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Speaker 2: Let's identify consensus, and then let's always think about what
Speaker 2: always will go wrong, because consensus never gets it quite right.
Speaker 2: Francois Trahan is excellent at this chief investment strategist being
Speaker 2: on capital Marcus. Let's start with what is consensus right
Speaker 2: now in the Trehan world.
Speaker 3: Consensus is pretty constructive. It's pretty bullish, as it should be.
Speaker 3: After my most stock indices in the US are sitting
Speaker 3: your all time highs, and so I think people are
Speaker 3: very constructive. Unfortunately, when you get into that mode, you
Speaker 3: stop thinking about what could possibly go wrong, and I
Speaker 3: think that's the most important question to ask when you're bullish.
Speaker 3: And the answer this year, I think is inflation and.
Speaker 2: LinkedIn to interest rates. Urine tim or out On LinkedIn
Speaker 2: with a brilliant, brilliant chart migrating the five percent thirty
Speaker 2: year bond a higher yield. Link out of consensus in
Speaker 2: the equity market with a five point two, five point four,
Speaker 2: five point whatever percent thirty year.
Speaker 3: I haven't seen it, well, I know you.
Speaker 2: Haven't seen it chart, but the basic idea is higher inflation,
Speaker 2: higher yields. Market it the thirty year bond. How will
Speaker 2: that affect the so.
Speaker 3: Push out, push out the curve. Well, you know that's
Speaker 3: the that's the issue is. I think people are really
Speaker 3: focused on one thing when it comes to inflation, and
Speaker 3: it's oil, which is now off the boil. It's really
Speaker 3: when a rise in commodity prices, energy prices turns into
Speaker 3: core inflation or what the FED calls underlying inflation, that
Speaker 3: it becomes in issue from market multiples. And I'm fearful
Speaker 3: that that might be, you know, that might be what
Speaker 3: we're wrestling with come the fall.
Speaker 4: We have a new FED chairman, mister Walsh. Presumably he
Speaker 4: comes in with some kind of expectation to lower rates,
Speaker 4: if you will, But boy, the data doesn't seem to
Speaker 4: support it. And what do you expect to hear from
Speaker 4: our fatt.
Speaker 2: It's in a tough spot.
Speaker 3: Yeah, let's be honest, because the data is very constructive,
Speaker 3: you know, particularly if you look at the pmis the
Speaker 3: ism yesterday, the regional pmis are seeing these smile patterns
Speaker 3: and virtually every data series. I think that was a
Speaker 3: surprise to consensus, you know, after what occurred in March.
Speaker 3: At the end of the day, we have an insane
Speaker 3: amount of stimulus hitting the economy in twenty twenty six.
Speaker 3: So it is your classic recovery, the tie that lifts
Speaker 3: all boats and earnings. We're clearly seeing that, and it's
Speaker 3: being augmented by what is happening to AI. Forward earnings
Speaker 3: growth for the S and P is up twenty nine percent.
Speaker 3: I've been at this a little over thirty years now.
Speaker 3: I've only seen numbers like that twice, coming out of
Speaker 3: the GFC and coming out of the pandemic, and so
Speaker 3: this is really unique times that we're in. But that
Speaker 3: is often a sign of an economy that is overheating.
Speaker 4: How about you see, like Tom mentioned earlier, Google coming
Speaker 4: to market really really the first time since it went
Speaker 4: public twenty some odd years ago, with this massive equity
Speaker 4: deal on the backs of the tech industry for the
Speaker 4: first time really in its history, tapping the bond market
Speaker 4: in size. What do you make of all this investment
Speaker 4: in AI? And it's something like we haven't seen.
Speaker 3: Yeah really, you know, at a you were asking me
Speaker 3: about consensus. So one place where I think it might
Speaker 3: be off is just how strong the US economy is
Speaker 3: in twenty twenty six. A lot of people are still
Speaker 3: hung up on structural issues, and they're very legitimate, but
Speaker 3: cyclically speaking, you know, if you do back of the
Speaker 3: envelope math, you're getting about a percent to GDP growth
Speaker 3: this year from the big beautiful bill. You're getting over
Speaker 3: a percent from the capex cycle, just from the top
Speaker 3: five hyperscalers, which is a little mind blowing if you
Speaker 3: think about it. And then we haven't even talked about
Speaker 3: the lagged effects of the Fed's rate cuts, you know,
Speaker 3: which take almost two years to impact the economy. So
Speaker 3: it's not that difficult to get to three four percent.
