Speaker 1the macro trading floor with me alfonso peccatillo founder of the macro compass and former head of investments at the large
Speaker 2european bank and i am brent donnelly president of spectrum markets i've been a portfolio manager day trader and market maker at the biggest commercial and investment banks in the united states i'm also the author of alpha trader and the art of currency trading if you want to know what's going on in markets and where they're going you found the right podcast hi everybody
Speaker 1and welcome back to the macro trading floor as always alf and brent with you before i even start this podcast i have to read out loud a couple of comments that you guys put out because last time my actual microphone was not functioning so i recorded from you know some suboptimal mic setup and these are two comments i received brent normally his microphone is bueno but oof trapped in a tumble dryer this was one comment the second one is great podcast but alf bro use some of your millions and get a decent mic sounds like you're speaking in a cave into 2018 two thousand dollar smartphone ask brent his microphone is bueno so brent i mean i use some of my millions to buy a microphone now is it better i mean
Speaker 2honestly these people are not wrong i mean you know you sounded like you were in a tumble dryer on a three dollar mic i mean you know it's similar to my my book uh i got a one-star review it says love the author love the content of the book but the soft cover was received bent like dude i don't control that yeah okay okay let's check for the one-star review anyways yes yes
Speaker 1so now guys you can actually hear me back decently again let's talk about macro and i want to start with the bank because brent donnelly the very brave canadian guy decided that he wanted to short the nasdaq i mean here here he dares to short the nasdaq brand you should try to explain to us why you're trying to burn money sorry to to to do this very difficult trade just go ahead what's
Speaker 2going on so yeah there's a lot of things to talk about with when you're talking about the nasdaq and you're talking about the so generally i even write in my books shorting indexes is and buying index puts is a negative sharp strategy i mean one of the best sharp strategies actually in the last 30 years has been just selling index puts every week or every day or whatever obviously there's a risk management issue there um but i also do feel like i know you're kind of joking around a little bit but there is actually something to be said for something a trade idea feels so stupid that you're actually embarrassed to say it out loud sometimes that's actually an indicator that you know everyone else is obviously feeling the same way i remember in um i guess it would be 2007 um and aussie was above one so it was above one double oh it's at 66 like it's at 0.66 or something now and it was unusual that it was above one and i put out a short aussie recommendation and one of the sales people said dude aussie only goes up what are you doing and like that's exactly what it feels like with and actually i did make money on that trade but so sorry matt mcleod um but uh but sometimes i think honestly that's an indicator so the other thing too is that i think as a trader with my time horizon it's important to be able to be flexible and do the trade in both directions so like you have to be willing to be long and short in order to have an objective view of the market so if there's something like for example let's say someone doesn't like elon musk so they can never be long tesla they really should not be trading tesla because your bias is going to cost you a lot of money and i do feel like with indexes because of drift i mean because of so many reasons they they tend to go up in the long run but on a shorter time horizon there's plenty of opportunities to to be short and tactically try to make money now the key is you don't keep shorting over and over and over all the way from you know one thousand to eight thousand because you know that the s&p was at one thousand in 2010 and now it's at eight thousand and a lot of money was lost along the way especially i would say in 2010 to 2014 when people still thought it was like a bear market rally or a dead cat bounce off the global financial crisis low but it's not like that it's like a bear market rally or a dead cat bounce off the global financial crisis but overall i i do believe you can make money tactically shorting indexes but you just have to be very tactical you have to have a stop loss and you can't just keep on buying puts you have to have some something a little bit more developed in terms of timing so there's a bunch of things to me that all kind of come together a combination of price action and a bunch of other stuff which i've written about where i feel like i'm taking my so i'm short qqq if it trades at 770 250 then i'm out and i'll move on to the next idea yeah
Speaker 1let's talk about a bit the reasons why uh you want to be short and a disclaimer here is that i have much longer time horizons in my strategy i guess it's pretty well known but um the confluence of conditions that i see today uh coming in macro are not the most supportive to be long now of course there are sectors and sectors equities doesn't mean you know it's a very broad concept and actually i think that mega cup is the best equipped to do okay relative to others um so if i have to be underweight or short equities i prefer to be underweight or short something else it's also in the price by the way the russell has been largely underperforming the equal weight smp has been largely underperforming the market cup weighted smp but i do see broadly brent this similar set of conditions so let's talk about it i guess it will be informative for people hearing why two crazy guys think it's time to be a bit more conservative on equities for the for the time being at least so you go first let me see if i have something
