00:00:00
Speaker 1: Hey, Odd Lots listeners, the Odd Lots tour continues and our next stop is in Chicago.

00:00:04
Speaker 2: That's right. Joe and I will be at the City Winery Chicago on October 15th for a live Odd Lots recording. Tickets are on sale now at Bloomberg.com forward slash Odd Lots.

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Speaker 1: And of course, a special thank you to Barclays for supporting Odd Lots Live.

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Speaker 2: So that's October 15th at City Winery in Chicago. Get your tickets now.

00:00:26
Speaker 1: Bloomberg Audio Studios. Podcasts, radio, news. Hello and welcome to another episode of the Odd Laws Podcast. I'm Joe Weisenthal.

00:00:47
Speaker 2: And I'm Tracy Allaway.

00:00:49
Speaker 1: Tracy, this, it dawned on me the other day, the market's kind of crazy right now. No, no, it's like seriously, it's like we're sort of used to all this stuff and everything and that. And then one day, one moment, I realized, oh, markets are really crazy these days.

00:01:03
Speaker 2: I would say weird. I find them very weird at the moment with like the biggest tension being what's happening in the bond market and the stock market. By the way, I have a huge caveat for this episode, which is we're recording this on September 29th. I've been away for the past week on vacation. I probably should have put up my like normal going on vacation warning. So something is about to blow up. Turns out it was the bond market.

00:01:25
Speaker 3: Yeah.

00:01:26
Speaker 1: Actually, it's funny you say that because the way I think about the market right now is so much is happening and nothing is happening in the specific sense that it's like, okay, we're in the middle of a war. with Iran. And so many, we're just like, oh, it's just this headline. Trump says negotiations are going good. And then it's like people move on. There's some crazy model leap, et cetera, by one of the AI companies. Huge news, but also so regularly cadence now that even that almost becomes noise. Obviously the movements in the bond market, I guess, like that is probably the one thing that does feel novel about maybe just the last few weeks is But even there, a lot of that angst has been going around a long time. So it's like, there's so much of everything. There's no one thing that just... You know, I was thinking, like yesterday, September 28th, it was announced that David Zervos was going from Jeffries to.

00:02:22
Speaker 2: I saw that. I was in Connecticut with no electricity, and even I saw that.

00:02:27
Speaker 1: Ten years ago... If that is announced, that would be like a really big thing people talk about. People would have been all this stuff and it barely broke through. But that would have been a time where that would have been the biggest sort of market related or Wall Street related story of the day.

00:02:42
Speaker 2: It feels like stock markets are sort of overwhelmed and or inured to everything happening except trying to make money. No. Like that is the one impulse that remains. That never gets old.

00:02:54
Speaker 1: No. And that's arguably the point of the whole thing. Anyway. We need like a sort of big rambling state of the markets episode. And we really do have the perfect guest, someone who used to be our colleague here at Bloomberg. We are, of course, speaking to Luke Kawa, head of markets at Sherwood News. Luke, thank you for coming back on Odd Lots.

00:03:13
Speaker 3: Great to be here. Thanks for having me, Al.

00:03:14
Speaker 1: Let me start on something niche, actually, because there's so much going on. Suddenly, lately, markets are having a great year. S & P up over 12% or about that as the time I'm talking. I see a lot of talk about breadth. This is, everyone's talking about market breadth these days.

00:03:30
Speaker 3: What's that all about? Yeah, I think why they're talking about breadth is because it's absolutely god-awful. There's been a lot of different stats to show it. You can say the average stat is XYZ, below its high. Well, the S & P 500 is, you know, as of writing about, you know, 1.5% off of its high. The one I came up with that bothered a lot of people the other day was, coming into this week, the S & P 500 was 0.5% off record high. Mm-hmm. just 51.2% of stocks were above their 200 day. The last time we had that proximity to a high with that few stocks above the 200 day was literally the day after the dot-com bubble peak. So that gets a lot of people mad, but then you have to point out, okay, wait, breadth was also that bad in 1998. The market ripped for another two years after that. So it really is a case of, and I think to unify a lot of what you were talking about in the intro, Is the market inert to higher rates? No, a lot of the market isn't. The S & P 500 equal weight certainly isn't. The Russell 2000 certainly isn't. However, basically, to me, there seems to be just this big bet that the AI impulse will continue to eat and swallow the world until who knows what puts a stop to it, whether that's kind of credit conditions, the capacity to lend, whether that's regulation. But right now, the pricing to me just looks like more and more betting on a singular factor to be able to drive growth. Think about it. When's the last time that there seemed to be more confidence in European industrials than the US consumer during a period of strong growth? I cannot ever remember that happening outside of maybe like Euro boom, what was it, 2017 for a couple months.