Speaker 3: You know, in twenty twenty six.
Speaker 2: The the nominal GDP is five ish or dare I say,
Speaker 2: with inflation sixes percent? I guess it's not a Banana republic.
Speaker 2: But it's not the American economy we knew two years ago,
Speaker 2: twelve years ago, twenty two years ago. It's original, isn't it.
Speaker 3: Well, what's changed is fiscal stimulus and monetary stimulus I
Speaker 3: would say we had the Kapex cycle. It wasn't as
Speaker 3: pronounced as it is today. But we've added to that
Speaker 3: rate cuts and we've added fiscal stimulus.
Speaker 2: Okay, so inside baseball, folks, I don't want to nerd
Speaker 2: out here. It's too early in the morning, and you know,
Speaker 2: Alexis and ire up all night talking about the Knicks.
Speaker 2: The bottom line is is the Kalucky Levy theory, which
Speaker 2: Richi Sharman talks about in the Ft, is that if
Speaker 2: you have a big government deficit, some of that rolls
Speaker 2: over is a spirit into the private economy. It's a
Speaker 2: you know, theory fifty sixty seventy years old. Are we
Speaker 2: getting a goost to our economy because of all this
Speaker 2: debt and deficit? Partially?
Speaker 3: Yeah, absolutely, And I think you know, the real challenge
Speaker 3: for Walsh is that the FED is dealing with labor
Speaker 3: markets that are unlike anything we've seen before. We have
Speaker 3: literally zero growth in the labor force this year, partially
Speaker 3: because of demographics, partially because of immigration policy. But we
Speaker 3: haven't seen anything like that one.
Speaker 2: The last thing, I mean, you know, it's amazing when
Speaker 2: you're with the Bank of Montreal, I'm looking at Brian
Speaker 2: Bouchet on ESPN at the hockey game or whatever, and
Speaker 2: there's friends out Trajan and Raleigh and that, Like in
Speaker 2: Montreal the next day. I mean, the Canadians want to
Speaker 2: run to get back into the game. Can they sustain
Speaker 2: this Montreal Canadians excellence in the next year.
Speaker 3: Oh yeah, there's always next year.
Speaker 2: I mean, that's what you're saying. Montreal. It's only Paul.
Speaker 2: They haven't won the Stanley Cup. I mean the reason
Speaker 2: the maple leafs are so bad and so there gonna
Speaker 2: be somebody's lil dies a Canadians, I know, like the
Speaker 2: last time they won.
Speaker 4: Yeh yeh yeh.
Speaker 2: Franz, thank you for coming in greatly, greatly appreciate it.
Speaker 2: Be more. Capital Market's really smart. Note with the tron charts,
Speaker 2: we love to see. Stay with us more from Bloomberg
Speaker 2: Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
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Speaker 2: This is the adult I want to get Smarter book
Speaker 2: for the summer for equity in bond people on the street.
Speaker 2: This is heavy lifting. There's no differential equations. But there's
Speaker 2: a lot of work here. And here's Paul. As you
Speaker 2: bring in Michael, here's what you need to know. Joyce Chain,
Speaker 2: JP Morgan, a guy named Gibelli heard of them, great supporter,
Speaker 2: Seth Klarman of Value, Howard Marx and at Carlisle Group
Speaker 2: ex School. When Harvey Schwartz lines up for this book
Speaker 2: is the the Wall Street book of the summer. It
Speaker 2: is the credit Investor's Handbricmichael Gatto Paul Sweeney.
Speaker 4: With Michael Professor Michael Gatto, partner, professor and author at
Speaker 4: silver Point Capital. Thanks for coming into our studio.
Speaker 5: Thank you so much for having me.
Speaker 4: How has the credit market changed? I went through the
Speaker 4: Chase Manhattan Bank and Credit training program. I feel like
Speaker 4: I'm pretty good on credit. But now I'm seeing some
Speaker 4: of the technology companies coming to the markets with these
Speaker 4: monster sized deals. How do you look at the credit market.
