Is The AI Selloff A Buying Opportunity? | Warren Pies

Nothing said on Ford guidance is a recommendation to buy or sell any investments for products. Hi everybody. Welcome back to another episode of Ford guidance and excited to be joined today by repeat guest Warren Pies founder of 314 Research. Warren always great to have you. What's going on man? Yeah, and likewise always enjoy our conversations. Really nothing's going on in the world, right? Nothing to talk about. Yeah, just another day like nothing to talk about just shoot the shit exactly. Yeah, yeah. Yeah, wanted to get you on the show because you put out a couple of recent reports where you've you've meaningfully changed your your allocation weightings, which is really interesting to me. You know, it feels like over the last few years you've you've very correctly faded many of the points of potential, you know, market noise hysteria, whatever you want to call it. But I know you recently changed some of your core allocations. So you've really just wanted to think about it, which is just this this fundamental outlook and then this technical outlook and how those both interplay with each other to understand like where expectations lie. And yeah, there's a lot of drivers for how to think about those two outlooks. There's, you know, these these big buckets which will will deep dive into each of them. But you know, you have the Iran we're going on in the energy crisis that's potentially ensuing from that. You have the AI buildout situation and how that reflects as being like one of the core drivers of the economy right now. You have how the Fed is reacting to that core driver and how to navigate that. So loss on pack, why don't you just tell us a bit of context on these recent changes in your allocations and how are you thinking about that? Yeah, so I think that's a good starting point. One of the things if anyone's been listening to me over these months, they are even over my career really going back to net Davis days. I kind of have this this saying that I build conviction on fundamentals, but manage risk with technicals. And it's just something that keep in my mind whenever we're going to these market events and you can have your convictions and you can have your fundamental outlook. But if the market starts going against you, I think you need to have the humility to shift years and understand like you can silo those two things in my opinion, you know it. And so like you said, I'd say since later 2023, early after wall or signal that the Fed was going to start easing, we've been on like a bullish overweight equity tilt. And we also saw some programmatic disinflation and things like that earlier in that this period. And I think a lot of those some of those tailwinds are coming to an end, but we've also been very bullish on the AI story and we remain bullish there. And I think that they're it's funny to me to hear the bears so confident they're so confident they talk about the bubble as if it's burst already and it's like a known thing. And I'm just I don't I'm not there. I'm pushing against that still. So fundamentally, I still believe that we have farther to go in this AI story. But like I said, the technicals I could be wrong. I mean, this is a whole new era that we're entering into with the new technology and the path could be very dangerous, even if I'm right about the destination. And so what do you have to do? I think is step back and have the humility to trust the the technicals. And so whenever you make a move, that's usually going to be where you start. So what did we see? Why did we downgrade stocks at the beginning of last week? Number one, the market entered what we call a consolidation. And this is like a defined period of very tight trading range and no new highs, no new lows. It it happens at all close to all time highs or 52 week highs. And it occurs about 13% of the time. We look for like a six or seven percent trading range over like a 63 day period. We have a bunch of other requirements. But the bottom line is when you get into one of those consolidations, you've lost momentum in the market. When you've lost momentum, you have to look for a trend change. And it could either be a breakout or a breakdown, but just risk management and discipline tells you you need to start your intended should go up that you could you could see a major trend change. And so we saw this consolidation. And then within the consolidation, I'd say the big one of the ways to foretell how you're going to resolve this consolidation is leadership trends. And the way we've classically looked at this is through the financials versus staples ratio. And this has been something we've used through the years. We used it going into the liberation day, sell off. We used it earlier this year because both times we entered a consolidation prior to those breakdowns. And then in each one of those cases, we saw financials roll over relative to staples. And this is a pattern we're seeing again right now as we enter this consolidation. So staples that's and by now everyone knows this staples up by 14% in the month of October. Everybody's trying to rotate aggressively into these non AI areas. And that's namely staples. And that's not healthy. I mean, if you study history, you know, a market led by energy and staples is a really unhealthy market. It's just not one. We're not going to get that big bull advanced that you really want to have as a tailwind if you're trying to get equity beta. And so that was that was the second thing we saw. And then the other thing that we called out back in coming off those July, that little many July period of turbulence, the leopold liquidation lows that we call it. So we saw hyperskiller, credit spreads start to break back up to and through those wides that we saw back there. And so everyone knows you're going to need a lot of financing to build it for this AI build out. And so I think seeing those credit spreads jump above the July levels before equities had corrected all the way back down there tells me again, our default assumption should be changing from a sustained uptrend to some kind of breakdown. And so those were that was the big picture of things that we saw that they got us to to downgrade equities. And so yeah, that's