Speaker 2else to add sure and i mean i think it's interesting that you're bearish because you know generally your view which has been correct through most of 2026 unless i'm wrong but i'm pretty sure has been bullish and there's been some times when you know the market was pretty bearish and it looked pretty scary and you maintained your bullish view uh mostly based on like the deficits and liquidity and economic growth which you know have all continued so there's there's one study that i did so if smp is within five percent of the high uh move index is close to the 52 week high which is like say in the top 80th 80 percentile or higher and then uh high yield is below its 50-day average relative to treasury's performance spread and new york stock exchange net new highs is below zero so that's essentially saying you have bad breath at the highs and fixed income is shitting the bed usually um and relative to baseline future returns from that starting point are pretty bad um yeah i don't want to give the number salad on on a podcast because i feel like hearing all those numbers will be confusing but just take my word for it you know stocks underperform with these starting conditions an event study like this to me and almost everything that i'm doing is always looking for like 55 45 or 60 40 kind of bets so that's my whole philosophy is i'm just trying to make a lot of or you know 50 50 bets that pay two to one is really more what i'm doing so that's what i think this setup is is that there's a certain amount of convexity or asymmetry in stocks that you know you could easily see you know say qqq is at 753 right now you could easily see a move back to 710 715 kind of thing so i that's my main view but then i i've been seeing these conditions for a couple of weeks and the reason i stayed away was that silver and crypto which i do feel are good you know liquidity barometers or thermometers or whatever um i guess it would be a thermometer not a barometer but people say barometer but i don't think it's a barometer i don't think it's a barometer but you don't think it's a barometer but anyways they're good measures of liquidity and silver and bitcoin had been still trading quite well off of the lows and so that was making me hesitate and then now you have the turn in both bitcoin and in silver and it looks to me like a pretty convincing top in bitcoin and there's some fud about cryptography and stuff like that that's the last leg of bitcoin lower has been driven by but even before that bitcoin wasn't trading that great so that gave me the confidence to take the shot so you kind of had these initial conditions really for the last two weeks and i was waiting and waiting and waiting and so now i'm taking my shot and like i said if if queues go above 770 250 then i'm out
Speaker 1okay so i um first of all of course when you mention a set of conditions brian the first thing that comes to to mind is oh is that a mining you know he's trying to basically back fit a bunch of conditions make him short but people that are a little bit aware of your work and you are the least person i would expect in the world not to be concerned about data mining and and fitting a back test you have also oh so i can
Speaker 2actually tell you about that so that's an important point because there's some people there's actually one i'm not going to say the person's name but there's a person who's been bear since 2009 who does put out things like this where it's like never before has chicago fed been below 33 and ism below 56 and ism prices paid above 61 that we didn't see a recession within eight months or whatever you know so like that kind of over parameterizing where you pick a whole bunch of variables you can literally find a bearish story any single day of any single week in any year um and actually so these parameters came from uh a guy uh a guy ptig who i i think is really good and he was saying i was just talking to him and he was saying it's pretty rare to see basically fixed income volatility at the highs stocks at the highs and breadth at the lows that's that's the thing and so i tested it and that that's what came out so and i didn't squeeze the parameters or anything in fact what you can do just if since people sometimes find this stuff interesting i don't know i'll try to keep it short but what you can do when you're doing stuff like this is to actually weaken the parameters and see what happens and then so like say i'm using within five percent of the high and then i'm using within five percent of the high and then i'm using within five percent of the high for s p then you try two percent you try three percent but then you try ten percent or like i'm saying move indexes is in the 80th percentile so you try 70 try 90 and net new highs you know you can try different parameters and if the results kind of stay the same as you move the parameters around within the range then usually that's a lot better than if you every time you move the parameter the results are completely different then you know like the that it's extremely over overfitted and just for people's information so these things come in clusters right because the situation that i'm testing for describing is a fairly specific regime and the main clusters were 07 2015 and 2021 those are kind of the big ones so obviously 07 was before global financial crisis 2015 people don't really remember that as well but there was kind of like a basically a crash in 2015 2016 basically a crash in 2015 2016 basically a crash in 2015 2016 china devalved oil went crazy absolutely china devalved oil went crazy absolutely china devalved oil went crazy absolutely crazy and um there was a lot of pain in crazy and um there was a lot of pain in crazy and um there was a lot of pain in the commodities the commodities the commodities world and then obviously 2021 was right world and then obviously 2021 was right world and then obviously 2021 was right before the 22 bear market so before the 22 bear market so before the 22 bear market so they're identifying you know regimes that they're identifying you know regimes that they're identifying you know regimes that have been pretty dangerous for stocks in have been pretty dangerous for stocks in the past and like you said i i get it can sound like i'm there's a bit of cherry picking or whatever but honestly i just did exactly what the guy said and and it worked pretty well for me he hadn't parameterized it he was just having a conversation for me um