Speaker 5: Well, it's changed massively over the thirty years I've been
Speaker 5: in it. Right, it used to be boring when you
Speaker 5: went to a commercial bank, you made a loan, you
Speaker 5: held it. That was said then in the nineteen nineties,
Speaker 5: loan started to trade, so banks, investment banks could arrange it,
Speaker 5: sell it off to non banks. They traded. Then two
Speaker 5: thousand and eight you got huge amount of influx of
Speaker 5: capital doing private credits, saying, hey, you could come directly
Speaker 5: to us, A fund will lend you the money. You
Speaker 5: don't need a bank. And then you had in twenty
Speaker 5: fifteen liability management or what the press loves, creditor on
Speaker 5: creditor violence. That changed the whole dynamic of lending senior security.
Speaker 5: It used to be with the Three Musketeers. If Tom
Speaker 5: owns a debt, you own it. I own it, same debt,
Speaker 5: same company, We're all for one, one for all, were
Speaker 5: the same. All of a sudden it changed, and certain
Speaker 5: investors in the same exact death instrument end up doing
Speaker 5: better than other debt instruments. So what I would say is,
Speaker 5: when I started in the business, senior secure lending was boring.
Speaker 5: I was boring. It was a perfect fund, And over
Speaker 5: time it became interesting and exciting.
Speaker 2: You know, folks, I got to cut to the chase here,
Speaker 2: I mean, you know, margin call with Jeremy Iron sitting
Speaker 2: at the end of the table, Peter Sullivan was the
Speaker 2: character Zach Quinto doing it the junior risk analysis and
Speaker 2: margin call from years ago. How many people in your
Speaker 2: racket really aren't all that smart because your book is
Speaker 2: a tough read and it makes them smarter. There's a
Speaker 2: lot of pretenders in credit, aren't there?
Speaker 5: No one, I get myself in trouble if I said
Speaker 5: there's a lot of pretenders in credit. No, I think
Speaker 5: people evolved. I think historically being in credit you were
Speaker 5: a second class citizen because it wasn't as sexy and
Speaker 5: it was like, hey, all you have to do is
Speaker 5: can I get paid back? Yes or no? And it
Speaker 5: was viewed as a lesser business. Then let's say equity
Speaker 5: as equity's got more and more efficient as dead started
Speaker 5: to troy as distress debt buying someone else's problem add
Speaker 5: significantly below palm where you could have downside protection, but
Speaker 5: all the upside of converting some of that debt potentially
Speaker 5: into equity. All of a sudden, people got a lot
Speaker 5: lot more sophisticated. And the reason I wrote the book
Speaker 5: is for the younger professionals. There was no book you
Speaker 5: could go on Amazon type how do I invest in equities?
Speaker 5: Thousands of books? How do I invest in senior secured,
Speaker 5: non investment grade, distress debt zero books. So I wrote it,
Speaker 5: I got a monopoly. I want to monetize the monopoly
Speaker 5: while it's still there.
Speaker 2: And I take a.
Speaker 5: Little offense Tom, and I love you. It's an easy read.
Speaker 5: I wrote this book so you My goal was you
Speaker 5: read it and say, holy crap. I learned a lot,
Speaker 5: but that wasn't pain fault. So every technical concept, like
Speaker 5: a fraudulent conveyance, I ended with an interesting story like
Speaker 5: Caesar's big fight over moving assets accusations of a fraudulent conveyance.
Speaker 5: So I try to teach all of the technicals that
Speaker 5: you need to be a CREDITI vest whether it's performing
Speaker 5: or distressed, but then use real companies to illustrate it,
Speaker 5: and then tell a war story. So you say, oh,
Speaker 5: the girl, that wasn't that paint fault.
Speaker 4: What's your view on private credit? If it weren't for
Speaker 4: the warner in, I think this market would be talking
Speaker 4: about private credit a lot more. How you view it?
Speaker 5: Yeah, Look, private credit historically has been a phenomenal asset class.
Speaker 5: You're lending senior secured. You put a one to one
Speaker 5: debt to equity ratio. And you're gotting double digit yields
Speaker 5: with downside protection. So it's a phenomenal asset class. Now,
Speaker 5: basic economics tell you if you're earning excess returns to
Speaker 5: the perceived risk, a lot of capital flows in. And
Speaker 5: that's what happened, a ton of capital float in. I
Speaker 5: just wrote an article on how the anaalog. You said,
Speaker 5: because what's gonna happen? Is this just going to be
Speaker 5: a dispersion of returns. The players that have been in
Speaker 5: it live through cycles, got punched in the face and
Speaker 5: al wait, learn from it. Are going to stay disciplined.
