UGO13: How Much Longer Can AI Carry the Market ft. Christian Mueller-Glissmann

0:03 Welcome back to U Got Options from the Cboe floor brought to you by Top Traders Unplugged and Kai Media. today we get to talk to Christian Mueller-Glissmann, from Goldman Sachs. An incredibly wide-ranging conversation dealing with everything from are we in a bubble? Are the earnings real and sustainable in the market?

0:39 Do valuations on a bond basis make sense at this point? What's the role of volatility in a portfolio and are we likely, at this point, to need to look at vol a little bit more than we had been in previous periods? Lastly, where are we going with the bond market and the speed limit of 60/40? Is this a time to be watchful and prepared for debasement?

1:26 I think you're going to really enjoy this one. (Music) Welcome to another episode of U Got Options here at the Cboe floor. Today I get Christian Mueller-Glissmann, from Goldman Sachs. He's the head of asset allocation research there. We have talked once before quite a while ago, an incredible conversation last time.

1:18 Can't wait to chat again today, welcome, Christian. Thanks for having me, Cem. Looking forward as well. So, I want to start out today with a couple concepts you have very recently kind of been talking about which is how the bond market has really been kind of… is becoming the speed limit of the equity market and this concept of broadly kind of innovation versus inflation.

1:52 There's really this tension between these, the bond market and the stock market, and what's happening. If you wouldn't mind maybe take us through a little bit of kind of how you're thinking about this moment we're in in terms of growth versus inflation, etc. And I'd love to hear a little bit kind of about how you see asset allocation at this time in history.

2:13 Yeah, sure. I mean listen, I think this macro regime that we have since the beginning of the year is very different to what most people expected coming into the year. Like at the beginning of the year like you had unemployment rates that were low, profit margins were high, equity valuations were elevated, policy rates were somewhat high and the best people were hoping for was some type of Goldilocks market where you get a bit of inflation relief coupled with maybe some regulatory and fiscal kind of help from policymakers.

2:13 But instead, you got this enormous AI CapEx boom that really pushed the business cycle to some extent back into a mid-cycle acceleration. Like, you create this enormous releveraging and you have to consider that the only thing that didn't look very late-cycle at the end of last year was private sector leverage.

3:51 Like the private sector didn't look particularly leveraged. And now you get a major re-leveraging here with the AI CapEx boom. And this AI CapEx boom has created this nominal growth acceleration. And that already feeds into the bond market. Because if you get like nominal growth accelerated, that usually is good for equities, it's bad for bonds.

3:22 And equities are usually supported by better earnings growth. And we've seen some of that for sure, even though it's been very narrowly driven. But we've had significant upward revisions to earnings growth. And then obviously, on the bond side, you have the issue that often such an acceleration can drive inflation.

2:48 And I think this time around, a lot of the inflation has actually maybe not even been driven by the AI CapEx boom, some of it. But I think the bigger driver of inflation has been the Middle East war. So, the Middle East war pushing up energy prices has then boosted inflation. And now the bond market essentially has to adjust to this new macro regime.

2:13 Equities have already kind of, to some extent, reaped some of the benefits because you had the earnings growth really boosting equities. But I think the bond market is still trying to find its new equilibrium. And as you were saying, the risk you're facing is a bit as the earnings tailwinds for equities are kind of moderating a bit because they've been really enormous for the first half of the year.

2:13 The rates headwinds are starting to bite a bit, and they're starting to weigh on equities a bit, especially certain parts of equities. And I guess that's the speed limit that you're talking about. The speed of the bond selloff, coupled with the fact that the earnings tailwinds have been moderating, has meant that equities have started to consolidate a bit.

4:52 So, I wanted to unpack these two parts of this and kind of separate them. Well, first I want to talk about the innovation part, and then I want to get to the bond… kind of the speed limit part. Carlyle wrote a recent report, which you may have kind of read, which came out a couple weeks ago, which really kind of unpacks the earnings growth and talks about where is it coming from, is it sustainable?

5:15 Should we be looking at this as real earnings growth that's sustainable kind of real earnings growth? And again, it's just people, go read the report, but it really speaks to two parts. One, how much of the earnings is being is just asset appreciation that's happening under the hood. Right? That's just a function of Anthropic going from US$380 billion to US$2 trillion, and all these stocks appreciating and then being marked as earnings, that's one.

6:02 But two, they then go into, okay, because of this boom in underlying liquidity that's coming into the market, specifically narrowly to this part of the market, which is then one to one going into CapEx. Right? How much of that CapEx is now being depreciated forward? How much of it is actual real earnings as opposed to kind of the sugar rush?

5:36 I want you to kind of think, talk through that. How do you think about it? Again, they came out on the side of, it's really just a sugar rush that is not sustainable. I'd like to hear your thoughts, if you believe that. So much of it gets painted as AI is causing all of this productivity gains that are driving this earnings boom.

5:50 Right? That's really kind of what you hear in the media most of the time. Obviously, I understand that view. I use AI day in, day out, clearly. I think that's why the media, everybody is so enamored with this view, that we're in this productivity boom. But I'd love to hear your thoughts. Do you think that's true?

6:29 And if so, why? And do you have any data that maybe backs that up on your own? Yeah, I think you're right. The problem about every technology kind of revolution is it goes in phases. The first phase is like the investment phase, and we've seen a lot of that. I think AI CapEx boosting semiconductor and kind of AI CapEx beneficiary earnings.

8:56 And the problem is you cannot extrapolate the investment phase for too long. This kind of investment phase might be one of the largest and longest we've seen in history with regards to how much it is as a proportion of GDP growth. But nevertheless, the market is already, to your point, starting to question a bit, how much you should extrapolate the type of level of earnings and the type of earnings growth that you've been generating linked to investment.

6:41 So, the second phase is then the kind of application phase where the applications really get rolled out and that leads into the adoption phase. And the big problem is that often you have this J curve where the actual productivity growth and the benefits take a long time. So, you have this J curve. And I would say that we are probably still at the early part of the J curve.

7:41 We need to be honest, it's pretty early in terms of saying that we can really see the productivity benefits in corporate earnings in kind of like broader macro measures of productivity. But I think there's some early signs. I mean you have occasionally like CEOs potentially quantifying cost savings. You obviously have all of us using AI in our work and in our lives and there's definitely some benefits to it.