Speaker 1i published it in my monthly letter as well um i think the market is looking for a new equilibrium for a very long time any measure of nominal yields in the u.s 10 year or third year has been trading well below any reasonable yardstick basically so yardsticks there can be a bunch of things the most known is nominal gdp growth you take the very core components of real growth and the core pce you sum them up you obtain let's say a stable core component of nominal gdp growth which by the way in the us is running at six percent as we speak and then you look at third year nominal yields and you look at these and you as an investor you would like to see some relationship between the level of nominal yields and the level of nominal economic growth another way to look at it is to say if core pc is three percent and the underlying real gdp growth is three percent for me to take the risk of third year duration in my portfolio i need to have a real yield that is at least consistent with real gdp growth that is reasonable right and we have a all the time since 2012-13 and very few occasions when that happened so that nominal gdp was below the level of yields so yields were higher it was actually a very good moment to go in and overweight your fixed income position and so that's what i mean with looking for a new equilibrium because third year yields after the sell-off are 562 on the screen as i look at them which is still 40 basis points below nominal gdp growth and so if the market is effectively abandoning the idea that we have to be below nominal gdp growth it's abandoning the idea because you know with all the war and higher energy prices u.s consumers are able to withstand all of it and private balance sheets are much stronger and nominal wages are much higher and disposable income is much higher and the government is printing deficits which is you know throwing fuel on the fire of this nominal gdp growth then why as a bond holder i should demand anything less than nominal gdp growth in 30 years for me to buy why should i demand less than six percent so that's my starting point right that's where i start looking at the new the search for new equilibrium right and the search for new equilibrium in markets can always be a bit messy and it is being messy let's be honest i mean bonds are kind of blowing up here and there and the dollar has gone up in a straight line and equities so far have held okay and i think the search for a new equilibrium might get a little bit messy that's basically the reason why i'm not so optimistic on being mega long stocks
Speaker 2anymore and when you say that like because i know your time horizon is longer and you know one of the hardest things about being stock being short stocks is there's the drift but then also sometimes it can be very expensive depending on how you're structuring it do you actually go short in your portfolio or no for you being flat is like being short basically well i'm serious i mean no no it's
Speaker 1a good question i mean in my strategy um it's a macro strategy so we'll try to put a top side beta limit to the s p 500 this is a very known discussion in the macro world right i mean if you're a macro fund you shouldn't in principle load up on stocks because you're gonna have downside equity beta if things go wrong and that's not what the investors are investing in your fund for right you're supposed to make money on rates and effects and other things right not on stocks but you're supposed to make money on stocks and effects and other things right not on stocks and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and that's not what the investors are investing in your fund for and so it's very difficult for you to say yeah why should i not participate into all of this now we try to be very conservative about it but prior like before the search for the new equilibrium so we try to be very conservative about it but prior like before the search for the new equilibrium because we thought the confluence was very very positive strong nominal growth and central banks way behind the curve and now things are changing i mean now you really see that the market is not accepting this anymore the market is looking for a new equilibrium and as this happens it tends to affect stocks uh the long answer to your question is to be short outright short it takes macro tales to convince us to do so which is inflation runs runaway inflation risks recession risks and i don't see any of this but i would say my stance has definitely turned more conservative so i saw your article yesterday and i just wanted to say i agree with you i'm also more conservative which might fit your net short over two weeks horizon as you know my investment is six months horizon it's always hard to reconcile the two views but i think we're pointing in the same
Speaker 2direction now i wanted to ask you something about your talk about a new equilibrium and all that stuff so maybe this is a stupid question but i'm not a bond person do you think that everything that you're saying is essentially a statement of neutral is higher and you know the back end reflects that or when people talk so my question is when people talk about neutral rate usually they're talking about you know terminal fed funds but is there a concept of sounds like what you're describing is almost like a neutral rate for the tenure where there's like a happy place where it needs to get to in order to neither be stimulative or or restrictive maybe in the mortgage market and stuff like that does anyone do you ever think about it that way or is that just stupid yeah