Speaker 5: They're not going to get involved in race to the
Speaker 5: bottom deals. And but I think the asset class is
Speaker 5: great if done well. I think some some fields that
Speaker 5: I've done were bad deals, and if you did too
Speaker 5: many of them, you're you're gonna have a problem.
Speaker 2: But I love the asset Wall Street worldwide. The credit
Speaker 2: investor's handback, Michael, getto whether we're going to continue where
Speaker 2: then the professor is definitive here with a guy named
Speaker 2: Solomon of Gold and Sex writing it forward is well,
Speaker 2: I want you to talk about the Gagillia. So the
Speaker 2: equity deal yesterday from Google original large in that. But
Speaker 2: talk about the wall, the demand, the demand for the
Speaker 2: hyperscaler bond offerings. What does it signal to.
Speaker 5: You, Well, look, a ton of capital is getting raised
Speaker 5: for data centers.
Speaker 2: There's going to be.
Speaker 5: Equity and debt as in every fundraising. It's an interesting
Speaker 5: thing debt play. The goal of a debt investor is
Speaker 5: to get equity like returns with debt like a downside.
Speaker 5: Now there's a question whether some of these debt deals
Speaker 5: you're getting debt returns with equity downside, which is the
Speaker 5: polar opposite of your wants of what you want. But
Speaker 5: I break these into three types. There's the data centers
Speaker 5: with a long term investment grade lease, lowest risk, but
Speaker 5: you got to do your work. One, are there cancelation
Speaker 5: causes in those leases because you might think, oh, I'm
Speaker 5: taking meta risk, and then all of a sudden you
Speaker 5: find out the contract could get canceled after two years
Speaker 5: if certain events happen. So you got to go in.
Speaker 5: You got to make sure or you have the right
Speaker 5: legal entity. Big companies have massive legal entities. You might
Speaker 5: have a name that's guarantee your loan that doesn't have
Speaker 5: the corporate guarantee. So you got to do a lot
Speaker 5: of work. And that's one end of the spectrum, lower risk.
Speaker 5: It's got a contract. And then there's the ones that
Speaker 5: you're builded and they would come and that's a higher risk.
Speaker 5: But everything is going to get financed with debt and equity.
Speaker 4: First Brands tell us about First Brands and how that
Speaker 4: might have been a teaching tool for credit investors.
Speaker 5: Look, I'm gonna professor, you see this, said, I teach
Speaker 5: how Columbia it's the school the MBAs and then ford
Speaker 5: him the undergrants, and I tell every student learn from mistakes.
Speaker 6: That's how you learn.
Speaker 5: Best way, learn from someone else's mistakes. First Brands had
Speaker 5: five I wrote an article on this. It had five
Speaker 5: red fires. Now, a red flag doesn't mean I'm not
Speaker 5: going to do the deal. A red flag means I
Speaker 5: got to dig deep B. And when you went into
Speaker 5: the first book, you said the Kate alone, you couldn't
Speaker 5: did deep BA and you had to make the decision
Speaker 5: just because everyone else is doing it? Should I? And
Speaker 5: I write about that, Michael, I got to get this in.
Speaker 2: I just think it's too too important. There's always leverage
Speaker 2: within the system. Where's the leverage now or the implied leverage.
Speaker 5: Well, I think and I've heard this some people have said,
Speaker 5: is private credit going to be the next catalyst for
Speaker 5: a downturn? I think it's very misunderstood when you look
Speaker 5: at it. Is a private equity. Let's use a private
Speaker 5: equity as an example. They're gonna buy a company. The
Speaker 5: private credit investors are usually lending about fifty percent loan
Speaker 5: to value. Then you have they go to the banks.
Speaker 5: The banks lend them fifty percent loan to value on
Speaker 5: what their debt was. So you got a ton of question.
Speaker 5: The company's got to decrease in value by half. Private
Speaker 5: equity loses money the debtholder dozen then it's got to
Speaker 5: reduce by another half for the banks. And the banks
Speaker 5: are cross collateralize. So I look at it and say, look,
Speaker 5: from the stability of the financial markets, this is very
Speaker 5: low risk for banks that are funding very.
Speaker 2: Eiching Green writes in his book Chapter to Chapter and
Speaker 2: the History of Currency about financialization, what does the Michael
Speaker 2: Ghetto financialization look like?
