Choppiness and Momentum Across Markets

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Terry Weissman joins right now. What we're really trying to do is get summary compendiums today briefed into the season. What is your single sentence three by five card summary summary? of the cacophony of world events? Are they idiosyncratic or do you sum it together at Macquarie? They're certainly not idiosyncratic.

I can point to one where I think there's quite a lot of linkage and that's the protests in France and the rise in sovereign spreads in.

France, right?

There's a bit of a doom loop happening in France here whereby as sovereign spreads rise, it puts a lot more pressure on the government to reduce spending but at the same time that pressure gets the people out in the streets And they demand that the government spend more. So there's implicitly a little bit of a feedback mechanism there.

Those two events are certainly not independent.

So on my coffee table at home is Eswar Prasad's book, The Doom Loop. Pretty cautious book. Is that where you are?

Yeah, because we got used during the European debt crisis, remember, to think about another doom loop. That was the doom loop between sovereign balance sheets and commercial bank balance sheets because the commercial banks, the banks owned a lot of sovereign debt. And of course, the government, you would think, would be obligated to bail out the banks if, in fact, the bank's balance sheets got too stressed. So that was a doom loop between the banks and the sovereign. Here we have a doom loop between the bond market and the social protests. There's another potential doom loop, too, right?

I mean, every time yields go up or down very fast, the way they have in the last few months in the U.S., someone blows up. We saw it in 1974 with. With Franklin National, we saw it in 1984. With Continental Illinois, we saw it in 1994. With Orange County, we saw it in 2023. With Silicon Valley Bank, I'm concerned that what puts a cap on the movement we've seen in the long end of the yield curve is not that the economy slows, because that's the wrong cause out. Yields are high because the economy is strong. I'm concerned that we wake up in the next few weeks or months and we see a major financial stress situation, maybe at a bank, maybe at a private credit company, and that's what puts the top in the yield.

Since we're talking international, I want to move to another continent now and talk Brazil for a moment because Flavio Bolsonaro, Brazil's right-wing presidential candidate, continuing to gain momentum here. You say a victory for Bolsonaro, it's going to reach well beyond Brazil.

Yeah, this is about what's been happening in the region even before this election. But the trend has been towards every government that's had an election, that election has gone to the right, the center right, the populist right. Every single one of those governments is now aligned.

With the U.S.

Geopolitically and strategically, right? Argentina is, Chile is, Peru, Ecuador, Bolivia, Colombia, hopefully now Brazil after the second round of the elections. Venezuela certainly could be. And of course, Mexico is aligned with the US by way of its economic relation. This has never happened, right? To have the whole hemisphere, with the potential exception of Canada, looking the same way, being aligned.

I think this could be a golden age for Latin America. The reasons that we could see coming out of this trade agreements, national security agreements, border security agreements, immigration agreements, everything good that countries should be doing with one another could happen over the next few years.

We're going to rip up the script here, folks, because what he just said, Terry Weissman just said, is really important within the heritage of New York Wall Street. There was a cottage industry years ago at Bear Stearns, Emmy Shio, Terry Weissman, and others, of study of Latin America. All of our listeners and viewers look at Latin America today is a multi-decade failed experience. Where do they finally pull themselves away from colonial idiocy and get to a better rule of law a better respect for contract, which allows for the South American boom everybody's been waiting for from our childhood.

Yeah, look, the first thing that they have to get rid of is the back and forth between left-wing governments and right-wing governments. We cannot have decades of flux where each country is not necessarily aligned with their own neighbors.

Do you believe now that's happening? Not necessarily.

These now centrist, market-oriented, pro-reform, pro-fiscal responsibility governments have to perform. We cannot simply assume that they will. But what I am saying is that it's easier for each individual administration to do so if all of their neighbors are on the same page.

