57I watch them on my TV right here in my0:59very office. But the bond market is the1:02engine room. And when the engine room1:04runs out of steam, the ship doesn't care1:06how pretty the sails look. I can tell1:08you that from experience. For the last1:1018 months now, the narrative sustaining1:13record tech valuations has been dead1:16simple. The giants of artificial1:18intelligence have infinite operating1:20cash flows. They can spend hundreds of1:23billions of dollars on data centers and1:25accelerators and chips and all that1:27great stuff. Because Microsoft and1:29Alphabet and Meta mint tens of billions1:32of dollars in pure profit every single1:35quarter. Well, that was phase one. And1:37phase one, my friends, well, it's1:40officially over because yesterday in New1:42York and London, Soft Bank Group opened1:45the books on an 11.151:48billion debt sale, $10 billion in US1:52dollars across three tanches, plus1:56another billion in euros. It's the1:58largest non-financial corporate bond2:00issue in Asian history and it carries a2:04credit rating of doubleB plus from both2:07S&P and Fitch. Translate that into2:10trading floor English. That is not2:13investment grade. That is speculative2:16grade. That is what we call a junk bond.2:19And the syndicate desks are testing2:21yields on longer seven and a halfyear2:24trunch in the high nine to 10% range.2:28Get that nine to 10%. Seriously, 10%2:31yield on 11 billion of tech debt at the2:34exact moment equity traders are calling2:37an all clear on financial conditions. So2:40why does a record junk bond sale in2:42Manhattan matter to somebody who does2:44not even own a single bond? Well, my2:47friends, I'm going to tell you because2:49that's not just a fundraising round. It2:51is a giant sponge draining liquidity out2:55of corporate credit right now, pushing2:58benchmark yields wider and creating a3:01valuation wall that every high multiple3:04stock in America is about to slam into3:08head first. Let's get into this big3:10time. But before we do, if you like this3:12type of content, please click like and3:14don't forget to subscribe. It's really3:16important to be in the know about this3:18very stuff and this is how you do it.3:20Okay, let's start with the mechanics3:22because this is where the desk level3:24truth lives. When a blue chip titan like3:28Apple or Microsoft sells bonds, it3:30issues investment grade paper at a tight3:33spread over treasuries. That means it3:36doesn't offer too much more than the3:38lower risk treasuries. Maybe 50 basis3:42points, 70 basis points. institutional3:45investors buy it with their eyes closed.3:47It's easy. But when SoftBank comes to3:50the market with 11.153:52billion, well, you're talking about a3:55capital structure that belongs to a3:57completely completely completely4:00different universe. This is doubleB+,4:04one notch below what would be considered4:07investment grade. and to clear 114:09billion across three and a half uh three4:12and a half, five and a half and seven4:14and a half year papers. Underwriters4:16like City, Goldman Sachs, JP Morgan, and4:19Morgan Stanley, they can't just place4:21calls to passive index funds. They have4:24to offer well a concession. Actually, a4:28fat concession. Soft Bank's existing4:302031 bonds were already changing hands4:33at an 8.2% yield earlier this week.4:37That's up from 6.7% in January. And4:40underwriters on this new multi-billion4:42dollar batch had to test the longer4:44tanches near double digits just to drum4:48up enough demand to fill their order4:50books. Now look at what happens to the4:53rest of the market when that concession4:56hits the tape. The corporate bond market4:58is an interconnected pricing web. If an5:01institutional credit manager sitting in5:03a pension fund or a life insurance5:05company can buy high yield high5:07singledigit uh or 10% paper, excuse me,5:11on mega cap syndication, he's not going5:14to buy a tripleB minus industrial bond5:17or utility bond at 6.5%.5:20No, he demands more yield. My friends,5:24that is the crowding out effect. In real5:27time, a single 11 billion offering5:30absorbs a massive slice of available5:33secondary liquidity. It forces credit5:36spreads wider across the entire high5:39yield and crossover space. Remember,5:41just let me take a step back. When we're5:43talking about wider spreads, okay, that5:46means higher yield. That means lower5:48prices. Okay, that's what is important5:51to get here. When those spreads rise,5:54those yields rise. And remember, in bond5:56land, when yields go up, prices go down.5:59So if you're buying it for the first6:01time, yeah, you're getting at a better6:02deal. But if you own bonds already, that6:05means the prices of your bonds might be6:08actually going down just because those6:10spreads have widened. And once credit6:12spreads blow