Speaker 4: Right now?
Speaker 2: Are we all being too cute with our technology? Our
Speaker 2: academics are smarts in credit.
Speaker 5: I'm got to be honest, I'm not sure I understand
Speaker 5: the question what do you mean by that?
Speaker 2: Very Chagreen says, at some point within a capitalistic system,
Speaker 2: financialization takes over where it's trading as trading. There's trading
Speaker 2: that within banking. Do you see that within the American system.
Speaker 5: I'm not sure. I have a strong view on that.
Speaker 5: My area of expertise is credit and private credit, and
Speaker 5: I see that as only positive in that one. If
Speaker 5: you're only relying on banks, when the banks get nervous
Speaker 5: and seeing your manage the owner of the bank saying
Speaker 5: reduce sk that could take a normal downturn and create
Speaker 5: a big session.
Speaker 4: You know.
Speaker 5: It's It's what Howard Marx talks about in his book
Speaker 5: is if all of a sudden the banks pull, a
Speaker 5: moderate recession becomes a big recession. And I think you
Speaker 5: see that in twenty twenty three, right, that's where the
Speaker 5: banks were hung with Twitter, Right, they were hung with
Speaker 5: another deal. The regional banks, Silicon Valley Bank which was
Speaker 5: obscure went under, and the banking are the more traditional
Speaker 5: finance providers just slow down because private credit was there
Speaker 5: in the world survive and if a private for any
Speaker 5: credit fun gets into problems, no harm, no foult.
Speaker 2: Michael Thank you so much. Michael Janner with this, Professor
Speaker 2: Gator with us the Credit Investor's Handbook. I can't say
Speaker 2: enough about this. This is the adult read for Global
Speaker 2: Wall Street this year. Even equity animals like Joyce Chang
Speaker 2: or JP Morgan's to shut up and read it. You're
Speaker 2: just really really good with some really foundational at work
Speaker 2: there for a Global Wall Street. Stay with us. More
Speaker 2: from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
Speaker 1: Applecarplay and Android Auto with the Bloomberg Business app, or
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Speaker 2: Our interview of the Day. Ted Mortensen is an institution
Speaker 2: at Baird looking at software. It's in right now. I
Speaker 2: like the treatment. I think zero headshet it yesterday that
Speaker 2: the Great Silence of May of twenty twenty six is
Speaker 2: the thirty five percent recovery in Microsoft straight down like
Speaker 2: a rock. Four standard deviations plus two minus two and
Speaker 2: boy his software come back. Let's start with the why
Speaker 2: why has software rebounded?
Speaker 7: I think you've seen some reports on data Dog and
Speaker 7: Snowflake on the consumption side, as well as Mango dB
Speaker 7: that I've actually blown out numbers, and I think we're
Speaker 7: now starting to see instead of a gentic software being
Speaker 7: in a test phase, it's actually been deployed.
Speaker 2: Bill Ackman bought Microsoft and made us splash as mister
Speaker 2: Ackman is wont to do. Did he jump start this? No?
Speaker 7: I think Jensen Jensen from a Navidia jump started at
Speaker 7: copy Taxi based.
Speaker 6: He said coat, Yeah, maybe you shouldn't, but both did.
Speaker 7: Software is a free cashlow machine and in this cycle,
Speaker 7: infrastructure leads the AI build software is going to go
Speaker 7: along for the ride, but the news software is going
Speaker 7: to go along for the ride. So a lot of
Speaker 7: free cash flow coming to these names.
Speaker 4: Ted, what do you make of our good friends at
Speaker 4: Alphabet coming to the market for really the first time?
Speaker 4: I would say, since the IPO with eighty billion dollars
Speaker 4: straight equity converts the whole nine yards of private investment
Speaker 4: from Berkshire, what does that tell you?
Speaker 6: It's a big deal.
Speaker 7: And the reason why it's a big deal is this
Speaker 7: is going to extend the cycle and if Google is
Speaker 7: doing it, I guarantee all the other clubs.
Speaker 6: Yes, that's right.
Speaker 2: The meetings you that are listening in your cars on
Speaker 2: your way to her. What God say to Google do meeting?
Speaker 6: That's right.
Speaker 7: So what this will do is that will extend the
Speaker 7: CAPEX cycle infrastructure first into twenty seven. This is a
Speaker 7: race to AGI or what we call human intelligence. And
Speaker 7: this is a cycle like no other. It's real, It's
Speaker 7: not two thousand.
