Prof G Markets
Breaking Down Warning Signals from the Bond Market — ft. William Cohan
Thu, 17 Apr 2025
Vote for Prof G Markets at the Webby Awards Scott and Ed discuss how the markets reacted to Trump’s tariff exemption on smartphones and computers, the dollar falling to a three-year low, and first quarter bank earnings. Then William Cohan, New York Times bestselling author and founding partner of Puck, joins the show to unpack the latest developments in the bond market. He explores the potential fallout of a credit crisis, weighs in on whether Japan and China are wielding the bond market as a geopolitical weapon, and offers his take on where the next wave of damage from the tariffs is likely to surface. Subscribe to the Prof G Markets newsletter Order "The Algebra of Wealth," out now Subscribe to No Mercy / No Malice Follow the podcast across socials @profgpod: Instagram Threads X Reddit Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices
Chapter 1: What are the latest market reactions to Trump's tariff exemptions?
What's up, y'all? It's Kenny Beecham. We are currently watching the best playoff basketball since I can't even remember when. This is what we've been waiting for all season long. And on my show, Small Ball, I'll be breaking down the series matchups, major performances, in-game coaching decisions, and game strategy, and so much more for the most exciting time of the NBA calendar.
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Today's number 60. That's the percentage of general admission Coachella attendees who use Buy Now, Pay Later to finance their tickets. Ed, have you ever had sex at a music festival? No. It's fucking intense.
I don't know why I like that one. For some reason, I like that one. I think I like the pun jokes. Yeah, it's cute, right? A little bit of a dad humor twist, yeah. How are you, Ed? What's going on with you? I'm doing very well, Scott. My dad's visiting, so I've been hanging out with him, which has been very nice, yeah.
What are the Elson men doing together? Like, what did you do with your dad? What did you take him to see?
We had lunch uptown and we walked around Central Park, which was nice. We're mostly just getting meals together, which is sort of what we like to do. I'll be having lunch with him tomorrow. We're having dinner together on Thursday.
During lunch, I know my dad and me. Oh, you can always, you guys can already hear it coming. Yeah. Everyone's like putting their hands over their... Do you remember when my father used to come visit? During long lunches, he would pause and he would reach across the table and he'd look at me and he'd say, you're such a disappointment. And... Has that happened to you? I'm still waiting on that one.
Anyways. How are you? You're in Palm Beach, right? I'm in Palm Beach. Why? I'm not sure. Probably... I forget. Either my sons have friends here or my partner has friends here. I don't even... Why am I here? I have no fucking idea why I'm here. Seriously, why am I here? I don't know. Anyways, we're at this new hotel called the Colony Hotel.
And it's what I call a 64 hotel, six-star prices, four-star service. And they just throw people at everything. And it's all these nice young people who have no desire to be in the services business who are waiting to go, I don't know, what people do in Florida, find a bale of cocaine. I don't know what it is. What do people do here in Florida? Open a nightclub? Fight crocodiles.
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Chapter 2: How is the dollar performing against the euro?
Let's move on to this third headline here, which is these big bank earnings. We had earnings from JP Morgan and Bank of America, all the big banks. And just by the numbers here, it was a great quarter. for the banks. JP Morgan beat on estimates. Their profits rose 9%. Bank of America also beat. Profits up 11%. Goldman Sachs beat. Profits up 15%. Citigroup beat up 21%. Morgan Stanley beat.
Profits up 26%. I mean, a huge, huge quarter, incredible quarter for these banks. And As usual, they're all kind of telling the same story here. And this is generally what we see in banking. It's a very cyclical business. Whatever's going right or wrong at J.P. Morgan is usually the same thing that's going right or wrong at Bank of America. Last year, it was this rise in net interest income.
The year before that, it was this downturn in investment banking, etc., etc. So what is the theme today? Well, it's actually something we predicted, and that is that trading revenues, the money that these banks make from facilitating and executing stock trades, that business is exploding. It was a record quarter for most of these banks. For Morgan Stanley, the trading revenue was up 45%.
And the reason this is happening is volatility. The administration is causing chaos in the markets, which is causing investors to reshuffle their portfolios. They're buying and they're selling. And the banks are profiting off of that. And this is what I said way back at South by Southwest. The people who are being rewarded here are not the value investors.
It's not the people who are investing long term into the real economy in America. In fact, they're getting burned. The people who are winning in the stock market are the traders, the gamblers, the speculators. It's basically the people who want to make a quick buck off of volatility. Scott, your reactions to what we're seeing from the big banks?
Very simply, when there's tumult in the market, people want to take moves. A company says, whether it's Mercedes that wants to hedge its exposure to the dollar, or whether it's a company that needs to come up with another you know, another $100 million to offload their products. They're going to have to pay a tariff on they weren't expecting.
They have to either raise money, go to a bank, or a consumer says, I freaked out about this. I'm retiring in two years. I'm going to take down my equity exposure. I'm going to sell stocks. But anything in the news like this just creates more urgency and more action and just more trading.