That's what I'm saying. Because of time, Terry, I've got to get this in. You mentioned Orange County. Robin Wigglesworth's book, folks, is just absolutely, you just throw it at every kid out there. It's my book of the autumn. It's amazing to me how fancy people like you and Robin Wigglesworth are. make Orange County a single sentence in a book or a passing thought where you and I lived it in the carnage from something like just to pick on affluent Orange County south of L.A. at the time was immense.

And you're saying we have to have a radar up about that.

Yeah, and let's think about it. This was about a derivatives trade that went wrong, right? The Fed was tightening and they were just on the wrong side of the trade. There could conceivably be hedge funds where we know that our position that were positioned wrongly against this big massive increase in yields. They're not going to reveal that until they get into real trouble with margin calls or something else.

We may see that in the next few weeks. I would submit, Tom, that it's not just increases in yields, right? LTCM went under in 1998, 1999 because of a big decline in yields. You can be positioned incorrectly against a big move either way because of leverage.

Either way, right?

These are derivative positions or spread positions that just go against it.

So here's the, we got to go, but here's the money question, Dr. Wiseman, as simple as I can. Do you see an implied leverage within the system given all the AI financing that we're seeing right now. It may not be overt LTC on leverage, But I'm sorry, it has leverage characteristics.

It does, but there isn't that much maturity in that cycle, right? We're not at a point where they have been taking on leverage for five years or 10 years. This is something that's fairly recent. Operating margins in those businesses are huge. Profitability is huge. These companies are well-equitized. They have great access to the capital markets, not just through the debt markets, but through the equity markets if they need them. That's not where we're going to see the blow-up. We're not going to see a financial stress at a hyperscaler. or someone who's been financing data centers. Certainly not yet. Where we're going to see it is the guys who are not in that industry, but are getting hurt by the

high yield, the movement in yields. And by the way, France could be the Orange County of 2027.

Oh, I love that.

It's not inconceivable that the guys who go under, the highly leveraged guys, is a sovereign, not necessarily a corporation, not necessarily a bank.

It would be all wrong.

That is how one would say it.

That's how one would say it. Terry Weissman, thank you so much for the card. Just brilliant there. I had a global currencies interest rate strategy.

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This is a joy.

He's making quite a splash. Ben Calhoun joins us right now with Baird, who's prodigious, not in oil or diesel and all that, but the magic of the new power of America. And you go, yeah, okay, so what? I don't care. My answer is, do you want to make 120% per year? And you do it. You make 120% per year.

That's like an Alexis trade. Electrification, boring, gas power, boring, hydropower, boring, wind. Boring. You follow boring. Boy, is it making money. Why? Why?

First of all, thanks for having me on. Second, I know what I'm getting for Christmas or asking for is that lightsaber.

Oh, good.

It doesn't always seem boring.

See if the family comes through for you.

Especially these days, you know, the power stocks, G, Vernova, Bloom Energy, anything exposed to data centers are trading with tech. And, you know, you can look at the charts and some are very similar here. But one of the things that was boring for so long that– We underinvested as a country in our grid infrastructure, and it's catching up with us now. And data centers are going to get the headlines, but it's not just that. It's like onshoring of manufacturing.

It's also general electrification of buildings. And then we also have old power plants that need to be shut down. Now, the Trump administration is making sure that doesn't happen as quickly as it should to exacerbate the problem, but it is a problem that will exacerbate. our demand on our grid.

Do you see things changing? Is there a reason for optimism for hope in 2027 in this space?

Definitely. And I think that, you know, the headlines heading into the election, and there's a lot of politicking, as politicians do, ahead of the election. And there's a lot of very serious and real concerns about data centers in people's backyards. But I think that, the industry is going to work through it. I think it's not only good for our economy, it's a national security issue as well.

And I think that once we get past the election, then I think the stocks will shake off. What else? Noise, but it's more than noise.

You brought along some goodies, some tidbits, some actual stocks we can talk about.

Sure.

Let's just tick through a couple of them. Next power, the ticker symbol there is NXT. Do you like this and why?