Speaker 4: Got the Philadelphia stockishing semiconductor inext up eighty percent?
Speaker 6: What is that about?
Speaker 4: I mean we're talking semis here.
Speaker 2: Well, we're now.
Speaker 7: You know, I'm old, so I've I've, I've I've lived
Speaker 7: through pretty much every single cycle. And you have to
Speaker 7: understand that we're now in animal spirits land and animal
Speaker 7: spirits then two thousand. This can go on for a
Speaker 7: long time and value doesn't matter. And if you look
Speaker 7: at the HP print last night, you know you're a
Speaker 7: different hemisphere on where these models are coming out post earning.
Speaker 2: So the Google deal was very interesting in that it
Speaker 2: was very conventional, like a six percent haircut on one
Speaker 2: trune to Berkshire, right, and almost eight percent haircut on
Speaker 2: another trune to Berkshire, et cetera, et cetera, And then
Speaker 2: there's this new fangled thing where they're going to pay
Speaker 2: the tax obligations to the employees by an on the
Speaker 2: run offering, which I think zero Edge is right on
Speaker 2: this that retail shareholders are going to pay the taxes
Speaker 2: do at Google? How did this happen? Where did this
Speaker 2: come from?
Speaker 7: I think it's this is a war for talent, and
Speaker 7: if you really look at all these companies, it's all
Speaker 7: about engineers. I mean, at the end of the day,
Speaker 7: it's product innovation through brilliant engineers. And I think they're
Speaker 7: just stop gapping, you know, with the intensity of free
Speaker 7: cash flow on the Capex builds, they're just finding another
Speaker 7: avenue to lock up employees.
Speaker 4: Are we rerating the valuation for global tech here these days?
Speaker 4: It just again you mentioned we're in the world of
Speaker 4: animal spirits, are rerating the valuation of technology absolutely so.
Speaker 7: If you look at Memory and that's you know, sk Heinec,
Speaker 7: Samsung and Micron. Take Micron for example. Traditionally it's been trading.
Speaker 6: On book value a multiple book value. Now it's trading
Speaker 6: on a pe.
Speaker 7: And if you look at Micron for example, I've never
Speaker 7: seen Micron or Memory have eighty.
Speaker 6: One percent gross margin guides.
Speaker 7: So we're in a different world, and that's due to
Speaker 7: inference in friends drives a tremendous amount of memory consumption.
Speaker 7: So yes, we're rerating, and I think you have to
Speaker 7: put the AI cycle own perspective.
Speaker 6: This is US and China right now.
Speaker 7: If we didn't have the Iranian War, you would see
Speaker 7: the Middle East go basically straight up on AI.
Speaker 6: And they will go up on AI.
Speaker 7: Europe has to go along for the ride, and unfortunately
Speaker 7: the EU is very bureaucratic, and I think they'd rather
Speaker 7: find US companies first innovate and they really risk not.
Speaker 6: Getting on this AI cycle economically. In defense related I
Speaker 6: endure William Power.
Speaker 2: You have William Power, but can we make some news
Speaker 2: swarning and are lifting his target on Microsoft? Would you
Speaker 2: like to make an announcement for no.
Speaker 7: I think will is a fantastic analyst. And I think
Speaker 7: when you see the leverage of their free cash flow
Speaker 7: and how they're re architecting the company real time, real time,
Speaker 7: it's a real time architecture. This is a company that
Speaker 7: dominates enterprise, just dominates enterprise.
Speaker 6: They're a line item on budgets. The point that's a
Speaker 6: good way and they are a line item.
Speaker 7: I think what they have to do to the enterprise
Speaker 7: is innovate where they're actually benefiting enterprise productivity going forward,
Speaker 7: and they have that opportunity.
Speaker 6: The whole management team is a rated so they'll get there.
Speaker 4: Ted, you're not a hype kind of guy. You've been
Speaker 4: around the long term.
Speaker 2: You're navy guy.
Speaker 4: I mean, what's going on that day? How how do
Speaker 4: you think about AI? Because it's just it's burst onto
Speaker 4: our lives in the last couple three years like nothing else.
Speaker 7: I think the infrastructure build is historic. Okay, So for
Speaker 7: my clients, they have to make money. And right now there,
Speaker 7: as you indicated, the semiconductor indexes up eighty percent, sixty
Speaker 7: percent in the last two months. You know that's a
Speaker 7: good decade return, right So I think from that standpoint,
Speaker 7: it is the most powerful cycle I've seen in my career. Now,
Speaker 7: with that said, there's a lot of exponential risk that
Speaker 7: is not factor into this market, whether it be geopolitical,
Speaker 7: whether it be US political, whether it be inflation. There's
Speaker 7: a tremendous amount of inflation going on in the tech market.
Speaker 2: I mean, and on long and Bloomberg News just said this,
Speaker 2: We're going to see later this year tech inflation fold
Speaker 2: into our general inflation statistics by that concept. Absolutely does
Speaker 2: it gets us about four percent inflation as a run rate. Yes,
Speaker 2: where's a yell go? Then the thirty the ten year yield?
Speaker 2: Does it get to five percent? Do we have a
Speaker 2: thirty year bond a gust of five and a six percent?
Speaker 2: That's why I'm getting you in so much trouble.
Speaker 7: Yes, it's my personal in the answers. Yes, what I
Speaker 7: see on just the HP call last night, right, they
Speaker 7: are raising prices. So is Dell so much on enterprise
Speaker 7: customers that they can print an number or they want
Speaker 7: on price increases. And you know memory is a big,
Speaker 7: big problem out there. When you have memory up sixty
Speaker 7: eight percent sequentially on price to say, that's not going
Speaker 7: to impact the longer bonds.
Speaker 6: That the FED can't control. I think we do go
Speaker 6: through five.
Speaker 2: This has been wonderful Ted More and said, what perfect
Speaker 2: time you director of technology? Definitive it bear stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
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Speaker 2: YouTube right now, truly one of the great strategies of
Speaker 2: the modern nage. From England, Matt King joined us Satori Insights. Matt,
Speaker 2: wonderful to have you on. You write on momentum. I
Speaker 2: suggest a lot of people don't understand the physics of
Speaker 2: momentum nor the investments selection of momentum. What are your
Speaker 2: thoughts on twenty twenty six tech momentum.
Speaker 8: So basically, thanks very much for having me so basically,
Speaker 8: the puzzling markets are sort of the same as it
Speaker 8: always is. Why does everything keep going up? But as
Speaker 8: you say, this year and especially recently, it's become more extreme.
Speaker 8: It's not just that the market always wants to rally,
Speaker 8: it's that the best performing strategies are all the ones
Speaker 8: that basically consist of just buying whatever's been rallying the
Speaker 8: most already. It's the exact opposite of what every professional
Speaker 8: has been trained to do to look for mean reversion,
Speaker 8: to look for things that are cheap, You buy the
Speaker 8: expensive things, You buy what's already rallied, and then you
Speaker 8: end up outperforming. And I think a lot of the
Speaker 8: reason that people are sort of so conflicted about in
Speaker 8: the market at the moment. It's because of this momentum
Speaker 8: is outperforming retails outperforming versus institutional investors in terms of
Speaker 8: the names that they're long. And then some of the
Speaker 8: things that are doing best are unprofitable tech or names
Speaker 8: with weak balance sheets. And it's not just the earnings
Speaker 8: that are driving it. That's the kind of consensus story. Oh,
Speaker 8: it's about the strength of tech earnings. That's some of
Speaker 8: the truth. I mean, you can tell from all these
Speaker 8: things it's not just about that there's something deeper going on.
Speaker 4: It's something deeper. It just it seems like investors, at
Speaker 4: least over the last twenty plus years, have been kind
Speaker 4: of trained it to buy the dip. Talk to us
Speaker 4: about that. That seems to be a pretty good strategy.
