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At PGM, our global perspective today unlocks investment opportunities. Tomorrow. Our 1400 investment professionals provide global expertise and local insights to help you navigate the complexities of a changing world. We offer a diverse range of active strategies across public and private markets to help you identify opportunities and achieve your long term goals. Pjum our investments shape tomorrow today.
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Pushkin.
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We've had quite the vibe shift in markets over the past few weeks. From la la la, everything is awesome to this is nuts. When's the crash? Riding to the rescue is Chip's mega monster Nvidia, which put out yet another set of crackerjack earnings earlier this week. Today on the show we're asking, has Nvidia just saved us from a massive market crash? This is Unhedged, the markets and finance podcast from the Financial Times. I'm Pushkin. I'm Katie Martin, a markets columnist at FTHQ in an increasingly wintery London. And I'm joined down the line from New York City by the big man, Rob Armstrong, off of the Unhedged newsletter. Rob, listeners can now see our little faces in, in the podcast box, can't they?
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B
And there's been an alarming, if predictable number of correspondents have written to say, I expected Rob to be much better looking. And I've replied to all of them. So did I.
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C
Yeah, my friend Al texted me at the weekend saying that he was under the impression that you look like Jon Hamm.
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B
That's what I thought too, until I saw that photograph. Whose chin is that? God.
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The voice of George Clooney, ladies and gentlemen, the face of Rob Armstrong. Now let's get down to business. Right, so markets have been looking pretty wobbly. Everyone's been getting pretty nervous. Bitcoin down 28% from the peak. You know, all that stuff. And then, boom, along comes Nvidia, world's biggest, most gigantic, most ginormous chips company in the States. And it put out incredible earnings. Like it's just making insane amounts of money. And that has kind of lifted the mood again. It's made everyone think, oh, maybe the AI trade is still on. Let's just carry on as we were. Rob, what do you reckon to that? Has Nvidia just like soothed all the ills of the world here?
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B
It just ain't that simple. This is actually quite a complicated situation. There is something a bit paradoxical going on here, Katie, which is like Nvidia comes out with once again incredibly strong numbers. Their revenues grow 60% or whatever it was, and it's $500 billion in revenue a quarter and they can't make their products fast enough and et cetera, et cetera. And everyone says, see, all that bubble talk was crazy.
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Exactly. Exactly. And that was pretty much exactly what Chief Executive Jensen Wang said to analysts.
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He said, people are talking AI bubble. I don't know what they're talking about. I'm selling tons of this stuff.
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Yeah. I'm worth a trillion dollars. It's like, yeah. Are you helping here, Jensen, or. No, I'm not sure.
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B
I mean, people always, I think, misspeak when they say things like Nvidia is overval. The worry is not Nvidia's price to earnings ratio or anything like that. The worry is that the revenue that it's earning and the growth rate of that revenue is ultimately unsustainable. At the current growth rate and level of revenue, Nvidia's valuation makes perfect sense. Right. The question is whether the revenues are going to keep going like this. So the headlines should have read this morning, there still might be an AI bubble, but it's not popped yet, right? Something like that.
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Well, like you, I spend a disproportionate amount of my life speaking to fund managers, people who manage other people's money for a living. They all say something along the lines of, look, if it walks like a duck, it quacks like a duck. You know, this thing is a bubble. Like, everyone can see there are. There's bubbly stuff going on here. There's, like, huge amounts of money all chasing this one thing. And there's some, like, crazy projects that are getting signed off, and there are just overly large numbers kicking around. And everyone can see that there's froth and exuberance here. But. And I think we may have spoken about this on the show before, you don't want to be early. You don't want to say, okay, I'm getting out of these names, or. Or I'm going to short them. Because the pain when you have that final, you know, push higher in these stocks, which could be another 10, 20%. I mean, or more guessing.
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B
Could be 50%, right? Yeah, no problem. Could be 50, right? Yeah.
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C
So you just don't want to be that person who's not in it.
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Yeah. Because if you are, you're just fired. It's as simple as that. That's what happens. You're fired.
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C
I was talking to someone the other day, and I do. If I remember who it was, I will say. And I. And I do apologize for not remembering, but they were saying, you know, someone had like a load of Nvidia stock and had, had run it from like almost nothing to where it is now and have made an absolute metric ton of money out of this one stock. And, and their financial advisor kept saying to them, you know, you really might want to like, take some of this risk off the table just in case it goes wrong. So he eventually said, okay, fine, I'll cut the size of my position by 10%. And then the stock went up another 10% or so. And he, and he was absolutely apparently furious with his financial advisor, saying, I've missed out on some of this rally.