I do like this long-term stock. In the short term, there's different regulations going on about Chinese panels and other panels coming in that might take a little speed bump here. But solar is going to be part of the equation. Next Power is a leading company in it. They utility scale solar. They're capturing more and more wallet share there.

And so in addition to building natural gas plants and batteries, you're going to also build solar plants.

The quote I made on Total Return is G.E. Vranova, Cambridge Mass, Streisand & Company. And, you know, what a shock. Mr. Culp comes in, splits up GE, and everybody makes money. Did you see that coming? Or has GE Vernona just been a shocking outperformer?

I think that, yes, it's been a shocking outperformer. And I'd like to say that I saw it coming, but not to this degree. And very quickly, I downgraded the stock early this year after making it my best pick for the year. And it was my quickest downgrade upgrade in my career. It was two weeks. And I downgraded it because there's excess capacity of different forms of generation coming online. And I thought that they wouldn't be able to get the price. And I quickly learned that the market didn't care. And there's so much demand for electricity generation that it didn't matter. And they're set up very strong. Scott, he's my age. He's running a big business and he's running hard and he's going to beat numbers going into

the quarter.

I mean, I think in America, we're ignorant of this. From a traditional CFA perspective, What's the biggest mystery on the accounting statements of our modern power creation? Is it the depreciation schedules we don't know? Is it CapEx? Are the capitals short? What's the thing that's distinctive to you, Ben?

Maybe two things. One is that industrial analysts, and I'll put myself like half industrial, half technology analysts, We're trained in cycles. Exactly. And this is a super cycle, though. And so we're already waiting for the party to be over because it's been so good in terms of GV's order for them in particular. The second thing is with them, the service side of the business. So they sell a gas turbine. Five years later, they get service. It carries better margin. It's a 15- to 20-year agreement, so it's like an annuity here, but it's hard to model that out right now, and so that's something that's being missed in this business. And you're going to run these turbines harder than anything else before because they're for data centers

that need power all the time.

Okay, so the game of the weekend here— is Alabama, Georgia. I mean, Georgia's number two. Roll Tide. I mean, you're like 5-0, whatever that, versus schedule. Alabama, they're playing, you know, they load the schedule up top. But now it starts with Georgia this weekend. You're in Alabama, Georgia this weekend, and somebody says, I hate data centers. How do you respond to that as a legit power pro?

So here's how the industry has to evolve. You have engineers that are running as fast as they can to build this. And they haven't had a good public relations.

Agreed.

Bloom energy is a company I cover and they, uh, just sponsored college football. Uh, and so they do behind the meter fuel cell, natural gas, uh, so that you don't have to draw on the grid. And they sponsored college football game day. They also just sponsored the 76ers. And I said, why are you, this is one of the big, biggest sponsorship, uh, And why are you doing this?

And it's part of the reaching out to the community. Hey, we're not here.

Why don't they reach? I don't understand this. You build a data center and you say you figure out within a circle, everybody gets utilities lifetime for free. Isn't that just simple?

I think that something like that, and especially with the amount of money that's going into these data centers. But again, I think it's like engineering focused companies that don't have good PR.

These are ruthless. But you know what? I want to get his thoughts on, you're not ruthless.

You just won an OPS Nick 76ers tickets.

From Bloom Energy. Exactly. Thank you very much. You also covered Tesla.

Okay.

So what's the outlook here? We know third quarter deliveries, another beat there. Do you see continued strength? Are we going to hit the Elon Musk milestones?

Well, I've covered it since it went public. And the first time I saw the pay package, the first pay package was 2011, 12-ish. I was like, even as a bull, I was like, this is impossible. And the second pay package, I was like, whoa, this is very impossible. The first one they beat in a year. The second one was like three years. Uh, this one is like, but, um, he'll get there. Um, and, uh, and you know, I'm sure he had his hands in building it as well. Uh, the big thing here, the companies are going to get, uh, put together at some time. Uh, it's not, it's not, it's not if, uh, it's, it's when, um, and, and, you know, I think behind the scenes, uh, they're, they're, they're doing that.