00:05:06
Speaker 2: I mean, it is true that in higher rates, so rates are a blunt tool for the Fed, right? And they're going to hurt something like a home builder a lot more than an AI company that is issuing like mega deals into the bond market, I would imagine. Is it the case that, you know, maybe the bet on AI makes sense in that environment? Maybe the AI companies are the ones that are less rate sensitive than a lot of other businesses out there.

00:05:32
Speaker 3: I think right now that's like a perfect encapsulation of conventional wisdom. To me, it's also very interesting that as we've had this latest explosion higher in yields and we've talked about like, oh, it's the AI impulse this, that. It's also come at a time where hyperscaler credit spreads, none of them are at their wides of the year at the long end. It comes after a September of, you can tell me how much USIG and USIG issuance there was by hyperscalers. I believe that's a zero for September. So it's, yeah, so very, very interesting.

00:06:01
Speaker 2: They cut back a lot because they got a little bit spooked with the CapEx response from the market.

00:06:07
Speaker 3: So that to me is something that like, hey, a lot of this in the bond market, both a response to stronger growth and the potential for issuance, a lot of this is like the classic Mark Dow belated overreaction to something we've been thinking and talking about for a long while. And then I think the, the question is how long can the cyclicals that are doing well, you know, operationally, at least how long can you, they be plumbing 52 week lows, a lot of these, and is it just because AI is doing so well? And I think that's the kind of important part to be making the important point to be making that so much of this market has been dispersion. Helene Meisler calls it the either or market. I've called it, you know, the Elaine George market, Jerry's friends, only one can do well at the right time. But that's been a really, really defining trademark of 2026. At first it was semi-software. I think more recently it's been like this idea of inertia stocks versus the general AI beneficiaries. And that to me is a bit of an important twist. It's this idea that like It's not just one layer of AI that benefits. It's multiple layers through software, through the hardware providers that get to benefit from an impulse like Muse, like Agentic Commerce, and then others that get hit. So that to me is at least a bit of a nuance in how the market treats AI and the impulse. But for me, it's just really a sign of the mechanics that have continued to dominate and just continuing to play out.

00:07:30
Speaker 4: It's interesting.

00:07:31
Speaker 1: I looked up a chart of McDonald's and... That was doing really well up until, and then it peaked on March 3rd and then it's been straight down. So it's like basically when the Iran war started, that was.

00:07:45
Speaker 2: Wait, was that when the CEO ate- Oh.

00:07:48
Speaker 1: Reluctantly ate part of the cheeseburger? I forgot about that. But it's just like any consumer name you can think of right now. The stock is awful. Nike is the classic example.

00:07:58
Speaker 3: That's crazy.

00:07:59
Speaker 1: That was $ 180 stock in 2021. It's 35 now. I mean, there's just like I mean, granted, it had a huge run up in 2021, too. But like any like just sort of like regular business that is they're just doing terrible.

00:08:14
Speaker 3: It's it's crazy. Like and when you look at Nike, one of the things that stands out and I think you could apply this more recently to a Walmart, possibly to a Costco. And I'll tie this back to software, oddly enough. But these were relatively expensive stocks that didn't have exceptional top line growth. in a world where nominal growth has been accelerating. That's been what the bond market move is about. That's what stock market resilience is about. Why do you want to own those stocks? Why do you want to own the stocks that aren't growing that fast, that are expensive, when everything else is growing very fast? So I think for what happened for a while is that a lot of these consumer names, Walmart and Costco in particular, they were stand-ins for the software stocks that were bound to be disrupted by AI. Because if you think about it, if you're going to spend a certain amount at Walmart every month. That looks to me like an ARR kind of revenue profile that you've got there. Costco is literally a subscription kind of membership in a lot of ways. So I think that was a stand-in for disruption fears. And as software has come back, you've seen kind of multiples there deflate. So I think it is, we got to find someone to punish. Maybe it's just because everyone's very invested, but when AI is doing well, you got to find someone to punish.

00:09:23
Speaker 2: What about just in terms of pure earnings expectations, what we're seeing here? Because this is the other thing that in theory should be happening, which is you hear about productivity gains from AI. You should be seeing people get excited about the possibility of cutting labor costs, I don't know, coming up with new products with AI or whatever. And in theory, you should be seeing that go into the earnings estimates for future years. Are we seeing any of that?

00:09:49
Speaker 3: I would say in theory and in practice, what we continue to see more of is the AI hardware impulse as just the straight fuel for earnings. Goldman had a good note released a couple of days ago where they said about half of earnings growth this year is expected to be just driven by hyperscaler CapEx. So pretty, pretty big impulse. We're talking about how strong growth has been, earnings growth has been this year. And you can just link it and distill it just down to that one factor. And then also, if you look at, okay, they also ran in a separate note. what do we think explains multiples across Russell 1000 stocks? And the answer they came up with was more so than usual, it's three years forward sales estimates. Right now, the one year forward sales estimates and those revisions have almost no explanatory power. So sales growth right now and for the near future, it's priced in. We all know it. We see the backlogs, all this, all that. The real bet on what you're willing to pay for is the kind of three years out thing. And when I did a scan of stocks that were just both expensive and had so markets willing to reward them and fairly high sales estimates. Your bloom energies, a lot of the optic stocks, those are the ones that pop out there. So that's been kind of the way to earn a higher valuation right now. In this market, it's betting on the continuation of the hardware trade.

