WSJ What’s News - How Investors’ Bets With Borrowed Money Unraveled Markets

Episode Date: August 12, 2024

P.M. Edition for Aug. 12. The rapid decline of several popular trades and the heavy use of leverage sparked last week’s markets meltdown. WSJ special writer Gregory Zuckerman breaks down how borrowed money and risky bets set off a stock-market roller coaster. And Heard on the Street columnist Jinjoo Lee explains why the AI boom could cause a hike in Americans’ power bills. Plus, Israel puts its military on high-alert on the possibility of an attack by Iran and Hezbollah. Francesca Fontana hosts.  Sign up for the WSJ's free What's News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Benefits vary by card, other conditions apply. Israel has put its military on high alert for a possible attack by Iran and Hezbollah and how the leverage trades behind the recent market meltdown unraveled. It's always the case that when things look optimistic for investors, they get a little bit giddy, they start borrowing money. So people get carried away. And that's what was happening with the Mag-7 trade.

Plus, what the explosion of AI could mean for Americans' power bills. It's Monday, August 12th. I'm Francesca Fontana for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. Israel has put its military on high alert as concerns mount over a possible attack by Iran and Hezbollah.

Meanwhile, the Pentagon said it's sending a guided-missile submarine to the Middle East and speeding up the arrival of a second aircraft carrier. According to a person familiar with the matter, Israel doesn't know whether attacks are in fact imminent but is proceeding cautiously. Tensions in the Middle East have been at some of their highest level since the war in Gaza began. That's due to the recent high-profile killings of two militant leaders in the capitals of Lebanon and Iran. An Iranian attack could also affect efforts led by the U.S. to revive talks aimed at a ceasefire in Gaza, which

are expected to be held later this week. Elon Musk has thrown himself behind Donald Trump in the Tesla CEO's first major foray into national politics. In May, Musk launched America PAC, a super PAC or political action committee, aimed at getting 800,000 people to vote for former President Trump in battleground states. The two of them, Musk and Trump, will be speaking in an appearance on X, former We Twitter, this evening. WJ Reporter Emily Glazer, who covers power and influence, joins us to explain how Musk's

super PAC is doing as the election gets closer. Emily, how has that been going? Well, this super PAC, known as the America PAC, has had a little dysfunction, and that's according to our sources. So Elon Musk tapped a number of vendors, and this all goes back to the spring. These are people that are creating the website to try to draw people in for voting efforts.

They are knocking on doors, canvassers, as they're known. It's digital advertising. It's a whole bunch of different ways all around reaching voters and trying to figure out who will vote for which candidate. But in recent weeks, they've replaced many of these vendors. And this is with, you know, just a couple of months until the election.

Like you said, this super PAC is sort of resetting itself with fewer than 90 days before the election. Is that enough time for Musk and his team to reach their goals? They hope it will be enough time for Musk and his team to reach their goals? They hope it will be enough time. I think what's key here is that the Trump campaign has not had the strongest ground game. There's no secret to that. They are relying a lot on outside groups, including the super PAC, to help boost their

presence to get out the vote. The G.O.T.V. efforts, as they're known in these battleground states, where it could be really crucial over who wins the presidential race. We know from Chris LaCivita, a senior Trump advisor who posted on X last month, quote, the new program 100% better than the old gang solidly support this effort. So they seem to be a fan of it. And I guess time will tell whether it will be enough. That was WSJ reporter Emily Glazer.

Ahead of his appearance with Musk tonight, Trump returned to X with a few tweets. As you may recall, Twitter was Trump's preferred platform during his presidency. Nowadays he mostly uses his own social media platform, Truth Social. A European Union official also sent a letter today to Musk warning about the EU's online content rules in the context of events, including tonight's interview, though the letter didn't name Trump, referring only to a US presidential candidate. The European Commission has been investigating X over its handling of illegal content and disinformation. X chief executive Linda Iaccarino responded on the platform, writing that the

letter was an unprecedented attempt to stretch a law intended to apply in Europe to political activities in the U.S. Coming up, how betting with borrowed money ended in summer mayhem for investors. That's after the break. Stocks remained on edge today, with Wall Street searching for direction after one of its wildest weeks in years. Major U.S. indexes moved between minor gains and losses throughout the session before closing mixed. The Dow Jones Industrial Average dropped by 0.4% or 141 points.

