← Monetary Matters with Jack Farley
Monetary Matters with Jack Farley
Why Macro is “Pretty Risk-On” for Equities | Tian Yang of Variant Perception
01:05:30
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- [00:00]
A
I'm joined once again by Tian Yang, co founder and head of research at Variant Perception. Tian, what do you think about the stock market right now? The S and P, the nasdaq, the semiconductor stocks, they have been trading quite weakly for the past month. Do you think that this is a bottom?
- [00:20]
B
So I think time horizon matters. So on our macro risk indicators that generally looking forward more, more three to six months, we are still in a risk on macro regime where it sees the mix of growth, inflation policy liquidity is broadly still supportive risk assets. So in general, I think the environment's still good. Now, clearly with the kind of hype around AI, the kind of mania in Korea, there's obviously signs of access linked specifically to AI, and that's clearly why we've obviously had that bubble like price action. You had a bunch of LPPL bubble exhaustions go off in early June. We've had the correction. But from here I would say that this is kind of like what the golden bitcoin tops felt like. So if you go back to some of 2025, it's kind of like the fundamental story hasn't really changed. Right. Like Trump's going to be a great crypto president, they're going to pass a genius act, all that. But despite that, the price action just exhausts similarly for gold at the beginning of the year. And I think you're a little bit at that stage with semis where there's enough like underlying things on bottlenecks and you know, the future, that's all still intact, the fundamentals haven't changed, but the price action is kind of telling you, you know, it's become like a meme. Too much money's got in and typically when that tops and rolls over, it's quite hard for it to regain the highs. Obviously we're well, well below the highs. So certainly we're recording this just as we have the situational awareness news. So certainly, yeah, sure. Could you get like a very sharp squeeze, a tradable bounce?
- [01:51]
A
Absolutely.
- [01:52]
B
But I think the, the medium term picture is that you. We need like a new narrative, right? The narrative around agency, AI, the narrative around bottlenecks. That's what fueled this leg of the rally from April on. That narrative is clearly done and we're waiting around for the next narrative. Maybe it's going to be like, you know, real world, world modeling, like things like that. Right. You need something else really to come along with, like a wow moment, I think for us to really get back to the high. So, yeah, I think we're more in the kind of phase of the market where the equity market is broadening out, the money is not necessarily leaving the market. It's just rotating to laggards and other areas which generally I think reflects the risk on. So yeah, I think broadly equity outlook is fine, but on the semi specifically I think we in terms of our position, we're keeping some of the exposure but we've really been rotating to more kind of the value laggers has been kind of popping up the portfolio in July. Right. So you know, only energy, only financials, only healthcare. Those have been pretty important as kind of more portfolio balanced.
- [02:53]
A
Tell me about the LPPL exhaustion signals. Remind me what that stands for. Why did, what, what were the signals you got, you know, a month, two months ago about there's too much risk, too much leverage in Korea, exhaustion. And also do the signals work the other way? Are you getting bullish LPPL signals or do they only work on the downside?
- [03:13]
B
They should work both ways. So LPPL stands for log periodic power law. So it's our bubble and crash detection system. So it's kind of designed to kind of get you that final O lag of the move that typically is not obvious. Right. It's more like after something has been moving exponentially for a while, it looks like it's stable. But then because inherently of like just the way markets were forced forced price action, there's always that final leg. Like recently we had it on China for example, right? China, sold off, sold off, sold off, just kept going lower. In May, April, it looked like it was bottoming and you have a final of leg in June. And it was in June that all the LPPO buy signals went off. Similarly on the semi, you know, when it was rallying up in April, in May, mid May kind of was like, wow, this is a bit much. But then it has that final leg up and then it triggers the model. So it's kind of designed to catch these log periodic power law waves. So you can think of these as just essentially a pattern matching model. But it's really looking for not just things to be exponential, but that the kind of wave pattern of the market speeds up as it's going exponential. And that's typically what you see at the end of these exhaustion moves. So you kind of saw, you know, a bunch of these from the beginning of June as we were kind of making the new highs. And so typically these are more tactical models. They typically are good for the next month. So they're not necessarily long term models, but they give you a Sense of when things are extreme to fade. So the most recent has been obviously all the semi AI related cells and then the China, Indonesia, a lot of these laggard bias things we've been writing about. And so obviously you've had that convergence. Yeah. So I would think of it very much as a tactical model to complement your kind of medium term views. In practice, the way we would use is you have thematic investments or stocks or concepts you like. That's really about next three to six months. And you use LPPL to help you with timing in and out and for managing exposure around it.
- [05:14]
A
And are you getting LPPL exhaustions to the downside indicating bottoms in semis in Nasdaq or. No, not yet.
- [05:21]
B
It's not. You're getting a little bit on more the intraday, right. So obviously on like the hourly 15 minute, like there was a bunch of those yesterday. So I think that would, that would fit into the kind of situational awareness, right. Like this short term liquidation, but for like the daily frequency, the medium term, you're not quite, quite that yet. So I would say you've gone from like extremely crowded on the long side to now. Clearly it's uncrowded, but not extremely so.
- [05:48]
A
You said agentic AI is kind of over as a growth factor of the semiconductor AI trade. Tell me about why you said that.
- [05:56]
B
I think we think of investing as partially trying to understand cycles, but a lot of it is about playing the game, right? You got to understand the narrative. It's like an S curve, right? Like the narrative diffuses. Our narrative starts somewhere and it diffuses out. Lots of people start participating and then like everybody knows it. By the time everyone knows it, we have to ask, what's the next narrative? So I think the AI trade has been capitalized by multiple legs of suddenly a new narrative takes hold and they slowly bleeds out to everyone. But by the time everybody is aware of it and understands the thesis, usually it's pretty late in the game. And so every time you get these big outsized moves to new highs, you need a new narrative. And I think the agency AI was obviously going back to December last year was Claude code. And these oh wow, agents is new. And then suddenly people start figuring out, okay, what are the implications? It turns out, okay, there's all these new bottlenecks because we need way more compute, way more of these things than anyone expected. So the bottlenecks and all these things start working really well, right. As investments. And then what we saw with the kind of blow off top was these things start to exhaust. Right. The prices are telling you this narrative is well known in no longer reacts. You've had multiple, you know, if you think all the way back to when Broadcom had earnings. Right. And then subsequently multiple companies, obviously Micron skin, not all of these and it stops reacting. That's just telling you it's kind of. Yeah. I think markets are generally going to top before the fundamentals change, before the analyst earnings move. So I think we're at that stage and we're just sat around waiting for where the next leg of the narrative is until you have that. I think it's more. I'm not saying it's going to crash. I think AI is real. It's just more. It's going to be dead money for a while. I think of what bitcoin's done since 2025. Right. Or what gold's done this year after the crash. It just stops doing anything. And I think that's more the. It feels like where we're at.
- [07:43]
A
So what's not dead money right now to you?