Did you play ball at Alabama?

Too small.

You were too small.

What?

Guy walks in the room, he can barely get to the door, and you're too small, right? Ben Kahlo, thank you so much. Just definitively Baird. I thank Steve Eisman for saying, shut up and get this guy on. Ben Kahlo, thank you, thank you so much. Really look forward to talking to you again. Ben Kahlo, is it Baird and all the power we don't understand?

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Erin Timmer in studio right now. You are the number one reason for anybody in the game to go to LinkedIn. Your publications on LinkedIn are outstanding.

How did it happen?

How did you decide... to take Fidelity wisdom and put it out on LinkedIn.

Good morning.

We have Fidelity compliance to thank for that. I've been publishing internally for decades, for as long as I've been at Fidelity. Every week I do a stream of consciousness. And it was just sort of first to keep myself honest when I was running a fund. It's like, okay, I want to make sure that what I'm doing is actually what I'm thinking and that you don't have this confirmation bias. So I would put out just a little thing with some sound bites on a Sunday and that grew and grew. And then during COVID, you know, our higher ups said, look, you know, every person who is client facing at Fidelity needs to have this because, you know, everyone is panicking. And then a few years later or a few years ago, I was able to convince compliance that,

you know, a publicly acceptable version of the report, it would really be helpful if that can go into compliance. LinkedIn or X. And LinkedIn still is what's better suited for that long form content. And so I'm very grateful to them. So I publish on Sunday. My media people, Jana, who sits in the other room right now, they look at it. It gets approved to send to you and people in the media on a background basis. And then compliance looks at it Monday and out it goes Tuesday morning.

And by carrier pigeon. Yeah. You use the word hope a lot. What is the hope right now that scares you, the hope of this bull market? We hope this will happen. What's the hope that you're in, Tim, or fears?

So a year ago, my hope would have been that the AI boom does not turn into a bubble like the Internet boom did 26 years ago. And a year later, we can say that at least I can say that it's not a bubble because PE ratios have only been falling since then because earnings are exploding so much that market can't even keep up with it. Right now, my hope is that the earnings train continues to chug along because if it doesn't, we run the risk of sort of an echo or aftershock of 2022 when, of course, we had this big reset in the cost of capital.

that knocked the stock market down 28% entirely because of interest rate increases. And we're in that same dynamic. Of course, we all know what's happening in the bond market. And I always remind folks that we all tend to solve for price, right? What's your price prediction? I was like, price is just the residual of earnings and valuation, right?

Discounted cash flow model. You figure out earnings, how much are investors going to pay or should they pay? And then you resolve for prices.

Urien Timmer at Fidelity, folks. Gospel, my essay of the year. I'll spend the weekend getting out tidbits of this. Rob Arnott and Kim Harvey at Duke on just what Urien Timmer was speaking about from Babson and Fidelity. It's about fundamentals, Alexis, not so much the price dynamic.

And in your note, too, we have to talk about the bond market, of course. And you call it a relentless bond bear market. You would think it would be the most hated asset class, but you have a great chart in here that shows quite a different story. So who's gobbling up the bonds?

So.

It's a confluence of narratives that has driven bond yields higher. And investors through ETFs or mutual funds have been buying bonds just as much as they've been buying equities. And I think that's actually a good thing, because if you're looking at retirement down the road and you can buy a 10-year treasury, supposedly the safest asset on the planet, for a real yield of close to 3%, I mean, what's not to like about that? That doesn't mean they can't go higher. Maybe they will. But so the economic buyers have been there. The non-economic buyers, central banks, institutions that are regulated by central banks, commercial banks, for instance, they have not been buying. And so the spread between

the growth in the debt... which is $ 17 trillion just since COVID, it's like a mind-boggling number, has not been offset by any kind of non-economic buying. And right now, of course, we're seeing selling. So the question is, who's doing the selling? I think part of it is actually technical, and this gets into, I'm sure, a topic that Tom loves is the the whole negative convexity hedging in the mortgage-backed securities market, that no one is prepaying mortgages because everyone is out the money on their mortgage because yields are rising. So the duration of the Bloomberg MBS index is going up while the duration of the Treasury index is going down.

