Happy Thursday!

📝 Focus

• Fitch-slapped

📊 In the Markets

• And in the after-market...

• Spiritual Opium Part II

📖 MoneyFitt Explains

🎓️ Give them some credit (rating agencies)

📝 Focus

Fitch-slapped

US stock markets joined a global sell-off on Wednesday triggered by the Fitch credit rating agency's🎓 one-notch rating downgrade on US government bonds, or "Treasuries." Prices fell to send benchmark 10-year yields up to 4.13%, their highest in nine months, though that was also from news the Treasury would increase bond sales to help cover the deficit. The immediate reaction from informed US observers to the Fitch announcement on Tuesday afternoon had been 1) "huh?" 2) "now?" and 3) "huh??" But overseas markets were less sanguine, though it can hardly be called a crash. One curious feature of markets is how, between geographies and asset classes, there's always a suspicion that the other knows an undefined something you don't, and that may have been part of the US market reaction to overseas markets' overnight reactions.

..... ▷ While the downgrade raises red flags (that everyone knew were already an issue), it is unlikely to force investors to sell their US debt holdings or raise borrowing costs as Treasuries are so important to global financial markets that their ratings are actually not an issue: they are effectively an asset class of their own, referred to in investment mandates and by banking regulators specifically, rather than as "AAA-rated government debt."

..... ▷ Fitch, the third major US credit rating agency🎓 after S&P and Moody's (and one of the 6 regulated by the SEC), is 100% owned by privately-held media and information conglomerate Hearst Corp. The agency cited the country’s growing debt burden and an “erosion of governance”, including on fiscal matters, as reasons for the downgrade. Fitch had already put the US’s top AAA rating "on watch" back in May as the dangerous debt ceiling fight raged on in Congress to raise the debt limit to keep the government from defaulting on its financial obligations, though federal workers were always (as always) going to take the hit before the Treasury would default on other obligations (interest, debt repayments etc.) It was ultimately signed on June 2, just three days before the US Treasury said the US could run out of money to pay its bills. But that was then.

..... ▷ The last time US debt got downgraded was in 2011 under President Obama, when, again, lawmakers drove debt ceiling negotiations right to the edge (but not over) the cliff. The threat of default was enough to prompt S&P into a credit downgrade, sparking a major stock market sell-off. (It's not been upgraded since.) That downgrade happened on a Friday afternoon, and on the following Monday, the S&P 500 plummeted 6.5%, which it took another half a year to recover from. As the first downgrade in history, investors around the world had no idea what to expect, but as it turns out, the downgrade didn’t in fact raise US borrowing costs significantly or damage the standing of Treasuries.

📊 In the Markets

And in the after-market: Wall Street closed lower for a second day after Fitch downgraded the U.S. government's credit rating from AAA to AA+ during after-market trading (see above). Major indexes recorded their biggest drop since April. Despite concerns, most informed observers believe the downgrade won't have any sustained negative impact on markets, not least thanks to the economy's strength (viz Private sector hiring in July, as per ADP, once again coming in well ahead of the expectations of Wall Street's Finest, at 324k vs 175k, driven by a 201k jump in hotels, restaurants and bars.) Traders took the opportunity to lighten holdings of tech stocks, including Tesla, Nvidia, Meta, and Apple.

..... ▷ Meanwhile, having traded up 3% in the after-market yesterday, Advanced Micro Devices ended the day DOWN 7% over concerns that targets for its artificial intelligence chip production ramp-up may be too ambitious. (LESSON: After-market trading can be a useful preview of the following day's stock moves... but not always.) Those worries overshadowed AMD's upbeat forecast for the year, though to be fair, the fall came amid the broader tech and mega-cap sell-off that saw GPU chip leader Nvidia drop 4.8%, and the Philadelphia SE Semiconductor Index ("SOX") drop 3.5%.

..... ▷ Zero-commission gamified app-based stock broker Robinhood, famously at the centre of 2021's meme stock frenzy (and PFOF controversies), reported its first-ever profitable quarter as a public company. HOOD produced a net income of $25mn, or 3 cents a share, vs forecasts of a 1 cent loss. But earnings were not boosted not directly from stock transactions, but from 243% higher interest income earned providing loans for customers' "margin trading". (Customers can borrow money to buy shares, though they still need to come up with some of it in cash. The balance is borrowed from the brokerage, which charges them interest.) What the market responded to was the one million decline in monthly active users to 10.8 million as well as a 5% drop in transaction-based revenue. HOOD was down 5.5% in after-market trading (see above.)

Spiritual Opium for Kids

Beijing plans to limit minors' device usage and control online content through a new system, challenging tech groups already regulated by the state. The powerful Cyberspace Administration of China (CAC) proposed a "minor mode" that sets time limits and curfews on usage, with pop-ups reminding minors to rest after 30 minutes. The rules aim to promote healthier activities and limit the addictive qualities of online content. All content providers, such as ByteDance and Tencent, must create limited pools of videos and games for minors. Some observers doubt the effectiveness and execution of the regulations, though Tencent dropped 3% in HK trading on Wednesday partially in response.

..... ▷ Children under eight years old will be restricted to using their smartphone for only 40 minutes a day, while those between the ages of 8 and 16 can use their phone for one hour per day. Teens 16 to 18 can use theirs for up to two hours each day, with anyone under 18 prevented from accessing the internet between 10 pm and 6 am. Any kid wanting permission to extend their internet use will need to formally send an exception request to their parent or guardian to sign off on. The platforms will also have to identify any and all illegal information before it even reaches the minor’s device, including “information that may affect the physical and mental health of minors,” although the regulation does not state what specifically falls under that category. The “minor mode” would need to be built into smartphones and tablets via the power button, the interface logo or the system setting.

..... ▷ Two years ago, almost to the day, the government in Beijing called online gaming "spiritual opium" in an article published in state media (the Economic Information Daily.) The term has a long history, traditionally being used when referring to foreign cultural products, and the Chinese government's antipathy towards video games is based on the idea that online gaming is addictive and harmful to the mental health of minors, and that article called for stricter regulations on the industry. In "response" to the article, the Chinese government implemented a number of new regulations on all online games that are played in China, including limiting the amount of time that minors can spend playing online games to one hour per day on Fridays, Saturdays, and Sundays, requiring all online games to have a "healthy" rating, meeting certain criteria for content and gameplay, banning the use of facial recognition technology to verify the age of minors. Inevitably, some criticised the regulations for stifling the growth of the online gaming industry. It warned then that it would continue to monitor the industry and that it is prepared to take further action if necessary. Well, that's now, and it's no longer restricted to online gaming.

..... ▷ Companies in China have since 2012 already had to use real-name registrations in order to comply with access restrictions. This includes requiring users to provide their name, date of birth and national ID number when they register for an account. Inevitably, this was met with mixed reactions at the time, ranging from the belief that it is a necessary measure to protect users from online fraud and other illegal activities to complaints that it was an infringement on privacy (or worse.) These proposed rules actually bear some similarities to bills introduced in US states like Arkansas, Louisiana and Utah to restrict kids from accessing the internet and social media (including, of course, Bytedance's TikTok.)