6:41 But I would agree with you, with regards to the AI boom, you're entering now a phase that's potentially less tangible. Like I think what was really quite nice in the AI CapEx boom is that it was very earnings driven and it was, to some extent, quarter to quarter the market could kind of pay for those earnings.

8:36 Whereas now, I think you're right, like you're going a bit away from the earnings linkage, maybe a bit more towards understanding what applications potential could be in the future. So, you have like companies launch applications, and then the market needs to make an assessment how successful these applications can be, what revenue, what profit they can bring, and also who are the losers and the winners.

8:46 So, like more dispersion to some extent within tech, but also within the broader economy. But I think our kind of macro team's forecasts, with regards to productivity growth benefits in the next decade or so, are still material. There's still a lot up for grabs. The challenge is just that in a very near term I would agree with you, we cannot really see it.

9:37 Yeah. And honestly, I think people naturally see those earnings numbers and they assume this is kind of some operational earnings growth. And it really isn't operational news. Actually, cash flows from these hyperscalers is falling out of bed. Right? Meanwhile they are the primary contributor to these earnings growth.

9:51 Right? When you look at it, it's almost, if you look at a chart of the two, they are normally highly correlated. Right? You'd imagine cash flow getting kicked off from earnings and yet the two cannot be more apart. And the amount of debt that is being taken on, as you know, and the credit issues that come with it, as you've already highlighted, are very structural.

10:15 It's hard to look at that. And yes, we can gloss over and say, yeah, earnings growth makes these current valuations maybe worthwhile. But it's hard to kind of believe that if you really dig more than kind of three feet underground. I think that's important, what you mentioned. Do you think we're in a bit of a bubble in that sense?

10:38 I would say it's important what you mentioned there in the sense that the market agrees with you. I think most investors we speak to, they're already discounting those earnings quite a bit. And this is important if you look at the kind of valuations of the semiconductor companies, if you look, in general, at valuations of the tech complex, they've derated a lot year-to-date.

12:22 What you actually will find is the 12-month forward PE ratio for the MSCI world will have come down 15% or so year to date. So, that shows you the market doesn't completely pay for the earnings and the earnings growth. And for the S&P 500, I think when we came into the year, 12-month forward PE ratio was 23 times, now you're at 19 times.

10:38 So, I would agree the market is already, to some extent, discounting some of these highly cyclical earnings because you're absolutely right, the business models that are generating, currently, a large amount of the earnings, are very cyclical businesses. And that's to some extent what you have to be a bit careful with.

13:19 Because just like earnings can go up a lot, they can also come down a lot. But what I would say though is that some of these kind of data center construction and compute contracts, they're quite long-dated, it's quite unusual. So, that's why, to some extent, you have a bit more visibility than normal.

13:22 And that's why investors are to some extent not worried yet. But I agree with you. At some point there's two major questions that you have to ask. How much compute do we need and what's the price for it based on the capacity and the type of technology advances that we will find. I think as of now, our team, both in the technology, equity research, but also all strategists, they've been looking at this and they find that because you're going from these kind of like LLM development compute demands, like frontier models, to applications, there's a good chance that the demand for compute in the near term is still going to remain quite high.

13:17 And until that really changes, it's very difficult to say what the right price for some of those earnings are. We would say we're certainly not in a valuation bubble. We are more likely to be a bit in an earnings bubble, at least in some of these parts of the market. But it's important because a valuation bubble can burst very quickly, whereas an earnings bubble can take a long time to deflate.

13:30 And that's a bit like the comfort you can take right now. Because yes, you're right, the hyperscalers, their free cash flow is negative, they have spent a lot and, over time, that CapEx needs to be depreciated. But that depreciation is spread over multiple years, and they can at the same time try to obviously make revenue from their investments.

10:38 And if you look at some very high frequency indication of AI monetization, like cloud computing and all of these things, they're actually starting to see revenue come in. And this will, I think, be a key focus for the Q3 earnings season that these companies will actually illustrate further how they will start to monetize that CapEx.

12:53 Because if they don't, I agree, these negative free cash flow yields and these future depreciation kind of headwinds, they need to be reflected further in valuations because profitability will come down. I think your distinction between an earnings bubble and a valuation bubble is very interesting. I'd like to kind of dig a little bit deeper in that before we get over to bonds here.

14:21 I mean, how is it that you can argue this isn't a valuation? I'd like you to kind of expound on that a little bit – a valuation bubble when we're looking at Shiller price to earnings ratios adjusted for bond yields, that are almost at all-time highs, especially with the ascent, as we talked about, with bonds.

14:41 Right? The price to earnings ratios, even year forward, it's hard to argue there's not a valuation bubble. It's the second biggest if not the biggest in history relative to bonds. So, I'd love for you to kind of expound upon why you think it's not a valuation bubble. Yeah, so, Shiller PE ratios are using the 10 year rolling earnings average.

15:19 And by extension, when earnings significantly shift above the average, like they have really in the last five years since COVID (they've massively accelerated versus the long run average), you start to see this gap between the Shiller PE, which is like in the 40s and similar to tech bubble levels, and like the 12 month forward PE ratio which actually has a bit more weight on the more recent earnings.

14:58 So, now you might say, but wait a second, that's why we do a Shiller PE. We do an average to understand what the trend earnings are, what the average earnings are. So, then it comes down to understanding how much of the recent increase in the last few years of earnings is cyclical relative to how much is structural.

16:28 And I would say, when you look at the return on equity of the S&P 500 right now you're like at 24 times, like only five years ago we were still below 20. So, some of the profitability of the companies has actually gone up significantly and that was even before the AI CapEx boom. Like the hyperscalers, they were actually having our return on equity in the ‘40s, even before, and the S&P 500 as well.

16:09 So, I would say the key question you got to ask yourself is where corporate profitability will settle in the next few years and in terms of return on equity? And then we can understand what the right measure of valuation is. But what I would say is even if the return on equity starts trending down in function of depreciation, in function of some maybe disappointing investments in the AI CapEx, it will probably be a relatively slow process.

16:13 It will not be like during a tech bubble where you have really sharp declines in equities. It will be much more specific. There will be winners and there will be losers. And I would say before we actually see more evidence of that, it's not so easy to make that call. And I would say that investors are already having an element of that pessimism like no investors we speak to don't worry to some extent about how high Shiller PEs are or how much are above trend, which is kind of the same phenomenon.