it. Again, we're really just took risk off. I mean, we have the we're many clearing events coming up and that we're going through right now. I mean, the midterms are today. I would say that there are a few, I don't want to act like I'm some kind of insider, but at this point in my life and career of like, there's some good contacts I have and they're plugged into the political side. And they sound very concerned about the concern over a blue, not just a blue wave, but a blue tsunami. And even the pressure that's coming at places like Texas state legislature to slow the pace of data center buildouts, I think that's a real risk. And so no one wants to put capital work. We had many different issues in the month of October. You have end of year tax law selling for mutual funds and things like that. And that's I think all kind of conspired to create this week market environment that we're in. And so I'm not sure that if we have that blue tsunami, I'm not sure that we'll we'll we'll we're just going to turn around on time. And so we doubt rated equities. I think it's best to see that range resolve itself and or if you want to try and buy further weakness, we need to see a true sentiment or positioning washout. We look at things like speculative or inverse ETF volume versus a percentage of speculative total. So that's levered plus inverse. It hasn't really shown a capitulatory reading yet. We have our own internal sentiment models that takes a whole bunch of stuff and aggregates that we haven't gotten to extreme pessimism there either. We do things like model out a vault target positioning. Those like vault target positioning from our estimation is still like roughly one standard deviation over the rolling mean. And so like there's a room for them to cut exposure. And so the bottom line is I just don't think so either going to buy a breakout. That's how we were positioned now or you're going to buy extreme fear. And we don't have you right now. So that's why we neutralize risk. Okay. So you know, basically stay sane and trying to get signals from market structure because you kind of hinted at it there earlier that the way markets work has changed a lot in recent years. Like you have so many of these weird systematic flows into markets that I'm just curious like contrasting trying to find signal because to your point, super stable is an energy or leading. I could sort of the, you know, the final plus it's not a very healthy situation to be in. But in the same vein, you have like all these different market structure flows that are just becoming so much more powerful. You mentioned like vault targeting funds and you have like, you know, options activity is just on a, you know, up only basis. You have the passive investment thing into indices, which is interesting to compare of like, you know, all the top line indices are are still, you know, in a pretty good spot. We're not that far off all time highs. But then you look down the long tail of asset classes and like a lot of stuff has already been struggling for months now that doesn't really go talk to bed. And I'm just curious like, how do you find that signal in this world where the market structure is just so much more noisy? Yeah, it's an imperfect process for sure. I do think you have to try to avoid. I see so my, so this is like my little editorial commentary on market philosophies. Like you know, when you don't want to boil the ocean, you're not going to be able to model the markets. That's like, you know, a fool's errand and things are constantly changing. I see people who struggle consistently like one of the things I said is build conviction with fundamentals and a lot of a lot of people don't have that technical overlay because conviction is weirdly synonymous with confirmation bias, and that's the line you have to walk there. As far as how do you make heads or tails out of technicals, I wouldn't say no one's perfect. You know, no one's perfect. You have to just try to test everything and then throw out the noise as best as you can tell and be very honest with yourself. And so that's what we've done. I think that this year in particular, given the way we saw the market structure evolve, one thing we would consistently do is run analysis of like, okay, you're today at How's the S&P doing on up and down days for every industry group. So it was like 50 something industry groups we track in the S&P 500 and by far the most important, the biggest spread between updates and down days with the S&Ps. So to make that a little more clear, what I'm saying is that when S&P conductors are up, then you own the S&P 500 on those days. When S&P conductors are down, you're not on the S&P. So what are those two? The distance between those two equity lines at this point of year is over 105%. There's no other industry with that wide of a spread. So what that tells you, not only have S&P's grown as like 20% of S&P 500 market cap now, they're obviously they are the lifeblood of the AI trade. It might change, like we can talk about how that could evolve going forward, but like so far that's been the way these pod shops and multi-stats, if they want to be exposed to the AI trade, they want to be along that and short something else. So it's been a joke of ours internally, like if you want to know what Hershey's is doing this year, just tell me what SMH is doing because it's just been moving opposite of it. There's no reason for that. So this is something we've written about all year. So we've really, with our macro indicators and fundamental indicators, we start really pounding the S&P conductor group. We've for years looked at GPU availability and GPU rental rates and we do a lot of work there to try and say, hey, fundamentally is the market for compute still, we loosening or weak or tightening, but our key key point is that SMHs have to get into gear. And so we we were worried coming through June that they were topping and then our hope was that July was the bottom, you know, in that we were the market was ready to get back into gear and the charts kind of broken down again. This episode is brought to you by Fidelity Crypto, a platform built in-house with the same discipline, Fidelity applies to everything. So you can invest in crypto with confidence free crypto backed by industry leading security. Get started at Fidelity.com/crypto. Crypto is offered by Fidelity Digital Assets NA is not insured by FDIC or SIPC and includes risk of significant loss. Fidelity brokerage services LLC member NYSE SIPC. This November 10th and 11th Crypto's best institutional event is coming back to London. The Blockworks Digital Assets Summit at Hilton Park Lane is coming up. 1500 attendees, more than 700 institutions and speakers from BlackRock, JP Morgan, Coinbase, Robin Hood, Figure, and more. Just a few years ago, a lot of these institutions thought crypto is a joke, but now JP Morgan and BlackRock are on the agenda. So there's two days of panels networking inside events, all building the on-chain financial future. Grab your ticket at blockworks.com/events and I'll see you in London. All right, so I think that leads well into like this first big bucket. That's one impacting like you just mentioned with SMH, how it's really one of the biggest drivers of just correlations in the broad market, but it also feels like it's a big component of what's driving the economy right now and how to unpack that. And yeah, I'm glad you're on. I have a lot of conflicting signals that I'm seeing in the AI complex right now that I'm trying to figure out. So hopefully you can help us walk through here. But you know, it just feels like we're all trying to figure out how much of this is a leverage washout in terms of the AI build-up place versus that meaningful signal. You mentioned SMH breaking down there from a key level. And there's a lot of conflicting signals coming from the AI complex right now. So, you know, compute is still quite tight. Like you've been putting out regularly these charts of just looking at like H100 rental industry prices and that sort of thing. And it's just like it's clear there's a lot of demand. There's talk of that compute market being in contango now. So, you know, some interesting signals there. And on the other side of things is we just had all the hyperscaler innings this week and you know, some of their cap cap ex-estimates had missed an analyst estimates. You also have the Anthropic S1 come out and how we're trying to piece through that. So yeah, you know, we're all trying to figure out the question, is this a leverage washout or is there more fundamental aspects at place? I'm curious how you're trying to tease out and get the signal here. Yeah, that I mean, the getting good data is so difficult, I think. And you have to have the projection. There's like, you hate to say it, but there's like a certain amount of faith in how this this technology has been a diffuse that's all baked in there. Our philosophy from day one has been to be as neutral on because there's so much there's like two strong sides. There's the bears and the bulls and it's like, it feels extremely emotional. And so from from day one, we've felt like we don't want to get caught in that trap. And so the best way to do that is to have key metrics that we're going to monitor and adhere to. And so the first one we built was like you said, GPU availability. And this is something that we started tracking back in 2023 and just like Fernando, if I work with me, go out and see how easily each hour every day he could, it was to obtain a GPU from a NeoCloud. So we were working with the NeoClouds on that. And what we saw early this year is like the agentic explosion happened is like our availability metrics took a massive dip. And so that was and that's basically been the state through this year, especially for Black Wells for B200s, B200 availability has been zero. So that's that has had a tendency to lead rental prices. And sure enough, that's what we've seen is that rental prices continue to creep higher. And it's important. I think when you get into this debate to remember where we came from. And if you would have gone back, everyone agreed when they modeled, we also data model data center economics. And so this is something that whenever we started modeling data center economics, one of the key assumptions is that GPU rents are going to decline over time. And so we haven't seen that. We've seen availability tightened and we've seen rents rise accordingly. And that's not in anyone's model for how these data centers are going to cash flow out. So like we looked at like our core assumption was a 25% annual decline in rents. So whenever we track, and these are all real time daily things that you can track, whenever we do that, we see a very tight market for GPUs for compute emerging. Now, like you said, another thing that's happened here recently, Silicon data who are friends with them and Steve, how over there is a is someone who I've talked to for years and he's he's moved from Bloomberg over there and they do great work. And they've started looking at term structure and there's some other companies that show you like one year out commitments. And it does seem that farther dated rental prices rents are going up or now in contango. And so that offers another confusing thing because this is obviously my background as oil. And you see a lot of people take that that contango and they misinterpret and they think that's a weak sign because that is a weak sign in the oil market when you have a physical commodity as to where the curve is managing inventory. That's not the case here. I think that you have a convenience yield in a physical commodity world. You have a capacity premium that's emerging here. So I think those farther out futures prices point to people locking in capacity and longer dated when longer dated rentals trade above spot. I think that's a very positive sign for how I understand commodity markets and the emerging GPU market. So everything on the GPU side looks good. And I would say in addition to that, the cloud revenues from the hyperscalers are now starting to ramp up and we saw that in the Q2 reporting season. All the hyperscalers rallied. I know that we're in a different kind of market regime. Everyone's nervous now. But I feel like the return on investment debate is kind of being ground down into nothing. I think that the returns are there and you're starting to see them emerge. And then finally, I think the anthropic S1, the fundamentals are pretty impressive from everything in that