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It's dangerous.
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And the advisor was like, no, but you still have 90% of this bet on, on like. But psychologically you get very upset by the money that you fail to make that was there right in front of you, of course. And, and you don't see the big picture.
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B
It's absolutely right. Speaking of the big picture, we got another big picture number this morning, which was a slightly old one, but nonetheless relevant and markets are responding to it, which was a U.S. jobs number, which.
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Was, remind me, Katie, 119,000.
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A big number, much bigger than expected, especially coming after the August number, which was plus or minus zero, right. Or, you know, in, in that range.
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And I'm here to tell you why that's actually bad news for your overall thesis.
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Yes, you are, you are the good news into bad news. Alchemist, Katie. You know, as alchemists turn lead into gold, you can turn news lead into lead into lead.
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But come on now, even you know this, all things equal, this makes it harder for the US Federal Reserve, right, the US Central bank to keep on cutting rates.
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True, but.
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And if you don't, if you don't get the rate cuts that, you know, is slightly problematic for some of the more fizzy bets that are out there.
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Point number one, I'll take the jobs over the cut every time. Point number two, there was something there for the pessimist too, which was the unemployment rate went up from 4.3, I believe, to 4.4. Now remember, these two numbers, the number of jobs added and the unemployment rate come from two different sources. The. What's it called? The Institution survey. It's basically the survey where they talk to businesses that gives you the jobs added taken away number. And the survey where they talk to households which gives you the unemployment rate. So there was something for the Fed should cut crowd in the unemployment rate, even if the jobs added number didn't supply that.
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Okay, yeah, yeah, yeah. It is the highest level of unemployment since 2021.
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True, but also a low level by historical standards. An economy with 4.4% unemployment is okay.
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Yes, hear.
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You hear.
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Yes.
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Okay. Can I say something funny about this? That was pointed out by Seema Shah this morning. Principal management, principal investors, principal asset management. Thanks very much. She pointed out. I'll just read from her note this morning. The report is making markets move. Equities and bonds seem to be picking the parts of the job release they like. Equities like the fact that payrolls were stronger than expected, suggesting the economy is still on firm footing while the bond market likes the rise in unemployment and slowdown in wage growth, which may keep the case for a December Fed cut just about alive. And do you know what kind of thinking picks the good stuff in one area and picks the bad stuff in the other area and doesn't look at the two of them together. That's bubble thinking, Katie. Right. Whatever happens is good news. That's bubble thinking. Right?
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Yeah.
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So the fact that the market is picking the good news wherever they can find it, that I think should make us a little nervous about where markets heads are at.
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Cherry picking is not exactly a new phenomenon in markets.
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Right.
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People always pick out little bits of economic data, corporate performance or whatever it is to bolster whatever their overall view is. And, and there's a, there's a lot of that, there's a lot of that going on at the moment. But you can nonetheless see a lot of reasons for concern. You know, again, like going back to the, the private credit thing. Investors still haven't got over that little string of failures that was related to the private credit markets a few weeks ago. People are still on high alert and thinking, you know, at what point is like the, you know, the odd fraud here and there or the odd, at what point is this a symptom of something bigger which is like crappy overly easy lending standards in a huge gold rush into private markets or there's a fine line between like esoteric risks and one offs and actually something bigger. And I don't think people have like declared you clear here.
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B
I agree with your instinct here, Katie. That sentiment among market professionals and pundits is a bit on wobbling on the razor's edge and could tip either way. Let me give you another example of that. But first let me quiz you on something. This is a quiz that is relevant to the transatlantic divide. There is a store that sells branded clothing at discounted prices and the second word in the store's name is max. What is the first word?
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It's obviously tk.
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Yes, you would say that because you're from England. Americans know this store correctly as TJ Maxx.
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I don't know why it's different. It's very old, isn't it?
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It's very weird. And in any case, this company, which is actually a very, very large, very successful company, the TJX companies, notice that they choose the J in the company's name, reported earnings this week and they had a very good earnings. And it was another example where market observers could pick out the story they wanted. You could look at the good earnings and say, look, people are still out there buying clothes. Or you could look at the earnings and say they did well because people are trading down, they're shopping at the discount place. Right. You know, Walmart reports the most important retailer in America there is, and it had good results. More people are shopping at low cost. Walmart. Is that a good sign for the economy or a bad sign for the economy? I give you this Rorschach blot to contemplate, Katie.