The S&P 500 finished roughly flat. And fueled by a jump in Nvidia shares, the tech-heavy Nasdaq Composite edged 0.2% higher. Today's relatively calm session was a nice breather for markets after last week's huge sell-off. It was also a welcome respite for the investors whose popular trades were behind the meltdown. A common theme in those trades? Heavy use of leverage. Here to break down what that means is WSJ special writer Gregory Zuckerman. Greg, how did that work?

There were a lot of trades that were fueled by leverage. and leverage is just some fancy term on Wall Street we use to mean borrowing money, yeah, to make hopefully your gains much bigger. And that's what's been going on the last few months in all kinds of different markets. People talk about the yen carry trade, that's basically just kind of borrowing yen, the assumption being that that currency won't go up too much, and then taking those proceeds in yen, converting them to dollars or other currencies, and then betting on all kinds of other things, including the Japanese stock market, but also elsewhere, other kinds of markets.

And that unraveled because the yen actually has gone in the opposite direction of the dollar. The dollar has been going down because the Fed is expected to cut rates and the Japanese Central Bank has raised rates. So that came undone and there were other leverage trades that also unraveled. And one of those had to do with some of the big tech companies we've been hearing so much about, right? Yeah, it's always the case that when things look optimistic for investors, they get a

little bit giddy, they start borrowing money. So people get carried away and that's what was happening with the Mag-7 trade, basically betting on these seven specific stocks, which include kind of tech leaders and have done so well. So that was a big trade that was going on and people now realize, hey, well, maybe that doesn't work. There've been losses from the Mag-7 trade, and people have been exiting that leverage trade. Now, as traders are trying to stop the bleeding,

so to speak, how are they doing that? On the one hand, the first thing you do is you unravel. You exit your leverage trade. And that could be on your own volition, or you're forced to by your broker. Your broker gives you a margin call, as we call it, and basically a tap on the shoulder. Hey, you are basically embracing too much risk here. You've got losses. We're going to sell your securities or holdings unless you do it yourself. So some have unfortunately

been forced to unravel their trade, to exit their trades. And other people have said, you know what, I'm a little bit nervous here. I'm going to do it on my own. That was WSJ special writer, Gregory Zuckerman. The world wants more AI. More AI means more data centers powering AI models and services around the clock. More data centers means more power demand from power plants. And more power demand could mean higher energy prices for Americans. Here to explain is WSJ heard on the street columnist Jinju Lee. Jinju, what's going on here? So basically it's a supply and demand story, right? There's an increase in electricity

demand from all this AI drivendriven data center buildout. At the same time, on the supply side, we're already seeing some power plant retirements, especially coal, and new power plants take time to build. Up to five years, maybe even more if you build them from scratch. So in between the data center buildout and the time it takes to build out the power capacity, prices could really be painful. And as you mentioned in your column, we already have indications of prices rising. Yeah, so this is the PJM Interconnection, which is a regional transmission organization that

covers 13 states, including very data center-rich Virginia. They recently published the results of their most recent capacity auction. And just to take a step back, capacity prices are what you get paid as a power plant for being available. As long as you're available, you get that sort of fixed revenue. So it's like a way for the market to incentivize power plant build out. And what we saw in that auction

was that capacity prices in most of PJM was nine times higher than it was a year ago. So a clear price signal showing that the market is very tight. How are various states handling all of this? We're seeing this in PJM right now, but as this translates into higher power prices for consumers, it'd be interesting to see how states react. One way we could see this play out is in some states like Pennsylvania, utilities are not allowed to own their own power plants. Some utilities talked about possibly trying to lobby for changes to legislation so that

utilities can own up power plants. So that's one way it could play out. Another thing we're starting to see is states rethinking incentives they have in place for data center buildouts. In Georgia, for instance, earlier this year, state lawmakers passed a bill that would have halted incentives for new data centers. And the governor eventually vetoed that. But it'll be interesting to see what the pushback could be.

That was WSJ columnist Jinju Lee. And that's What's News for this Monday afternoon. Today's show is produced by Pierre Bienamé and Anthony Bansi with supervising producer Michael Kosmitis. I'm Francesca Fontana for The Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening. Music