S1 in my opinion. I think if you look at the way revenue per dollar of compute spend has trended, gone from 57 cents in Q2 last year up to $2.00 in essence. It dropped a little bit with their release here in Q3. But it's still strong margins. And the other factor is that like inference keeps dropping as a percentage of their compute spend. So if you ran that same dollar of revenue per inference compute spend, it has trended up every quarter, including Q3. So I think and I'm saying all that without referencing the tech and what the tech can do in my it's which inform a lot of what we do as investors. I'm just saying here's the objective facts. The objective facts. tell me that the AI trade isn't intact still. - Yeah, I think it's some, you mentioned this notion of how emotional this discussion has become, and I feel like so much of it is because people are misinterpreting the fundamental use cases and the value you get out of these tools, which like anybody who's tapped in, I think nobody's debating that. I think it's just a matter of how dialed in you are on these tools to understanding the potential use cases, and it's just, like I'm on the same boat there, like the value there is just absurd. I don't think it's even up for debate. What is maybe a bit more off of debate is just, who's financing it, and what does that runaway look like? And that's when trying to figure out like, what, you know, if you just think about the downstream from the CapEx SMS from these hyperscores, that we got last week, like, you know, is one of the reasons that we missed on those SMS just because of how supply crunched we are on other aspects to actually make this build out happen. And then obviously, you know, we had the midterms today, and there's a lot of talk of like, you know, the Texas, Texas, Texas governorship run. Whoever wins there is gonna matter a lot to how much of these data centers we can build out. So like, how much are those weird aspects of just the supply crunch dynamic affecting the CapEx SMS as opposed to like an actual demand for data center and inference? - I think it's a really hard to disentangle me. There's you have capital market limitations in the face of the Fed hiking, which I think is all tied together. I mean, you've had, you've gone from going into the year or right before the war, we had another 75 basis points of cuts priced in the so-for-market. Now we had as many as six hikes priced out to 2027 for this cycle. So things have shifted rapidly and funding markets have also, you know, we've had so many companies, scam or funding markets and everyone's trying to get in before the lab IPOs. And, you know, there's a little bit of like a pull forward effect going on. And so I acknowledge those are real risks. And this is one of the reasons we were watching in credit spreads as like a key metric for us is our managing risk. And then you have politics, I can't sit here and stand understand how all that's going to unfold, right? I can't, I have no idea. The one thing we do is we just, we monitor satellite data for every data center that's under construction. And we've created a pacing model. This is another thing on the supply side. So you know, all the GPU metrics I went through are on the demand side. But on the supply side, what we're doing is trying to track the pace of every project that's under construction from groundbreaking to an energized shell and then backing in. How does that align with the estimates, earnings estimates, revenue estimates for the semiconductor industry? And so far what we're seeing is an alignment. We're not seeing a supply shortfall yet in our satellite data. So I think it's much more, that's how markets work. It's much more anticipatory right now than reality that we can't add to it. We have our models suggests there's going to be an additional 27 plus gigawatts coming online over 2027, which does, in our view, that supports the top line estimates for the semiconductor group. And so in our view, that's everything aligns. It makes sense there. Now, if you do hit a supply like politics, if there's a supply or some kind of power shortage or material shortage or labor shortage that slows the pace down, we should see that in our model. We should see that in the data. As far as how the market would move, like it doesn't make sense for me to see hyperscalers and semis sell off. And that's real. Like, that's where I think you can kind of see, like this market is liquidating and degrosing in general and everything's being sold. One of the big phenomenon that was going on earlier this year was semis up hyperscalers down in our theory, which was that these things are going to catch back together because it's kind of all part of one trade. If AI is like really hitting on all cylinders, but instead, now you're seeing both sell off the other. And if that's a supply worry, it doesn't make sense. Because if it's a supply worry, then the owners of the data center capacity that gets in front of that supply crunch, that's going, the economics there is going to continue to be strong. And of course, you can restrict catbacks if that's what the market's cheering on. Then you'll get great returns in your data center business, compute market stays tight, even artificially tighter. And at the same time, your capital requirements go down. So like, you need to own hyperscalers in that scenario. I could definitely see that being bearish for semis, but not for both. So to me, this price action is panicky and doesn't, it doesn't make sense with that supply crunch scenario. I'd be wanting to own the hyperscalers. I already want to own hyperscalers when this thing isn't done, but it would become even more attractive by crunch scenario, in my opinion. Awesome. So just to simply summarize that, is like, you can't have GP rental prices increasing like they are and hyperscalers and semis down at the same time, unless it's a liquidation, vars shock type of scenario. Exactly, exactly, and so if it is a liquidation of our shock, it goes back to our technical overlay and managing risk and maintaining your fundamental conviction as we go through this period. So you maintain your fundamental, if I saw something change fundamentally if GPU prices are availability, availability spikes and GPU