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Yeah, exactly. But just as a mental exercise, right? Let's, let's say this really is a bubble and it really is about to pop.
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Yeah.
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Like two questions, like how do you hedge against that and what would the pop look like? So, you know, again, I was talking to some investors this morning and they were talking about, look, we do think there's a very high risk of, you know, corrections or pullbacks in the AI trade next year. So the way we're hedging that is to invest more in China or to think not just about, you know, specifically AI stocks, but the infrastructure behind it. Right. So data centers and energy and commodities and that sort of thing. And I'm like, how is that hedging? That's just investing in a different part of the same thing. So.
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I'm like, I mean, it is very tempting and I fell into this temptation in print this week that if you own certain kinds of risk assets, when the bubble that might or might not exist pops, you will do better. So, for example, the one I've been writing about is what if you owned basically boring stocks, anti tech stocks like Staples, you know, Procter and Gamble, which makes Tide and stuff that we're going to buy even when the. Not your family, by the way, Katie, because your family makes its own dishwasher tablets. But most families, most families do not make homemade detergents on the weekend. Normal families continue buying these things in, even in a crisis.
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I'm not keen on this whole family thing. This is a Mr. Martin thing that's got nothing to do with me.
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Okay.
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The homemade dish.
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So you. Or you buy cheaper stocks, you buy the UK index instead of the US Index, or you buy the S and P equal weight index, which gives you less weight to the big tech stocks. You basically say, I'm still an equity investor, but I'm going to safer corners of the market. And if you look at bubbles in the past, that has given you some protection, but not much.
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No. I mean, the spoiler alert here is if it blows up, like, spectacularly, all of those things will get ironed out. Like, everything will get killed in the short term. Maybe they recover faster and end up being less volatile, but everything will take a hit.
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What is a bubble popping? Let me just. To hit that point again. I think it's a really important one. When a bubble pops, there's the. There's the. The primary victim is the stuff that was massively overvalued. In this case, that'll be, you know, we'll discover that Nvidia was overvalued. You know, the other AI stocks were overvalued. And of course you have to sell those. They're collapsing. But then the stuff that's still doing fine becomes a funding source. You're like, oh, my Procter and Gamble shares have held their value. Now I can sell those so I can get the cash that I need for various other problems that I have. Right. So even the stuff that's holding up good gets blown up when a bubble pops.
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So the general rule of thumb is that when there is some sort of pop in markets for like, whatever reason, like Covid or Liberation Day, crazy tariffs or whatever it is, investors don't necessarily sell what they want to sell. They sell what they can sell. Like, whatever is still.
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That's another way of making a point.
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Yeah, whatever they can sell quickly to get some. Some cash in the bank. I feel like this thing, when it pops, if it pops, might be a bit different in that the thing that's going to be liquid and easy to sell in that scenario is still Nvidia because it's so big, because it's such a big stock. I had much of it.
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Yeah.
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So I wonder whether.
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Yeah.
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Actually, if this is a bubble and if it blows up, it might actually be quite a controlled explosion because there's just, you know, the stocks that are in the middle of the. The mix here might be the ones that are punished more than your nice, boring Procter and Gamble and your.
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You know what this makes me think of is one of my favorite phrases. Is which is like the tactical nuclear weapon. Like, oh, this one, this one will only blow up half of the city, you know, like, oh, great.
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Yeah, yeah. Or like there's a, a columnist who was famous in this country who was called Victor Lewis Smith and he used to say it's like having a pissing area in a swimming pool.
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Doesn't everybody have those?
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Maybe in the pool in your, in your backyard, your, your luxury abode.
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But I will note there are exceptions to the idea that the market is a swimming pool and owning safe stocks is the pissing area. Like for example, in the Great Financial crisis.
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Yes.
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Am I getting this right? In the great Financial Crisis, if you own staple stocks, their value was stable in 0809. Right. So you didn't lose money. So, you know, there are exceptions, but they are few and far between. And so I'm not utterly convinced that we are. I mean, I think the market is overvalued and I think there is, there's AI Frost. But whether this is a massive bubble that's about to implode I'm not smart enough to determine. So I'm just going to say I'm not sure about that as a way to close the loop here on this particular.