00:11:04
Speaker 1: Yeah, this is something interesting. Both Tracy and I love the hair charts, the Medusa charts of all sorts, where you see historical expectations of trajectory. And one of the ones you're starting to see more is just the CapEx one. And so you look at what sell side had estimated hyperscaler CapEx would be in 2023 and over the next three years. And then that keeps getting revised higher. And it seems like it's continuous. And so I'm curious, there is some number exists, right? So maybe, I don't know what it is. They'll say like, okay, they're expected to spend 1.2 trillion over X period of time. And that's up. But how much of the trade is essentially a trade that then the estimates will keep getting revised higher for spending.

00:11:54
Speaker 3: I got to think a solid chunk right now. And there's at some point, I think there has to be this handoff from that to a kind of more broader set. And when NVIDIA, and it was either a quarter ago or one before that, they actually kind of rejiggered how they're organizing... their earnings to account for the fact that we expect sovereign AI and robotics and physical AI on-prem stuff. We expect that to be contributing more and more to our sales going forward. It's going to be real small now to start, but we expect that to be a bigger driver than hyperscalers and potentially neoclouds, but they're doing all they can to support that. going forward. So I think right now that is a huge, huge chunk of the trade, the bulk of the trade. But the promise of AI is that it has to be more applicable than that, right? To your point, it has to have the productivity booms. It has to have the labor saving. If it doesn't, then what are we here for is kind of, I think, the question at some point.

00:12:48
Speaker 1: Yeah.

00:12:49
Speaker 2: Did you see the chart? I think it was in Adam Tooze's newsletter this morning saying that The CapEx expenditure on AI is now like the biggest.

00:12:56
Speaker 1: Infrastructure boom of all time.

00:12:58
Speaker 3: Oh, yeah, yeah.

00:12:58
Speaker 2: There have been two great papers.

00:12:59
Speaker 1: I saw the economist Hannah Lustig, I'm not sure if I'm pronouncing his name right, who's saying that to justify all the spending that they estimate, like a handful of companies will have to get revenue that's like 9% of GDP in order to justify it, which is just like unbelievable.

00:13:17
Speaker 3: It's ambitious. Ambitious.

00:13:19
Speaker 2: I'll put it that way. So I promised myself I wasn't going to talk exclusively fixed income in this conversation, but we can't have Fluke on without talking more about fixed income. Bond yields rising. So these are the headlines that I saw when I was on vacation last week. The 10-year going to above 5%, 30-year rising as well. What's your story for, I guess I should divide it up, global bond yields rising and then U.S. Treasury yields rising specifically?

00:14:03
Speaker 3: Predominantly, I think it's the same story for both or the same. Like if you had to do a principal component analysis or something, I think what would stick out across the board is it's the global growth impulse. It's activity. It's both in the U.S. and globally. I think we see the industrial side of every economy is doing incredibly well and expected to do so. And I think something you wrote a while ago kind of fits into this about that which can be repurposed for AI will be with reference to Ford. I believe that it seems as though the impulse is just getting more widely shared. You have an impulse this big, it's bound to lift a lot of boats. And I would say that's kind of what's happening throughout the global economy. That is far and away, I would say, the one thing to think of if you just had an elevator pitch with someone, why are bond yields high? Because growth is really strong, that's putting inflation up, and central banks are expected to respond to that.

00:14:56
Speaker 2: Wait, but we haven't had a huge move in break-evens in the US, for instance.

00:15:01
Speaker 3: Yeah, but I think that somewhat speaks to the idea that central banks are going to be quote-unquote credible in keeping a lid on inflation over time. You can believe that or not, because if you've been a hold to maturity buyer of five-year US treasuries from at any point in 2011 to 2021, outside of like a little before the shale bust, if you got in there, you have negative real returns for the entire period.

00:15:24
Speaker 1: I'm actually very curious. I find this, the stability of breakevens to be very surprising because usually what people say is like, well, yeah, naturally people think the Fed is going to take its dual mandate seriously. And okay, we're going to, they're going to have to raise rates to roughly, I think it's, and Therefore, inflation will be a little over 2%. Are you surprised that after years and years of the Fed missing its inflation target, there hasn't been more like, no, we do not think, we do not have the confidence that the Fed will be able to maintain stable inflation in the years ahead? Or why isn't it manifesting on that chart? Oh.

00:16:07
Speaker 3: I would say in a word, yes. I'm genuinely surprised by that.