prices plummet and it looks like we didn't overbuild, there's absolutely no signs of an overbuild. And if we hit a supply shock, it's going to be an underbuild. So all these things get tighter. And so if I saw that, then my fundamental conviction would change, but instead everything, you know, it looks, it looks like just a technical vars shock, isn't it? Yeah, I'm with you, I'm with you. Take a disciplined approach to crypto investing with Fidelity Crypto, a platform built in-house using over a decade of crypto experience. Affidelity, you can trade crypto and stocks together back by industry leading security. When you can see your accounts in one place, it's easier to make smarter decisions. Crypto is offered by Fidelity Digital Assets. NA is not insured by FDIC or SIPC and includes risk of significant loss. Securities offered by Fidelity Brokered Services, LLC. Remember NYSE SIPC. This November 10th and 11th, crypto's best institutional event is coming back to London. 1,500 attendees, more than 700 institutions, and speakers from BlackRock, JP Morgan, Coinbase, Robin Hood, Figure, and more. Grab your ticket at blockworks.com/events, and I'll see you in London. All right, so I want to talk about, and this starts to lead into how the Fed is reacting to all of this, but the economic impact of this buildout, it's very clear that we're in an investment boom right now. There's a lot of financial assets that are being issued the fund this right now, and that has to be digested one way or another. But I'm curious about how you discern this distinction between what's going on in terms of what's leading so much to this economic growth, which is this buildout and this investment boom with the rest of the economy. And then, of course, how the Fed is trying to navigate this situation. This is a very unique situation to be in, where you have these two forces in polar opposites. You look at stuff like McDonald's stock or whatever, which has just been having a real tough year at the same time that so much of this is happening, and the housing market is frozen. So yeah, just curious how you think about that whole dynamic, and how the Fed starts to navigate this. - Yeah, so that's to me, we get out of the fundamentals, and we get out of the technicals, and we go to the macro, and to me, macro is the intermediate term risk. That throws more, it's a bearish situation. It has evolved to become a more bearish situation. So I just kind of say, we came through the year, like I said before the war, we were still in a cut cycle. There are a whole different set of rules when the Fed's got your back, and it's cutting, and cutting, it's like the difference between the Fed having your back and trying to break your back is what we say. And we've quickly transitioned with the war starting out of a cut cycle into a hike cycle, and now we actually are here, and that hike cycle has realized, the drivers of rates has changed. So I see if I can say this in the right way. So one of the big debates that's gone on, especially in this Kevin Worsh era is like, what's driving rates, right? That's like a big thing, you know? And so for a long time, the tenure and oil were related, right? And that's like, it gave us some hope that if the war were in suddenly, and oil prices reverted to their pre-war norm, you could have a relief in rates. Then that flipped, and this is the concerning part, it's flipped to the correlations flipped more towards like NASDAQ. So NASDAQ and 10 years now much more correlated than the tenure is with oil. And so that goes to your point, like there's this up there. other thing now, the handoff of inflationary causes is gone from the the war in oil to the build out. And that's a problem. That's a problem. And the the thing I would say just to be to make this this technically correct is like the one thing that hasn't changed through all this is the relationship between the sofa market and the tenure. Its correlation has been like 90 plus percent all the time. So what this reminds you is in and everyone is in the worst era where we want to step back like the the the feds movements and how the market sees those as always at the center of the world. It's just what's moving the fed. What is the fed focused on? They were focused on oil their speeches focused on oil and now they're focused on AI in the build out and that's the big change. And so with that change the risk is that the fed doesn't stop until they've broken something in the AI trade in the funny markets and that's a there's a less clean path out of this hike cycle with the fed focusing on tech and AI build out than it was back when we were focusing on just ending the war and you had a supply side disruption of oil that we could we could that could back the fed off. And so those are that's my thoughts and that's how the macro has evolved in what I would say is a disconcerting way. The other thing just to finish my thoughts on it is that in this so it shouldn't be all that surprising we really zoom out is that we've never seen the fed cutting into a capex cycle. We've had that for the first time ever we had the fed cutting from 24 to through last year as capex was ramping and so it was a little bit you could you could point to that and say well that was a policy mistake I don't I'm not there but it's not surprising entirely to see this this inflation pressure starting to come out in this later cycle part of the capex cycle. How important is it like just honing in on the specific component of the build out which is the debt issuance component of the build out like obviously things were all well and good when we could find this whole build out unlevered with free cashflow that was in excess but obviously that's been tapped now. So now we're in this phase of waiting between equity issuance and debt issuance. I imagine the fed isn't too worried about the equity issue inside of things but the debt market you know we've seen some some pretty big moves and things like the core weave bond market and the spreads there and that's and not associated with the component. How yeah how important do you think it is the fact that like the stage we're in now is the one where it's so dominant by actual issuance of securities with how that contrasts with how the fed and the