Quoting one of our indexes.

That's nice.

Yeah, well, I'm a big fan of all your data. But so it's the opposite of what you see with this negative convexity spiral that you see with low rates. So in 2020, when the 10-year went to 0.3%, everyone was refinancing, as they should have. The mortgages get repaid. So the duration of the mortgage index goes down, treasury goes up, and you cross hedging.

I got two things. Folks, convexity is Uri and Tim or Babson talk. Monica Guerrero would never talk like that. It's like acceleration. So on a full faith and credit 10-year yield, 5.2%. Mortgage out at 7 point whatever percent. It's nonlinear price down, yield up. How close are we to where accelerative convex tendencies... go into price and really cause some damage. Are we close to that?

We're in it, right? So I would say probably the last, since we broke 5%, it's just a guess, I would say a lot of the action has just been technical. It's hedging, right? So you sell treasuries because your durations are mismatched between treasuries and mortgages. And it's just the opposite of what made yields go down even more than they should have back in 2020. So the question is, when does that end? Do we go to 6 or do we stay at 5-3 or is it over? Nobody really knows, but I think a lot of what we're seeing right now is technical.

Okay, Urien Timmer with us. I don't care about any of this, Urien. Here's what people want to know. Nobody in the Bloomberg surveillance world does a dinner party like Urien Timmer. Now, at the end of the table for 10... is a bar, folks, at his house that looks like Lockover 1965. No one has a bar bigger than you.

Is that the secret to a dinner party for 10 is to have a few beverages beforehand?

No, and actually that bar sits mostly idle. Because it has all kinds of whiskeys and bourbons, and I don't drink. I'm not a whiskey person. So it's there, but generally speaking, my dinner parties, it's always 10 people. I always plate the food because, like a chartist, I want people to... Taste the food with their eyes before they taste.

Oh, I love this.

Yes.

So I always played. But no one really goes to the bar counter because we'll have wine and we'd sit.

Is there a cocktail of choice, though? I mean.

Well, so my son, who just moved to New York, he's 27, he's a very, very accomplished mixologist. And he's actually looking for a job right now, if anyone out there. But he makes these incredible drinks and he puts like the egg white foam in it.

Oh, you're killing me. When it's foam, I run.

I want to cut to the chase.

What do you do as food guy with how people are so damn fussy today? Like you can't cook meat because you got six different ways people have to have it or they walk out the door. What do you do about modern fussiness in a dinner party for 10?

If they walk out my door, they're not invited back.

But.

So the only fussiness is, like, if someone's a vegetarian, fine, I will cater to them. Gluten-free? Well, I don't really cook with, like, yeah, okay, that would be a pasta thing. But I generally don't make pasta because when you're cooking for 10 and you're plating, you want stuff that has been prepped a lot. And, you know, putting a pot of pasta together at the last minute.

Is, He has to come back for a cooking segment.

Generally, we only invite low-maintenance people.

Is Ms.

Johnson or Will Danoff, have they come over to the house?

So we have dinner parties for our non-work friends, but twice a year.

Do they get the lesser food?

No, no, no.

But twice a year, I'll do a dinner party for my colleagues. So in our asset allocation group, some portfolio managers.

Great.

It tends to be a little earlier. You know, they come early, they leave early. But twice a year, spring and fall. But the bar gets a bigger use.

You're in, Timmer.

Thank you so much.

With fidelity. Head of Global Medical.

