If I knew with certainty the Fed was

going to hike in September, I'd be

underweight stocks right now. It's not

that I would say I'm straight-up bearish

here. I just think the risks are

two-sided. We highlighted the window

from August 15th to October 15th as a

period where

I don't like the seasonals and I don't

like the structure. I don't necessarily

agree with how the market is priced some

of these macro risks. You have this

market structure for single stock wall

has been crushed. Correlations still are

low.

And so I just think that it's a time to

take down risk.

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Later in the show, you'll hear more

about HFGM, currently the number one

Morningstar rated fund since its

inception in the US macro trading

category. Let's get into it. Hello and

welcome to other people's money. I'm Max

Wiethe and today I'm joined by Warren

Pies, co-founder of 314 Research.

Warren, thank you so much for coming

back on the podcast.

>> Absolutely. Thanks for having me.

>> All right. So last week to your clients,

you wrote a report called macro

takeover. It does feel like macro risk

is taking over after what was

a clearly very strong earning season,

but we're starting to see some

choppiness in the market. So I want to

know why you believe macro risk is

taking over and and what are the the big

macro risks in particular that are

driving the market right now?

>> To avoid burying the lead, we downgraded

stocks.

Um

I guess it was about 2 weeks ago now.

And so off of that big bounce we had

coming out of earning season,

we got up to right about a 7,800 and

that was a really about where we said

okay, this is a good place to take some

risk off the board. We We had been

overweight from mid-April

and I explained some of the overweight

stuff to Jack on one of your your family

of podcasts back around that time, maybe

more in the springtime.

>> Before we got going, he said make sure

to give Warren some credit. He made a

great call on my podcast. So, yes, you

you were you were decidedly bullish

coming into earning season.

>> Yeah, so for from mid-April through into

I don't know when that was, August 10th

or whatever it was. Um

we had stayed overweight stocks. And so,

that was our call and we've neutralized

that now. It's not that I would say I'm

straight-up bearish here. I just think

the risks are two-sided. I think that

the concerns that were happening back

in July

were sort of misplaced and a little

early. And so, like back in July, what I

was hearing from a lot of clients was

this worry that we have low

correlations, internal correlations in

the market.

And that there could be a macro risk

that emerges.

We had the Fed's July meeting

back then. That was like a a good reason

potentially for to spike correlations.

So, correlation spike and send the VIX

higher, the index volatility higher, and

you get a sell-off. And everybody was

indexing back on the

July 2024 incident where we had the the

yen carry trade blow up. And that was

the only time we'd seen implied

one-month correlations lower than they

were back at the start of earning

season. So, our position was that that

was

that we were actually had a a favorable

market structure going into earning

season. So, the baseline takeaway, we've

been very bullish on earnings all year,

something we pointed out back in

December that we expected this to be an

earnings explosion year. We could see

signs of that in the in the way analyst

estimates were moving relative to their

seasonal tendencies back last December.

And so, that was our call and we we

think that's still ongoing. So, it's

hard to get too bearish on the market.

But at the same time, that's now on

everybody's radar. Everybody's been If

you watch CNBC or Bloomberg, I mean, you

get a parade of strategists to tell you

how great earnings are? And I think

that's the rearview. But back in July,

there was a lot of nervousness. There

was worry about macro. We were going

into earning season. We thought that

that would carry the day. And the

structure that was favorable was we had

single stock volatility.

You could use like the VIX EQ to

approximate it. We break it down by

different components and stuff like

that. We looked at semiconductor vol,

which was like up at 80%, but single

stock volatility was above 50% for a

brief period of time coming into that

earning season. So, when we looked at

history, we said, "Okay, well, when you

go into an earning season, as long as

single stock volatility single stock

volatility

um

it as long as that comes down through

earning season, which it usually does,

and you usually see correlations rise

coming through earning season because

you have like maximum um disparate

outlooks as you go through the earning

season. And then everything as that ends

converges back to macro. So, our view is

that you would see um this natural kind

of push and pull between single stock

volatility and correlations as we exited

a positive earning season. And

historically, that's a that's a good

recipe for the stock market. So, we

stayed bullish through July. We pushed

that kept that overweight through um

what were these

this I would say period of nervousness.

Now, we've had the earnings. Everybody's

bold up because of the earnings. There's

extrapolation out to 2027, 2028, and all

that stuff. And that might work. I'm not

really making a call on that. But it's

just that everyone's talking about the

earnings, which is the rearview. And

now, we're stuck with what I think is

this period where macro can emerge.

