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- [00:00]
A
Welcome back to the Rundown interview edition. Today we are talking to John Petrides, Portfolio manager at Tocqueville Asset Management. This is John's second time on the show and he's joining us at a wild time for the markets with earnings season in full gear plus some macro stuff popping back into the picture like higher oil prices and bond yield surging. So in today's conversation we get into it all with John, his thoughts on the Capex boom and the tech sell off if the market is underpricing the geopolitical risk and and what he thinks the Fed might do with interest rates next week. And into the latter half of the year this was a fun and free flowing conversation. I think you guys are going to love it. So let's get into it. All right guys, today we are joined again by John Petrides, Portfolio manager at Tocqueville Asset Management. John, welcome back to the Rundown.
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B
Thanks for having me on again.
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A
I'm so excited to talk to you today. There's so much happening in the markets right now. You're coming, you're joining us at a really good time because, because we're starting earnings season right now but there's also like this emergence of geopolitical risk and other macro factors. So I want to start there. You know, earnings season just kicked off, numbers have been pretty good so far but now we're seeing oil prices come back up, tariffs are in the headlines again. What do you make of the macro backdrop before we dive into some of the earnings stuff?
- [01:19]
B
Yeah, it's a great question and I think what you're seeing is investors have been emphasizing the AI capex spend particularly of the MAG 7 more than they have the resurgence of conflict in Iran and really just brushing aside the fact that interest rates on the 10 year have back up above 4.6%. So if you remember in 2022 when the stock market sold off aggressively, everyone was pointing at the rising interest rates. Right. And now it's kind of being shrugged off. So it's fascinating to see where the narrative is really emphasized these days.
- [02:04]
A
Yeah, like the bond market yields are rising, oil prices are rising, but the stock market, I mean I know that tech, tech's kind of been suppressed a little bit but like what? We're 2, maybe 3% away from all time highs in the S and P. It's just I'm so confused on what to make of everything right now.
- [02:19]
B
Yeah, no, you hit the nail on the head. Confusion is a good word because you know, if you're a trader wow. It's been a rough past five or six weeks because presumably, or actually probably last three months. I mean look what happened within the entire tech stack, particularly semiconductors and hardware related stocks in April and May, right? We saw this massive step function higher and you saw a sell off of everything not nailed to the ground to buy anything hardware, AI, tech related. Right. And then basically you could point a finger at once. We saw a peak of token, maxing of tokens being used. Right? You saw a massive sell off in tech and as we know, and that was around June 12, June 15. You've had some headlines in there, you've had some other notable items pop up that have sort of added to the volatility. And as we all know, we've been talking about it for a long time. You know the global financial market, not just the US is really focused on tech and AI spending.
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A
Well, let's talk about some of the tech and AI spending. The big headline this week was Google dropped their earnings report. I mean I thought it was a blowout quarter, right? I mean the top line, bottom line, their cloud growth up 82%. Thanks a lot, A lot. Large part to all their AI investment, yet the stock sold off big time. And I think most people are pointing to the fact that Google's cash flow came in negative last quarter for the first time ever and then they actually increased their CapEx guidance to over $200 billion. And I, I just, what I don't understand though is that like I would have thought that Google showing the massive growth in their cloud business would maybe, you know, give investors some calm but even that wasn't good enough for investors. I guess nothing is going to justify all this capex spend. How do you make of all that?
- [04:16]
B
Yeah, you know, so we own shares of Google for our clients. I own shares of Google personally I think Google is a fantastic company. I think you're getting to the point where it's what narrative do you want to focus on? And we are really in a, an arm wrestling match between momentum tech investors and value non momentum tech investors. And it really is where, and Google is probably a great representation of that, where do you want to be? What narrative are you focusing on? I agree, particularly the cloud number was extraordinary. But if you're getting frustrated or those investors that are getting frustrated on the true lack of return on invested capital, the true lack of where is all this spending headed? And you see negative free cash flow by the way, for a, for, for a company that you're in growing the cloud business that much which is such high margin where all the cash falls to the bottom line and you're negative. You know, investors may force the management team to start cutting back down on expenses. You know, it kind of reminds me of REM, the fall of 2022, where, you know, Mark Zuckerberg and Meta shares that we also are. A company that we also own shares in, was pounding the table on Metaverse, right? Like efficiency quarters, year of efficiency. Right. And, and the stock went down all the way to about $80 a share. And then he came back in 2023 and said, Year of efficiency we're going to cost. You know, I'm not portending that the Mag 7 is going to sell off that much, but if investors get frustrated, they'll speak with their fingers and hit the sell button and say, you know, we're going to force you into submission to either put up or shut up here in terms of spending this money. Because right now, to us, one narrative, I'm not saying me specifically, but to one side of the narrative, is that you're really just flushing investor capital down, down a toilet.