reaction function is so tied to you know rates markets like credit spreads are going to move and the fed is hiking that just kind of makes sense. Yeah well I mean I think we're finding like and I've I was guilty of saying this at one point so like I could like it's it's I'm happy I'm free to say like I'm rethinking how interest rate policy interacts with the AI build out like earlier this year it would be easily the common wisdom was that like well the fed can't dent this AI build out you know and I think that was true when they were funding like you said the CapEx build out through cashflow but now that they the external funding markets are there as a as a limiting factor on the supply side like we said then yeah I think that this becomes a real risk if the feds are going to continue hiking if the inflation data doesn't calm down then I do think you're going to inevitably at some point slow down this cycle again I don't think that's like a death blow to the AI trade but it would be a nasty path to get there especially for semis like semis would suffer and as we said semis have been an important leadership group for the market and so the implications aren't great but if this happens it's it's a I would say it's a it leans bearish if we go that way so yeah I think it's a big deal the other fact way the feds can impact the AI trade something that we looked at and I think a lot of other people are starting to look at it is how the VC market has been a huge consumer of AI and we estimated that VC startup companies are about 25% of lab ARR so if we really killed if we really killed the VC funding cycle with the fed with fed hikes and higher interest rates then similar to 2022 then you could see a pretty big chunk of lab ARR come out from just from that group so there are channels that interest rate policy is going to impact this thing and so that's like you need to have I think that just means like macro is the risk right now on your immediate term that's that's the risk not this I don't think it's the the fundamentals of the AI build out and to the extent I can separate those things I think it's the the fed the risk that interest rate policy chokes off or slows down the supply side how much of a subscriber are you to the geopolitical game theory potentialities here around you know the AI build out to winning the AI race being a national security issue you one might argue and that we we need to do everything we can to to get to the other side of this and the notion that you know I freshly approved fed share that was tapped from the Trump administration is that the head here who's a genuine believer in this in the AI story how much do you subscribe to the notion that they're geopolitical game theory games here to be cognizant of that we don't we don't tighten too much that we start to question the ability to get to the other side here of this race I think there's something to it I mean the fed that that's ultimately when I boil it all down I I don't think the fed just going to kill the AI trade because because of when you get right down to it number one I do think that the the data would slow the market would we've already seen market instability with some some minor credits stress right and market instability if we got worse from here would it's already in worse already acknowledged it he said I'm unable to say financial conditions are tight right now but he he wobbled versus like his jackson hole speech he's he's changing so you get another credit wobble and they're going to be done hiking you know and it won't and it won't be far before they start cutting and you know we start talking about the importance of this this this to a lot maybe it won't be overt but like to me that's everyone knows this is a very important thing and to crash the AI trade or crash the AI build out right now is to it there's a lot of downstream consequences I think the fed is in a really tough spot in general because they're hiking rates now to respond to the political dissatisfaction that's cropped up since the since really since covid I think this is all one big story that's just evolved since we started blowing deficits out post covid and so now the fed is even when they started hiking kind of in response to the Iran war I think you can read it in some of wallers commentary they're starting to become very self conscious of the inflation story and ultimately the political backlash and I think when you boil all down they actually risk getting more heat if they if they damage the AI trade in a meaningful way so yeah I think it's yeah I think it's a real factor you're probably not going to hear about it but I think it's it's absolutely operating the background how sensitive do you think the economy is to this potential AI wobble like if if the rest of the economy kind of sucks which it which it does and then this one key driver of so much economic growth starts to wobble like how quicks the sensitivity there are we talking about like quickly positioning for a growth slowdown or even a recession already see it is just more a kind of chopping around here I think it's more chopping because we still have that we so like we have a fiscal impulse that's sort of fading which is another big factor obviously but we still have pretty wide deficit right now and the thing is like just like what we've seen in the markets where when AI trade sells off to the extent rates come down when the AI trade comes off you see a bit at things like staples and rate sensitive pockets of the market and I think that that's reflecting some it's it's a little overdone in the markets but it reflects some reality economically so if you were to cool the AI trade off a little bit and right my view is again if the two years at four six I think the Fed has one more hike in it and basically that they're done they're they'll probably have a a hiking bias that they'll maintain or a hawkish bias from there I think that if that hawkish bias goes away and they say here we're done we're done done then I think that you have room to move the two year down I think the yield curve has room to flatten a little bit and that opens up that re-accelerates some of these areas of the economy that have been kind of crowded out by the AI build out so I think the between the