Speaker 1correct so there is a framework we use for the front end and a framework used for the long end this equilibrium framework for the front end is basically an approximation of the neutral interest rate which is unmeasurable so you have to make your own assumptions the federal reserve by the way brian says it's 325 that's what the federal reserve says that's the nominal fed fund rate which is neutral according to the fed and earlier this year brandis was the reason why the front end was mispriced because code inflation was running 100 plus basis point above target and the federal reserve was barely above their nominal neutral now if you want to adjust monetary policy for inflation above target you have to raise your fed fund target above nominal and above neutral right and so that adjustment led the front end to move if i look at the front end now let's say one year forward fed funds they are appropriately priced for a federal reserve that wants to be restrictive against today's level of core inflation and then today's conjunction in wage growth which is pretty moderate so it's very hard for us to see runaway inflation and therefore the fed has to do a lot more in the front end than priced okay so the front end has moved to a correct pricing let's say and then there is the long end right for the level of tech year or 30 year yields you need to start overlaying a bunch of things on top of this basically you need to have a model for the steepness of the curve right if the nominal fed fund is x where should 10 year be how much above should it be and this is basically a measure of yeah let's call it term premium for you to buy a 10 or a 30 year bond how much margin do you want to be compensated for effectively right so that's the search for the new equilibrium for a very long time the market accepted that despite the federal reserve was below what was behind the curve in the front end they wanted i don't know 75 to 100 basis point of steepness and that was fine and now the market is saying not only the front end has been repriced correctly but i also want the long end to give me more premium back and we try to model what is a fair level there and as i said there are a few yardsticks right so one yardstick is the volatility of inflation how volatile the inflation impulse is and that is pretty benign like if you look at that at the inflation side so that's supportive anything else is not if you have basically full employment and you run a three percent primary deficit every year the equilibrium steepness of the curve should be higher right i mean the cheddar is party boost and your rates should be higher to compensate investors for debt risk if you have private sector balance sheets deleveraging so that means the variable mortgage rate in the u.s is non-existent the total private debt to gdp in the u.s is the lowest in 25 years i repeat corporate and households leverage in the u.s is the lowest in 25 years yeah as a percentage of gdp if you look at uh people say oh but this energy crunch is going to lead to consumer spending coming down the amount of nominal wages spent by the median american in gasoline electricity and heating is seven percent of nominal wages in 2011 it was double this number so again what energy crunch are you talking about if you take all of this together then you see basically my model says that the appropriate steepness of the curve plus the appropriate level of fed funds in the front mean that a 10-year rate less than five and a half and a third year rate less than six percent are not close to equilibrium and that by the way brand if you get there you are just at equilibrium so from a long-term perspective bonds are fairly priced they're not cheap they're fairly priced they're fairly priced they're fairly priced and then i asked you know what's interesting oh
Speaker 2sorry go ahead go ahead oh
Speaker 1no sorry i was just ranting for too long i'm talking about my models and how i invest so i get i get very passionate and then uh at the end of the day you still have to remember that when you get to six percent in the long end they're not cheap they're just fair and then the process of getting there in my experience the market has a way of testing policymakers when they when they're looking for a new equilibrium they don't just gently go there and they tell the policymaker oh yeah i'm going to six percent don't worry just you know five basis point a week and the equity market is going to be fine and credit is going to be fine there is a non-trivial risk that that process becomes a bit
Speaker 2messy right and i think that's a really interesting concept of like seeking a new normal or seeking a new equilibrium which is probably somewhat similar to the style of equilibrium that existed before the global financial crisis which is you know nominal yields and in a nominal growth being kind of in the same ballpark the interesting thing there is that i think a lot of the mentality in the market is like looking to catch the bottom in bonds for the big rally and what actually might happen is we finally you know overshoot or whatever like you said policymakers get nervous etc etc but then there's no reason why yields need to go back down substantially i mean one day sure there'll be a ai capex financial crisis or whatever and yeah and all bets are off but for now you know maybe the the reality is that yields are going to go up here and they're going to find their new equilibrium wherever that is but then they're just going to stay back stay up here and that's going to be the new you know the new range will be 5.0 to 6.2 or whatever the new range is but it there might not be this epic trade to buy the dip in bonds because they might just stabilize at a at a much higher