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Monica Guerrero with us, head of U.S. policy, Morgan Stanley, wealth management with serious cred in city planning as well. Monica, what is your lead insight into the midterm elections?

So for us, we're not calling every race, but we do expect some sort of divided government. We are in consensus in that way. But where we really want to highlight for our investors is that in midterm years, you're typically down in the market. So since 2000, you've had the S & P post returns of negative 4.5% on average.

And this year, we're up 18 points higher than that. So how does that relate to midterms? So post midterms, once you get that divided government dynamic, it means that there's more headline related policy risk. And that essentially could mean that you get more volatility as it relates to AI, technology, private equity, all the areas that a democratic house are going to look under the hood.

Doesn't Wall Street like gridlock, though? I mean, what might... I don't remember in recent time, honestly, though, Monica, when a midterm election really swayed the markets. Might this time be different? So markets love gridlock. That's important.

I'm not making a call for the entire market. When we're thinking about this, you want to look at where those pockets of weakness could be. Because negative policy news, because now you have this new Congress... and they're looking at AI and hyperscalers and holding their feet to the coals in a forum, a public forum, those are signals that there could be some nice entry points because it's not going to derail the broader business cycle. So we just want to really lean into that nuance That, you know, that negative news is not negative fundamentals to your point.

And that the broader dynamic that nothing is going to come out of Congress because either you have a, you know, a Democratic House and a and a red Senate or you have a unified blue Congress versus a GOP president who's going to veto everything that comes out.

Nothing changes.

Right.

And markets love that.

So, yes, you're right.

But essentially, it creates these pockets of opportunity in our view where you can actually, you know, be tactical on the margins if there is some of that negative headline.

The granularity of this Morgan Stanley study, folks, is just great. I mean, this does cook political report. Justice here. I mean, just as one example, Alexis, Ohio and Maine lead ad spending, and it's a chart of the gajillions of dollars that's being spent.

This is the most expensive midterm election ever, isn't it, Monica? Yes, yes.

And one of the things that we're watching really closely, so we created our midterms signal monitor that looks at positively correlated polling and economic data. And then we also dug deep in our latest report where we're, you know, really highlight those election, this election specific dynamic. And that includes, right, that ad spending, because the more ad spending you see, essentially both sides think they have a chance. A really good indicator of this is if you look at Ohio, right, it's the, it is the, the top spend is the most they've had spent in the state in any election compared We're going to continue to see that push pull.

But then in states like North Carolina, the GOP has now pulled ad spending.

Right.

So that's a sign that they're saying, you know what, we need to put our efforts elsewhere because the Democrats are likely to take this.

Right. This is a sensitive question. I'm going to get in trouble with Morgan Stanley compliance on this, but they don't listen to Fridays. They work from home. They're all off today. Monica, you have massive city cred. It happens to be New York City, but, you know, cities nationwide. Do you see a permanence to the urban Democratic Party social experiment with or in the trenches of all the meetings you've actually been in, does that left experiment move center just because of the inertial force of the American politics?

That's a great question.

And one of the things that I'm addressing on the road every single day, I'm just on the road for the last two months, is questions around DSA. Is it the beginnings of something new? We don't know that yet. We don't have a crystal ball. It could be like how the Tea Party was the beginning of MAGA. But one of the sort of critical things that I keep being struck with is how fractured the Democratic Party is as far as people's identification. And that you actually have, to your point, this real moderate pull happening elsewhere. So a really good example of that is actually in Texas, where I am right now in Houston. And the governor's race is Now, the Democratic candidate asked about their pronouns

and they refused to answer that question. So six years ago, that wouldn't necessarily played the same way because the political environment was different. And now you're seeing sort of more of a pragmatic approach from the party. So they're doing what they're essentially what works in their region. And it's not indicative of the entire nation.

Monica, thank you.

Thank you. Thank you so much. Monica Guerrero with her public service to the boroughs of New York City.

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Choppiness and Momentum Across Markets

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