00:16:10
Speaker 1: Yeah, I find this really surprising.

00:16:11
Speaker 3: I think it is an odd dynamic. The best explanation I have for it is just thinking back to when I'd be in meetings and we're discussing asset allocation, especially during 2022 at UBS and 2023, high inflation environment. Basically, bonds become the residual at a certain point. Like You buy bonds when you're worried about growth and you don't think there's going to be that much inflation. If you think growth is fine and it's inflationary, well, you know, it's cash or short term and a lot of stocks or stocks, commodities, a little bit of cash. So it's just like bonds are kind of the thing you make the final decision on. So I would say the fact that a lot of this is driven by real yields might come back to a thing of like, How do we get bonds to be more attractive relative to stocks? And a lot of people will do your earnings yield less the plain vanilla yield on bonds. You should probably be doing it versus the real yield. Stock earnings are more of a real stream of assets. So I think in order to get bonds to be a more competitive asset with stocks, you do need to see reals rising and that a lot of the move is effectively saying like, hey, I can't justify buying a 2% even real return, 3% real return when.

00:17:23
Speaker 3: This is what I think is on offer in AI. So I think having it come through reels is part of that story and part of why part of the decision-making process in terms of how a cross asset investor would be looking at bonds.

00:17:34
Speaker 2: Or you go the financial repression route and just make everyone hold bonds, right? That's like, that's an actual possibility.

00:17:42
Speaker 1: Or we need to have a big national campaign to to get people to stop spending money and to put their money into AI bonds a la war bonds, right?

00:17:52
Speaker 3: I mean, yeah, with people already putting some weight on PDoom with not liking the noise from data centers and their environment, I think what America needs right now is to be told to spend less so that the AI boom can more fully run its course. I'm not running as a third party candidate and I'm also probably not allowed, but that would be definitely my platform.

00:18:13
Speaker 2: I would classify that under financial repression, but I'm sure you see it differently.

00:18:17
Speaker 1: It is a form of financial repression. Yeah, yeah, totally. Just make it patriotic. This is actually a worrisome dynamic to me in thinking about the economy, which is people perceive that AI supremacy is going to be crucial for national security, right? I believe this is a widely held view in Washington, etc., If we actually then took that idea seriously, we would be saying, yeah, we want to depress the non-AI parts of the economy to free up real resources for the build-out, et cetera. Clearly, no one can say this or articulate this or say, we're going to tax consumption of this. We're going to tax consumption of boats, anything that could be stripped for its parts to be put into a data center, et cetera. But- if it is a matter of like existential national security, that would be the way we would be doing policy.

00:19:18
Speaker 2: Right.

00:19:19
Speaker 3: Almost certainly. And then you have to go like with, man, if I'm being told I can't still can't buy a house because of the, that's, that's going to bother the hell out of me. So I think there is, and it's not like, and it's.

00:19:31
Speaker 1: Not like the nuclear, the nuclear race where once a country has achieved a bomb, it is then in the club of nuclear powers. There's like, it's never ending because it's like, there's no like reason to presume. It's like, Oh, we got the capabilities here.

00:19:47
Speaker 3: And when I, hear that, what I immediately think of is, damn, we don't know how easy we had it, speaking as a policymaker, back in the post-GFC era. There were no, like, did trade-offs exist?

00:19:59
Speaker 1: Did trade-offs do.

00:20:00
Speaker 3: Not exist for an entire cycle? We still probably didn't do it optimally, but pretty darn close. And now I grew up hearing about how central banks- just by virtue of saying inflation was going to be 2%, that was one of the important factors that would help it be 2% over time. I think now we're learning that that's junk that, completely junk that. You got to prove it over time or else you will be in a situation we are right now where people really apparently don't like to hold bonds.

00:20:26
Speaker 2: So Joe described this as a crazy market. I described it as a weird market. Can you choose your one word for describing the market? And then you're over at Robinhood now. I'm sure you see some interesting retail investment trends and color, and maybe a little bit of flow. Like, what are you seeing at the moment?

00:20:44
Speaker 3: Yeah. So if I had to summarize the cross asset, how I see it, like last year ago was Tina. And there is no alternative. Yes, there is no alternative. This is too fast to fade both prices and earnings, just moving too fast to fade. And speed is something that I think has completely defined 2026. If you look at the monthly change between semis and software, Those have had some of its most four violent moves in either direction this year alone. I remember when Silver was going crazy, but that was this year. Absolutely nuts moves all over the place. And to make this an AI thing, we were being told AI compresses economic time. And I think that was both because the power of the technology, the need to be able to look forward and see what has disrupted. And now because of agents who can work when we're asleep. So this idea of a compression of time and speed manifesting in the markets is really, really what sticks out to me. And in terms of the retail side, the trading I've seen, so I can describe net single stock purchases at Robinhood. So the absolute peak for that, the rolling 21 day peak happened right about in late June, let's call it. So around Micron's earnings then, that was the overall peak. There was one before that in early November 2025, which coincided roughly with a really big spec asset peak, in my view, in October 2025. That's still, in some senses, we haven't fully recovered from. So a spec? A spec asset, like a lot of things, like Palantir, Bitcoin, quantum stocks, so many of these things.

