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- [00:00]
A
At pjum, we actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most. From geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility, helping our clients to navigate risk and achieve their long term goals. PJUM our investments shape tomorrow today.
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B
Pushkin the mood in markets right now remains decidedly wobbly. Stocks have generally had a pretty good year after some early shocks, but now up at these heights, they're finding the air a little thin. The big worry, of course, is an AI bubble. Are we in one? And if we are, when does it pop and what happens next? Regular listeners will know. We've talked about this a lot lately and spoiler alert, we're very likely to keep on talking about it too. But today on the show we're trying to find out what the supposedly smartest people in the room are thinking. Heaven knows that's not us, but we want to know what are the hedge funds betting against and what does that mean for the rest of us mere mortals? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London where everyone is pretty nervous about this week's budget from the government. Hooray for us. But I have an unusual co pilot today. Robin Wigglesworth, the editor of FT Alphaville, who despite his very English sounding name and pretty English sounding accent is actually half Norwegian. More than half, given that he lives all the way over there in in Oslo. First of all, for our listeners who may not be aware, like what is Alphaville? What is this thing that you edit? It's basically Nerdsville, right?
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C
Yes, that's a pretty apt description. But it's basically our finance blog. So, you know, we dig into anything that's kind of weird or fun or interesting in finance, economics, business, markets, investing. We can do kind of whatever we want, whenever we want, in any way we want. So we try to have fun with it because I mean, you and I know that this stuff is actually genuinely really fun and we try to maybe let that get reflected in how we write as well.
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B
Yeah, exactly. And there's an awful lot of nerds out there. And like a proper nerd, you are very excited that you've launched on Substack this week. What's that all about?
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C
Yeah, that is actually quite exciting. I mean, Alphavol has had newsletters in the past, but they've been kind of, dare I say, simple half assed efforts. But this is something a bit more ambitious, a bit more fun. We don't really want to be beholden to Elon Musk and X or any other social networks. We don't want to depend on search. And frankly, it's just getting into people's inbox is a good way of writing and talking directly to people. So substack kind of worked well for us. And you know, they have little video capabilities. We can start little forums there. We let people know about drink stews, pub quizzes, stuff like that. So it's kind of perfect and exciting. And most exciting of all, I don't have to write it myself. It's my colleague Bryce doing that.
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B
Exactly. Just hoof it off to Bryce.
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C
Yeah, he gets us in so much legal trouble anyway, so I just figured just make him do it.
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B
Yeah, exactly. But listeners, if you are deep down a nerd and you wish to express that in your life, then there is a substack for you. Ft Alphaville. Very easy to find. Robin. So people who listen to this show are well accustomed to the thing that we do at the end called long short. So that's where you go long things you love and short things you hate. And we call it that because in the real world of markets, that's what hedge funds and other sort of speculative investors do, right? If they like a stock, they buy it. If they really like a stock, maybe they borrow money to buy loads of it and maybe they even buy options that pay out loads of money if the stocks keep climbing. But if they don't like a stock, they go short, they bet against it. What does that involve?
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C
Basically, two main things. One thing is short selling. In that you borrow the stock rather than buy it and then sell it. You're actually selling something you borrowed. And if that stock then falls in value, well, you can buy it back and return it to the original owner and pocket the difference, essentially a profit. So if you borrowed something at $100 and it drops to $10, you sell it at $100, it drops to $10, you buy back at $10 and hand it back to the original owner at the $10 value and you've made $90. Another way is doing it through options. If you talk about like calls, this type of option that, you know, you gain upside exposure. You can also buy puts. So that's the right to sell a stock at a certain price if it drops enough.
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B
So you can just bet that the value of this thing is going to fall. And if you make money out of it. Happy days.
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C
Happy days.
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B
But it's a risky old game, isn't it? It's not for the faint hearted because if you short something and it goes up, you get annihilated. Not for the faint hearted, but what is going on? What are hedge funds kind of like speculative investors? What sort of shorts are they taking out on the US stock market at the moment?
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C
Well, the positioning data for hedge funds on short selling is a little bit iffy sometimes, but we do get these little snapshots here and there. Goldman Sachs has a big prime brokerage that's kind of the desk that is like a concierge service for hedge funds and they collate a lot of this data. And it was really interesting seeing the latest snapshot which indicated that, look, hedge funds are still not kind of really putting on the big short on AI quite yet. As you point out, you can get absolutely destroyed if it goes up against you. Because you know, if you buy a stock, worst thing, you can go to zero, you lose all your money, but that's it. If you're a shorter stock and it goes up, there's no limit to your losses. You can lose an unlimited amount of money in theory. So it is a dangerous thing. But now they seem to be dabbling around the edges of the AI.
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B
Yeah, they're nibbling, aren't they?
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C
Yeah, just kind of testing things out. Maybe a few of the weaker companies in the AI hyperscaler game or a few companies that are benefiting from it, sort of adjacent AI, adjacent stocks.
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B
Yeah. So I was looking at the post that you wrote on this the other day over at alphaville. So about 2.4% of the overall value of the S&P 500 index, that's the kind of big index of US stocks that's currently short effectively and that's a lot relative to the past five years and it's well above the average that we've seen since 1995. But as you say, they're not shorting your kind of Nvidias and Apples and Amazons of the world. Although if you shorted Meta recently, you would have made quite a lot of money out of it. So as you say, they're kind of looking more around the edges and being a little bit cleverer than that. So what sort of companies are they betting against?
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C
Well, in the AI boom right at the center, but sort of maybe not like a Microsoft or Meta or Alphabet, those kind of stocks. Oracle is kind of seen as the weak one of that herd.
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B
I see.
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C
So It's a big valuable company and people aren't sort of going crazy shorting it. But we can definitely see short interest as a measure of like how many shares are out on loan has been creeping up for Oracle. We've also seen people buying something called credit default swaps on Oracle debt which is an interesting way of betting a company's bonds. It's credit worthiness.
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B
So just to do a little kind of freeze frame on credit default swaps. These are accursed words you never want to hear about CDS in relation to anything. Ideally because listeners I won't bore you with the details but they are ways that investors can bet against the debt of certain companies and, and they were absolutely at the center of the drama like a decade and a half ago or so with relation to the eurozone debt crisis. So investors were buying cds so buying insurance contracts that would pay out in the event that a member of the euro defaulted on its debt, which is terrible, terrible, no good, awful thing to happen. And you kind of got in these situations where the CDS contracts were kind of the tail that wagged the dog and they were effectively helping the bonds to fall in value and then people bought more of the CDS and it was an unholy and I haven't heard the letters CDS in relation to pretty much anything for quite a long time. So the fact that they're back in relation to debt from technology companies is just not a fantastic sign. But the levels aren't that high on the cds. Right. Nobody thinks really that Oracle's going to default.
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C
No, it's more of a bet on Oracle's credit worthiness dropping, not dropping like a rock. Nobody's betting that Oracle is going to go bankrupt or anything like that. But it's to say snazzy way for credit hedge funds. Those are hedge funds that deal more with bonds and fixed income rather than stocks to bet on or against the AI bubble. And Oracle just as the kind of the weaker one of the herd is the one that people are maybe sort of circling around a little bit, keeping an eye on.
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B
Yeah. Just to stick on the issue of debt for a little bit. I was reading a piece from the Swiss bank UBS the other day. They had a note out, I'm pretty sure it was from Matt Mish on credit and he was saying that issuance. So the amount of debt that's coming from companies in the tech sector has absolutely rocketed. So in investment grade debt in the States that's kind of safe corporate debt, the amount of it that's coming from technology companies. It's up by 80% this year. And similarly, there's been a big jump in the amount of private credit that's coming from technology companies. And so it's not just in stocks where you can see all this kind of fizzy AI excitement. Just the amount of new debt that's coming to market from tech companies is absolutely mind blowing. Does that worry you at all?
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C
I think it's a symptom of this underlying frothiness. These are companies largely that are still wildly profitable, have very little debt already. That's why it's kind of noticeable. Like Meta and Amazon and Microsoft don't really issue that many bonds, if any. So despite them, I think issuing last time I checked over $300 billion worth this year to finance data centers primarily for those companies, that's still only, you know, is easy covered by their cash flow. Yeah, but it is interesting just that it kind of displaces everything else. Right. It's like this big fat elephant walked into the bond market, squatted and kind of starts commanding attention from everything else. So you could easily see knock on impact on other sectors that suddenly have to compete with metabonds in a way they never had to before.
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B
Yeah, scary stuff. Yeah. Also from the, from the UBS note, they were saying AI data center and project finance deals are estimated to have increased tenfold this year to at least $125 billion. It's an awful lot of techy debt kicking around. But just so going back to the stock markets, you know, as you say, it looks like hedge funds are taking quite a quizzical look at Oracle. But they're also betting against some quite obscure smaller companies in weird sectors like utilities. Explain to normal people why utilities get caught up in the mix here.
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C
Well, that's what I thought was the most interesting in this recent Goldman Sachs report. It showed that there's never been more short interest against US utilities since at least 1995. Really, I think, is how far the data goes back. And you know, utilities are kind of by design, they're kind of boring. They should be boring. You don't want a utility to be exciting and racy. So there's very little short interest in utilities normally. The reason that has changed is that of course, as much as AI requires data centers to run, data centers require power, a lot of power. So a lot of utilities have been investing tens, sometimes hundreds of billions of dollars in new energy projects to fuel these data centers. They've seen their stocks rise in tandem with the AI excitement. But the Danger is, of course, that some of these utilities borrow money and bet the farm on AI and then are left holding the bag when actually turns out that this isn't that data intensive, that they've built all this infrastructure that they can't really pay for in the future. So that's why we've seen a lot of a big spike in short interest in utilities.
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B
And it just feels like, you know, markets are sort of swirling around the plug hole a bit, sort of kind of waiting to get sucked down into the abyss. Right. There is just this sense that they've had it too good for too long. And it feels like, you know, we don't necessarily get a crash in AI stocks, which, you know, to be clear, would like, nuke the entire market for, for a pretty short period of time at least. But everyone's kind of dancing around this, this sort of bubble theme and wondering when does this get dragged down and what will make it get dragged down? I mean, your guess is as good as mine, which is as good as anybody else's. What, what do you think is going on here? What do you think people are waiting for before this correction, if there is one, really takes hold?
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C
I mean, I have no clue. But really, when the correction actually starts, the reality is that hedge funds, at least the smart ones, don't want to bet against a bubble. Whilst it'll still inflate, you'll get run over. You wait until it actually is already collapsing and then you pounce on it, essentially. I mean, most hedge funds are still yoloing into technology stocks and AI stocks in general. They are still massively long Nvidia and all the other AI companies. And that hasn't really changed. What is changing is that you can see they're starting to map out a playbook of what they might start doing when eventually things do crumble, because we know they always do. And it might be next week, it might be next month, it might be next year, or maybe in five years, we don't know. But you can see that where they think the most carnage is going to fold are all these AI adjacent sectors like energy companies, utilities, that are kind of, frankly, probably boring. Investing too much money to service something that might end up proving a bit of a mirage. Yeah, yeah, so we're not there yet, but we're maybe seeing the early contours of the first playbook, as it were.
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B
Yeah, the contours of a playbook. I mean, you know, this is very much the kind of bread and butter of what you guys do over at Alphaville isn't it? It's like that little tagline, you know, this is nuts. When's the crash? Is. Yes, it's the question that keeps coming up in Alphaville posts, but it does feel like you've been asking it for a long time. Like, when is the crash? Like, what are you going to write about when that actually happens?
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C
Yeah. There's a reason why we're financial journalists and not zillionaires sitting on a Caribbean island by ourselves counting our massive stacks of money. Quite often people will point out that we are irredeemably cynical and skeptical of everything and we're saying, where's the crash? Since I think the first time, 2013. The advantage of being a journalist that we have no skin in the game. We'll be proven right at some point and then we'll try not to be too smug about it because frankly, everybody else is still richer than us. But it does feel right now that things have gone a little bit nutty around AI and even if you believe that it is transformational, even if it does prove transformational, prices can still be stupid.
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B
Yes.
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C
And people forget that. Dot com. Everything was right. Everything that people said in 1999 was completely right, but people still lost an ungodly amount of money in the years that came afterwards.
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B
Yeah. So in that sense, it is a little bit of a warning sign that people are starting to put their money where their mouth is and bet against some of the kind of, you know, shaky a bits around the edges of the AI trade. I mean, you know, do you have a good sense of whether it makes sense to watch what hedge funds are doing? Are they the smartest people in the room and do they tend to move first in terms of, you know, picking market direction, or are they just as lost as the rest of us?
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C
It's a good question. I, I'd say that individually they are incredibly smart. Like, they can be wrong, but they are very smart. They have dedicated every little atom of their being, understanding and beating markets.
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B
Yeah.
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C
And they struggle to do it quite often as a group. No, they do not tend to have a lot of presence when it comes to these things. They move as a herd, just like mutual fund managers do and just like day traders do as well.
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B
Yeah.