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A
Well, that's what's confusing to me is like, what is it going to take for, for them to get the investors back on their side again? I can understand on one case like Meta, if Meta was to do this and they can't really point to anything, any increase in revenue, or with Tesla, they increase their capex numbers and they're pointing to future growth of Robo Taxis and Optimus, that is kind of harder to justify to investors. But if Google can be like, hey, look, our cloud numbers are going up like crazy and investors are still not on their side. That's what caught my attention. And that actually brings me to my next question, is that now we're going to have earnings from Microsoft, Amazon and Meta next week. These companies are expected to, you know, report massive capex numbers. Do you think that they might change their mind a little bit after seeing the reaction from the markets on Google, or is it just going to be full steam ahead?
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B
Yeah, well, well, the numbers are going to be the numbers, right? I mean, and, and, and, and each company is going to be specific to what they're doing. Maybe on the transcript, on the conference call, maybe they, maybe they'll pivot the narrative a little bit more. Maybe they'll try to find more, you know, more, more of a storyline to draw people's attention. I mean, if you listen to the Google number, if you listen to the Google call, I mean, some of the things that they're Incorporating Gemini into maybe into YouTube or in other places. Wow. If you're a competitor against Google in some of those spaces, I'd be really nervous. So maybe it's not just totally about sometimes when you play chess, it's not always about, you know, being aggressive. It's about being defensive and waiting and playing defense to be better at offense. Right. So if you're a competitor and you don't have the resources that Google has with potential ability to add efficiency or to add productivity, you may be concerned as to what some of the things they're doing.
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A
Do you think that for the second half of the year, do you think the story turns around? Because like I said, the Mag 7 has been a big lag compared to the rest of the market. You know, we're seeing this rotation out of tech and into other areas. We saw it from the max 7 to some of the chip stocks and socks at a massive second massive Q2 and now we're seeing it going into other sectors. Healthcare, financials. Do you see that rotation continuing or how do you seeing it playing out?
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B
It's a good question. I think from a portfolio positioning standpoint for our clients, you know, we have been underweight technology for quite some time and tech plus the Mag 7 within the S&P 500 is something like 55% of the entire stock market. So we definitely think that we had been and continue to be positioned more horizontally. You know, focus back on diversification, look for value in either the financial sector or healthcare sector. We know the AI trade and the AI investment is broad. So you know, there are, you know, spending by the mag 7 or the hyperscalers on the capex touches so many other companies which is what makes the whole narrative here quite scary because the moment that they pull the horns in, they, you know, does that sort of filter throughout the utility sector and all these other places. So my point behind that is, you know, there are so many variables just to think out over the next six months, you know, if there is a pullback in the rate of change in the growth of dollars for CapEx, the conflict in the Middle east is complicated and it does not look like that is going to get resolved anytime soon.
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A
Do you know the markets are underpricing that that risk?
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B
Yeah, well I, I do at this point in time now the markets are taking are not. If this was 20 years ago, okay, the impact of the, in my opinion, the impact of this conflict in the Middle east, this war would have really done a number on the market. The reason why it isn't I think is because the US Is flush with oil and natural gas. You know, the US Strategic reserves are at the lowest point it's been in quite some time. So. But, you know, and so far the consumer has been able to take the punch in the gut, generally speaking. But you're going to be rolling off the tax refund from the one big beautiful bill. You know, oil is back up, gas prices are back up. Your job gains haven't been great, they've been okay. And positive gains are better than no gains. But if the rate of change slows on the number of jobs added, you could see incremental pressure on the consumer. So, and then interest rates don't help anything. And you have a new Fed governor, that Fed chairman of. The chairperson of the Fed, who does not believe in quantitative easing. Right. You know, one of his major policies to try to reduce the assets on the balance sheet, which removes liquidity from the system, which does not help the overall financial market. So it's tricky. The next, you know, thinking out the back half of the year for sure.