Speaker 1yield indeed so that's another thing right because the temptation for macro people i consider myself one of these species called the macro people the macro people are very funny people you know they have huge biases so i need to ah we are not on youtube so i'm just looking at your book that i'm reading here um just you know it's one of the things that you do well is try to uh make you think about your psychology right so you you look at the book and i started taking these notes down for my biases over the years and it's like dude i just want to buy bonds all the time and i want to sell dollars all the time what the hell like my system has been screaming dude the amount of primary deficit is through the roof money creation is through the roof the central bank is behind the curve sell the freaking long end with two hands basically right and then i remember drunken miller coming out with this interview some what's it four months ago five months ago where he said um yeah i'm long stocks because the central banks are behind the curve and the conditions are too accommodative and as a hedge to this i'm short long and bones and and i remember listening to this i was like what what what does it i don't understand yeah now i understand what he meant i mean my models were also saying basically if the market has to look for a new equilibrium it can become a bit disruptive right so actually selling the long end is the the thing to do and then look at your biases as many macro people have biases i invite you if you're a macro person as one of the species to write down your your biases right and and try to fight them try to fight them and one of the biases is you always want to be long bonds and at least for me and to because i basically grew up in the 2013 2020 period this was like my first the start of my trading career yeah of course you always have to be long carry and bonds i mean what else there is the qe and z zero inflation i mean what else do you want to do and and then it takes time for you to eradicate this bias but if you go with 30 at six percent i want to repeat to myself first it doesn't mean anything it doesn't mean bonds are cheap six percent is not a magic number it's a confidence interval of an appropriate level that bondholders might find to start buying some bonds technically you might be stretched out there if you have a long time horizon you just went to the end of a long time horizon you just went to the end of a long time horizon you just went to
Speaker 2uh what are you thinking in fx so i'll i'll just give my thing first because it's short um because essentially now we're in in a trading environment that i find one of the harder ones which is you have the dollars overbought uh the market's long dollars but there's absolutely no reason to be short dollars like you know the nominal growth stuff you know u.s labor market is hot et cetera et cetera ai capex looks fine until further notice et cetera et cetera so and then also i'm worried about europe into the winter on the energy stuff and the french election so i do think it's a pretty realistic and logical trend for a dollar higher but when i see like i have this rsi heat map that shows a hundred things like it's it's not just fx it's like the major etfs the major currencies et cetera et cetera in the top left corner which is the higher rsis in all this whole macro universe you have ewz which is brazil ewz if you're american z is zed um you have dollar max dollar canada dollar index dollar sweden yeah and and then xom those are the ones in the top and in the bottom you have euro cnh which is basically euro because cnh is low beta you have euro dollar euro sterling new zealand dollar and nickel so seeing currencies dominating the rsis plus the positioning indicator that we run is like getting close to a bit scary but absolutely no reason to be short dollars i find that a very hard setup and and to me usually that leads that means what happens is there's consolidation so you need enough time for the overbought to burn off for people's options to expire worthless and then you know euro can trend to 108 or 109. so that's kind of my view right now is uh probably a consolidation period followed by continued dollar strength but uh i'm curious what you think in the search
Speaker 1for new equilibrium brent the dollar has to be higher uh it is not as straightforward as yields higher because the dollar is influenced by a million more factors uh so we need to talk about the dollar against what exactly but if you're dcb and you're starting to sound like you're yourself sorry for the french yeah because you know you start seeing lagarde saying stuff like yeah but you know we have to be very moderate in our tightening and then the economy might slow down so before it even slows down you start to say like oh yields are too high you know we have already done two hikes and we are europe what do you expect us to do you know that's already enough
Speaker 2it sounds like it sounds a lot like the fed you know we hiked but we didn't really want to hike and we promised we won't hike too much and don't worry about october it's like the most dovish panic hikes of you know that's what -
Speaker 1Correct, correct, correct, so the dollar per se as the, let's say, PC1 factor to this search for equilibrium should be higher because the U.S. economy is one of the most insulated in this process, right, of where are the disruptions going to come up from higher bond yields? The U.S. doesn't have a private, doesn't have a variable mortgage market. The U.S. has declining private sector debt. The U.S. has very strong balance sheets. The U.S. has a stock market that is all about AI and mega cap mostly, so it can be more insulated from higher interest rates. The U.S. has everything from a PC1 factor to be the most resistant currency, but if the Federal Reserve starts saying, oh yeah, I don't hack in October, yeah, but maybe I hack in December and I'm done, then all of a sudden that interest rate differential push at the front goes away, right? So I'm inclined to say, Brent, the euro should go down a little bit more, but mostly as a function of the ECB being so much, you know, hesitant to act further, but how many variables do you want? I mean, what if Le Pen? He votes for a very tight budget and then this French fear go away for a bit because people don't know.