- [07:46]
B
Like it depends on like what your mandate is. I would say if you give me any trade within global macro equities, everything live right now we really like buying a Sonia Sonia future. So betting on the bank of England to be less hawkish. Right. Like UK has really high rates but there's lots of growth and inflation downside risks. So it's a pretty big outlier. So I think that's like the cleanest thing live today. We did have onshore Swiss cm but as we're recording this like the BOJ is intervening overnight. So I think that. So I think that's slightly done for now and then within equity space in terms of how we're positioned. If you look at our VPX etf, we're basically running a barbell of long energy, long financials and we're actually starting to buy back into the kind of tech and semi names that's crashed. So I think we had a pretty long. Pretty big long all the way into May. We de risked a little bit, but that definitely has hurt performance a bit. But it's being offset by the energy and financials piece. So we still kind of have this barbell of you have like value exposure with a little bit of the secular growth, but you're just kind of tweaking that just so your portfolio overall has kind of a better kind of risk return profile.
- [08:56]
A
Why financials, why energy and why did you say a few minutes ago that the macro is fundamentally risk on for equities? Why Is that the case?
- [09:08]
B
Yeah. So the way our macro risk models work is that it's basically a bunch of decision trees, right. That tries to understand macro causality. So it's like lots of decision trees that go through things like how is our US growth lead indicator? Right. And how is our China growth lead indicator and how is policy? So it's asking a bunch of these questions and right now what they're saying is yes, inflation is high, Iran has been a problem. So as a result the inflation component is no longer very risk on. It's going to constrain policy but there's no real reason for central banks to hike aggressively. Growth lead indicators are broadly okay and liquidity on our models is still fine.
- [09:49]
A
Right.
- [09:49]
B
There's a long lead lag from when liquidity tightens to when it actually hits. So that's kind of more like again there's lots and lots of decision trees that come through the model. It's a gradient booster model but basically if you net everything out it's kind of telling you growth is still fine. It's not amazing, not terrible, but fine. Yes, inflation is high but not overly so. This isn't like 22 on the policy front. People are overly worried about big tightening cycles everywhere. Obviously we have you know the Fed this week right. They didn't hike. Now August is no meeting again. Are they going to really try and force a hike like mid September so close to midterms. Right. So again I think it's, it's probably unlikely. So, so again policy is not a huge problem. And then liquidity, yeah the fact that equities are broadening out, you look at value line arithmetic, the average stocks making higher, higher, low, that's typically not we would expect to see if there's truly a lack of liquidity and net money going into, into equity market. So yeah, so high level. That's why I think that the macro is pretty risk on in terms of signposts for what end of cycles look like. There's two key things we've seen are all the major generational tops. If you go back to nifty50 in the 70s.com 1929 the two consistent top down things is one is that monetary policy has generally been tightening for six to nine months. Right. So we don't quite have that. Obviously if, if the wash Fed does start hiking then clearly that starts the clock ticking. But generally you have monetary policy tightening for six to nine months while, while it's they're tightening you see equity breath narrow and the definition is why I Mentioned value line arithmetic or these median stock. The median stock stops going up, right? It stops making higher, higher, higher lows. But the concept stocks keep going up, right? Generally when you see those and you see those for like six to nine months, that's generally been like the absolute peak of the generational cycle. And what's very interesting is it will generally line up with big events, right? So AOL Time Warner or these kind of major events people talk about. And obviously we have a few candidates this time around, right? And Frog Pig will try to IPO in October. But maybe OpenAI is going to be like the single most important company in the world right now if they try and get their IPO off. Maybe it's end of the year, maybe it's Q1 27. That could be the moment that marks potentially the top that might line up with when these macro factors are in place. So. So I think if it's like our models are telling us things are fine when we've studied history or thought about it, we're like, okay, these are the signposts. If we start seeing it, we need to start being careful. The model might not understand the nuances, but right now we don't have those signs and the model's still fine. So broadly, it remains risk on, well,
- [12:31]
A
breadth in terms of how many stocks are going up and doing well, breadth has been extremely good. Even though the semiconductor space and NASDAQ has kind of melted down over the past month and a half, the S P has really held in there much more than I would have thought had you told me there'd be such a, you know, literally a bear market in the Nasdaq and we're down like 20%.
- [12:51]
B
Yeah. And like I say, I think broadly the not not only are model things risk on, you have lots of confirming data points, right. If you look at credit spreads, especially adjusted for sovereign risk premiums, credit spreads in like a normal range, it's not super low, super high. Savings rates remain very low. So, you know, like from a collective point of view, like money's just flowing around the economy, one person spending someone else's income, right. Just going around. So, yeah, there's been a lot of insider buying, right. Despite all these things, there's like a flood of insider buying globally across lots of different stocks. So, yeah, these are not what you typically see at the imminent top. You know, we did our exercise before, right. We have this market top checklist that we run through periodically from all the different factors like behavioral, corporate, economic. And really when you run through the Market hop checklist. It's more like an amber warning like what is excessive is the corporate behavior, right? The circular financing Nvidia is basically behind every has to prop up everything else because you know there's a struggle for credit, right? CDS is widening for hyperscale and so forth. So you see some of those signs, you see some of the retail excesses like with Korea with kind of news guru investors obviously just because it is a live news, right? For example Leopold, the fact that my Chinese cousin might know who he is, these kind of things. So those were kind of the red alerts but you were missing the economy, right? The economy wasn't slowing down, you were missing the market internals. Those were the things that you typically see. So at the top you need to see all these things lined up and we really in Abrigum we'll have amber warnings like they're kind of full reds at the moment.
- [14:33]
A
Why did the economy hold up? Why with the price of oil going to 120 bucks, gas going up so much in the US in Europe it being even worse. Why has the economy held up? Has the economy held up? That's my first question.
- [14:45]
B
Yeah, I think well our models is being fine. Again it's not too hot, not too cold. We would say somewhere between 1 1/2 to 2 probably closer to 2% real growth in the US well obviously everyone knows the answer, right? It's AI AI CapEx that that's been one piece that that's been helpful but the way I frame it is this idea of like I mentioned collective levy, right? This idea of one person saving is somebody else's income that isn't, that wasn't realized. So one person spending is very important because the more you spend the more that's somebody else's income and they can spend and economy works because money flows. So what we've actually observed is that for the corporate sector as a whole there's obviously a lot of capex a lot of investment. So corporates are dis saving that's providing a net income to everyone else. At the same time the fiscal side tariff refunds obba Foreign loading. Again fiscal ended up not being that bad. Our best neutral if not even slightly of a positive impulse. So again that's providing net income to other people and then at the same time there's all these concerns about oh yeah K shaped consumer like oh you know, delinquencies are bad, all these things. But the key is household savings remain low. Now you can argue it's dystopian lower Income consumers can't save, they're living paycheck to paycheck but what's happening is they're getting a lot of, they're getting maybe multiple jobs and what income they get, they spend. So the savings rate remains low. So if everybody's savings rate is low and going down, that's somebody else's income and it just keeps flowing. And I think that's basically been the case for the economy and that's still basically the case right now. Like the time to worry is when people start saving more. So for example, if suddenly the hyperscalers go right we're going to cut capex that's at the margin more saving from corporates. That's bad.