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A
Well, just even looking at next week, right. Let's talk more about the Fed. Kevin Warsh and the Fed had their Fed meeting next week. And I mean, over like the last week or so, the markets are pricing in like a 40% chance now of a rate hike. It's kind of crazy how, like, the narratives are turned. Earlier this year we were thinking about a potential rate cut. Right now we're looking at one or multiple rate hikes for the latter half of the year. What, what I don't understand though is that obviously with oil prices going back up, that's going to add inflation pressures. But I mean, it's a supply side thing. Kevin Ward's going to keep hiking rates, but that's not going to lead to a ceasefire. So, like what, what do you think the Fed, like, the Fed's in a tough spot here. What are they going to do? Like, what can they possibly do? Do they just focus on the job numbers? Like, how do you see it playing out?
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B
Yeah, no, it's a great question. And if you look at interest rates and the yield curve, right, where Treasuries are either one to two years, you know, three to seven years, you know, seven years out. Right. Three points of the curve. You're right. The front end of the curve is really getting pressured because of higher oil prices and fears of inflation shock from the war. The middle part of the curve, think three to seven years. Treasuries have not performed well. You know why? Because the hyperscalers have been issuing so much debt and up until, I don't know, the last two weeks or so, investors have been more willing to, to buy Google's debt, Amazon's debt, Microsoft's debt, then they have the U.S. treasury. Right. So the yield on the middle part of the curve on treasury notes has actually gone higher. And then you look longer dated 10 year, 20 year, 30 year on US treasuries. Investors are just fearful of the fiscal situation and the debt that the US has on its balance sheet just doesn't think it's sustainable. So if the Fed were to cut interest rates, which is clearly off the cards right now. Right. That only impacts the front end of the curve. If the Fed really wants to bring down interest rates on the long end of the curve, well, it's taking money out of the balance sheet out of the, it would be, it would be reducing liquidity into the market. So from the market, so it has, the Fed's in a tough spot, there's no question about that. And it's going to be very interesting to see how they act. But again, the narrative is, or the expectations is for at least one, you know, quarter of 1 percentage point, 25 basis point rate hike coming sooner rather than later.
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A
Yeah. What I've shared with my audience, I don't, I never thought that the Fed was actually going to move forward with a rate hike. I still don't think that. But I mean, obviously the market does. I mean, are you, are you open to share your opinion? Do you think the Fed will ultimately hike at some point this year?
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B
Yeah, it's a great question. If they do, would be the December meeting.
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A
Okay.
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B
Not in the September meeting? I'd be very surprised given, you know, the midterm elections are in November. In November. Right. And the Republicans are facing an uphill battle and it's going to be a referendum on President Trump and you know, presumably, or the expectations are the Republicans are going to lose a handful of seats throughout Congress on both Senate and House. So, you know, increasing rates in the face of the election is probably not going to happen, especially given that, you know, I can't imagine, you know, this is, this is, this is Trump's guy. And, and I just, I just can't imagine that would, they would do that. They would just wait and you're really not going to help the Republican Party much if you raise interest rates into the face of elections. So if you do a quarter of 1%, I would assume it would be the December meeting, which is usually the third Week of the month or something along those lines. But we'll find out more. You know, we're a month from today is the, the annual Jackson Hole off site meeting that the Fed usually has. So you know, Chairman Warsh has come up with these task forces to handle a handful of different issues. So I would assume in the September meeting we'll get more commentary and visibility on, on direction.
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A
I'm curious, have you been to the Jackson Hole meeting before?
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B
Never been to the Jackson.
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A
That's the same here. One day I would like to go to. Maybe we can record a podcast there in the next couple years. Okay, that's, that's a very good insight. You know, you make a good point about the, how the election plays into this and, and when we could potentially see a rate hike. But just zooming out though, just big picture as we enter into the second half of the year, is there, is there a story or a risk that you think the market isn't paying attention to? Whether it's one of these hyperscalers blinking and cutting capex, whether this earnings report or the next one or anything in the background that you don't think anyone's paying attention to that, that, that you think we should be paying attention to?