00:22:19
Speaker 1: Yes, yes.

00:22:20
Speaker 3: And even call option volumes in total, those peaked for a while and rolled over. But that was a huge spec top that we're still kind of clawing our way back from in some senses. So there's that. And more recently, what we've seen is supposed to be traditionally a slow month, September for retail. It's really rebounded quite, quite strongly. September, last numbers I have are about 89% of the peak that we saw in June, we're back to. So it's been a really strong month for buying.

00:22:49
Speaker 2: It's because I went on vacation and spent a lot of money.

00:22:51
Speaker 3: And a lot of it's the names you would suspect. It's your Microns, your SpaceXes, those lead it. But every day when I look at this, There's a name in the top 25. I consider myself someone who knows a lot of tickers. There is a name that I do not recognize and have to look up very often. It's fun. It's a sign of how people look for volatility. People look to get rich quick, look at options trading. Stock market is a place where we go to express our views about the long-term earnings power of corporate America. And we do it with options with four days or less to expiry. That's the story of the world we.

00:23:25
Speaker 2: Live in now.

00:23:26
Speaker 1: The October 2025 speculative assets boom it does not get talked about that much, but it's fun. It's a good chart. Like if you just pull up Bitcoin and Palantir, how close their peaks were together around October, they both recently sort of hit a low in June.

00:23:46
Speaker 3: I'm sorry.

00:23:46
Speaker 1: I saw it was six, but I love like, actually I love the framing of speed because it seems very relevant to even how I introduced this. And one of the things that like the AI is, singularity type people talk about, Kurzweil talked about, et cetera, is this notion of like, okay, if you measure time by how long it takes for the world, the earth to revolve around the sun, that's like stable. If you measure time by how long does it take for there to be a headline worthy event, which is a different, legitimately different way to measure time This is like extraordinary because, and it goes to the intro, which is just the pace of headline worthy events is just extraordinary. And then you see it manifest. Therefore, then in the speed of the movements of the, whatever underlying asset you're trading.

00:24:40
Speaker 2: Yeah.

00:24:41
Speaker 3: Spooze and blues should have been like all across my Twitter feed yesterday. And it probably got drowned out within, you know, a couple of minutes. That's for the uninitiated. That's your David. Yeah. Old motto there back in the day.

00:24:51
Speaker 2: Wait, is it headlines, though, or is there also an element of market structure in here? Because the other thing that's happened is we have a lot more pod shops that are out there that seem to be affecting the market and causing sharp swings. We have a lot more products. We have a lot more zero day call options, things like that. And this has been an ongoing trend in the market for a while where we see the mean reversals happening really, really fast now, much faster than they used to.

00:25:15
Speaker 3: I certainly think both the higher participation of retail, the increased AUM, if you want to call it that, in the pod shop models with tighter stops, even agentic trading, which from what I can see so far seems to be a little more Momo driven than most in terms of the rules people will put in to do this. Yeah, I think all of that and overlay the dispersion trade on top of that, I think all of that does contribute to an environment where you do get a lot more single stock volatility and a lot less at the index level. And that means even when markets are doing absolutely nothing, it's the classic duck with its feet underwater going crazy. We always have something to talk about even when the stock market is completely aimless for months.

00:25:59
Speaker 1: This reminds me, you know, I don't trade, but one of the projects I sort of want to see how easy it is to build now is like an agentic trading bot and like paper trade on Kelsey or something. And it like Go do a bunch of academic research, find where people speculate that there might be mispricing, and then create a systematic thing. Make no mistakes and go. I've started to fiddle around with that, but I haven't really done it. Do you see a lot of people diving headlong into figuring this out?

00:26:30
Speaker 3: I see a lot of people diving or tiptoeing, at least, into setting it up. It's honestly something... I want to look at a lot more because I think it has some fun implications potentially for market structure. Like, hey, if you've got an agent setting up rules for trading, does that mean there's less orders, less stops out there? Does that mean, what does that do to market visibility? That kind of thing. So I'm interested in that and kind of how that manifests. And I do need to, I think, talk to more people that have their fingers on the button, so to speak. But I really think it also has the potential to, again, exacerbate volatility. It seems like basically everything we've done and been moving towards has the potential to exacerbate single day volatility.

00:27:23
Speaker 2: Can I put you on the spot and ask you, I guess, the question that everyone is wondering? Because a lot of people will look at this market and say, like, it does, in fact, look a little bit bubbly. It's, again, weird that we've been able to shake off interest rate pressures, a freaking war with Iran, all of that. What are the sort of warning signs that you're looking out for for a durable turnover, I guess, in stocks? You mentioned breadth earlier, but again, like breadth can give a false positive like we saw in 1998.