- [16:34]
A
That's why I'm well tian, you know meta reported Microsoft reported Meta basic they raised their capex by the range just a tiny bit. I would say it's a very anemic raise. And then Microsoft literally held their CapEx guidance flat. And so when companies are raising CapEx and CapEx and then what do they have to do before they cut capex is they keep it flat. So I'd say that's not even though the semiconductor stocks are one of the biggest days today in the rally and you know technically in my personal portfolio like I guess is a very, very good day but I guess the, the reaction is a lot better than I would have thought based on the capex from Microsoft and meta.
- [17:10]
B
Right. So I agree but I think we got to think of it what makes this cycle slightly different I would say to you know when people think of railway mania or like.com is they tend to be more heavily private sector only driven whereas obviously we have this I think you know even when I spoke to you previously, right. We've been talk we have this whole 5 to 10 year theme for investing called essentially the primacy of sovereignty. Right. Sovereignty is the most important lens in which to think about every investment decision. There's a existential US China like competition going on in all the kind of key pillars of sovereignty from energy to manufacturing to technology. Right. So what makes this cycle trickier is even if you fully exhaust the private sector's ability to fund the capex the government will find ways to try and step in. Right. And, and you see the heavy involvement, you know the Ministry of Defense or I guess Department of War, right. Like you can see lots of government involvement in all these sovereignty pillars. Right. And that will keep going and they will backstop and try and facilitate financing if the private sector starts exhaust and in a way it's just mirroring what China does. Right. You can think of it as a national balance sheet. Just like in China people are very comfortable with the idea, okay, the Chinese business and Chinese government the same thing. But you, so you can view as a national balance sheet and they use it well in the same way the US needs to do the same, the Max 7 and the US treasury, that's one balance sheet that needs to be used to facilitate this build out. Right. To ensure the US's sovereignty. Right. It does not have huge dependence. So I think that's the part that's trickier, that will keep the, keep the, the kind of capex out going longer than people expect. But for sure, right at the margin the first sign would be these guys slowing down.
- [18:53]
A
Yeah, I mean I will say the backstop that Nvidia is providing, it does seem like the companies are going to use that. And I think, I mean I think capex is going to go up by a lot over the next 18 months.
- [19:08]
B
And I think that's the thing where it's very easy to have a initial dismissal of circular finance. But fundamentally circular financing is no different in my mind to any other forms of financing on the way up. And that's the key on the way up. So we talk a lot about this. I'm a big fan of Perry Merling's work. Right. I think obviously he's not super frequent guests on shows but obviously Pirazi shows up. But core idea is the hierarchy of money, right? So the core idea of the hierarchy of money is the quality of money matters only in the downside, only when things are turning down. When things are good transactions can be settled by whatever people willing to accept. Right. It doesn't matter what par value is, it doesn't matter anything else. So if we're in the upcycle, people are willing to accept Nvidia's backing or accept compute or whatever, whatever things that are not cash. Like it's fine. The problem is when you start to see the first signs that people demand cash settlement, at some point we're going to turn around, go right, we need cash settlement for these things. And that's when all the kind of transactions that were built on these pledge things start to unwind. I mean you see in the credit space, payment in kind instead of forcing cash settlement, there's lots of these things. So I think as long as the cycle's turning up, that's all fine. But the moment we start to see the demand for cash settlement it starts becoming bit more of a Concern, concern. And I would say that's why these mega IPOs matter, right? Because SpaceX, the first one is like, hey, we need cash settlement. We can't just take stock or other things. We want to start seeing cash. And then as more and more of these come in, that will start to, I think potentially create downside risks.
- [20:47]
A
Tien, have you ever seen a stock trade as badly as SpaceX from the IPO? It literally goes down every single day. And it's funny, I think if you had asked 10 financial pundits, how do you think SpaceX trades? I think many of them, my partner Max said, oh, well, there's so much, the unlock is ridiculous. There's going to be so much selling, it's not going to do well at all. And normally some of the times the pundits are it's too easy. It's too easy. But literally SpaceX just goes down every single day and it's still not cheap by any metrics. And I mean literally, okay, if data centers in space are going to be a thing, buy silver. Because the data centers need way more silver in space and they can't, they, they have to disintegrate when they go back into the earth, so they can't be recycled, which is key for silver. So like, I think, like, if you're going to have some ridiculous thing about data centers in space, which is probably is going to happen in like 20 to 50 years, I don't know, about five or 10, then like, there's a lot of other ways to, to play it. And it just seems very, very speculative. I don't know. And, and just broadly, how concerned are you about these mega IPOs that are requiring tons of capital to be spent and basically be sucked out of the market? People have to sell Nvidia to buy SpaceX. That's just a fact. And when anthropic and OpenAI go, go public, if, if they do, which they probably will, you know, people have to sell more Nvidia.
- [22:04]
B
I guess the first thing is I, I, I get what you're saying on the, you know, like when all the experts agree, something else happens. Right. That's like the very famous Bob Farrell quote. And you know, we saw that with oil, for example, Right. Every expert agreed and something else happened.
- [22:16]
A
Yeah.
- [22:17]
B
So I think typically those things happen because humans and markets are not good at pricing. Kind of the reflexivity, the second order path dependence. It's very good at pricing first order and seeing it, but we tend to miss the second order, which is when everybody sees it it tends to be a policy reaction that shifts things. And so I think that's my mental model for why when all the experts agree on something macro, it often doesn't work because there's a policy shift from the policymakers that suddenly change the dynamics. But on something like the IPO lockup is very unlikely for there to be a policy shift. It's very unlikely the Fed or whoever's going to look at space as going down and decide to change. So then maybe that's why if you think back to when Facebook at the time ipo, after a while it's just like down, down, down, down, down. So, yeah, I'm with you. I'd be surprised though how on time it's been. Right. You expect all the book runners to do a good job and pump it, which they do. And then you. Okay. And then the passive index buyers bid it, which they do. And then, you know, the unlocks really start in July and they do and it just starts going. But like I said, I think there's no second order reflexive kind of shift in behavior that results versus a lot of those other examples, which is probably why it is carrying on. How low can it go? I don't know, but like maybe 80 is like a. Okay. Level. Just thinking.
- [23:48]
A
Yeah, I mean I. What is the floor? Like there's no valuation floor. I mean, I'm, I'm a fundamentals guy in, deep in my heart. There's no fundamentals, there's no valuation floor. I mean the, you know, the space business loses money. The Starlink business makes a lot of money. But then they're spending so much money on the data center business, which is a new thing. And look, Elon Musk is the best hardware person in the world. Not going to bet against him there. But it's just, there's nothing in the numbers to say, oh my God, yeah. $70. It can't go below $70. Once it hits $70, it's, it's cheap.
- [24:22]
B
Like no way. Maybe $7 a trading vehicle, right? Yeah, yeah. But I've learned my lesson, like looking at Tesla, if you look at the amount of people that got burned both long and short on Tesla, it's kind of like true.
- [24:35]
A
And yeah, Tesla's fundamentals have gotten worse. Like literally revenue declines in some sectors, literally cars. And the stock has been flat to moderately up.
- [24:44]
B
Robots. Yeah, it's, it's, it's not robots. Right. Like, that's the thing. So. Too odd.
- [24:49]
A
Yeah. So Tien, how do you think about oil?