Speaker 2That was a good call, actually. You said that in the last podcast and then two days later, she actually did come out with some stuff. And I think that's an interesting point is that people are kind of doing this French trade so early, way before the election. And then we have Moody's on October 23rd in doing a ratings review on France. I guess the one thing and the hard thing with all these fiscal trades is the French, you know, numbers are really bad. Like you were talking earlier about the private, essentially in the US, the sovereign took over all the private debt essentially is what happened after COVID. In France, I mean, Canada's like this too, but in France, that's not what happened. Like private debt is just going up and government debt is going up. And so it's logical, but like those things are true for the last couple of years. So it's the arbitrary nature of when the market attacks. These things makes it difficult to trade. Like you just have to kind of either know it when you see it or have catalysts on your radar and go, okay, I think the market's going to go for it on these, you know, on these catalysts, like the election being the obvious one, correct. But then, you know, Moody's on the 23rd, et cetera, et cetera. But you know, it, it does kind of look a little bit like we may have actually seen a blow off in spreads last week when we got, I think French France got to, um, to one 60 and then, and was quickly back at one 40 basis points. And it's still, you know, it's at one 38 right now. So is it a consolidation or was that the blow off? That's the question. And I guess to me, I don't think it's over, but the consolidations can
Speaker 1be painful indeed. And I think too many people are now in the camp of, uh, you know, French bed, French bed, French bed, and I'm Italian, so very, very happy to endorse this. No, just kidding. Uh, but, um, yeah. If Le Pen votes for a very tight budget now, Brent, then she's showing that she knows she's not interested in blowing up spreads. And if she becomes the president, then what, then what's the problem? I mean, the only thing that markets care about is your fiscal stance. And if your fiscal stance is going to be tight, then great. You're actually good for French spreads. So it's not like I invite people to not think, Oh, Le Pen victory equals bad. No, no, no fiscal loosening equal bad. And if she votes for a tight budget, their credibility goes up. You know, it's a bit what we saw with Maloney in Italy as well. So, uh, yeah, I mean, again, just because of DCB, I think it makes sense to, to try and be short euros, but it's very crowded dollar dollar, broadly speaking, if you're searching for a new equilibrium, I think the trend is still for the dollar to go up. I've been trying to ask myself what stops the trend Brent it's it's early, I know, but what stops the search for the new equilibrium? How do you stop and move on to a new narrative? I mean, when he has a 6% or 6%. Well, I mean, yeah. Okay. Let's say the euro is 20 or whatever. And the euro is 107. Okay. All good. And then what is the catalyst that, that, uh, that comes in at that point?
Speaker 2I mean, the really obvious one, because we saw it yesterday in a super micro format is the market thinks that peak CapEx has been reached for whatever reason, like either hyperscaler earnings with, or they actually say in those calls, you know, we believe we've re we've reached an adequate level of compute that we don't need to keep spending. A trillion dollars every two years or whatever, because yesterday when the open, there was a, there was a headline that open AI revenues were lower than people thought, and it's already been rebutted. But yesterday when it was happening, you actually did see stocks down and bonds up, which hasn't been like a common combination. So I think there's a big enough cohort out there that believes in the circular financing story. Um, and the idea that we're going to have some kind of financial crisis after. The AI CapEx bubble bursts, if, if the revenues are not large enough to finance the, the issuance, but you know, when do you actually know the answer to that? That's the problem is probably 2028 or something. I mean, unless there's some huge red flag, like people just stopped using chat GPT because they realize the free models are, they like free things better than expensive things or whatever. But, um, yeah, it's, I think that's the really obvious one because there's so many. Transmission mechanisms from the AI CapEx to the economy, to the dollar, to, you know, to bonds, et cetera. Yeah. That's a very good point.