Speaker 8: I think it's exactly that, And the drivers have changed
Speaker 8: a little bit. I feel like I spent my whole
Speaker 8: professional career studying bubbles and dip buying, but the drivers
Speaker 8: have changed. For a long time, it was central bank
Speaker 8: liquidity that was driving it. Then it was US fiscal
Speaker 8: that's driving it. But increasingly at the moment, exactly as
Speaker 8: you say, it's as though investors have been trained to
Speaker 8: keep on buying the dips So if we look back,
Speaker 8: say all the way to nineteen twenty eight, if you
Speaker 8: had been buying the dips, if every time the SMB
Speaker 8: went down ten percent you bought it, you would have
Speaker 8: made money just over half the time. If you had
Speaker 8: bought those dips in the two thousands, you would only
Speaker 8: have made money a third of the time. If you've
Speaker 8: been doing that since two thousand and nine, you've made
Speaker 8: money every single time. And it's like there was a
Speaker 8: wonderful statistic in the Bantle survey recently where they said, oh,
Speaker 8: cash levels are really low, everyone's really long. This triggers
Speaker 8: our cell signal. But the magnitude of the cell off
Speaker 8: you get is only two or three percent. That's not
Speaker 8: a sell signal, that's a by signal. And so now
Speaker 8: it's not only retail that's doing hedge funds are forced
Speaker 8: into the same strategies.
Speaker 2: And what's interesting here, Matt and in Christ the crash
Speaker 2: of seven and eight was Matt King's fault.
Speaker 6: I don't know if you knew that.
Speaker 2: But Matt, is your study of history leverage always plays here.
Speaker 2: Do we have an overt leverage now within our crazy
Speaker 2: system or is there a very subtle leverage from things
Speaker 2: like huge deficits, et cetera.
Speaker 8: Two great questions there bought leverage in financial markets. It's
Speaker 8: not the amount, although we are back to post two
Speaker 8: thousand and eight highs on hedge fund leverage. It's whether
Speaker 8: it's diversified or not. And the snag at the moment
Speaker 8: is not only that the leverage levels are high, but
Speaker 8: even though the beaters with the S and P look low,
Speaker 8: the correlations are high. So what that means is it's
Speaker 8: not that people are overtly long in the market. It's
Speaker 8: not that the hedges are chasing momentum for the sake
Speaker 8: of it. But they're doing a whole load of things
Speaker 8: they hope are diversified, but they're actually all ending up
Speaker 8: in the same sorts of trades, the same names. Anyway,
Speaker 8: it's not as diversified as they think. And the real
Speaker 8: thing that's been low and could spike higher is correlation.
Speaker 8: And Cameron Creess had a wonderful article on Bloomberg about
Speaker 8: that just the other day. As for the fiscal side,
Speaker 8: you're right in the background, even though financial sector leverage
Speaker 8: has been lower, you've had this creeping up of public
Speaker 8: debt levels, and I think across the board. What we've
Speaker 8: had is this sort of suppressing the day to day
Speaker 8: problem but adding to the tail risks. And that's true
Speaker 8: in politics, that's true for immediate markets and central banks.
Speaker 8: And it's this tension beneath the surface, which is there
Speaker 8: the whole time and which investors find so hard to
Speaker 8: deal with.
Speaker 4: What could put an end matt to this sense that
Speaker 4: the market just keeps going up? I mean, is an
Speaker 4: external event? Is it a FED misstep, is it a
Speaker 4: what do you think could kind of derail this?
Speaker 8: The obviest thing that everyone would point to is interest
Speaker 8: rates and interest rate hikes, and yes, that increases the
Speaker 8: cost of leverage, and it's one of the moving parts here,
Speaker 8: and so people do worry about inflation and around the triggers.
Speaker 8: Having said that, not only can you see the market
Speaker 8: shrugging it off from one day to the next, we
Speaker 8: rally more on Trump saying oh, we're close to a
Speaker 8: deal than we do want around saying no, no, we
Speaker 8: don't even want to negotiate anymore. But I think more
Speaker 8: than that, when the levels themselves become so extended, the
Speaker 8: trigger can be almost irrelevant. It's not the match that
Speaker 8: starts the forest fire. It's the vulnerability of the forest
Speaker 8: in the first place. Having said all that, on the
Speaker 8: metrics I look at, I don't think we're particularly close
Speaker 8: to that at the moment. If you try and build
Speaker 8: trading rules on the back of it, which is much
Speaker 8: easy to do these days with AI than it's ever
Speaker 8: been in the past, all those trading will say you
Speaker 8: shouldn't be selling here. If anything, you're forced to participate,
Speaker 8: and the best you can do is have on things
Speaker 8: like correlation hedges or out of the money put hedges.
Speaker 2: Matt King, thank you so much. It's been way too long.
Speaker 2: Thrilled Devan. I'd love to see you on sooner more often.
Speaker 2: Met King. Founder Satori Insights, in charge of the bedding
Speaker 2: pool on English World Cup soccer. Thrilling could join us.
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