00:27:53
Speaker 3: Yeah. Breath is not something that I would use as like a sufficient or even necessary cause for this. I'm very boring and I like to stick for what drives stocks over the long term. Also kind of does help drive them over the medium term and shorter term. It's earnings. I took a look at recently. So what would happen if you waited until S & P 500 earnings revisions were 5% off their 52 week high? What if you were like, And we all know analysts are notoriously late. You've definitely missed the top. But how bad would that be? How far off would that be? The only place where you're really, really getting killed on that for the past six or seven bear markets is COVID. Just because it happened so fast and absolutely nobody had time and we were already in the whole lockdown by the time it happened. But pretty much every other time, if you held for two years backwards even after the time that estimates have been cut so you know you're arriving late to the party admittedly most of the time you're still you know looking at pretty healthy gains so my kind of thing is hey if you've been invested you can probably afford to wait for earnings to start to crack at the index level and have some kind of warning signal you're getting out yeah beyond that i think it's folks like you who are keenly focused on the credit market and some of the peculiarities happening there yeah that are going to be i think in the best position to be able to spot okay like When has this kind of financial ingenuity gone too far? Because one of the things that was high conviction for me was when hyperscalers went negative FCF, okay, you have two choices right now. Either the AI boom slows or the financing starts to get more creative. The financing has gotten more creative. So at a certain point, it's interesting to think about because when you think about sources of profits right now, hyperscaler capex, obviously, and more of that debt financed. And we do have a big fiscal... deficit. So can you think of more safe places to be sourcing your profits from than hyperscaler debt and fiscal debt? That's pretty darn safe until it isn't your classic kind of Minsky and formula there. So that's one thing that honestly has me surprised that multiples haven't even been more supported. Just the fact that this debt comes from kind of safe places. Right.

00:30:00
Speaker 1: Talk to us a little bit more about if you're on the recipient end of hyperscaler spending, it almost feels like a bond at this point, right? Not really, but that's kind of what you're saying, which is like, these are big structural things. It could be fairly predictable. On the other hand, when you look at who some of the recipients of this money are going to be, like It's not literally the recipients of the CapEx money, but kind of like CoreWeave CDS. How do you think about credit angst among some of the AI players with the assumption that AI spending is just going to keep going through the moon?

00:30:35
Speaker 3: Yeah, I think you can pretty closely map in a lot of cases, just a straight up concern about the level of debt and just look at your classic debt ratios. And there's a reason why Oracle stands out versus all the other major hyperscalers. on this and kind of use that to fly.

00:30:52
Speaker 1: What's the reason that they say that?

00:30:53
Speaker 3: I would say just relatively more indebtedness than, than peers or just like less credit worthiness to begin with. That's why I think a big recent thing that's happened is Nvidia trying to effectively credit wrap, make everyone the safest AI borrower possible. But, but yeah, no, I do think it's, I do think we live in a world where now a lot of companies both aren't necessarily treated as unimpeachable ai beneficiaries and also the the second derivatives turned we are no longer pricing in the the fastest earnings revisions across the board ever at some point you've got to make the transition from hyper growth to growth at a reasonable price and a lot of stocks post the q3 momentum road are still also trying to do that only have two semiconductor companies that have made 52 week highs in q3 only two amd and skyworks in the s.

00:31:44
Speaker 4: & p 500 interesting crazy Speaking of like Oracle being different, Greg Ip at the Wall Street Journal had a really good tweet the other day observing the fact that, okay, the one thing that makes the AI boom weird is that it's not being financed by the fruits of the AI boom, right?

00:32:02
Speaker 3: So you have all these internet, right?

00:32:03
Speaker 1: And so it's like the companies that are best positioned to spend have their own money printers. Facebook has a gigantically profitable businesses. Google has search, et cetera. Oracle is like, No, I mean, nothing against Oracle. It's a good, successful company, but it does not have that pure money spigot the way the other hyperscalers had. And actually, right now, today, we continue to see their CDS spike.

00:32:32
Speaker 2: Speaking of financial engineering and cash spigots, there's a headline that came across the terminal just as we started this conversation, Luke. Slight tangent, but I think it's still relevant. Man City inflated revenue cut costs by £ 900 million Premier League fines. They're going to be sanctioned. We don't know what the sanctions are just yet, but immediate reaction. Let's do sports.

00:32:55
Speaker 3: Yeah, immediate reaction couldn't happen to a better man Manchester team. Hey, you know... You're a Man U fan, right? Yes. Yeah, so this is, you know, what is it, FAFO? I'll keep it to that. And I'm very much hoping that I will tolerate Arsenal retroactively getting trophies if it means we can also retroactively get one as well. And that takes a lot for me to say.