And that And the correlations rose a

little bit through this earning season,

but I'd say they rose less than I

expected. We still have this highly

rotational market that we've been

talking about all year.

And so, correlations are still in the

single digits. And now, with earning

season basically over, I know we have

Nvidia and a couple other companies

this week, but they're basically over at

this point.

I think that the concern going forward

is that we do have that now everyone

exhales,

but you're still stuck with uh a less

favorable market structure and more

potential macro risk ahead of us. You

have

potential lab IPOs, you have a Fed

meeting, you have Jackson Hole this

week.

Um you have midterm elections and

increasingly I think that the midterm

elections are going to be a

uh

a blue wave, maybe a blue tsunami.

Um

and so you have all that

that the market has to get through.

Maybe it gets through it just fine.

Uh and at the same time you have this

market structure of single stock wall

has been crushed, correlations still are

low.

And so I just think that it's a time to

take down risk. The other factor that

kind of plays on in the background is we

are in this midterm cycle.

Midterm cycle turns

it's a weak cycle, you don't put too

much on it. There's only so many cases,

we all know that stuff, but I do think

that, you know, you seize up a little

bit in this period of time leading into

midterms.

>> Okay, so when you downgrade stocks, what

is taking their position in the

portfolio?

>> Yeah, we put it all in cash. So we did

with when we did the downgrade, we

actually took commodities down to a

benchmark weight, we took stocks down to

a benchmark weight. They'd both been

overweights. We've been running a bond

underweight, commodity overweight, stock

overweight, cash underweight. That's

been our basic positioning that we've

led clients to and uh it I think it's

worked pretty good this year.

Um

I I look at commodities as kind of a

hedge to my equity book and so we not so

much

that we changed our view on commodities,

it's more of

you know, if you take equities down and

then let's say we had some kind of big

deal out of the Iran or something like

that, you crush oil. If you stayed

overweight commodities, you could crush

oil and then shoot stocks higher. It's

just bad risk management. So that's why

we took commodities down because we just

look at it as a hedge for equities in

this environment until we get some more

normalization out of the

straight out of moves. So, that's that's

the move we did. I don't expect this to

be here

um forever. I just think it's that this

is that window. We We highlighted the

window from August 15th to October 15th

as a period where

I don't like the seasonals and I don't

like the structure. I don't necessarily

agree with how the market is priced some

of these macro risks as well. Um

primarily the Fed meeting coming up uh

next month.

And so, um to me, some of those macro

risks are not being fully reflected by

the market.

>> Talking about that that Fed pricing, I

mean, what are you seeing?

>> Well, I've noticed like so the odds have

ticked back up to like 40-something

percent. I think that's closer to nor to

what you should be at for September, but

we got down to 30% for odds of a hike at

September meeting. And reme- remember

again, back in July, odds of a September

hike were like 75%. So, like this is

These are the things you want to fade.

Like you want to train yourself to be

bullish when that stuff's, you know, you

single stock vol above 50. 75% chance of

a Fed hike at a meeting that's really a

coin flip. Um earnings that are ahead of

us, not behind us, and they're positive.

Like these are the things you should be

like leaning into, and that's what pre-

that's what precedes a big rally, and we

got the big rally. Now we have kind of

the opposite of all that. We've had

single stock vol go from 50 to 35. We've

had um earnings are in the rearview, not

ahead of us for the most part, and we

have Fed hike odds been from 75 to 30%.

Think that at this moment they're back

to 40%.

>> It's about 42.

>> Okay, so our argument has been this

whole time that this is a coin flip

meeting.

Um in that the data is this still live.

We in the data that's come in

that where we saw the odds of a Fed

hike come down.

Our synthesis of that data is that it

has not

been nearly as dovish as the market's

reaction to it. So, we I I think um

you can make an argument if you want to

that that data actually was

more um pushes you closer to a hike.

>> What did the market get wrong? Did they

just over index to the headline number?

>> We plugged in CPI and PPI

to our PCE nowcast. Core PCE from our

nowcast

we expect it to come in at uh 0.28 month

over month. I I mean, you never want to

like hin- put your hang your hat on

getting one month out to the hundredth

decimal place on core PCE. Nobody can do

that. I can't do it. Goldman can't do

it. But we have a this model we've been

running for 2 years and it's been pretty

darn good.

Um you have to trust what you see. Um

you could look through that like the

arguments would be like, well, a lot of

that is portfolio management fees and

like you should look through that. You

should look through that. But my big

picture view of the Fed right now,

they're not explaining their reaction

function so much

anymore because of the worst regime

change. But my view is that the

tolerance for looking through things,

even things that are appropriate to look

through at the Fed, is wearing thin. So,

the Fed is

and and I would say that's another way

of describing political pressure.