out, benchmark borrowing6:14costs rise across the entire economy.6:17That's even outside of the bond market6:20that we're talking about. It doesn't6:22matter what the Federal Reserve does6:23with overnight funds. The spread you pay6:26on corporate debt widens by 5,100 basis6:29points. The corporate cost of capital6:32just shot up by the same amount. Whoa.6:35And that brings me to the transmission6:37mechanism that hits yours and also my6:39401k. This is the stuff that you need to6:42pay attention to if you don't own bonds.6:44Every equity valuation model runs on on6:47Wall Street runs on what we call a6:49discount rate. You take projected6:51earnings of a company 10 years into the6:54future and you discount those earnings6:56back to today using that company's6:59weighted average cost of capital WACC.7:03Inside the business, we call it the7:04whack or the weighted average cost of7:06capital. When the cost of capital sits7:09at five or 6%, those distant earnings7:12look huge. That's how you justify paying7:1535 or 40 times forward earnings for a7:18semiconductor company or a cloud7:19software platform. But when corporate7:22credit clears at 9 and 10%, guys, come7:25on. We haven't seen those types of7:27yields for decades, your discount rate7:30goes straight up. And when the discount7:33rate jumps, the mathematical present7:35value of those future earnings, it7:37collapses. It's just math because those7:39numbers, those discount rates are in the7:41denominator. the bottom part of the7:44fraction that's used to make those7:46calculations. It's just math. That is7:48what Wall Street calls multiple7:51compression. And you cannot wish it away7:54either. Either earnings have to surge7:56dramatically to offset the higher7:58discount rate or the multiple has to8:01contract. And when you have more NASDAQ8:03stocks printing new 52- week lows than8:05highs on a day the index hit records,8:08and that happened, I'm probably going to8:09have to put out a video on that, too.8:11The multiple compression has already8:13begun under the surface. I hope you8:16remember that. Now, here's the shadow8:18data behind this specific deal, guys.8:21You know, I love the shadow data. And8:22this is the part that should make your8:24hair stand up. You can't tell, but mine8:27is actually standing up. Why did Soft8:30Bank have to drop 11 billion debt flood8:33right now? Because of a calendar date,8:36October 1st. Earlier this year, SoftBank8:38committed to a $30 billion follow-on8:40investment into Open AI. It was8:44structured in three exact $10 billion8:46tranches. The trunch uh trunch number8:49one settled in April. Trunch number two,8:52like a trunch is is a bucket, right? So,8:55they do things in buckets sometimes when8:57you're doing financing. And the word the8:59fancy word for that is a trunch, right?9:01So, the second bucket or trunch number9:03two settled in July. Trunch 3 is due,9:07guess what? On October 1st, exactly one9:11week from today. The bond deal price is9:14today, Thursday the 24th. It settles9:17next Tuesday, the 29th. That means those9:20$10 billion will sit on Soft Bank's9:23balance sheet for less than 48 hours9:26before being wired, guess where?9:28Directly into Open AI's bank account. A9:32multinational holding company uh9:34preaching a 300year vision uh of9:38artificial intelligence is running its9:40cash operations on a 48hour9:44margin fuse. And what is it buying with9:47that 10% money? Well, it's funding an9:50unlisted startup that is projected to9:52run a cumulative free cash flow deficit9:55of $278 billion through 2030. $27810:01billion of projected cash burn. Sam10:04Alman explicitly confirmed last week10:07that OpenAI will not execute an initial10:09public offering in 2026. It's probably10:12old news by now. There is no public e10:14equity exit ramp for him at this point.10:17There are no dividends to service the10:1910% junk debt. And to make it worse,10:22look at what's backing Soft Bank's10:24ability to borrow in the first place.10:27Well, the collateral SoftBank holds10:30roughly 90% of ARM Holdings. You10:33remember that company, ARM, ARM10:35Holdings? That's the crown jewel of its10:38portfolio. Earlier this year, SoftBank10:40expanded its margin loan facility to $2510:43billion. And how do they backs stop that10:46$25 billion facility? Well, guess what?10:48By pledging 769 million shares of ARM.10:54That is 72% of the entire company tied10:57up as collateral on a bank credit line.11:00Now, play the game. Three moves forward11:03cuz that's what you got to do on Wall11:05Street these days. If rising corporate11:07bond yields force multiple compression11:09on tech equities, chip stocks, well,11:11chip stocks, they drop. If chips if chip11:14stocks drop, ARM shares, well, guess11:18what? It's a chip stock. It declines. If11:20ARM declines, the margin