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I'm very much in favor of just saying I don't know. But if I were to place a bet on this, I would say the likelihood of some sort of correction, not necessarily a crash, but a correction next year is very high. I mean, you wouldn't rule it out. Right.
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Ultimately, there is one hedging technique that you know is going to work in a massive correction or a financial crisis and that is increasing your allocation to cash. In fact, you can think of the whole market as just two assets, risk assets and cash. And when I say cash, I don't necessarily mean literally cash, I mean cash and sort of rolling short term bonds or certificates of deposit.
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Yeah. Or just like keep your money on deposit at a bank with a, you know, some kind of interest rate where the last thing I want anyone to do is like listen to this podcast and then head out and take all of their money out of the bank in like notes and put it under their bed. Don't do that.
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And anytime you're having a bubble in risk asset means that means you're having a bare market in, in cash. And at the. What we're talking about here is whether there's suddenly going to be a huge bull market in cash. Right. That's going to be the asset everybody wants. Right. So if you think there's going to be a huge bull market in cash, maybe hold a little bit more of it. I would never by the way, because I've made mistakes in my past, as you may know, Katie, I've made mistakes in my past and those mistakes have taught me you never want to be all the way out of the equity market. Never. It just doesn't pay. You want to keep some stock equities are the best asset they have been through history. If you have anything like a long time horizon, you want to own some of those things. Expense markets and famously, you know, market whatever.
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If you miss the big updates that come when the tide turns and it gets more positive again, then you lose a lot of money relative to what you could have done. So that's the thing. Even if you know or think you know that we're at the top, you're very unlikely to also be be able to predict the bottom and get back in again at the right time.
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But if you're a 5%, if you're a 5% cash position woman, maybe it's time to be a 10% cash position woman. Right. Like I'm a kind of a 10:15 guy and I'm, I've been edging up in my, you know, my own modest savings. I've been edging up a little bit in terms of cash. Did it too early. Oh well, I'm sleeping like a baby these days.
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Sleep. All that beauty sleep that you need.
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Rob, it's not working at all. It's ugliness sleep in my case.
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Let's not be too harsh on ourselves there. Yes, your, your face aside. Let's, let's, let's close this loop here and conclude to listeners that we don't know and we are willing to own the fact that we don't know but that we do think that there might be something going on. That sounds like solid advice. We will be back in just one second with Long.
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At Pjum Our global perspective today unlocks investment opportunities tomorrow. Our 1400 investment professionals provide global expertise and local insights to help you navigate the complexities of a changing world. We offer a diverse range of active strategies across public and private markets to help you identify, identify opportunities and achieve your long term goals. PJUM our investments shape tomorrow today.
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Okie doke. It's time for Long Short. That part of the show where we go long a thing we love or short a thing we hate. Rob, what are you saying?
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Katie, I am long the stimulus check. Ah yes, the stimulus check you may remember as the thing that brought Americans 9% inflation when they thought that was a thing of the past. But President Trump has renamed it the Tariff Dividend and has tossed around the idea of sending $2,000 to everybody in America who makes less than $100,000 a year. Various other senators of both persuasions, Republican and Democrat, have pooh poohed this idea. I am here to tell you that if things start to go sideways, Congress and the White House is gonna fall back in love with the stimulus check. Yeah, just you wait. Do not count the stimmy out. What do you have, Katie?
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I am long. If you're looking for a red flag to tell you that markets are overly exuberant and stupid stuff is going on, I'm here to bring you the news that a company called Luxus is debuting an investment fund for luxury handbags. That's it. That's the story. It's going to focus on Hermes and Hermes, Birkin and Kelly handbags. Meaning I don't know what they are.
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The fund gets your money, buys these handbags and then they appreciate and they. Then they sell the bags and give you the cash. Or maybe the technicalities aren't important. All you really need to know is handbags as investment.
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That's it. That's the story. That's all you need to know. This is nuts. When's the crash? We've come full circle here.
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We don't know many things, you and I, Katie. We know that's stupid.
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Yeah, we know dumb when we see it.
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That is stupid.
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Well, as long as there isn't some hideous crash that ends humanity between now and Tuesday, listeners will be back in your ears then. So listen up. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. Topher ForHees is the FT's acting co head of Audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening.