I would think about credit spreads as an indicator of perceived credit risk in the bond market.  For example, assume high-yield bond spreads are 400 wide. In that scenario, you’re getting 4% more in yield above equivalent maturity Treasuries as compensation for the risk you’re taking to lend money to a below investment-grade borrower.  The tighter the spread over treasuries, the less perceived risk there is in the market.  That can be a sign of health, and it can also be a sign of complacency.  I would relate this to stock market multiples, as the higher they are, the less perceived risk there is, and the more an investor is willing to pay for potential growth and return.  

I pay close attention to both of these things, but if I were to choose one as my preferred underlying indicator of where the market and economy are headed, it would definitely be credit spreads.  They tend to be less fickle and move more intentionally when there is a real underlying change in the economy.  If you think about what goes into setting these spread levels,  it is not only complex (corporate solvency, collateral, interest rates, global liquidity, etc.), but also more institutionally set between borrowers and lenders versus retail.  During the GFC, spreads blew out 1500 wide as global liquidity in the financial system evaporated in the largest credit event of our lives.  Current high-yield spreads are tight in comparison at 310 wide.  Now these are actually off the lows since the beginning of October, given the recent rise in volatility, but they are still historically tight and something I am watching.

The pivotal difference with 2008 was its forced inter-connectedness to credit markets and the entire banking system. I believe that many AI investors (VC, PE, etc) have a lot on the line. And I believe many hyper-scalers may write down hundreds of billions of dollars of capital expenditures (possibly). But this is largely an UNLEVERED mania, with almost no systemic or contagious exposure. In other words, bank depositors and bondholders are not on the line as they were in 2008. In 2008, if you and I paid our house payment, we were still in trouble if our bank went down because they had extended too much credit to millions of other borrowers. But in this AI situation, while many people may incur losses, they are largely highly capitalized and sophisticated institutional players, dealing with non-borrowed money. Losses will be had, but they do not bleed into the financial system at large like 2008 did.

If they are traders who bought it low and now traded high, sure.  But as for the actual ownership thesis that makes someone a “gold bug,” of course not.  There has recently been a good run in gold, which was preceded by a terrible run in gold, which was preceded by a good run in gold, which was preceded by a terrible run in gold.  CPI and Gold are basically up the same amount since 1980, and that has been true for about ten minutes; for 44.9 years of the last 45 years, inflation was up more than gold.  But wait, there’s more.  When we talk about “hedging inflation,” the stock market is up 62x since 1980 (from 106 to 6,600).  There is an inflation hedge that has beaten inflation by 15x over since 1980, and it is called public equities.  And how much is it up more than gold?  Well, since gold and inflation have been dead even since 1980, it has beaten gold by… 15x.  That is a lot.

Gold has proven to be an excellent vehicle for traders (including the last two years, where, of course, everything is up a lot).  It has proven to be quite disappointing for long-term holders (a 0% real return for 45 years), and most interestingly to me, it has proven to be quite surprising in the face of certain macroeconomic realities (gold flat from 2011-2021 – a full decade – when central banks and developed economies went on the biggest monetary experiment binge in world history).

But it can go higher.  Or not.

So first of all, I should clarify what they all are.  The video and the podcast are the same thing in terms of audio content; only the video has a camera on me while recording the audio.  With a face for radio and no real interest in being a camera talent, I don’t blame people if they prefer a different medium than the video.  We post a lot of shorts and reels from the videos on social media, and the videos are preferred by the fans of that medium, which is great.  The audio content on the video and podcast is NOT a recitation of the written Dividend Cafe – I basically have a few notes from the written version in front of me most of the time (sometimes nothing at all), but it is me more or less just doing a talk without a script on the same subject as the written Dividend Cafe.  We do all three mediums because there are people who prefer each of them.

But the reason I say I prefer the written is that it is what drives the others.  I start by writing a Dividend Cafe, and then I turn that into a video and podcast.  I don’t start with a video/podcast and turn that into a writing.  Now, we have gotten better about taking the charts from the written Dividend Cafe and adding them to the video, but the written Div Cafe always has everything, and the video/podcast will always be abridged relative to the written treatment.  Beyond that, it is just preferential.  My dad was a reader and a writer, I am a reader (and I try to be a writer), and I see a lot of people whose attention span for the written word has declined as the popularity of more digestible mediums like podcast and video have taken off.  Ultimately, all I care about is delivering useful and truthful content, but I do like adding my two cents every week, that, yes, the written format is the original flavor, and will always be my favorite.