00:00Your outlook, you and the team, you think cuts are more likely than hikes, but your base case is essentially
00:05no move.
00:05That's not necessarily what the market is pricing. It's pricing in that hikes are more likely.
00:10So what are we missing?
00:11Yeah, well, I don't think you're missing anything, Dan, but I do think that the market's missing something.
00:16I mean, I think the market is basically living in like the world of two months ago, as was the
00:20Fed minutes,
00:21which is like living in a different world.
00:23If you think about, you know, the Fed minutes, that basically came out, that meeting happened hours before the MOU
00:29was signed.
00:29So the war was still effectively going on.
00:32Gasoline prices were above $4, and job growth was running about 170,000 jobs per month.
00:38If you fast forward to today, you know, yes, there's fits and starts, but I think more likely, you know,
00:44the peace deal will hold.
00:46You'll continue to see more passage go through the Strait of Hormuz.
00:49Gasoline prices have come down, and job growth is closer to 50,000.
00:53So it's just a different world that we're living.
00:55And if you take this world that we live in today and you look at what the minutes said about
00:59what the scenarios that they're talking about,
01:01I think you're more likely to see, you know, cuts than you are hikes.
01:05Because they said if inflation comes down because they're ran, pressure goes away.
01:10And then you start to see inflation come toward the 2% target, then you're more likely to see a
01:16scenario where you're on hold or you're going to cut.
01:19And that's kind of what we laid out in the report.
01:21So when does the market see this, Dan, because right now we have yields going higher.
01:25I mean, right now the 30-year yield is still at 507.
01:28Yeah, I think the markets will come around to this when inflation comes around.
01:34The problem for the markets is inflation is a lagging indicator.
01:37So if you focus on the best and gasoline prices are coming down, albeit sort of the move on the
01:43news overnight,
01:44you know, gasoline prices will probably be trending lower.
01:48Overall energy prices will be trending lower.
01:50They noted in the minutes, actually, that housing pressures will continue to be a drag on inflation.
01:54So if you get that dynamic playing out through markets, if you look at some sort of real-time metrics
01:59of inflation,
02:00they're telling you that there's probably more downside to where those numbers are going to go.
02:04One of the interesting things, though, about those 30-year yields being elevated is it's not just inflation.
02:09Because real yields are also at the highest since 2008.
02:12What do you think is driving that?
02:14And why do you think risk assets haven't reacted more to this?
02:17Because this is usually something that could be troubling for stock markets, for example.
02:21And they continue to trade within 1% of all-time highs.
02:23Yeah, I think, you know, there's the structural, you know, case for inflation and rates.
02:28And then there's sort of what's happening, you know, relative to geopolitics in the cycle.
02:32I think structurally we're in a higher-for-longer inflation environment and a higher-for-longer interest rate environment,
02:38which is why you're sort of seeing that in the 10-year.
02:40I mean, we have fiscal issues to take care of.
02:42We're in a deglobalizing world.
02:46All that puts upward pressure on the longer-term inflation and interest rates,
02:50which is why I think, you know, the long end is going to be a bit more sticky.
02:53But that means you'll probably see some yield curves steepening through the end of the year.
02:57Why don't risk assets care, though?
02:58I think risk assets are removed on this.
03:00I mean, this is one of the points that we highlighted in the mid-year,
03:03is that, you know, the markets have moved on from hormones, right?
03:06It almost, like, doesn't matter.
03:08And we actually said it was actually a mispriced risk, an underpriced risk.
03:12Like, so, base case is that Iran is over from, effectively over from a market perspective.
03:17But the markets had 100% priced it out, and that was a little bit extreme in our view.
03:22So, being the global investment strategist, where are you looking to next?
03:25I mean, Korea has had a whale of a time, literally.
03:27And, you know, before that, it was pretty much Japan.
03:30Where might be the next hot market?
03:32I think it depends on sort of what you're trying to get at when you look internationally,
03:36because, you know, Korea, Taiwan, they've been phenomenal performers,
03:40but, you know, they're concentrated semi-plays, right?
03:42Obviously tied into the AI story.
03:44So, you're not really getting a ton of diversification, even though geographically you are.
03:48And so, one of the areas, we look at sort of risk-reward.
03:51I think Japan is actually one of the more interesting areas,
03:54because fundamentally, you're actually seeing good earnings momentum.
03:56You look at some of their economic indicators, they're improving.
04:00You know, it's not too expensive, and you get a lot of high-quality companies.
04:03So, I think that's probably one of the better risk-reward areas right now.
04:06Meanwhile, here in the U.S., I mean, it's been some remarkable chop, Dan.
04:09Like, one day we love semis, the next day we hate them.
04:12It's a back-and-forth between them and the hyperscalers and the check riders and the check receivers.
04:17Is this a rotation taking place?
04:19Is this a fight for leadership?
04:21Yeah.
04:22I mean, obviously, you know, you're dealing with two dynamics.
04:25It's the pendulum is swinging, you know.
04:26It's swung really far in the direction of sort of the check receivers, I think you said, right?
04:31And I think maybe, you know, what we talked about in our earlier report is sort of the idea of
04:36the CapEx vigilantes.
04:37The market's going to say, you're spending too much.
04:40We don't see line of sight to actually that turning into business results.
04:43And so, I think the hyperscalers, to some extent, have listened, and they're monetizing that CapEx.
04:49And so, now you start to see that pendulum sort of shift the other way.
04:52Ultimately, I think there's that dynamic along with the competitive dynamic.
04:56That's why you're seeing all this moving around.
04:58I think it is sort of a nice case.
05:01I think you will start to see that pendulum continue to swing in favor of the hyperscalers to some extent.
05:08But there is ongoing competition coming in.
05:11And you're seeing, you know, the pricing pressure on the model story.
05:15I mean, every day we're getting a new story about how they're having to cut prices or offer more for
05:19less.
05:19That's not a great sign.
05:20CapEx Vigilantes.
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