00:33:19
Speaker 2: Joe thinks the Premier League is the bull case for Europe.

00:33:22
Speaker 3: Oh, yeah. I loved those competing articles. I will not say which one I enjoyed more. I love all my parents equally.

00:33:30
Speaker 1: You know our friend Guan?

00:33:32
Speaker 2: Yeah.

00:33:33
Speaker 1: He got me a gift. The Shenzhen Pang City Football Club. He got me one of their jerseys.

00:33:37
Speaker 3: What colors?

00:33:38
Speaker 1: It's blue. They're owned by Man City. It's part of the same corporation or something like that. There's some sort of connection. Shenzhen Peng City FC is part of the city football group network alongside Manchester City. And I think like Manchester City.

00:33:55
Speaker 3: What's the equivalent of the championship league over there?

00:33:58
Speaker 1: I don't know. I want to learn more. Like every American, first of all, their jerseys are the same color as the Manchester City jerseys. But every American, you know, it's like, oh, we get excited about the World Cup and then we forget about soccer. Not me. Me and my son have been watching the UEFA tournament that's happening right now. Spain versus England was really good. Harry Kane missed a penalty kick.

00:34:20
Speaker 3: Love that.

00:34:21
Speaker 1: We saw the Netherlands versus Serbia game. So I am not one of the Americans who just stops paying attention to soccer when it ends.

00:34:28
Speaker 3: I like that. You're the hipster American soccer fan. This is very good.

00:34:33
Speaker 1: No, hey.

00:34:34
Speaker 3: What else are you supposed to do? Like in the morning on the weekends, you have kids, so there's things to do. But like, hey, for the rest of us, what else is there to do?

00:34:44
Speaker 2: Well, you never know. Also, maybe China football will become a huge thing if the UAE can't spend money in the UK anymore.

00:34:50
Speaker 3: Oh, yeah.

00:34:50
Speaker 1: I think it's going to be huge.

00:34:53
Speaker 3: We're just putting Luke on the spot.

00:34:55
Speaker 1: It's like, Luke, another football question.

00:34:58
Speaker 3: If we're going to transition to a sport, I was really hoping we'd go to hockey next.

00:35:01
Speaker 1: To bring it back to markets for a second, There was an interesting note in my inbox, Terry Wiseman over at Macquarie. And he had pointed out that like, okay, so we talk about these huge spending impulses, et cetera. And the two big ones, obviously AI and then structural government entitlements, et cetera, that keeps going up. And then he points out though, that like wars are really expensive. And so markets people look at the around war headlines. It seems like mostly through the lens of the oil price, right? To the extent that people trading their interest in the Iran war is basically like, OK, when is this trade? When is it going to open? What are the prices of oil? Diesel spreads maybe. But he points out it's like wars are very expensive. And he's like, is this like this is a third driver of inflationary impulse that doesn't get much attention. But defense spending rising for years all around the world.

00:35:57
Speaker 3: Yeah, wars are expensive, rearmaments expensive, trying to reshore and build domestic capacity of semiconductors is expensive. Yeah, all of this is really, really expensive. It is the defining feature of this era, like how much we are willing to kind of tolerate the side effects that are in our face every day of policies that are definitely bottom line inflationary.

00:36:24
Speaker 1: Anything else really stand out for you right now as being kind of eye-opening in this market?

00:36:31
Speaker 3: I don't have much else. The only thing, I do think it is just borderline psycho that the idea that European equal weight is closer to an all-time high than U.S. equal weight when we're running around 6% nominal growth right now in the U.S. absolutely boggles my mind that U.S. consumer discretionary has become the new punching bag for the market in a strong growth environment. In a quarter where it's estimated to contribute, what, 2.8 percentage points to growth. Nuts, amazing.

00:37:04
Speaker 1: I guess one question I have in addition to that is, in a different era, there would have just been so much more attention to how bad the housing market is. It used to be housing was the business cycle. Well, A, housing was the business cycle for multiple reasons. People spent out of their home, equity, et cetera. Now we have this miserable punk housing market, and it hardly seems to matter.

00:37:28
Speaker 2: But now AI is the business cycle, which worries.

00:37:31
Speaker 1: Me because you get the same dynamic. And this wealth effect of people spending out of their stock market gains. I'm just curious, your take on, I don't know, either way you look at it, whether it's like The salience of the stock market and the wealth effect, or just the general market's lack of interest in housing these days.

00:37:51
Speaker 3: Well, perfect timing, right? It wasn't an earlier this year when Americans share wealth from stocks versus from housing also crossed overs. Yeah, it is a, it does feel like a seminal moment in that front. And when you think about why housing was the business cycle, it's because you, you had these spillover effects to consumption via HELOCs or just via wealth effect. from that and also, you know, spillovers from housing markets doing better, you're buying more consumer durables. You can just take all of that and transfer it over to AI, right? Like you can just take, that's where the construction impulse comes from. That's where the wealth impulse comes from. And as we've talked about, it's rivaling or surpassing everything we've ever done in terms of the CapEx boom in size. So do I think it lasts forever?