They're feeling political pressure.

Um you see it in like Beth Hammack's

LinkedIn post and comments. It's

it's a very uh alarmist, emotional, and

political

set of commentary arguing for a hike.

And it's really just saying, "We've been

above target for a long time and my the

people in my uh district can't handle

this." And

you know, it's emotional appeal, not a

like a data appeal,

in my opinion.

Um and so to me that's indicative of

like the the mindset that starts giving

way to a a Fed mistake. Now, Hammock's

always been a a hawk and that's where

she she's one of the three dissents.

Um, I worry more about the core of the

committee.

And that's

Waller and Williams and Powell. Powell I

think they're really on the same page.

Williams probably the most dovish of

them. Waller, I I see him as a very much

a bellwether on the committee.

Um,

and if you read if you go back and

listen to any of his commentary,

especially like his May commentary, he

he kind of describes what I think is

his this political pressure in a really

interesting way. He says like basically,

if we don't if we keep having these

one-off supply-induced spikes to

inflation,

and we don't react to them, but then

each each one keeps coming in as like a

surprise on the inflationary side,

the population might start

reading some signal into that

randomness, cuz each one of these shocks

should be theoretically random. And he's

saying, "Well, if the population starts

seeing this these things as connected,

then they're going to believe we're not

doing our job. So, we might have to hike

anyways." And so, when I hear all this

in academic speak and just like

listening to these guys for a long time,

he's basically saying like, "I don't

think, personally,

just in my heart of hearts, that we

should be hiking because of the price of

oil because of a supply outage and the

straight-up war moves,

but I do feel the pressure. And I

understand the guy in the street sees

the gas prices up, and I also understand

that the guy in the street thinks that

the buck for inflation stops with me. He

doesn't want to hear about fiscal

deficits. He doesn't want to hear about

geopolitics. He wants to He's wants to

take his anger out. He wants a

scapegoat. And the Fed is a ready-made

scapegoat, if you're not careful.

And so,

I think that

he's describing political pressure and

the political pressure that comes from

higher oil prices and

that goes back to like, you know, we've

seen CPI and PPI in our nowcast point to

higher PCE going forward.

Um

unemployment rate is down. Again, in the

Fed's framework, the the Fed doesn't the

Fed's not going to parse the non-farm

payroll report, at least by their own

own strict definitions. They're not

going to parse it the way like we would

in this community. They look they

forecast the unemployment rate.

Unemployment rate falls,

they see it as a tighter labor market, a

more inflationary labor market. They

work within a Phillips curve framework.

So,

I think as much as that was like a

negative jobs report and it looked kind

of

it looked sluggish, you know,

and the the fall in the unemployment

rate was all due to labor force

participation rate dropping,

it could very well mean revert,

but I don't think that the Fed

necessarily

is going to feel comfortable looking

through all that. And then you bring in

the oil price. It's higher. It's still

higher.

You know, these guys and we all kind of

expected this thing this this war to be

done by now, for prices to have

normalized by now,

and they haven't. They're just hanging

out here above 90. And every day that

goes by with oil prices above 90 and

crack spreads that are like double that,

um

which points to high diesel prices, high

gas prices, every day that we hang out

here, that political pressure that

Waller was referencing back in May, it

builds. So,

could the that core of the committee,

along with the dissents,

along with Lisa Cook, who's talked to

directly about AI investment as

inflationary, could they get together

and and push for a hike in September? I

think absolutely. And there hasn't been

enough data

that points um

that let's put it this way, hasn't been

enough data that alleviates the

political pressure, which I think is the

real issue within the Fed right now.

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LLC. Thanks for listening. Let's get

back to today's interview.

>> Definitely going to

get that PCE, but you know, as you said,

it's kind of tied to CPI and PPI with

the PCE. Are Correct me, we're not going

to get another PCE print before the next

meeting. This is going to be the last

one. Sort of the last big data point.

>> Well, PCE and then we'll get CPI and

PPI,

um

>> But they claim that they don't look at

those.

>> Right, but I mean they do. So, I mean

they would they would love it if we got

another, you know, week. They

This could change. Like that data could

would absolutely It's a live meeting.

It's a coin flip. I don't think that

this is preset. I don't believe Warsh is

What I don't feel is that Warsh is going

to be pushing for high. I think that's

what makes the dynamics interesting, and

I think there's a lot going on,

honestly, within this Fed right now.