covenants on11:23that $2 billion loan tighten instantly.11:27And SoftBank is hit with a collateral11:29squeeze at the exact moment it's11:31committed to paying hundreds of millions11:33of dollars a year in fixed interest11:36coupons on its new junk paper. My11:40friends, that's not speculation. That is11:42the mathematical geometry of a leveraged11:45balance sheet. Now, of course, I will11:48present the other side of this. I always11:51owe this to you because I want to give11:53you the full tape on this first. Okay.11:56First, SoftBank still carries11:59substantial liquidity reserves and12:01proved during the monsoon draw down of12:052022 that it can defend its balance12:07sheet by pausing investments and just12:09divesting assets. You might remember12:11that they did that in the past. So they12:14have an the ability to sort of clear12:17things up a little bit. Second, demand12:19for cutting edge computing has not12:21slowed down at all. In case you haven't12:23noticed, hyperscalers are still12:25purchasing hardware at historical run12:27rates, and it doesn't look like that's12:29going away anytime soon, believe me. And12:31if cash generation from generative tools12:33surprises to the upside next year,12:36private valuations could expand to12:38cushion the debt at the same time. And12:40number three, the overnight Fed hike has12:43led some desks to speculate that12:45long-term yields will eventually peak12:47and retreat, providing easier12:49refinancing windows before the12:51maturities hit in 2030. But don't let12:55anyone convince you that this does not12:57reach your pocketbook. You might say,12:59"Mark, Mark, I don't buy Japanese junk13:02bonds and I don't own ARM Holdings. I13:05didn't even know what ARM Holdings was13:06until you just mentioned it. Why does13:08this matter to me, Mark? Well, because13:11of where that 11 billion actually lands,13:14my friends. Listen to this. Pull open13:17the summary perspectus of your 401k or13:20your retirement account right now. Look13:23at your multis- sector bond funds. Look13:26at your core plus fixed income sleeves.13:29Look at the popular exchangeraded funds13:31like HYG and JNK. I'm sure you've heard13:35of those. Those funds are legally13:37mandated to track the benchmark credit13:39indexes. When an issuer drops 11 billion13:42dollars of crossover junk paper onto the13:45street, those benchmark weights shift13:48automatically. Those funds are forced to13:50absorb proportional slices of that paper13:53just to match their benchmarks. Your13:55retirement savings are underwriting13:57literally literally underwriting venture14:00capital level risk. collecting a fixed14:03coupon while carrying the balance sheet14:05exposure of a cash burning unlisted14:08startup. And meanwhile, the elevated14:10yield floor sits directly under the14:12stock market, constantly pulling the PE14:14multiples of your equity holdings14:16downward. That gravity is very real and14:19it's getting tougher and tougher. So,14:21what do you actually do with all this14:22stuff? Okay, first I want you to audit14:25your bond exposure. Of course, you14:27should do this. know exactly how much14:29high yield and crossover credit is14:31sitting inside your so-called14:33conservative allocations. Make sure14:36you're not absorbing unrated or14:38speculative tech in uh syndications at14:41the tail end of a cycle because that14:43could hurt bad. Second, look closely at14:46your high multiple growth equities. This14:48is the stuff that we all know and love.14:50All the chip stocks, all the AI stocks,14:52all the really cool stocks that have14:54done really, really well in the past14:56couple of years. If a company depends on14:58persistent debt financing to fund its15:00losses, well, a 10% benchmark cost of15:03capital is a mortal threat to its share15:06price. That's important. And third,15:09watch three specific signals over the15:11next 48 hours. Watch the final pricing15:14of those 10 billion dollar tranches15:16today and see whether the spread widens15:18against the high yield benchmarks. Watch15:20ARM Holdings share price because that is15:23the collateral guys backstopping the15:26entire tower. And watch the 10-year15:29Treasury yield and high yield spreads15:30tomorrow. Because when a giant flood of15:32debt hits the shore, well, the tide15:35doesn't go out in one place. It rises15:38everywhere. So don't miss it. Pay close15:41attention right now. And your truth bomb15:43for today is this. Artificial15:44intelligence is no longer being funded15:47out of operating cash flow. That's an15:49old thing. It is being funded by 1115:51billion dollars of junk debt testing 10%15:54yields. When the cost of capital hits15:56double digits, well, the multiple on15:58your stocks doesn't expand, it cracks.
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