00:38:32
Speaker 1: No.

00:38:32
Speaker 3: Do I think it's kind of more of an anomaly around now?

00:38:35
Speaker 2: Certainly.

00:38:36
Speaker 3: Because like at the end of the day, we're all either businesses trying to make a profit or consumers trying to buy something we like. All of this has to eventually be good for somebody downstream at the end of this or else there is no point to anything we're doing. So there is no point to the profit if there's no kind of consumer intent for it in the long run and a consumer income to buy it.

00:38:59
Speaker 2: Yeah, the circularity and the size is what starts to worry you, I think. And when you hear that people are using their stocks, their stock market gains to buy stuff, which is helping the economy along, along with the AI CapEx build out, and that's leading to stock gains and relative economic growth. And then it just becomes very perpetual motion machining.

00:39:21
Speaker 1: Something that you've talked about for a long time that I've started to think about is like this idea of like something big is going to happen soon, right? And that big could be, it's like, oh, maybe there was like a major catastrophe like caused by a bot or whatever, or sorry, an AI model, or there's something big could be like Utopia and everyone, real weight, real wealth goes up dramatically and things get a lot cheaper, et cetera. Or there's something big could be a major reshuffling of people's place in the labor market in some way. But I'm curious whether like, okay, some thing that everyone just sort of has out there is going to happen, whether that leads to like a dip in the savings rate, because it's like, well, like, This, you know, that's a real thing yet.

00:40:10
Speaker 3: It's the exact opposite of the, like, right. If you fear nuclear war, then just buy stocks anyways, because if it's in the price, I think now, like you could reasonably argue the other side, like, Hey, if, If the world's doomed in 10 years, why am I saving it all? I find that fun and interesting.

00:40:24
Speaker 1: Do you think that's a real thing yet?

00:40:27
Speaker 3: I don't think if you're someone with children, you could possibly countenance the, hey, I'm going to sacrifice future welfare for that. So I don't think it's something that could gain broad traction. But in terms of infecting people's minds, I think we're kind of definitely already there.

00:40:45
Speaker 2: If AI kills us all by setting off a nuclear weapon, our portfolios will be on fire.

00:40:50
Speaker 1: And you'll feel stupid for not having gone out to eat.

00:40:53
Speaker 2: If AI doesn't kill us all, then our portfolios will also be on fire.

00:40:58
Speaker 1: That's a good one.

00:40:59
Speaker 2: Thank you. I've tweeted that before, so I'm recycling my own jokes.

00:41:01
Speaker 1: That's fine.

00:41:02
Speaker 3: That's fine.

00:41:02
Speaker 1: Luke, that was a lot of fun. I love your framing. Great stuff. Appreciate you coming back on Outbox.

00:41:08
Speaker 3: Always a pleasure. Keep it up, guys. I love following and reading what you guys do.

00:41:25
Speaker 1: There's a lot of fun. We could talk to Luke for hours. And I do think, you know, I went into this episode, it's like, oh, there's a crazy market. I love the speed characterization that Luke gave. I think that's perfect.

00:41:39
Speaker 2: No, I think that makes a lot of sense. And again, in my mind, there's two things happening here, which is you have a change in the actual structure and makeup of the market. And you also have just the headlines flying thick and fast. It's so hard to keep up. And if you see one negative headline on a Monday, chances are you might see a positive headline on a Tuesday. Even if you don't believe the positive headlines, you know the markets will react to them. And so you're just sort of ping-ponging back and forth between the news flow.

00:42:07
Speaker 1: I want to build something like where we just look. The history of red headlines would be an interesting... chart right yeah and it would be really curious to look over trends about the pacing of them there's got to be some way to do.

00:42:19
Speaker 2: That one thing i'd be interested in it used to be the case with early machine reading trading as we used to call it no one calls it that anymore that people would actually step away when there was a big headline so there was a little bit of a dip in liquidity because it took like a second for a lot of the machines to read the news and like figure out how to react I doubt that's the case anymore. I would be very curious to see what liquidity provision actually looks like around headlines. But I don't know if anyone's done a study.

00:42:48
Speaker 1: I worry about plenty of things.

00:42:52
Speaker 2: Okay. Shall we leave it there?

00:42:54
Speaker 1: Let's leave it there.

00:42:54
Speaker 2: All right. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway.

00:43:00
Speaker 1: And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And follow our guest, Luke Kawa at LJ Kawa. For more Odd Lots content, go to Bloomberg.com slash Odd Lots. We have a daily newsletter on all of our episodes. And you can chat about all of these topics 24-7 in our Discord, Discord.gg slash Odd Lots.

00:43:26
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