I mean, we've all been – everything we're talking about in terms of diversification, all the moves require a certain – or induce, if you will, a certain level of action. What we've been saying is don't do panic selling. And there's friction in that activity in the form of commissions and trading commissions for investment banks.
So whenever there's activity like this and tumult in the marketplace that inspires a lot of actions, buying and selling, the volume of commissions go up. In addition – There's going to be more exotics and more derivatives and more margin and more kind of sophisticated trading vehicles that clients and corporations will call on. They'll say, I'm worried about the U.S. market.
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Chapter 3: What are the implications of a credit crisis from the bond market?
What happens during a credit crisis or a credit freeze is that that availability of debt capital just dries up. Can't get it. you know, you can get it at exorbitant rates of interest. But, you know, most people won't pay that exorbitant rate of interest. So just pass on the purchase, pass on doing the deal, pass on the refinancing, whatever it is.
And, you know, the markets, I mean, one of the reasons I love the debt markets is because it shares so much information with you so quickly. And about risk. You know, it's a place where sort of risk hangs out, and you can see it developing on a minute-to-minute basis, like, you know, when it became apparent. And I especially love, you know, the high-yield bond index, because that's
where high-yield bonds, junk bonds are issued by companies with less than stellar credit rating, who have real risk to their credit, but can still get access to capital.
That was the great innovation of Mike Milken at Drexel Burnham, providing capital to companies that otherwise wouldn't have been able to get it, and doing it in the junk bond market by issuing these bonds publicly to a large extent. But they don't have AAA credit ratings. They often don't have investment-grade credit ratings.
They have below-investment-grade credit ratings, which means that they have to pay a higher rate of interest to borrow the money than, say, Johnson & Johnson would have to pay or the government would have to pay, assuming we don't default on our debt or we lift the debt ceiling or we don't get too crazy, which...
We happen to be going through a crazy phase now, which is why everybody gets so nervous. And so when the yields in the junk bond markets spike up, you really get the sense that people are really risk-off, as they like to say on Wall Street, that they'll borrow money or these companies can borrow money, but they really have to pay up for it.
So what happens in the junk bond market can tell you so much about— how people are feeling about risk. And last week, the yield in the junk bond market, which was already trending up because interest rates had been rising and people were worried about the economy generally, had been about 7.5%, leapt up to 8.5% like in a day or two. I mean, another huge jump in a very short period of time.
So people are really nervous. And that's just the average rate Some junk bonds are yielding, you know, 20% or more.
There's a general sense that last week that either intentionally, you know, using the debt markets as a weapon. And that is people are fed up with Trump and these sort of what they believe are reckless, mutually, you know, assured mutual destruction tariffs. And that they went, the Japanese and potentially the Chinese, went into the bond market and
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Chapter 4: How are small businesses affected by tariff policies?
The big question is ultimately, okay, then where does all the money go? I think we could reframe it not necessarily in terms of alpha, but just as a basic question. If capital is leaving the U.S. stock market, it's also leaving the U.S. bond market, it's also leaving the U.S. dollar. I mean, we've seen the dollar at a three-year low compared to the euro. Then it has to go somewhere else.
And I think the question we have to address is where will the money go eventually if that rotation is to fully materialize? Does it go to Europe? Does it go to China or to gold or maybe even to Bitcoin? Maybe to other foreign debt markets? If you had to make a very long-term prediction as to where the money ultimately goes if this rotation materializes, what would you predict?
This is not completely black and white. There's a lot of shades of gray here. I mean, the money isn't leaving our bond markets or even our equity markets. What's happening is everything's being re-rated. Everything's being repriced. So you can still get capital, which is why we're not yet in a credit crunch or credit freeze. You can still get capital. It's just going to cost you a lot more.
you can still invest in NVIDIA. It's going to cost you a lot less. So, I mean, as Howard Marks said, the great distressed bond investor, he said, you know, if suddenly you go into Bloomingdale's and everything's 25% off, you're not going to run out of the store and say, oh my God, I'm not going to buy anything. Everything's 25% off.
you're going to say, oh, let me get out my shopping cart here and pull as much as I can that I wanted to buy and put it in there.
So, you know, the time to back up the dump truck in the equity markets is when there's a major correction, which is, you know, why Warren Buffett moved into cash in such a big way at the end of last year and the beginning of this year, and now has like $350 billion of cash. You know, he's the only—if you look at the billionaire list— uh, the Bloomberg billionaire list, which I love to look at.
Uh, he's the only billionaire, I think in the top 10, whose, uh, net worth has increased since the first of the year. And he's up like 25 billion because he's sitting on this pile of cash that's earning whatever it's earning four or 5% in the bond market. Uh, so, uh, as usual, he's much more brilliant than everybody else, even though he's 92, 93, 94, not, not being ageist here, Scott. Uh,
But I think that, you know, it's just we've got the for sale sign on and you can't catch a falling knife. So you have to be careful. You know, it could go it could get worse. But basically, the message always has been in the past when markets correct. I always say that's a good thing and that's a time to invest.
So I think the majority of the people, at least the circles we run and think that this is one, bad, but two, a lot of the damage has yet to be felt. Now, obviously, we see the markets because they get marked every day.
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