- [24:52]
B
So we've Actually we're running a pretty big overweight on energy right now, but we actually have not until about May, so we did get her a little bit on the May leg and it's been doing okay. I think of it as like, I don't really need oil prices go up to justify the fundamentals here, right. Crack spreads are super wide. As long as you own like the integrators, the refiners, they should be making hay and printing money and just please, please just don't do dumb things and destroy it. Just like return it to shareholders, buy back shares, free cash flow and obviously it's a very natural portfolio balance. Right. Like it's the one thing that's going to break is going to be a prolonged inflation stagflation scare that keeps longer and yields high and long end yields high is not good because everything else we discuss, ultimately there's a lot of capex to finance. And so I think it's. So to the extent you have equity risk, which is basically just AI risk, this becomes like a really obvious kind of balance against that. Right? So that's probably more the way I think about it right now in terms of the Iran war. It's funny, I think on the eve of the war I actually spoke with Max. I think we record this, I mean literally the day or the day after, have to have some hot takes and stuff. But I would say I think the China US Trade war is a very good take template for kind of how the politics of it goes, right, that when the US and China reach that phase one trade deal back in like, you know, 2019, 2020, whenever they announced it, that was basically as good as it got because the fundamental issue is irresolvable from both sides and Iran and the US the same. The fundamental thing both sides want is, is just not possible. Right? It's irresolvable. So I think the MOU is kind of that phase one trade deal that you both agree that you see where the ledge is and neither side wants to jump. But from there, you know, you can't really close the gap. So then you go for a period of both sides overplaying their cards a little bit, thinking you have leverage, but the reality is like it's not a closable gap.
- [26:56]
A
Yes, I agree. If you look at us, Israel and Iran, there's nothing in the world that could satisfy all three parties. Nothing at all.
- [27:06]
B
40 years you got supposed to fix 40 years of, you know, issues in the however many weeks and months it's, I would say it's probably more the second order. I mean something that's probably under talked about was the Saudi Arabia nuclear deal. Right. That got announced. Like those things are really norm breaking. And I think just like this is where I think the Trump administration's pragmatism could really have some long term actual consequences. Right. Like you're injecting a lot of these things that are breaking how the region operates normally. And so yeah, like you know, if you're the rain is seeing that deal, like what incentive do you have to give in?
- [27:44]
A
Yes. And, and also I think that the conditions that the US and Israel initially demanded of Iran of literally no enrichment at all, that is something that extremely few countries have ever agreed to. Like I think maybe the UAE or Bahrain, like, like being able to, you know, enrich uranium to, to have nuclear energy is kind of a right of something of a country and it is kind of an extreme demand to make as Iran has made various extreme demands too. Of course.
- [28:14]
B
How do you think the UAE feels today seeing the Saudi deal when as you say they signed something in 2014? There's a lot of dynamics that I think is so broken now in the region. So I guess as investors we should just be prepared that there's just going to be more sovereign supply chain, sovereign link shocks right to your portfolio. So like that's going to be the, that's probably like the new risk off defensive asset. It's not going to be hiding out in consumer staples.
- [28:38]
A
So where should you hide out? Sorry, what do you mean?
- [28:40]
B
Yeah, so I think you're going to, I think all the geopolitical shifts just means that there's the likelihood supply size shocks is so much greater. Right. Just like it's going to be a lot easier to have more supply side shocks. That affects obviously very optimized supply chains. They just have random things go up. Right. These are generally going to be various forms of resources of some kind. Right. You just, you just keep shifting the world's politics and that's more likely where the shocks are. So if, if you live in a world where you expect most of your shocks to be these supply side shocks, then you know the traditional definition of cyclical defensive of what your portfolio bias look like doesn't work. Right. Because tradition, you're like hey, I hide out in bond nominal bonds and I hide out in names like staples. Right. All these are going to get hurt if you have like stagflation type of setup. Right. So I think that's like a pretty meaningful regime shift in how markets operate.
- [29:35]
A
Yes, but don't you feel like that at least in the United States there have been fewer supply shocks that have actually impacted markets maybe less than we deserve. Like given what the US has done in Iran, I would have thought that the US economy would have been impacted a lot more. But it does seem like we are in, you know, separated by two oceans and we have this immense natural gas and, and oil reserve in, in Texas. Like I don't know, it seems like the global oil markets are functioning better without the straight of Horus than I would have thought and everyone would have thought.
- [30:08]
B
Yeah, I, I think when back in March when we did our scenario analysis on the economies, we thought for the US it's like WTI, we need to get to 120 to, to, to be the tipping point for a recession.
- [30:20]
A
And that happened for like a few days but, but not a long time.
- [30:23]
B
We would need to average, essentially average 120 for the rest of the year to get you to recession or else the same. Obviously that's a big assumption there. Whereas for example in Europe it's somewhere between like 110 to 120. Brent, if you average that it's like at the tipping point. Right. So like there's like different sensitivities to your point because of these natural advantages and you know, and how much redundancy there is. But yeah, we've seen clearly a lot of reserves got released. I think we've all been surprised by China's role. I don't know why China would be willing to do that, but I think it's probably pragmatic. Right. You can see China was managing their refinery runs, they stopped exports refined products and now they're just managing that. So it's probably not altruistic.
- [31:04]
A
Yes. And I think that China has a huge stockpile of petroleum reserves and they were willing to draw that down. So. But I think that, that we shouldn't let that, let that excuse be for complacency like the, yeah, we were saved by stockpiles going down around the world, particularly in China. But that's that number one, that we can't rely on that forever and number two, it has to be replaced. So like theoretically the, the oil straight up from use could be solved tomorrow, but over the next two years we're in a structurally bull market in oil because China's buying back all the oil.
- [31:37]
B
So the impressive. I agree, but I think the whole point of the supply, the whole point of the reserves, that they're like a one off supply buffer. Right. Like I don't think they I don't think it's going to be such a strong bit to push up prices. The whole point of like reserves, you just wait until price is so bad and you step in, you just get filled. But I think the China definitely is real because I, I remember the last two or three years people kept asking me, do you think China was going to try and make a move on Taiwan? Because people were looking at China's oil. They're like, the economy is doing so badly, why are they buying so much oil? Right. Like literally nonstop. I guess now we have.
- [32:09]
A
They're doing it for the tanks, they need it for the planes.
- [32:11]
B
Yeah, yeah, yeah, right. Like, remember that, like there's a non stop talk on my man. Look how bad the organic demand is. Why are they buying so much? They're stockpiling so much. So much. So much. Yeah. It turns out it's probably more to be resilient in a world of just lots of shocks.
- [32:27]
A
What do you think about the Chinese economy and Chinese stocks particularly?
- [32:32]
B
I think people keep making the same mistake on China. I don't think China's coming back in terms of consumer. Right. China remains an export oriented priority. Again, the overarching lens is primacy of sovereignty. It's an existential competition between us and China. China will be prioritizing, you know, manufacturing, technology, all the things industrial policy needs that necessarily crowds out your household sector because credit resources are funneled towards the geopolitical sovereign, sovereign priorities. Right. So your household sector is by definition crowded out. They just have to make sure things don't get so bad for the household that I think that's really bad. They'll buffer it and put backstop the pol. You know, we had the pol meeting July, nothing happened. Right. Like, I just think, you know, you look, I look at these luxury good company like, like earnings results and they, oh, you know, yeah, but maybe China's coming. I'm like, I don't think it's coming back.
- [33:23]
A
Yeah, the, the growth factor for LVMH and all these luxury European brands was China was growing at like 30% year over year. Now it's flat to down contracting very bad. But within China, the domestic consumption has always been weak. So that's not new.
- [33:37]
B
Yeah. And it's because China's been executing the sovereign thing for like 10, 15 years. Right. They prioritize industry and tech that necessarily crowds out your household sector. And so the household sector generally is under more pressure so they can't consume as much. And now house prices are down so much. Like, I mean Basically, like we all know real estate value is how people is people's wealth. If real estate value is down so much, how are you going to get people to feel 30% richer overnight? You're going to have to, let's say they revalue the R and B. Suddenly we wake up tomorrow, $R and B is a five, a four, like crazy appreciation overnight. Then sure. Then maybe the Chinese suddenly feel a lot richer in dollar terms. They're going to start buying stuff globally and then we can have a bit of a, a, a rebound. But again that, that, that's very, very unlikely. Right. China doesn't do things like that under the current regime.
- [34:26]
A
Right.
- [34:27]
B
There's no big shock policy. So yeah, yes, obviously. Could you have like sectors that do well? Of course, if the government's behind them, like, yeah, you can get cycles. Like I say, we had those LPPO exhaustions in June. So there's always tactical trading opportunities. I think Chinese tech, Chinese AI, Chinese biotech, like certain things, China has a lot of potential. But yeah, I think if you want the narrative to shift on China, you know, we've had this story, oh, they're going to do fiscal, they're going to do these. But fundamentally you can see China's focus on supply side. It's focused on geopolitical priorities and it's going to be very hard to see how we shift from that. Which means, you know, they're going to have to just export. Right. And you export because you want people to stay in pro to have jobs. Right. That, that's just like the most fundamental thing on. And I don't think that's going to change for the foreseeable future. Like I say, if we wait for one day to do a big reval, I'll be buying Chinese equity consumer stuff hand over face. But it's very hard to see at the moment.
- [35:30]
A
What about the key drivers for corporate profitability? Mainly the big stocks. Alibaba, Tencent, Meituan, Pinduoduo, basically all these online retailers, the Amazons of China have been killing each other because they've been competing on price so much and the government keeps on saying anti involution, anti involution. We're going to encourage our companies to actually stop, you know, fighting each other like Japanese fighting fish or Chinese fighting fish. But it never really does seem to happen. Do you see any policy changes there of like, oh, actually we need to get Alibaba's profits up, we need to get 10 cents, its profits up because we need to stop having a Financial crisis or, or no. Do you think, you think that's all talk?
- [36:11]
B
I think they're clearly doing. I think it's clearly something you should do at the margin. But the fundamental issue is do you have enough domestic demand for all these things? And fundamentally the issue is there's not enough demand yet because you're worried about employment. You don't want these companies to truly shrink. Right. The way you would truly shrink. Yeah. If all the companies start firing tons of people and cutting costs, then yeah, you can get a restoration. But the government doesn't want that. And that applies to every part of the Chinese economy, I think. And I think that's the real tension. So if your priority is jobs, it's very hard to solve the involution, I think because you need to cut actual supply right down to where the demand is. Because you don't want to do that. You have excess of supply versus domestic demand, has you export and everything is about access. So yeah, I think they can try things at the margin, but it's a bit like the Japan, all these things. Right. There's like a global macro balance and you have to solve the breaking point issue. And I think on China, the critical breaking point issue is the importance of employment, which is a supply side issue in China.
- [37:23]
A
What do you think of Chinese AI? So that's the publicly traded AI model companies which we actually don't have. Ours are publicly traded. Really? That's the Chinese semiconductor chain. That's the cloud providers like Alibaba, which also owns Moonshot and owns whatever. Are these, are these investable? What do you think?
- [37:42]
B
I think it depends on who you are. If you're like a western minority shareholder, like, you know, you have to decide what your risks are. Right. But yeah, but yeah, you look, you look like the cxmt, right? The memory ipo. Yeah. You are local government, you're like a, you know, soe, state backed private equity fund, venture fund. You're making out great. Right. So I think it depends a little bit on who you are and if you have access. I think in terms of how investable, I would say in general for Western investor investors, it's probably not super obvious that you're your first in line to, to get access. I clearly, I think the impact is more broader that is moving us away from the kind of, you know, Frontier Labs. Right. Closed model. Right. That's clearly helping to accelerate kind of price compression. Essentially China is doing the work to accelerate Japan's paradox, to ultimately get more people to use it. But in terms of how that profit pool is split. Like, you know, China, when China enters the industry, generally it destroys the profit pool. Right. That's happened like, and everything. And I think that's the. That's a little bit of the problem here.
- [38:55]
A
Yeah, totally. I mean, just like if you look at Alibaba's AI cloud revenue, it actually is growing at triple digits, but it is so low compared to Google, Amazon or, you know, Microsoft, what they are charging OpenAI Anthropic. So it's just like in China, just things are just so cheap and. Absolutely.
- [39:11]
B
I don't think they're going to raise prices.
- [39:13]
A
China is where profit is going to die.
- [39:14]
B
Yeah, but it's. But again, you got to think of it as a sovereign balance sheet, right? It's a national balance sheet. And then they want to make sure they win market share in the rest of the world. So I think what China is exceptional at is obviously taking new things, adapting them. Right. Commercializing them, and they're trying to win share. And I think they're doing the same playbook here. So they're going to China just way better, commercializing, gaining share and meeting customer needs at low cost. They've done that in manufacturing, all these things. And I think that's what they're doing with obviously the focus of Open Way, make sure that people are locked in or not locked in, but essentially that people are not locked into the US Right. In a way, if you view it for the sovereign lens, I think things make much more sense. China does not want the rest of the world to be locked into the US especially closed wei. So as long as China fully commits to open wei and makes these breakthroughs, the rest of the world obviously will pick China. And in fact, in the end game is the US have to catch up and also commit to open wei.
- [40:13]
A
Maybe there's also the hope that companies in Europe are going to use Anthropic and OpenAI and pay more because they don't trust China. And that is kind of what happened in software, you know, Right. People use Microsoft and I'm sure there's like a Singaporean version of Microsoft Word that's cheaper, but people still use Microsoft.
- [40:31]
B
I think of it a few different ways. So I think we have to obviously guess what the end state of the market looks like. I think essentially you're going to have three tiers, Right. Like the way I would describe is you have a 150 IQ mass market tier that's like open way cheapest, lowest marginal cost, everybody can have access. Right. Good for consumer you probably have 150 to 200 IQ range. That's for like small businesses like ours, right. Or for business adoption speed up lots of processes, right. And, and it's very good at that. And then like the 200 IQ plus is for governments big business where rest of us no chance of touching it. Right. And that's like the new growth part, the enterprise part is what eats the profit pool of horizontal SaaS, whatever consulting or the middle layer that eats the profit pool. The consumer tier is very hard to make money because it'll be open and then the top is where the money is made. But that's a much smaller I think addressable market. So that's in my mind how the end state looks. So if that's the end state and you work backwards like why do companies like Microsoft these succeed? I think it's more to your point. The trust is because they have the complementary assets because you trust them with your data and their cloud. Right. So yes that's going to certainly be that for companies that don't have great in house tech talent then clearly if I'm on the Google Microsoft ecosystem I'll stick with them if the price difference is not too big. But even then you can see that everyone's building harnesses, right. So you can be on Microsoft. Microsoft can plug you into whatever open source open way model you want. Right. So that's another shift that you know you're not going to be tied in. Right. Like that's the big shift as well. And also another big trend is clearly on premise, right? Where people are taking open way, deploying their on premise, keeping that data on premise. Right. I would say the biggest development of the last couple of months is just the sheer pushback against US Frontier Labs from US businesses. Right. Like you know I heard the story like the the hugging face founder or someone was like protesting OpenAI this weekend like right. Like I think that that's a reflection of the shift that I think people don't want to just give all that data over to Frontier Labs, have to pay off for everything that there's a clearly a desire to optimize spend. So in terms of what you said, I do agree if you look at the hyperscalers, they will ultimately be okay, right? Your Apples, Microsoft, Google's, you have the complementary asset, you have the customer trust. You can plug in and out whatever model people want to use. But that doesn't mean the Chinese models won't have a compressing effect on pricing. That's a profit point.
- [43:02]
A
And Tian, how is that not a case, that this ultimately will be a bubble. You know, like, look, I've been bullish on semiconductors, I still am, but I'm just, just saying like ultimately that this will end in a, in a bubble that will burst. Because literally, I mean, I heard Sam Altman on, on a podcast and he was, he's still talking about intelligence as a commodity and how it's going to be like a utility. And I'm like, dude, you cannot be talking about something that costs trillions of dollars basically to make as a commodity. Like you know, Con Ed and all these, you know, utilities, they're granted a monopoly by the government and they spend a lot of money on capex, but nowhere near what you're spending. Like, I think that, I don't know you the word commodity, maybe on the west coast people don't think of that very negatively, but on the east coast, all, all these investors in public markets, like, I don't know, he should, he should stop saying that word. But, but, but like if, if it really is a commodity, then the ultimate pricing power is not strong at all. Like what is the moat? And then it's going to be a bubble that is not defensible, basically. I'm not saying that that's going to happen tomorrow. In fact, I don't think it will happen tomorrow. But how is that not where we end up?
- [44:16]
B
Well, I think that's where the tiering matters, right? I think your 200/ IQ is not a commodity. The 150, 200 is also not that obvious a commodity that will need deployments on human AI loops to get it to work. But yeah, I think for the 150 IQ AI that we all use day to day for everything in our daily workflow, I think that's the part that goes away. So yeah, that obviously affects the consumer application side. I think that part's probably the most vulnerable. But I mean again, I think with all these things it's like the Charlie Munger invert the problem. Right? So I think we'll be eternally debating this and challenging on you. Invert the problem. What's the opposite case, and I think the most compelling was my colleague Ben actually mentioned this idea of yeah, if we suddenly need to move on to modeling, like doing world simulations, like modeling real world physics, these are all things that matter. For robotics and real world interaction. That's a heck of a lot more data you've got to collect and process and use. Suddenly you need a lot more training, a lot more inference. That's potentially one Thing that can keep this going for a while if we get genuine breakthrough on reinforcement learning. I think there's a lot of debate because fundamentally one of the bottlenecks we've run out of data. So we're supposed to generate. The models need to generate their own data to start the self improvement cycle. So far there's pretty limited evidence of that. But that's possible if you suddenly. Because that would obviously unblock the kind of hardware software data loop to start again. So there are things that I think again you'll need some kind of crawl code like in December 2020, one moment when we suddenly will wake up going oh wow, this was actually a breakthrough and then the next that comes in. But I think until then it's probably more just dead money. Like I said, I don't think it's necessary over. Right. It's just. Yeah. We don't have a narrative that people can hold onto to drive the kind of. Yeah. Next leg.
- [46:13]
A
What is your recommended allocation towards US versus foreign stocks? And it sounds like you're not in love with China, the Chinese equity market. Like what foreign markets do you like in terms of equities?
- [46:24]
B
No, we still like Latam, but I, I feel like I say that every time I come on your show.
- [46:27]
A
Yeah, it's true, true.
- [46:29]
B
But like Brazil has elections coming up in October so maybe like you know, there'll be some wobbles around that. Yeah. So we like latam. We like, we like the Americas basically. I'm skeptical on the Europe. I think Europe feels very contrarian but you know it's exposed to energy crisis. Right. It's got a lot of regulatory issues to deal with like a good long term client. Mine always used to make this joke about you want to go to Europe on holiday but you need to get all your work done. The US I think. Yeah. Until Europe overcomes a lot of these regulatory energy issues, going to be tough. Right. Plus like the Chinese exports just everywhere in Europe. Right. You don't have to travel very far to see Chinese electric vehicles. I think potentially Chinese aircon I think is a theme that might be coming to Europe. So I think that that's what's pretty limiting for European assets. So yeah, we still generally like the Americas still ultimately.
- [47:28]
A
And what about India, Taiwan, Korea, other.
- [47:32]
B
So I think India sold off a lot that I know people are starting looking. I personally pretty skeptical of India as an allocation just because one valuation is not obviously cheap. But fundamentally, again with that sovereignty lens, I think India is caught between China and the US and it's going to get hit with the stick by both, whereas Latam is going to be the carrot. Right. So I think India's, I don't think the US Wants to allow India's rise because they don't want to make the same mistake they did with China. So I don't think the US Is going to be very supportive of any Indian initiatives. India wants to do manufacturing. I don't think US is going to support any of that. At least the Trump administration has not been equally obviously for China, India gaining a footholding, manufacturing, any of these things, a direct threat. Right. So yes, maybe China, India has some cooperation on doing like a Brics currency things as a margin. But I think India is actually caught between China and the US because it could be enough of a threat if left alone. And I think that's going to be real limitation. Sure. There's obviously a lot of real growth on the ground. Right. Maybe some of the banks, but I, I just think that that's, that's a pretty big headwind. Whereas for Latin America, like both, China doesn't want to give up, the US Needs to dominate it and they're doing it with, with carrots.
- [48:47]
A
But Indian growth is so high and corporate profitability is growing so much like it's like China, but it has capitalism and companies are allowed to make money.
- [48:55]
B
Yeah. Like, you know, I think it certainly sold off a lot. I'm just letting you know that my overarching thing is I really don't like India's geopolitical setup. Right. I think it's extremely vulnerable there. And also, you know, it has one of the biggest weights for food in terms of its inflation basket. Right. We obviously live in a world with El Nino, a lot of disruption. So that's going to limit the RBI's ability to, to loosen policy. So I don't think the policy outlook India looks particularly good. Right. Real rates and these things will be held up. Sure. Of course there's a lot of growth. Yeah. Obviously if you can get some exposure, it's okay. I just think it's something that I will point the kind of. Yeah, it feels too hard. And if there's truly going to be money rotating away from Korea, then I will pick China over India. And then you've seen that this month does the lack of money truly go to India or is it just go to China? So it's like either AI keeps going, the money stays and goes back into Korea, Taiwan. But so far the evidence of this month when it comes out, it's going to China.
- [49:58]
A
What about Japan?
- [49:59]
B
Yeah, so I think there's some interesting plays. So like, you know, companies like Nintendo and these I've looked at a lot like, so I've been thinking about, are there companies that have been hurt by the memory AI components, but that irreplaceable have irreplaceable assets and moats, right? So some of those are kind of interesting. But ideally I would like the Japanese government, boj to resolve that currency issue. So today is obviously the first big one, right? Like Japan's macro situation is just so ridiculously untenable that it's just a joke, right? Like Tokyo real estate price are growing double digits, right? There's just like inflation everywhere. You know, Shanto wage rounds like 5% plus three years in a row, just like ridiculous amounts of inflation everywhere in Japan. And yet obviously BoJ hasn't done anything and yet Tak has been going like full fiscal, right? So no wonder your currency is weak and yet you're trying to intervene. So guess what? That doesn't work. It's the impossible trinity. The only way that works is you get your buddy, you know, Basset at the treasury and the Fed to come help you, to give you some credibility, right? And that will be a Plaza Court type thing. So I think there's a non zero risk of that happening. So I would like that shock to happen and then I think Japan, the macro situation will resolve and then it'll be more interesting.
- [51:19]
A
So I'm looking at headline Japanese inflation is still low like 1.7%. But you're saying that on the ground it's a lot higher.
- [51:27]
B
Yeah, well like if you look, they've been like they have core, core, core, right? Like you strip out food and energy and then you stripped out these institutional factors. And by the way, we're at the turning point for the base effects from the yen depreciation. So all the previous depreciation kicks in now as well. So from here, even mechanically it will go up, but it's just more across the board. The real inflation is what's on the ground. Wages going up, real estate price is going up a lot. Yet people are struggling with cost of living. And so the way you're supposed to resolve all this is you need to get a handle on fx, right? You need to stop the depreciation. You're supposed to do that because Japanese pension funds and real money supposed to repatriate and buy back fund, right? And bring money back home to buy JGBs, right? At some point JGB yields rise enough, you're supposed to want to buy it. But these guys, it's like a generation that's seeing Japan depreciate and turn around. Right. You need something major to shift them out of that mindset. Otherwise I don't think it's that easy to just flip around.
- [52:25]
A
Right.
- [52:25]
B
Again, why would they turn around? They, they can just keep buying agency debt. Right. By high yield in the U.S. right. There's alternative. So it's going to take a lot to flip.
- [52:34]
A
That is U.S. debt, U.S. treasury yields, let's say the U.S. 10 year yield, is that attractive to buy to a Japanese investor. Now relative to the Japanese 10 year, if you take into account hedging costs. Is it Japanese? It's not.
- [52:47]
B
Yeah, it's not. Yeah. In theory. Well that's, that's the argument all the macro guys been making for ages. Right. So. Oh yeah, FX adjusted JGBs give you like 200 basis points over. So why wouldn't you repatriate? But I'm just saying that the reality on the ground is you can see the numbers, right? They report pension fund buying and selling. Nobody wants to do that because you can get extra spread elsewhere. That's what I was saying. You can buy agency, you can buy credit, you can invest in US credit funds, you invest in US private credit. Right. You don't have to go to Treasuries when you do this.
- [53:16]
A
Yeah. There's a reason that when Howard Marks is interviewed, he's often in Japan. He's raising money.
- [53:20]
B
Yeah. But it's because the Japanese, they have a generation of institutional memory of like the yen only gets weaker because our policymakers can't get a hold on this. So I think you need to shock them out of that. You've done the first shock, right. You've broken the deflation mindset. That's clear. The next piece is you need to shock them out of the fact. Okay, we're going to have like real monetary policy. I think if we do that, then suddenly I think it works. But again, this is where the, I think the Takaychi fiscal makes it really complicated. Right. Because interest expense is a big deal. It's the same thing ultimately that I think Walsh is tied to in the US if you hike and you issue a lot of debt, it's going to mechanically force up interest expenses. And clearly that's limiting the boj.
- [54:03]
A
People say that a lot. Tian. When I first entered the business in 2019, people would say no one can ever raise rates because there's so much debt. But you know, here we are, six Seven years later and rates are higher and yes, the overnight rate for Japan is only 1% but you know, the 30 year yield is, is very, very high and you know, the sun still rises, you know, in the east, like isn't like it's not impossible for, for rates to go up with the amount of high debt we have. And theoretically you should say it actually could be justified because if there's more debt, there's a greater supply of debt.
- [54:39]
B
Well, it's about avoiding the supposed doom loop. Right. So obviously if you can walk it up whilst you can have economic fundamentals to justify it so that ultimately like people still want to buy your debt, that's fine. Right. I think the concern is more. Do you want to do. The concern is more like if you're looking to like massively boost your fiscal and then you hike into it and people are very focused on interest expenses, then basically like you know, your central bank has to step in and buy up. Right. So yes, you can technically hike, but it's kind of self defeating because if you hike and then you, you then need to do QE afterwards, it kind of defeats it. And I think that's more the point. Right. And obviously on the US case specifically, obviously they've been trying to reduce the duration of issuance. So obviously the more you crowd is the front, the more sensitive you get. So yeah, I think ultimately I don't believe in the whole bond vigilante. They're going to lose control. Right. Policymakers have lots of things they can force onto the bond market to control it, but you probably don't want to get to that point of genuinely explicit yoke of control, all these things. Right. You don't really want to get to that point line. So I think that's more what we're dealing with here.
- [55:47]
A
Do you say bond vigilantes? The US 30 year yield is now at the highest level since 2007, maybe 2006. What do you think happens to long end rates, the treasury bond market?
- [56:01]
B
I think until Japan resolves that issue generally there'll be upward bias for yields everywhere because Japan's kind of like I think the lead indicator that they have the most broken fiscal versus monetary policy set up and flow setup. If you get some signs that stabilizes that will allow the rest to, to stabilize. That's kind of more my mental model. So I don't see as a massive issue on the U.S. or commentary on the U.S. it's more the Japanese are letting their Y go and yeah, they're trying to intervene. The FX Market, most likely they have to sell US assets if they truly intervening. So I think it's more if Japan basically just hikes rates a lot, it will take the pressure off and resolve it otherwise. Obviously the reason we're talking today is because the market is obviously trying to test Walsh. Right. Because he didn't hike and he came across probably a little bit smug on the, in the press conference. Right. So I think that might be why the markets are pushing a little bit. But ultimately I think by the time we get to September, the data will probably give him, give them some excuse not to do it. Right. Like I say, U.S. housing, U.S. labor market, U.S. small businesses, the data is all fairly muted and sideways. So I don't think it's that obvious. He has to be forced to hike.
- [57:15]
A
The only thing that forces him to hike would be him basically trashing the Fed before for not hiking. And he's always said the Fed is too dovish, the Fed is too dovish and now it's his job and he's not hiking. It's like how are you going to fight inflation if you don't raise interest rates?
- [57:29]
B
Obviously I know where the market is pricing. Obviously a lot of the hawkish has been taken out right overnight a little bit on the front end. But the way I thought about it was I think he's doing something extremely important for basically the future of, of of markets in general, which is you need to reform the Fed full stop. Right. The basic concept is money markets have stopped functioning as a signal because money markets became just whatever the Fed said and got priced. So restoring the functioning of money markets, right, removing the excess reserve regime, right. Allowing the market to actually do its job and provide a signal, I think that is so existentially important to restore credibility to market. It's way more important than 25 bips or here or there. So I think the nature of who he's picked for these task forces and ultimately I view as him, you know, obviously Bassin, they all work for Dr. Miller. Driller is on record the complex, right. They've all expressed some concern with the post JFC fiscal monetary policy mix. So I think if they truly can work together and resolve these longer term issues, restore market functioning, that's way bigger win than are you going to do 25 BIPs here or there. But that means they need time. That's where the political capital should be spent. Rather than hiking now, hiking again in September. Why would you do that? To risk pissing off the President ahead of the midterm when you know he doesn't want you to hike hike rates. So I guess that's more the lens in which I've been looking at it which is why I've generally been skeptical of hikes. But yeah, we'll see. Right.
- [59:01]
A
What do you think of the metals?
- [59:02]
B
I think it's not clear what the catalyst for gold to rally is. I think gold's found on the floor, it's just going to be sideways. From here the gold miner valuations look pretty reasonable but we're going to need central banks to start cutting for gold to really take off. So until we get there it's probably fine. I do think gold plays a portfolio role as your stack flation in terms of multi asset portfolio. Right. Like I still prefer having some gold instead of nominal bonds. So you have some tips, some gold as your offset against your equity risk. I think that makes sense. The rest of the metals. Yeah I think we, we I would say you know bullish right. Want exposure especially as I say in this there's going to be more geopolitical shocks so having upside exposure won't make a difference.
- [59:45]
A
Yeah, it is interesting. I'm just looking like I think the gold near, close to the gold's top was when Kevin Warsh was nominated by Trump and I. You could say that's gold pricing in a more hawkish Fed but if the hawkishness is basically fake and he's not going to be that, that, that hawkish maybe that yeah maybe gold stops going down as you said.
- [60:08]
B
I also think that's probably oh I just think goals moving January and February is nothing to do with fundamentals at all. It's just the end of a meme like trading where every again everybody, every retail, every you know like my cousin, like people's cousin, you know sister day trading at home. Right. People got in and got out. I just think it's similar to like I think the, the semi move in May and June and July. Right. People got in, got, got long and got levered and got destroyed on the way down. Right. So signal is probably like where it was before like the end of December, end of 25 was probably more like gold getting to a level that's reasonable. Yeah which is why it's like the 4000 seems okay right.
- [60:45]
A
Tell us about VPX your variant perception cycleware US Equity ETF.
- [60:50]
B
Yeah so this is a long only systematic strategy that's designed to be an alternative to your S P allocation. So we created the product because for our super long term money we just want to be long US EQUITIES Right. But looking at S and P we're a bit nervous about it's obviously 10 names are like half the index is obviously everything is on AI and we wanted something a bit more active that can rebalance. And using an ETF vehicle is very good because you can do a lot of frequent rebalancing in a tax efficient manner. So we launched it in March. It utilizes our macro capital cycle quality crowding models and you know, touchwood. But so far I think performance has been very, very good in terms of upside capture to downside capture. So this is more for long term. If you have some S and P, you're nervous, you can sell a bit of that and replace it with this. That's the short version. But essentially it's just large cap US equity allocation rotating between sectors and picking stocks.
- [61:45]
A
And what's the process for picking those stocks and sectors?
- [61:48]
B
So everything is systematic. So this is the combines every model we've built in the history of VP that we've used out of sample that has survived to now. So it starts off using basically our capital cycle models to drive sector tilts and then once you have the sector tilts you will then look at quality and crowding to essentially pick the stocks. And then after that there's a macro and LPP overlay to manage risks around it. Everything is combining to essentially a forecast return. So the difference between this and every other quant strategy I'm aware of is we, we take all our factors but try and turn it into a forecast return so that when we rebalance we're trying to maximize forecast return in the portfolio for the given amount of risk we expect. And I think it's subtly different from just ranking based on valuation like a value factor or quality factor. So yeah, so I think obviously there's not been that much high record since March, but it's so far I think it's shown that we've survived the kind of factor meltdown that's really hurt QU funds this year very well. Right.
- [62:50]
A
Yeah, you've definitely drastically outperformed the S and P since launch. So congratulations. To what, to what do you attribute that in terms of more energy exposure, less software exposure? What would you say are the biggest drivers of that outperformance just in terms of kind of factor attribution?
- [63:05]
B
So I think it's been more factor timing. So we've had pretty big because the market's been so volatile, there's been very significant factor and sector exposure. So we were like mega long everything in tech in April and May, but then at the end of May actually sold down a lot of the tech. Right. And put into energy. Right. So that was basically, I would say sector wise, the biggest shift. But if you look at the factor attribution, we started off with a very big growth, even sector neutral, pretty big growth bias, but then flipped to a pretty big value bias from May as well. So there's definitely an element of timing with the factors. But I think the reason you have factor timing is those things are not stable anymore and we're in the environment, there's constantly going to be more shocks. I think all you can do with your portfolio is when there's volume, try and rebalance to optimize for expected returns. So the attribution is almost slightly misleading in a way because I don't think factors are stable. There's basically. There's an AI factor or not. Right. That's basically like almost the only factor in the market.
- [64:01]
A
Yes. Like the value people who are permeables on value which I'm not hating on at all but like they, that the values outperformed. And the reason is, is because like micron was 18%, you know, so. Yeah.
- [64:12]
B
And the industry balances and now the, you know, the IWD or whatever is like what Apple, Microsoft. Right. And index now. Yeah.
- [64:20]
A
Wait, what's IWD?
- [64:22]
B
Oh, the Russell 1000 Value ETF.
- [64:24]
A
Okay, okay, gotcha.
- [64:27]
B
I think it's like IWD, IWF, whichever way around, like one's growth, one's value. So that's pretty important to be aware of. That was a very big Russell reclassification end of June, I think. Yeah. So it's not the traditional value you think. It's got a lot of mega cap tech into value now. So I think we prefer our value more in the energy financials piece rather than just outright in the tech space.
- [64:52]
A
But tm, we will leave it there. People can find you on X at variant perception. Tell us about your website and where can people find out more about the ETF stuff?
- [65:01]
B
Like I say, varception.com we think of ourselves as combining macro quant with bottom of equities. Obviously, you know, I've been, you know, lucky enough doing a show multiple times, so hopefully the audience kind of knows. But yeah, I think the ETFs our attempt to try and show it's not just research we're writing. Right. We're trying to prove over time that we can generate our performance as well.