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C
So, you know, they get stuff wrong. There are times when hedge funds are unduly negative or unduly positive, and the, the proverbial dumb money, the, the you and me money is faster.
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B
Yeah.
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C
But over time, you know, they, they can suss out problems pretty early. And this is why I think we shouldn't look to them to understand the timing of when the AI bubble might burst, but more to understand how it might start playing out. And right now they're saying the main damage is not necessarily going to be in Meta and Alphabet and Microsoft and Nvidia, which have solid, very profitable businesses. Even if AI went away tomorrow, it's in all the adjacent companies and maybe some of the AI has beens, but these who the second.
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B
The hangers on players.
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C
Yeah, hangers on that are trying to basically borrow and spend as much money to become meaningful players and what they think is going to be a massive transformational industrial shift. Yeah, those are the ones I think are going to be get hammered in the downturn that comes at some point.
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B
So as we've been saying, short selling is hard. It's very, very hard to get it right. One of the more famous people in the world who has sort of done this for a living is a chap called Michael Burry. Tell us about him and what he's up to.
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C
Well, Michael Burry first rose to prominence as one of the few people that sort of bet against the housing bubble. In 2008 he was immortalized in the book the Big Short by Michael Lewis that was later made into a film, one of the racier films made about financial crisis that I can remember seeing. And because of that he's kind of. Because he's such a sort of idiot democratic character, he's very single minded. He's become a kind of a celebrity.
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B
Yeah, he's got cult status.
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C
Right, exactly. And he's just, he's, he's mysterious and inscrutable online, he's got like a massive following on X and I'd say, like, I mean, reality. He is a good example of how hard short selling is because although he made an absolute fortune in 2008, a lot of the stuff he's tried to do since then hasn't worked out in the same way. It's just very hard being short a market that generally speaking does go up. And he tried to put on the short, or he put on the short, it seems on Palantir and Nvidia earlier this year, until in the end he just threw in the towel and he closed his hedge fund. He couldn't be bothered anymore, so he set up a substack which seems to be letting in anybody these days.
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B
Yeah, so we go. Thank you so much for sharing your brain there. As you say, us journalists, we may be poor, but we do have more fun than those terrible finance people. I am also I have personal experience of being short. Firstly from the point of view that I bet against MicroStrategy, you might remember in last year's stock picking competition and I got killed. And also I'm short in the sense that I'm only 5 foot 2 so take pity on me. But Wiggo, thank you so much listeners. If you are into that sort of stuff, shorting and the guts of financial markets and all of that, check out FT Alphaville in general and its new substack in particular. Robin, you've been a gent. Thank you so much. We're going to be back in just one sec with Long Short.
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A
At pgum, we actively manage risk today while targeting outperformance tomorrow. So no matter what investment risks concern you most. From geopolitics to inflation to liquidity, PGM brings disciplined risk management expertise that spans 30 market cycles. Our active approach finds opportunities and volatility helping our clients to navigate risk and achieve their long term goals. Pgm, our investments shape tomorrow today.
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B
Okey doke, it's time for Long Short. That part of the show where as for the rest of the show, in fact we go long a thing we love or short a thing we hate. Wiggo, what you saying?
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C
Well, I don't hate it, but just given the theme of this pod today, I thought I'd go short. I go short the most heavily shorted stock in America, in fact, a company called Bloom Energy that makes fuel cells for data centers and it doesn't actually make a lot of money. I think it's forecast to make maybe $100 million next year and it's valued at around $30 billion. It has been very heavily sucked up and amped in this whole sort of AI frenzy to kind of preposterous levels. And although I'm slightly worried it's a very crowded short and they can be quite dangerous as we saw with GameStop a few years ago. I just think like this is nuts, there will be a crash. So Bloom Energy is my short.
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B
Okay listeners, this is not investment advice and we are terrible at this. I am short the crypto maxis because I had a little bit of a dig at crypto in my column the other day and they didn't even really email to say how much they hate me like they normally do. And I thought these guys are a bit off their game. So I'm not saying please do email me your usual flood of abuse, but I am saying, you know, you okay hun? Like they have gone a little bit quiet now that bitcoin has taken a bit of a step back in price. Robin again, thank you so much for being with us today. All of your Internet issues notwithstanding, listeners, this show is produced and edited by our friends at Pushkin in the US and they are of course out for Thanksgiving Thursday. So we are going to be back next week. If you're in the States, have a lovely holiday and wherever you are, listen up when we are back in your ears on Tuesday. 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 Clarke, 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.