Speaker 1But, but I was thinking this podcast is going to be a few minutes longer, but I, I am loving it. So who cares? Um, how do we like, normally it's the second derivative, right? It's inflection point that matters. You don't have to wait for CapEx to actually come down and I look at next year and at least the hyperscalers are priced at about four to five billion. Yeah. Yeah. It's like 500 billion of, of additional, which, you know, it's not only high as a number, but it's higher than this year. So it doesn't even look like the second derivative is turning down, let alone the year on year comps, basically. So the question is how do we get an idea when that's about to happen? I mean, what to track to get a better idea there?
Speaker 2I mean, I think conference calls of the, like the hyperscaler conference calls are probably the main thing. Okay. Because they're going to be talking about it way before it happens. So to me, that's, that's kind of like the biggest place I'll be looking. And then I guess the other thing is people are monitoring this now, but it's very difficult to tell what's going on, but like the move from closed to open source and people, you know, so if there's just a really aggressive migration and somehow you get wind of it, I don't know. It would probably be like an article in the information or a Bloomberg or something. Yeah. Corporations feel their IT bills are too high and they're moving to open source. Then I guess, you know, maybe that would be the sort of the tell, but yeah, that's, I actually was thinking about writing a piece of like, I had the Whitney Houston song. I think it's Whitney Houston. How will I know in my head, but like, how will I know when, when this thing's done? Because it's obviously the biggest driver of every single asset class. And, and, and the real economy. And I was thinking about it and the answers other than what I just said are not very obvious. Like how will I know when, when we've reached peak capex and, and it's time to take the other side. I don't know. Honestly, I don't know. Other than one of the hyperscalers just saying it. I'm not sure. :
Speaker 1Hey, Brandon, you know, we could also do fiscal tightening. Oh yeah. That's such a good joke, but it's actually, this would also stop the trend. : Yeah, exactly. Yeah. Yeah. : Right. : Absolutely. It's struck right away. Right. If after the midterms, for any reason you can imagine, feel free, if you're creative to send us an email and explain to us which party between the Democrats and the Republicans, depending on your view on our midterms turn is going to effectively try to force a tighter primary stance in the U S fiscal primary stance. Please let us know. I'm very curious to hear, but if you can see that happening, that would immediately stop things in the truck. Right. So basically saying lower nominal growth, right? So the other thing would be if higher interest rates feed into weaker nominal growth in the U S I think it's possible, but it's probably takes a lot of time and also it's very gradual as a process. :
Speaker 2Right. That was one thing that I read recently that kind of raised my eyebrows is cause it's one of those statements that you only hear at the highs was that because, uh, investors believe that the, um, returns. On AI are potentially infinite, a rate, a rise in the cost of capital is meaningless. Whether cost of capital is six, seven or nine or 10%, doesn't matter if you're pursuing infinite returns on the revenue side and anyone that's been around for more than 10 years should be scared by that comment. No price is too high as a Howard Marks sarcastically says. :
Speaker 1Absolutely. Yes. : Okay. So, um, we are basically searching for a new equilibrium brand also things that the stocks might not be immune from the search from, for the new equilibrium. And um, we invite everyone to check their biases, including us, please, please remember to check your biases every time. And uh, thanks for listening. I hope I'm not speaking from a tumble dryer today and we talk again next week. :
Speaker 2All right. Happy Thanksgiving to everyone in Canada. Remember someone out there is praying for something you have very, very inspiring.
Speaker 1inspiring talk soon guys all right ciao the content provided on the macro trading floor podcast is for general information purposes only no information or other content provided in this podcast should be considered as investment advice seek independent professional consultation in the form of legal financial and fiscal advice before making any investment decision always perform your own due diligence ♪ ♪
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