17:19 Yeah, definitely not easy. And I hear you. People are more aware this time around. I would hope that like after the tech bubble and everything else, we've learned a bit, and people… Although, the corollary to what you said about the 10-year lag, like earnings… acceleration recently and the slower earnings affecting, I think you can make the same argument on bonds.

18:21 Right? Bonds were at zero for a big part of the last decade. Right. And so, the 10-year kind of valuation difference there, based on what is maybe normal, I think that's easier to predict than whether the earnings themselves are sustainable or not. The other corollary, I'd give to that, which I think is an important rebuttal to what you're saying, is that what we've seen in other past bubbles is not that earnings kind of has gotten to this new high and then it just slows down.

18:40 We see actually mean reversion and earnings dramatically. Right? So, when you are… right now, you see about a 100 year, 6%, real kind of earnings growth over the long-term. We're now 50% above that, structurally, on a rolling basis. And whenever we see that in history, the mean reversion is not just to the mean, it's well beyond the mean to the other side for the next several, two, three, four, five years.

18:32 And there's an argument to be made, a lot of this is a sugar rush. It's the CapEx that's coming in that's pushing earnings. It's not something that I would say is structurally, per se, higher earnings. The other benefit that we've seen in the last five years is lower tax rates. Right? These are these regulatory kind of supply-side responses that have driven a very, kind of, if it stays there forever, then yeah, but you're not going to get more of that earnings growth from lower and lower taxes, I would argue, from this point.

19:08 And if anything, with populism where it is, those types of things can reverse the other way, which then becomes sudden headwinds from tailwinds. So, there are a lot of things that have been structural tailwinds that could very quickly… And this is what we have seen historically, pendulums swing and then they swing back.

18:42 It's not like they swing, and because they've swung they now have gotten to a new high. This time is different – a higher structural level. Historically we actually see more mean reversion than we do kind of structural new growth booms that drive, in terms of earnings. We've seen structural growth booms in technology, like we saw at the launch of the Internet.

18:47 But that translates into a structural earnings. A higher level of earnings I think is more debatable. Anyway, any responses to that before we move on to bonds? Yeah, I mean I would say it really comes down to kind of like recession risk because what you're describing there, like the pendulum swings in earnings have been very much linked to cyclicality and recessions.

20:48 And I think if you have something specific to the tech sector, I think where it's about depreciation and it's about managing the drag from depreciation, it could be a bit more gradual, that's what I'm saying. And at the same time you might actually generate some structural tailwinds from the new technology.

19:53 But I'm with you. The phase that we're entering in now is more difficult because the tailwinds you get from the AI CapEx for earnings are peaking because like AI CapEx is peaking. So, the second derivative is to some extent less favorable, and these new sources of revenue and earnings are more uncertain.

21:06 Like this whole adoption application phase of every technology revolution is more uncertain for all kinds of reasons because there might be over investment, there might be technological progress, there might be winners and losers. So, I'm with you that the uncertainty is picking up a bit. But I would still say that even before AI came about like Shiller PEs were already a bit elevated.

20:21 So, it tells me that there was an element of earnings pickup really in the last kind of like five years. Some of it, I think, has the potential to be more structural. It's the rise of the platform companies, the technology adoption, some of the peripheral technologies that have come about in the last few years, like cloud computing, and all of those things.

21:57 They're highly profitable and they're already up and running. And yes, the free cash flow yield for the hyperscalers is negative right now, but that's because of the AI CapEx. If you would take the AI CapEx out, they would be incredibly profitable. And a lot of this profitability is not linked to cyclical businesses.

20:59 So, I would say that the truth is in the middle. I would definitely agree that there's some type of mean reversion in earnings ahead of us in the coming years. But there's some of that earnings growth that we've seen in the last five years that probably will stick. Yeah, makes sense. So, I will highlight, you said it depends on recession, right?

22:32 Which is, itself… I think I want to highlight this. I know you know this, but a lot of viewers may not fully appreciate how much we used to… We still talk about the economy as if it's separate from the market. It used to be that markets themselves were a ticker. They were a kind of a printout of what was happening in the economy.

23:47 They were like a reflection of some type of real world happening that then reflected kind of output. Most people don't realize how much the roles have really reversed. Markets themselves are arguably the biggest driver of the economy, period. We have, give or take, US$50 trillion of equities now in the world between public equities in the US, public, international, private, combined, all being indicated off of an S&P 500 broad level.

23:12 When we get a 20% appreciation in the market like we saw in April and May of this year, in just two months, we went from a US$250, give or take, trillion to US$300 trillion of collateral. Collateral that's not even including all the debt and everything else. And so, think about that. That is a $50 trillion increase of liquidity.

22:56 Compare that to the US$10 trillion of QE that was done by the Fed in response to COVID. Which this is something that just happened in two months, in April and May. So, where is that CapEx coming from? And this is part of what the Carlyle report talks about. It's coming from markets going up. Markets go up, so you get CapEx, and then they report earnings, which then is a reflexive reason and the market reflects that as potential.

23:19 And it's true, if the market keeps going up, the earnings will continue, and then we will internalize them until the market goes down, and then the pendulum will swing. And so, you're right, it does depend on, ultimately… This is why it's so hard, this reflexive loop of liquidity. And how reliable is that liquidity in markets?

24:33 Yeah, I think this, you make a great point there. And this is probably more important now than it's been ever in history because if you look at the value of equity holdings for US households as a proportion of their wealth, you're at the highest level ever. You're actually at higher levels than during the tech bubble, during the COVID recovery.

24:33 And more importantly, the spread to the value of residential real estate, as a proportion of net wealth, is the widest ever. Like every time when you're in the middle of a long equity bull market, like in the ‘50s and ‘60s, in the ‘90s up until the tech bubble, post the global financial crisis, you tend to get drift where your assets, like if you're a household, your assets shift a bit more towards equity because they're just doing really well.

24:33 And that's the wealth effect that you were mentioning there. And they get bigger and bigger, and it gets, to some extent, more supportive. And I think we gotten into quite an extreme point which, to your point, when you get actually a sharp correction in equities, there is probably a negative feedback loop to the economy, there is a negative feedback loop to households, and financial conditions tightening and that's, to some extent, larger.

24:33 But the problem you have, in this situation, especially in the first instance, you would probably get some central bank response, you would probably get the Fed kind of reacting to that. And while we know, once you set things into motion it's not always easy to stabilize things as policymakers, but I would say that considering the importance of these wealth effects, and considering exactly that linkage you were highlighting, there would probably be a bit of a buffer from policy.