I I had personally think Warsh is wants

is a dove in this world. Um

and

it's a question on whether this

committee is going to kind of revolt and

put him in an uncomfortable spot. They

can almost force him to move with them

or be a descent, and I don't think he

would do that because it would he would

>> Has the chair ever dissented?

>> Not to my knowledge. Not I don't I

honestly don't know 100%, but it sure

seems like a Seems like a crazy unlikely

thing. And so, yeah, I think the chair

is, you know, I That's the dynamic.

Maybe I'm crazy. That's the dynamic that

I read, um

uh out of the committee.

>> But what about the the reaction? Let's

just say they do hike, right? So many

people are saying that the the long end

is doing what it's doing because the Fed

hasn't acted to fight inflation. You've

got another camp of people who are

saying it's driven by the fiscal deficit

and the issues that we're seeing there.

Um, but there there's certainly a lot of

people in the market who believe that a

hike would put an end to the pressure

that we're seeing on the long end of the

curve. I mean, do you think that the Fed

stepping in here would help solve those

problems?

>> No, but let me just first define some

terms. Um,

when we say the long end, I think

mean a lot of people are talking about

the 30-year. I think the 30-year is

in inconsequential yield at this point

in time. I get I get that bets are

reacting to this, so maybe it's less

Maybe it's more consequential than I

give it credit for, but I'm not trying

to predict the 30-year. I think it's

highly illiquid an odd little market,

and it's not really the economy's not

pricing off the 30-year. Um, you could

argue that the if it gets high enough,

then you're going to suck capital out of

the 10-year, which is the yield that

matters, and eventually, you know,

create

>> It's going to pull the 10-year up.

>> Right. And so, like, you could make that

argument, but like just for sake of

discussion, let's just say the 30-year

doesn't really matter, and what really

matters to the Fed and what really

matters to the economy is the 10-year.

And can you And will the Fed by hiking

cause the 10-year to come down?

Um,

my my belief is no. That's not how I see

the how the market works, in my opinion.

Um,

and I would just say, like,

almost throw the question back to you as

like a thought experiment. Like, why

would Why would the 10-year come down

because the Fed funds rate went up?

Like, what would be the reason for that

in in in that you hear out there? You

>> Oh, it just because it it it shows

credibility to their inflation-fighting

mandate, and thus that they are going to

rein things in, and that we're going to

get back to a cutting cycle faster,

right? That That stepping in here means

that the the time between

end of of this hiking cycle, however

long or short it is, to the next cutting

cycle is compressed.

>> I think I would say like that if it's

like we're fighting we're hiking to save

credibility and we're hoping to

come bring

um

take down the lack of credibility risk

premium in the market. You would see

that show up in a term premium. You'd

see that show up in a yield curve.

Uh we've done a lot of work historically

on term premium models and yield curve

are very highly connected. So, you can

almost speak of these things

interchangeably.

Term premium model, you can look like at

the ACM term premium model. It is like

80 something basis points right now. Um

and that's in the real yields that we

talk about that have gone up here in

recent months.

Um

but like the yield curve is around 50

basis points or 45 basis points right

now. Two stands yield curve. Uh I I

don't think there's a lot of

cre- credibility that's built into that

right now. I don't think that that that

you you would see a steeper yield curve

if the Fed was starting to lose truly

lose credibility. You would see a higher

term premium if the Fed was really

starting to lose credibility. So, I

don't think that's what's driving rates

right now or what's in the market right

now. So, in order for a a hike to signal

future cuts, you would need to go

through this process, which is what

always plays out. Gen- Basically, every

major hike cycle. Again, we showed that

in our report, which is that you need to

hike and then you

will flatten the yield curve, but the

two-year yield will go up

uh along with the 10-year yield. In most

hike cycles, the rule of thumb, and this

is not for every single hike, but this

is the rule of thumb going back to the

the '80s forward, seven hike starting

seven hike cycles, every 25 basis point

rise in the Fed funds rate gives us a 20

basis point rise in the two-year

Treasury yield and a 12 basis point rise

in the 10-year Treasury yield, which

means you're going to have a eight basis

point per hikes flattening of the yield

curve, a bear flattening.

That would be my expectation if the Fed

had started hiking. That's what's

happened historically. That's what I

think would happen.

Um and in order to get to a place where

the Fed's going to cut to that in a way

that the 10-year would start going down,

flattening, and maybe even inverting,

you need to start seeing economic

activity slow.