deficits in the way the AI credit wobble would interact with interest rates I have a hard time getting to like a true recessionary scenario in the in the current environment fair enough all right last big bucket to talk about um the Iran war the energy I don't know if you believe it to be a crisis or not quite yet but uh lots going on there in terms of how it impacts the economy curious your take as a stands. There's obviously a lot of of unknown right now, where we're recording this on the day of the midterms as a law speculation of whether a meaningful escalation comes after the midterms, but yeah, obviously your background is an energy and oil, when you count the barrels out there and where it stands, and also very curious about how you see cracks, beds and distillates and just how elevated diesel prices have been and the impact on inflation. Yeah, how's the landscape as it stands right now? - Well, I mean, it's obviously the markets are a mess. I think nobody has conviction to put any big trades on right now. Like the oil traders there on my service that I talk to, I mean, it's a really difficult market to navigate because you have, I really do think the next big move is gonna get be dictated by the geopolitics and the range of opinions on that are actually wider than the consensus expects. I think the consensus got really crowded into this idea that inevitable that we were gonna restart the conflict. I don't know, I've always been a little skeptical of that viewpoint that we're gonna just go right back to a bombing campaign because as we said it early on in this thing, like there's really like four main channels that you can prosecute this war from the US's perspective. You have what I would call discriminate bombing where you're hitting certain sites, but you're not blowing up oil infrastructure, you're not hitting civilian infrastructure. We did that, you have indiscriminate bombing which is going to tactical nukes or mother of all bombs or whatever and you're hitting more a wide variety of targets including energy infrastructure. We haven't done that. We threatened it. Trump threatens it all the time, but we haven't done it. And I think that the reason we haven't is because he knows the response would be devastating to the regional infrastructure to the Gulf Coast countries and the GCC has not been on board with that kind of a move. You have a ground invasion. That would be the third way we can do this. We haven't taken that route either because there would be mass casualties. There is no political appetite for that. And so when I look around, you know what's gonna happen with the elections, I think that it would only get worse for the Republicans and if we get a Democrat sweep then you're gonna have less scope to do a ground invasion. And then the final strategy was the blockade. And we're doing the blockade and I think the blockade is working. I think we are choking off Iranian exports, Iranian floating storage is down. But at the same time a blockade, everyone knows that it requires a lot of patience to execute properly and there's, you know, does Trump have that kind of patience to see the strategy through? I think that's the question. But when I look at all those things, I just don't see anywhere, there's no movement. And then so the final thing I'd say is that you kind of look towards some kind of a deal. And I think a deal, post-election is more likely than a deal pre-election because more than likely the deal is gonna look pretty, there's some elements to it that are gonna look pretty bad politically, first the status quo. And so I don't know, but it's gonna be the next move is going to dictate the price of oil in my view. I think that we're running low on the SBR release, the European releases, which included a lot of distillates, the G7 release is also, you know, we have a couple months there. So this thing's gonna need to get figured out over the next 45 days in my opinion. And you're seeing the Chinese lean on the Iranians too. So I think that was the element that I always expected to come in at some point. And you're starting to hear that chatter. I think that China is sick of drawing down their own internal inventories. And so yeah, we've had, look, I mean, over 60% of the VLCCs in the global fleet were laid in last I checked. So I mean, this is totally unbalanced. The shipping is unbalanced. Crack spreads as you referenced are totally blown out. The diesel market is a mess. Middle distillates are a mess. And that's why you're seeing Brent WTI. So it's blown out too. I mean, this market is a mess. And then you look at the futures market, there isn't an extreme. Like my tell navigating this whole thing has been waiting for extremes and fading does on positioning. And what I see is positioning has been totally squared. And no one wants to take a strong stance ahead of the next move. And so we're all left kind of trying to guess where Trump's heads at. Yeah, so positioning wise, I've always said you have to have an overweight energy within a balanced portfolio because it's just, there's no other way to hedge the risk that this thing goes sideways. Yeah, knowing that we can't predict what that final clearing event is going to look like, whether it's a deal or just an all out attack that tries to truly end this thing. Curious what you think about what might be some of the more durable changes to the composition of the old landscape industry, especially around the US. I mean, there's this notion that the straight has been half close, half open, but yeah, the blockade has been seemingly working. And during that time, you know, that the oil market and global supply chains are a dynamic system and are gonna adjust. And so I'm curious how you think about what might be some of the more permanent impacts from this Hormuz crisis and what that could do, especially for the US as one of the largest producers in the world. Do you see certain changes that are started to happen and that are gonna accelerate and that might actually be like a durable permanent change to the oil landscape? Knowing that we don't actually know how the final clearing event is going to look like. Yeah, it's hard to say. I think that there's, I think that there's, the number one thing's gonna happen is that there's