26:17 There has to be. And you're absolutely right, the market's just gotten too big to fail. So, it becomes this loop where we must own equities at higher and higher valuations because they are the driver of the economy. Which means you have to be long to equities. And this becomes a reflexive loop. So, again, it’s almost impossible to call the top of a bubble, but almost by definition a bubble is this.

27:27 It is, things become very fragile and centered on the equity market itself. This is what happened during the tech bubble. This is because we had 27% earnings growth in 1999. It’s the same reasons, because of CapEx. Right? What happened to all of the build-out of all the fiber and everything else? You all know that story, right?

27:17 And how was earnings growth the next 2, 3, 4, 5 years? We got the benefits of it. But the reality is this whole thing, markets and the reason this is so hard is because the whole thing has become a closed loop. The markets themselves are driving the economy and the economy is… It shows growth when markets are doing incredibly well, particularly more and more fragilely concentrated into the areas which are getting the appreciation themselves.

27:40 But one thing I would say, which is really important to keep in mind when we do these comparisons to the late 1990s is, the return on equity right now is more than double than what it was during the late 1990s. So, I think these valuation comparisons, I think they're always a bit tricky because the whole build out of tech, all the CapEx at the time, coupled with the applications, were to some extent much more early stage.

28:21 And I think the businesses, they were all very concentrated and in the same kind of arena. Whereas I would say like the hyperscalers, while it's very concentrated as well, they're like very diversified business models. They’ve got a very different kind of stage of profitability and a very different stage of operating in terms of balance sheet and cash flow generation.

27:40 But I think we agree on the risk, there's no doubt about it. I guess where I would put a bit of a difference is just like the corporate sector and the economy and the markets, they don't look as bubbly as it did there. Yeah, and I would argue though, the amount of debt (which takes us finally to the bond side of the equation), that is being taken on to create that return on capital, it's essentially that leverage that I think I would argue is maybe what makes those numbers look a lot better than maybe they did at that period.

31:34 And so that's something at least polemically to think about. Now let's switch to the bond side. Right? The thing with Shiller is Shiller looks at a 10-year bond level as well. And the reason he does that (you probably didn't think you were going to talk so much about Shiller today) is because, quite frankly, bonds work with long and variable lags.

30:28 Why do they work with long variable lags? I get this all the time. Why Cem, you said if bonds go this high that we're going to have eventually a problem in equities because it's the speed limit as you mentioned to equities. Right? But why not yet? It’s all pretty simple, right? Like everybody financed at 0% five years ago, in 2021, and the average duration of debt is five to eight years.

30:22 Right? So, nobody cares. The effect of increasing interest rates doesn't matter fully until the world has to refinance and roll over that debt. And so, I would argue, and I'd love to hear your thoughts, that the reasons we're having the issues in bond market is not just the Strait of Hormuz, we hear a lot about that and that is true.

30:25 The inflationary structural effects are definitely a major effect. But there are two other major effects. I'd say there are three. We could talk about the wholesale abandoning of debt from emerging the rest of the world. But let's put that aside. The other two main ones, in my opinion, is one, the rolling over debt writ large globally as we hit this five to eight year window where all of the debt that was taken zero percent…

29:56 Just quite simply, if you took out debt at 1%-2% to invest in something that had a 5% return per year, now you're refinancing at 7.5%percent, and you either have to liquidate that thing, or come back to market and figure out how you're going to just hold this debt to manage that, hoping that interest rates go lower.

31:35 This is why we look at a 10-year yield in terms of the Shiller index. So, that's one, and then the second one is, quite frankly, all this debt that I mentioned and the crowding out because it's not just the rollover debt that needs to happen, it's now the dramatic increases of debt that are happening simultaneously that are now looking for financing at exactly the same time.

30:34 So, this is why we have this wave of supply and demand imbalance that even though the administration has done, what, Stablecoin Act, change the SLR ratio, doing treasury buybacks, interventions, in the end that they can't seem to… The house can't seem to hold things at bay. I'd love to hear your thoughts about the bond market.

29:42 Where do you see it and how do you think… Is there anything I've said there that doesn't ring true for you or any other thoughts that you may have? No, I think you had a nice summary there. I think when I think about the world as you know, there's always three cycles. There's the structural cycle, the business cycle and the sentiment cycle.

34:59 And that really impacts all asset markets. And there are different drivers here. And the structural cycle has just become much less friendly for bonds. Like you described it, innovate. I always say the structural cycle is a fight between innovation and inflation. So, if you have innovation that actually has the potential to boost productivity growth, that means longer term higher real yields.

33:48 But in the near term it has the potential of crowding out the bond market. Exactly as you said. Like there's obviously investors are happy to hold onto the equities and maybe buy more, but there's less demand for bonds. So, innovation, to some extent, structurally is already changing a bit the kind of attractiveness of bonds.

32:01 And then you have the inflation which I don't need to go through that. Clearly higher inflation, volatility and higher inflation isn't great for bonds. And it's not easy for central banks to have policy as easy as they did before the COVID crisis with negative rates and QE, all of these things, they're much more difficult from here.

36:08 And then on top of that you have to consider fiscal, kind of fiscal considerations, debt to GDP ratios concerns. So, putting it all together, the structural cycle has become less friendly for long duration bonds. And the market is still trying to find its equilibrium. What is the right level for a 10-year bond in this type of new world?

33:54 If you look at the 300-year average of the US 10-year yield, it's 4.7. So, if you take out the ‘70s, it's 4.5. We had 5.3, 5.4. So, the question is then this spread, is that correct compensation for all of what is going on? But then you have to start to go to the business cycle. That's only the structural cycle discussion.

32:01 The business cycle discussion is very much linked to what we discussed earlier. You're in this nominal growth boom and this nominal growth boom is kind of pulling some of that capital competition forward. And it's very difficult for central banks right now to step off the pedal with regards to tightening policy because the concern is always that the longer dated bond yields just unanchor too quickly and you essentially get negative feedback loops to equities to the economy.

37:15 So, from that perspective, the business cycle and the sentiment cycle are also currently very difficult to stabilize the bond market. So, to your question now, what's the interaction with equity? And that's the interesting one because to some extent equity that are starting to consolidate and maybe get more volatile, that can stabilize bond yields.

35:56 It can also, to some extent, bring back the diversification benefits between equities and bonds which has been absent for a long time now. And we've been talking about this last time, I remember, Cem, like on 60/40 and all of this and, certainly, what we were discussing at the time, that certainly came true.

33:58 And I would say that I'm still not in the camp that 60/40 portfolios will come back and be what they were before COVID, but you can have a short-term period where maybe the equity bond linkage becomes a bit more friendly in the sense that the kind of interaction between rising bond yields and equities, to me, always depends on three factors: the level, the speed, and the source of bond yield increases.

32:01 Level you already mentioned. It is a moving target. It's a moving target. It used to be that at 5% you really get worried. But then you're not in a world where there's innovation, and capital competition, and equities have this underlying earnings tailwind. So, you've been going through the 5% and you've been dealing with it, at least for now.

32:01 I think then the question is, if you go above 5, do you start to hurt some of the parts of the S&P 500 that don't have those earnings tailwinds? And we actually start to see that a bit underneath the surface. Like you see small mid caps have come under pressure, real estate, home builders, rate sensitive parts, selective financials.

36:27 So, you start to see that, to your point, there is damage, like the higher bond yields are causing damage. So, I think, level wise, we are definitely getting closer. Historically we like to look also at the speed. So, usually when bond yields increase, over like a three month window by more than two standard deviations, that's when you start to see indigestion.

36:11 We went past that level at 5.1 to 5.2. We are more than two standard deviations now over three months. And then we come to the source, and the source, if it's driven by growth rather than inflation and policy, equities can deal a bit better with it. But I would say that the kind of growth news flow since the summer has been a bit more muted.

37:04 Like I think you've seen macro data, especially consumer related data, actually starting to weaken. And also, the earnings tailwinds, as we discussed before, like we didn't have an earnings season so you didn't get any incremental information and people are, to some extent, skeptical. And this is why the upcoming earnings season is so important.

34:20 Like if the corporate sector has another quarter where they can convince that the AI CapEx boom is still going and is also still… There are some signs of AI monetization of the spenders as well. Like you need to have like some of the spenders give plans of how they're planning to make revenue, maybe you will still have that growth source that will make it easier for equities to digest the higher bond yields.

32:01 But the problem is this, as you were saying as well, the drivers so far have been real yields and front end real yields. So, it's a lot linked to policy and that's normally not friendly for equity. So, I think you need to really follow through with growth in the next few weeks and months in order to help equities digest these higher bond yields.

38:40 But the way that earnings growth continues is more and more debt for hyperscalers, and meanwhile we're seeing CDS break out. So even if they do, we do see another good quarter. Right? How sustainable is this? It's just driven by more, and more debt which is crowding out the long end of the market. It's a bit of a circle, isn't it?

38:40 I mean, at the end of the day to continue the earnings growth they need to borrow more which is going to crowd out the long end of the curve more. This is a death loop. Right? At some point that's not sustainable. It's just not sustainable. I mean yes, you can continue for quarters, but can it continue for years?

38:50 I mean, you kind of need to the best case to happen which is really the innovation… like the benefits of this being adopted in the earnings that are structured coming out of it, that are non CapEx related, to start booming all of a sudden. And that could happen. I'm not dismissing… I’m not saying it's not possible, but to make that your base case, which is where we are at this point in terms of market pricing, I think is really hard to do.

39:50 I think you're right. The AI CapEx tailwinds are definitely being discounted more and I think that's not really which can give us the relief or the kind of comfort that we probably need in the coming months to deal with higher rates and to generally deal with the uncertainties that we have. So, this is why I think this earnings season will be really important to understand, what are also (exactly as you said) the adopters doing?

41:07 Are you starting to see more announcements from companies in the S&P 500 and globally using AI and having use cases that actually start to illustrate productivity? I mean like our US Strategy team, they've done some really interesting work on looking at how much S&P 500 companies are spending currently on AI, like literally spending via subscriptions, etc., on token use.

40:32 And it's like, I think the statistic was to me sounding much too low, but it's 0.1% of cost of goods sold. So that's very small. So, there's a large amount of potential spend from the corporates, and they're already using it. It's probably that they are not paying for it fully. And so, you need to bridge that gap where you start to talk about monetizing AI.

40:09 And if you leave it too long, I agree with you, the risk you're having is that it remains incredibly narrow in terms of the earnings drivers and the market is not willing to pay for that anymore because they know that it comes with risks. It comes with risks with regards to cyclicality of those earnings and it comes with potentially increasing credit risk in the whole AI ecosystem.

41:34 Yeah, I couldn't agree more, and I'll highlight that CDS are starting to break out, as we've seen. We haven't seen this in a long time. The MOVE index or, in other words, the volatility of bond vol obviously is starting to break out, but the VIX continues to just, ho hum, nothing to see here. Any thoughts?

41:35 I know you started your career in the derivative space as well, we share that in common here. I'd love to hear your thoughts on volatility. Obviously, I have a few views there, but I'd love to hear your views on volatility. If you see this kind of… these jaws kind of coming together now that you're starting to see the MOVE and CDS break out, what are your thoughts on volatility and maybe not just today, but three months, six months, nine months forward here.

42:22 Yeah, I think equity volatility is a bit cheap here. No doubt. I think you highlighted it. If you benchmark market to credit spreads, to rates volatility, to commodity volatility, I think it does look a bit cheap and I think there's multiple convexities that equities can offer you right now. I mean, part of that is what I mentioned is linked to earnings, part of it is linked to the applications, part of it is linked to reaction to bonds, and that creates convexities in both directions.

42:22 So, I do think that currently the Vol is a bit cheap. Why? I think it has a lot to do with dispersion. I think there is a huge amount of divergence underneath the surface, as I mentioned, and the tech space (and this is also important) is currently harvesting annualized 30% earnings growth. So, if you're flat, that actually means you're derating by 30% over a year.

44:30 And when you have such strong earnings growth, it's very difficult to generate a lot of downside volatility without the earnings growth showing the second derivative decline, which we've discussed earlier. So, clearly, if the earnings season delivers this catalyst (which is not our house view, not our baseline view), then there's a lot of downside convexity that you would potentially generate.

43:51 I think I'm leaning more towards the upside convexity being cheap into year-end. And it can be very attractive to own slightly longer dated calls to kind of run your equity exposure right now. Maybe also longer dated calls in the tech space because since the summer, the tech volatility has really resolved, reset.

43:10 You remember, like, before the momentum unwind in the summer, you had a lot of the single stock vols around the hyperscalers trade, very, very expensive. And I think it seems like, since the summer when you had that momentum unwind, these vols have really come down. So, I'm leaning into this camp, equity wall is cheap.

42:22 A bit to your point as well, with long and variable lags or the linkages to bonds, I think we're definitely building up a wall of worry right now. The wall of worry is linked to the midterms, it's linked to the Middle East war, it's linked to the bond sell-off, it's linked to maybe some of the things we discussed on the AI earnings.

44:20 But this wall of worry can essentially be climbed eventually, or it can drive eventually some type of capitulation where the market just says, all right, that's too much, we need to put more risk premium into equities. I'm leaning to the slightly more optimistic side eventually, but I agree, in the very near term, the potential for the negative spillover from rates, the potential for uncertainty on AI…

43:41 We have obviously several catalysts linked to some of the large companies in the AI space, linked to the earnings releases, I think the potential for the market putting more risk premium in, like they do in the credits, is definitely there. I think the point you make about dispersion. I just want to, for viewers, kind of…

45:50 We've had this conversation before, but so much… so many people take kind of the dispersion as the lead, kind of like similar to that idea that the economy used to drive the ticker. That was the market. Right? Similarly, here, people think, oh well, different stocks are moving differently. That's why volatility is low.

45:31 I want to be clear. Index volatility compression, which has been happening because of increases in structured products and all of the structure of selling of all that happens, is pinning the index relative to the constituents, which is forcing that dispersion. We know that. I think we can say the word “know”, because if you look at 120 years of history realized dispersion of the indexes is within a very solid band.

46:34 That includes World War II. That includes all kinds of crazy macro events where things structurally move differently because of all kinds of different outcomes. But what we've seen, since 2017, is a dramatic increase structural of dispersion. Right? And that higher level of dispersion, that increase of almost one to one correlates with the selling of all at the index level, like that's the one thing that you can map against this, that's driving this outcome…

46:53 Go ahead. But the interesting question you got to ask there, as well, is that the causality or is it just that those two things move together and there's an underlying fundamental causality? And I think the truth is possibly in the middle because the earnings dispersion, that we currently have, is probably one of the largest on record as well.

46:57 That's really kind of one way I find this underlying dispersion argument a bit more fundamentally supplemented, and we discussed this before as well, when you look at the proportion of stocks in the S&P 500 that have a negative beta, that's quite remarkable. Generally, a negative beta stock, if you believe the capital asset pricing model, is quite unusual.

47:56 Maybe that indicates in the long run that it should have a negative return. Like quite unusual. And nevertheless, if you look over the last three months, nearly 40% within the S&P 500, 40% of stocks had a negative beta to the S&P 500. If you look over the last year, it's kind of something like 25%...

48:52 to 20% to 25%. So that is actually, that has never happened. And the last time we saw something similar was during the tech bubble, which is why some of the comparisons we're making here, they're very prescient. I mean, they're very much what you want to discuss. But what I want to say is when you look, then, at these 40% negative beta stocks, who are those companies?

47:42 Which are those companies? So, it's essentially exactly what we discussed earlier, rate sensitive companies that have suffered from the higher rates but didn't have the earnings tailwinds to actually keep up with the S&P 500. It is kind of like bond proxy type assets. It's low volatility stocks, it's high dividend yield stocks.

46:57 And just to be clear, I would probably say that some of those stocks, they're going to be a fantastic diversifier later down the road if something goes wrong with AI. But right now it kind of makes sense that they're negatively correlated. And you could also link it to the fundamentals with regards to AI, because AI will create a lot of winners and losers.

49:18 And that also fundamentally can drive a bit more dispersion. So now, if you have this dispersion, it attracts the index vol sellers. And we certainly have seen that with our client base where there's more kind of interest in dispersion carry, because, to your point, you kind of realize that incredibly low dispersion.

48:31 So, there's a bit of a chicken and egg problem, I would say, but I would certainly agree with you that it's very unusual, what we're seeing, in terms of dispersion levels. So, I want to connect those two things because I think you're absolutely right. And then by no means am I saying that because vol is compressed, that has caused tech to exclusively go up and other parts of the market to go down.

50:34 What it does, by definition (this is mathematically so)… I know you understand this, I'm really talking more to the viewer, is that idiosyncratic risk still exists. And if you hold something in place, that includes everything inside of it. And what you're pointing to is that some of that idiosyncratic risk drives a positive outcome for something.

51:44 By definition, the other things have to go down. And that's what that negative beta is. You are holding this thing at bay. Right? And meanwhile you have some idiosyncratic growth. Some growth in part of the market which is driving growth, which is forcing everything away from each other. Now, next level up from that thesis...

49:55 So, you're right, it's chicken and the egg. There are multiple different forces that are interacting on this, that are forcing this dispersion. But then as that begins to happen, momentum effects kick in, all the passive flows, everything that everybody else knows about. And the other major momentum factor is the thing we just talked about.

51:53 If numbers go up, that's more earnings. This is the whole Carlyle thing, which then drives more momentum in that name, that drives more dispersion. Well, at the end of the day, the compression at the vol level is structural and critical to this allocation and this breakdown underneath the hood. It forces momentum.

50:52 It forces also dramatically different outcomes for different parts of the market. So, it concentrates the gains in part of the market, which then drives more CapEx than ever. So, these things are interacting in a very, very… in a way that drives extreme outcomes. Right? And those extreme outcomes are why I call it a bubble, really.

50:11 It's that, at the end of the day, it is dependent on everything maintaining this direction. But the reality is those things work in the opposite direction just as strong. And all it takes is a bit of idiosyncratic other side, and then, all of a sudden, we’re a long way from Kansas, as we say here in the US.

49:41 What makes it so challenging in a bubble is you can be in a bubble for years. Markets can stay irrational longer than you can stay solvent. That doesn't mean you're not in a bubble. We talked about the tech bubble in ‘98. We were all talking about it. We were talking about the housing bubble in 2005, 2006.

52:18 Everybody knew about it. It just didn't pop for years. And the popping itself, it's unsustainable is the point, and it's overdone. Now, can it continue? Sure, it can continue, but that doesn't mean you're not where you are, which is in this structurally forced outcome that is driving more extreme, and more extreme (kind of historic, as you highlighted) kinds of outcomes of markets.

52:45 But I think you make a good point there. I think we all know that we're in a boom, and the boom, at some point, comes to an end. I wouldn't call it a bubble, as I said, let's say a boom for now. And I think the most important thing to keep in mind is that timing the peak of a bull market is incredibly difficult.

54:56 That was very difficult, ss you were saying, also in the late 1990s. If you were talking about the bubble in the late 1990s and ‘98, you were two years too early. And I think you would have let a lot of money lie on the table and possibly, depending on your institutional or your personal investing setup, that could have been very painful.

54:15 So, I think what is the best approach right now is to prepare your portfolio and to introduce risk management and introduce kind of ways to deal with kinds of shocks and to deal with potentially more volatility. So, one thing you mentioned there, which I thought was a very nice explanation of not only the problem but also the solution, you have one part of the equity market is pushing higher and higher, and another one that's pushing in the opposite direction, if it reverses, then obviously the things that are currently lagging could actually do really well.

52:45 And I always give the following statistic that surprises some investors. During the tech bubble, Nasdaq was down 80%, S&P 500 was down 46%. But if you look at a simple S&P Dividend Aristocrats index or like an S&P low vol ETF, it would have been a up 10 up. So, like the market was down 46%, Nasdaq down 80% and these very boring defensive kind of areas of the market, that at the time also had a negative beta to tech, eventually they actually snapped back and were actually up.

52:45 So, what I'm saying is, at this point there's always two value adds that you have as an asset allocator - market timing and diversification. Right now you need to be very careful about portfolio construction and diversification to manage some of these concentrations and manage some of those risks that come with it.

53:57 And factor diversification is a very good example. And maybe the bond market, as we discussed earlier, can be a bit more helpful. Maybe not long duration bonds, maybe a bit more in the belly. And of course, equity volatility as an asset class and related trades, I think all of these are tools that can help you to kind of prepare the portfolio.

55:23 I completely agree with what you said and couldn't agree more. I think the thing that worked so well, I mean, I started in this business in ‘98. My first experience in ‘98, ‘99 into 2000, the tech bubble boom, was actually the best thing to do, the easiest trade was to own out of money calls instead of stocks or just to own longer dated cheap volatility.

57:47 And I think, particularly longer out in the curve. Those positionings can benefit into a rally. But in a bubble markets tend to start moving in kind of a megaphone type pattern. And so, different set of risks than equities, clearly. And markets have changed a lot since that time period. But I completely agree with you that there is a place, particularly given how relative to the potential distribution of outcomes, how cheap some of these equity kind of calls are and volatility is dramatic.

57:33 So, I think that's a wonderful way to play it without necessarily trying to short the market. Right? And I think that that is incredibly desirable. Also, to your point, certain businesses are really cheap right now. Like if you can go look at it, just a discounted cash flow at some businesses, particularly relative to earnings growth.

56:17 There's a lot of structurally stable that are real solid earnings that aren't built just on CapEx or on kind of the market going up. Clearly, they will have some blowback just like every other business will if the economic cycle turns a bit. But they can be much more resilient and much more… Money ultimately needs to go somewhere, to your point, can be very defensive and a great asset in that period.

55:23 All right, for the last like five, ten minutes, I want to kind of get into kind of what I think of what I call the third leg of the stool. We've been talking about macro primarily and we've talked a little bit about market microstructure and flows, this pinning of vol and kind of the reflexive CapEx that happens and these types of momentum flows.

57:59 But I really think an important thing that we're… The biggest way that this market has changed, in my last 28 years of being in this business, is really the last two years of how aggressive (I don't know how to think of another word)… It's not just pointing the finger at this administration, it's the pressures in the system are forcing, particularly for the US, dramatic outcomes.

57:47 And we have an administration that is being aggressive, partially because it has to. I'd love to hear your thoughts a little bit about the role and how you are thinking about what the administration is doing in the US, what globally, what China is doing, and how this can dramatically change asset allocation.

57:28 How we should be thinking about those risks and how they're playing a role in market outcomes. Yeah, I think political uncertainty and geopolitical risk is very difficult for market participants and asset allocators to take a strong view on and adjust the portfolio. And I think that's the big challenge.

1:00:04 What we always say is timing geopolitical risk and timing the market response around geopolitical risk is very difficult. So, this comes back to what I said earlier. There are two value adds that you have as an asset allocator - market timing and diversification. I think you just need to think about how to create a portfolio that's more robust to potential geopolitical shocks.

59:03 One of the conclusions we've had with a lot of asset owners discussions on is real assets - the value of real assets in the portfolio. Because a lot of policy choices that kind of cause volatility in markets often generate inflation. And real assets are, on the one hand, delivering stable cash flow growth, but also in real terms.

1:01:08 And yes, when the inflation happens, they don't always protect you. Certainly not real estate and infrastructure, maybe a bit more commodities, but over the medium-term they have the potential to cushion inflation volatility. The other thing we've noticed, in speaking to global asset allocators, is there's a bit more home bias because of FX risk.

59:30 Because the challenge you have is that FX risk starts to matter because you have large policy shifts potentially. And so, that means that if you are an asset owner that has a liability or that really has to manage returns in a specific currency, that automatically you migrate a bit closer to home. We've certainly seen that in bond markets.

58:50 We are seeing that also increasingly in equity markets. It's difficult because the best opportunities are often like in countries different to your own. You need to be nimble, like to find the best opportunities. But home bias is definitely kind of something that we start to see a bit more. And the last thing is, of course, you really need to focus on risk mitigation in a very different way.

59:32 Like when you live in a world where inflation is low and anchored deflation is the bigger concern than inflation and there's fiscal austerity and fiscal consolidation. I think the bond market, no matter where it is in the world, is a good buffer for your portfolio. But in this new world where I think you essentially have fiscal concerns in most countries, you have a policy uncertainty and political volatility in a lot of countries, I think suddenly the bond market, on top of the reasons we discussed earlier, is becoming a less reliable partner for equities in the portfolio.

1:01:20 So, that can completely change, depending on where you are as well, what you can do with duration. So, we've seen a lot more focus on gold. Like I always say, like gold has this very interesting convexity when there is an issue with trust. So, like in the ‘70s, investors didn't trust central banks to bring down inflation from very high levels.

59:46 In the global financial crisis, people didn't trust the financial system. And since the COVID crisis, there's a problem with trust towards governments globally. And I feel like that has supported gold and we've been quite constructive on gold as a portfolio diversifier to deal with broad geopolitical risk.

1:01:19 But timing the day-to-day gyrations and the day-to-day movements on policy and politics, I think that's very difficult for investors and anyone to do. So, we're trying to stay away from that. Yeah, I agree it's hard. And that's what makes this so difficult. I used to be able to look at the structural flows and look at the macro forces and then government, sitting on the other side of the poker table, would be reflexively responding.

1:05:21 Right? They are much more proactive and pushing outcomes. And I do think the greatest risk, that is not talked about enough and more and more people are waking up to it and that we've been talking about it for at least five years, is the debasement reality. Right? There is no way out of this debt issue in the US.

1:03:48 There is no way to deal with that debt issue and simultaneously compete with China and drive the level of growth, the level of national kind of investment that needs to be made, I would argue, without some level of debasement, leaning on the exorbitant privilege of the US dollar. It has become clear to me, I think one of these things we talked two years ago, a lot of the things we talked about have come true.

1:02:22 The thing that I'm going to highlight today is that debasement that people have been talking about for some time is no longer 2, 5, 10 years away, it's coming in the next year. And that debasement, when it starts to happen, will be a dramatic convex outcome for global markets in very dramatic ways. That doesn't mean it's markets go down per se, but the effects of that are going to be an earthquake through the system when it comes.

1:02:22 And I think the other thing people aren't preparing for enough is what goes with that, which is that direct investment from government. Much more of a China model in the US where we are going to start rolling out a sovereign wealth fund at scale, Trump accounts at scale, because this market quite frankly is too big to fail.

1:03:47 And so, this next crisis or next whatever downturn that we see, which I think will be much more managed than usual, even will be, in the words of Hank Paulson, the coming treasury crisis that we're seeing will be met with massive QE, as they always are, but this time with a cap on the long end of the curve, which is going to drive a structural inflationary loop.

1:05:25 And I would argue that's kind of part of the plan because that will allow the rollout of direct investment into corporations. So, the way this CapEx bubble keeps going is it takes the next logical step, which is no longer being dependent on markets, free markets, pushing it higher, no longer just CapEx coming from…

1:03:48 which is softly, by the way, I would argue, coming from government. Don't forget, September 2025 they sat around a table and said, I'll do US$600 billion. How about you? I'll do US$500 billion of CapEx. Right? But it's going to be direct investment coming into equities from the US government. And I think this is the thing people are least thinking about and least prepared for.

1:03:13 The incentives drive those outcomes. And the truth is the incentives are pointing in such a way that there is no way out other than print money, buy stocks. And as you know, Japan did this for 15 years. This will not be the first time in history for this to happen. I'd love to hear any last thoughts.

1:02:38 And this is why I agree with your asset allocation. You have to own gold, you have to own farmland, you have to try and have debt on your real estate. You know that you want to have the same position broadly that the government has. The greatest irony is most people think that a mortgage is a risk, it's leverage.

1:04:52 Like I need less leverage. But the greatest risk of all might be not being levered enough. I'd love to hear your thoughts, the final thoughts there related to. Yeah, I think you definitely painted like kind of a really bad picture how it could all end. What I would say is that FX volatility (we talked a lot about equity volatility), to me, also looks remarkably cheap when you think about it like because FX used to be boring, it used to be mean reverting.

1:06:16 You didn't have very violent convex moves before the COVID crisis. But really in recent years that has changed. I mean, look at just what happened in the last few days around Europe, like some of the moves in the euro, some of the moves in the Swiss franc, then obviously before you had the moves in the yen.

1:06:36 So, I would say that maybe FX volatility and expressions linked to FX volatility will also become much more valuable in the portfolio to protect assets outside your home currency. I couldn't agree more. Last data point, we've done a study in the ‘60s and ‘70s and we can't help but see some similarities, right, obviously with some of these things we're talking about.

1:07:21 During that period, the volatility of FX and bonds and gold (which is essentially a currency) dramatically outperform any other period in history. Meanwhile, counterintuitively, industrial commodities and equity vol dramatically underperform. And a lot of that was with the equity side is this push/pull because it's nominal, right?

1:06:48 Equities are nominal like inflationary pressures are. It would be good for all assets, in theory, on a structural level. But at the same time, the volatility and risks of profit margin compression, all of the other, the discount rate rising and the multiple contraction that you see, those things end up pulling in two directions for equities.

1:07:43 And as we saw, ‘68 to ’82, equity markets went nowhere in nominal terms. And that I think is a dramatic departure from what we've seen otherwise. Christian, wonderful conversation, broad ranging, covered so many important topics, such a critical time in history. I can't wait to have another conversation with you in a year or so to come back and see kind of more of what we've talked about comes true again.

1:07:55 But always a pleasure, thank you for your time. Likewise, thanks so much for having me. (Music) Thanks for listening to Top Traders Unplugged. If you feel you learned something of value from today's episode, the best way to stay updated is to go on over to your favorite podcast platform and follow the show so that you'll be sure to get all the new episodes as they're released.

1:09:07 We have some amazing guests lined up for you and to ensure our show continues to grow, please leave us an honest rating and review. It only takes a minute and it's the best way to show us you love the podcast. We'll see you next time on Top Traders Unplugged. But before we go, we just need to remind you that this podcast expresses the view of Kynexis, LLC, and the guests appearing on the podcast as of the date of its recording, and such views are subject to change without notice.

1:08:56 Kynexis LLC and Top Traders Unplugged do not have any duty or obligation to update the information contained herein. Furthermore, Kynexis, LLC and Top Traders Unplugged make no representation to its accuracy and it shall not be assumed that past investment performance is an indication of future results.

1:09:43 Moreover, wherever there is a potential for profit, there is also the possibility of loss. This content is made available for educational purposes only and should not be used for any other purpose. The information contained in this podcast does not constitute and should not be construed as investment advice or an offering of advisory services, or an offer to sell or a solicitation to buy any securities or related financial instruments in any jurisdiction.

1:08:51 Certain information contained herein concerning economic trends, performance and other data is based on or derived from information provided by independent third-party sources. Kynexis LLC and Top Traders Unplugged may believe that the sources from which such information are obtained are reliable. However, each of Kynexis LLC and Top Traders Unplugged cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

1:08:15 This podcast, including the information contained herein, may not be reproduced, copied, republished or posted in whole or in part in any form without the prior written consent of Kynexis LLC and Top Traders Unplugged.