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B
Yeah, that is a good question. The cons, you know, trying to judge the strength of the consumer has been really tricky. And my fear is the back half of the year, the knees of the consumer start to buckle. You've had basically three catalysts help the first seven months of this year. The first one is their tax refund from the one big beautiful bill, right. That is being spent right now in some of the ways, very healthy manner because debt that the consumer has taken on is at relatively lower levels. Right. So it's not just about, you know, spending on consumption. So but that's going to roll off the. There is a shot in the arm from the World cup, there's no question about that. Right. That has been a shot in the arm that will not be here. You know, that rolls off, you kind of roll off the, you know, the July 4th, you know, 250th anniversary of the US and you wake up to what now? You wake up to higher interest rates, higher gas prices. You know, you don't have those sort of quick fix, quick hit stimulus. So. And the world has basically just given said, wow, I'm surprised. The consumer has been relatively strong. So I think that's kind of been pushed to the wayside as a given that the consumer is just going to continue to muddle and continue to power on through this. And if there's one thing that I don't think investors are paying enough attention to is what if the knees buckle on the consumer? Right. So you get, you know, the bear case and I'm not advocating that this is going to happen. But the worst case scenario is that the rate of change on spending on AI Capex slows dramatically which has a ripple effect through the economy and through the stock market. The consumer retrenches and you have these one time effects roll off, oil prices stay higher, if not elevate more. The situation in Iran really turns into a quagmire and the Fed then has to raise interest rates not one time but maybe two times before year end instead of doing a 25 basis point or a quarter of 1% December maybe they do half of 1% or 50 basis points. Right. So that to me would be a really bad scenario. And you're going to put all those together. You know, the market has been pulling a thread of each individual narrative. But what happens if they all happen at the same time?
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A
That's a great point and I think you're right. No one's really paying attention to the consumer, the consumer health. Everyone just assumes we're going to keep spending. And I think to add to that, what I would say is that the labor market probably plays a huge role there. I think as long as the labor market has held up like it has and people have jobs, they feel like they can get another job, they're just going to keep spending. But if that sentiment starts to change, you know, we saw a little bit of a softness in the jobs report this summer. If we continue to see more data like that, then it could potentially add to that narrative of like the consumers can the consumer hold up and then if the consumer can't hold up, yeah, all the cascading effects there. That's a very good point.
- [19:46]
B
You know, Z one thing too that's, that's, that's still working its way through the economy and we're in year really year three of it, two and a half year three of it in earnest has, was the Biden administration infrastructure stimulus package. I mean they threw up like $2 trillion into this thing into 2021, 22 with a multi year period. So I think you know that's, that's going to tail off at some point in time you're not going to have that fiscal stimulus. And you know, when I look at industrials and certain companies, of course the AI narrative, the hyperscaler Capex you know, this insatiable demand to build that out is a story. But you know, my concern is, you know, what if a lot of being baked into this is infrastructure spending from the government from the past administration that at some point is going to roll off and then, you know, your, your, your, your year over year comparisons become really, really tricky because you've just pulled a major Jenga piece out of the Tower. So that's another thing too that I'm still, you know, looking for and there's some sell side that do some good research note on it and some macro stuff of, of how far along are we in that infrastructure spending and what happens when that's no longer there.
- [21:05]
A
That's a, that's an excellent point. We get, we, we definitely got to keep a, keep an eye on that. You know, it's just so funny to see how like fast the narratives change. Like the last time you were on, we were all, we were talking about like gold and bitcoin. That was like the hot topics, right? And now no one's talking about gold and bitcoin and now everyone's talking about, you know, AI CapEx and all that stuff. So just crazy to see how fast things change. John, I really appreciate you coming on today. We'll have to have you on next quarter and we can kind go through some of the talking points that we just did.
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B
Yeah, thanks for having me on. Great conversation. I really appreciate it.
- [21:35]
A
Thank you so much. Well, all right guys, hope you enjoyed that conversation with John Petrides. You know, it was great to hear his perspective on the markets. I also loved how he explained how the middle of the yield curve was being impacted by tech companies borrowing money. I like getting into the details like that sometimes. Let me know what you guys thought about today's conversation and how you feel about the markets in general. Drop your comments on Spotify and YouTube and while you're at it, consider giving us a five star rating or thumbs up as well. You know, all that engagement really does help us out and it helps other people find the show. Thank you guys again for listening, watching and commenting. Shout out to Mike for all the work behind the scenes and we'll see you guys back here tomorrow.
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B
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C
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B
And breathe.
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C
Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste.
- [22:44]
A
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- [22:48]
B
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- [22:50]
D
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