probably a good chance that we, it could accelerate, I think, the any transition for decarbonization transition that was already underway. I think that you're gonna see less presence, US presence in the Middle East and around the Gulf Coast. I think you're already seen, Trump trying to take a step back there. I mean, this is kind of like when you zoom in, this is all part of the multi polarity that's emerging, right? I mean, like this is, I kinda hate talking like this because it's like so macro galaxy brain stuff, and I don't wanna go, I would like to stay, I prefer to stay very concrete with my analysis. But there is a reality here. The reality is that this world, this unipolar world where we were policing the straight-of-horn moves and we are policing, all of them were policing the South China Sea, we're policing every region at the same time, you're seeing those, that those capabilities have been stretched and exposed to a certain extent through this conflict. And so I think it fast forwards. And you're seeing like, to end the war, we're bringing China and we're bringing Russian, we're having multiple, multiple major power discussions. Again, I hate talking like that on some level, but it's the truth. And that's the shift that I think is accelerating through this process. And I do think that it's almost objectively true. This was a strategic miscalculation to do this from the US's perspective. So I think we've lost soft power. Our hard power is in more question. The multi polar world that everyone in the macro community for the turning types has talked about for years, you can see the edges of that start to really expose it themselves and this is an accelerant. - All right, last question for you on all markets. And well, yeah, we'll come back down to earth from the macro pie in the sky. But it's kind of a random one, but just something I've been trying to figure out, I don't trade energy markets by any means, but I've been trying to figure out like those cracks reds in the distalist aspect of what typically resolves and tightens those spreads because just on my basic understanding, which is that like with spreads where they're at, refiners are just like exceptionally profitable right now. I would imagine that for that spread to resolve, they would just keep ripping these things out there until that starts to normalize versus the price of oil. But it surprised me that it just doesn't seem like that is happening. So I'm just curious in your expertise in this regard, like how does that typically resolve itself and why hasn't it yet? Typically it resolves itself by refiners retooling to produce more of the product where you see these elevated crack spreads that then supply comes on and brings that down. And you also have some level of demand destruction. I do think there is some demand destruction going on at 200 plus dollar barrel diesel, which is where we've been for now months. It takes some time to work through system. Like if you're running middle distalists, if you're using heating oil, you may be able to switch. There is some switching ability there. And so you'll get a mix of demand destruction and some supply from refiners. The exceptions to that rule, and when you see these crack spreads stay high like this for sustained period is when there's structural changes. And there are some structural things going on right now that make it a little bit of that flavor too. So like when we had, back in the days of the early-shale revolution when you had a ban on crude oil exports, those were the days, those were the salad days for refiners. That was like, so you had an export ban for crude, but refined product you're allowed to export as refiner. So those types of structural periods of your studying history, you'll see long periods of sustained high crack spreads, but it requires that kind of structural oddity. So I think we're going to end up a little mix of both. And you're going to see a reversion of these spreads. You'll see refiners also will ultimately bid up oil. You'll see oil prices stay sticky high. You can't have really a collapse in the price of oil when you have a whatever it is, $70 crack spread for middle distillates. I mean, last night checked what Singapore gas oil cracks were above $70 a barrel. And I don't know what they're at today, but you know, I mean, these are really high levels. And like the refining businesses, not a business to get married to, is the first group of stocks that I started covering when I started this, I'm like, they're here. And they're the most cyclical businesses in the world. Do you go back, gosh, look at that. Was it Lee Raymond, was it Lee Raymond, the old Exxon CEO? I think it was Lee Raymond. He goes back, he used to talk about, he was the CEO of Exxon. He used to talk about how bad of a business reform. You know, you go into it because it's cool. So don't get married to it. They're going to work themselves out. We're not going to be stuck with a $100 crack spreads indefinitely. You're going to see, I think you're going to see oil prices stay sticky and go higher. You're going to see demand destruction. And you're ultimately going to see all these refiners point their capabilities at the middle of the barrel to solve the problem. So it's a temporary phenomenon. Cool. All right, great explanation. All right, Warren. Always great to have you on Forgotten. That was awesome. Yeah, working folks go up there. I want to see more of your research and what you guys do. Yeah, you can follow me @Warrenpies on X. 314 research is the number 3 spell out 14 research.com for your institutional investor. We do institutional research. If you're interested in our AI agent, we have a research agent. It's pretty cool. And we're also developing, which I saw you guys are doing the same thing. We're developing our own MCP. I think this is going to be the way people consume research going forward. So we have our Caliban AI research agent. That's open to anybody who wants to apply for that. You can try it out. It's really neat. So that's Caliban, not Taliban. Fatty people say. Caliban. Is it Caliban? I-B-A-N. So those are the ways to check us out. Cool, man. Well, we're going to appreciate you. That was awesome. Yeah, great to have you as always. Thanks for having me.