And so, in order to slow economic

activity, I think you need a higher

10-year

before, because we aren't slowing the

economy with a 4.7 10-year right now.

So, um

you know, you would need a bigger rate

shock. So, I don't think that this idea

that the Fed

hikes is going to lower the 10-year

really passes the smell test. It doesn't

pass recent history. If you look at the

move between like

um so for futures implied rate and the

10-year, they're really moving in

lockstep for the last two years. If you

look at previous hike cycles or cut

cycles for that matter, we've looked at

all these regimes.

When the Fed starts hiking, the the

curve starts flattening. It's a bear

flattener. Like I said, I went through

the numbers on how it rises. Um

and there is nothing in the si- the size

of the yield curve, the the steepness of

the yield curve, or the size of the term

premium in these various models that we

look at that suggests the market's

really press- pricing in um a Fed

credibility problem. I think it's

probably pricing in

a

you know, that neutral is a little

higher than most of us expected.

>> Okay. So, so you think that the the

market is is mispricing the chances of a

hike. We've come closer to that in the

last few days, but then on top of that,

you think that that people's beliefs, at

least from what we're hearing in

commentary, it's hard to say whether the

positioning aligns with that, but at

least the commentary seems to to believe

that that this would be a stabilizing a

stabilizing hike. And and you don't

really see it that way. So do you think

that that this hike potential in

September is that correlations to one

type of event if we get it?

>> I worry about that. Yeah. I would guess

if you knew if I knew with certainty

that the Fed was going to hike in

September, I'd be underweight stocks

right now. That would be my that would

be the the way I would be positioned or

be gliding guiding my clients to

position.

Um and like I said, I think that the

meeting's a coin flip. I don't think

that anyone can have a ton of um

confidence in what the Fed's going to do

given the different blocks of the

committee, given Warsh's cloak and

dagger kind of uh communication style,

and given the amount of data that we

still have to take in between here and

there. But when you're that close

and we've gone through the earning

season, that's why I say neutral posture

here is appropriate. Neutral to your

benchmark, especially if you haven't a

good year. If you're over if you've been

overweight through the rally

if you're ahead of the bench your

benchmark like you should reduce risk

here. That's been and I had a lot of

clients when we did the downgrade who

managed like big pools of capital and

they

I think they were surprised. They're

like, you just won. Like you just you

pushed and said be stable, stay bullish.

We get the breakout and now you're

taking it down. Like and I had to

explain all this to them and

you know, it's hard when you have a

bunch of different client types.

Um I'm just trying to say like to the to

to the person that's managing pools of

institutional capital with a benchmark

like this would be the part where I

started

saying, "Okay, let's protect what we've

done this year."

>> Okay. So if you had that certainty, you

would be

underweight. We've been focused on the

Fed. What about some of these other

macro risks? Obviously, we we get Nvidia

earnings. The AI trade has not quite

bounced as much as the rest of the

market. We've gotten a lot of rotation.

I mean, is there a potential that that

we continue to see weakness in the tech

sector and the rest of the market starts

to correlate? The the rotation, the

broadening slows down and and the rest

of the market starts to follow it. I I

actually asked Caliban last week

to to just give me a breakdown of

everything that happened with earnings

and I think it said something like

uh nine

nine out of 11 sectors had had beaten

their earnings.

>> Yeah, I mean, the broadness is

I'm a little bit of a

my and I think I explained this with

Jack like my ideal

mechanism for this bull market

continuing higher is tech leadership

broadening. Tech leadership broadening.

I think we are in this broadening phase.

Then you look at the the chart of like

RSP or equal weight S&P 500 and that's a

it's a beautiful chart. It's just

constantly putting in new highs. I mean,

that's probably one of the if you're

again, you're neutral, I'm neutral here.

I'm not There's a lot of bullish things

I could pull out too and we've been

talking about the risk factors.

I think that that chart is is

it's hard to look at that and be too

bullish or bearish at this moment in

time. But I do think that the way these

things work is you

you have tech leading

broadening phase. That's where we're at.

And you need to you'll ultimately need

to see tech re-assert its leadership.

Otherwise, I don't think the market has

a ton of upside. I just think

mathematically when you look at we're

50% tech

at this point on the S&P 500.

Um

it's these things just like the broadest

years we've ever seen

if you're measuring it by the percentage

of stocks beating an index, the broadest

years we've ever seen were in the the

bear market years following the tech

bust. And you see, you don't want to see

a market that's too broad right now.

Like 2000, 2001, 2002, those were the

years where more stocks beat the index

than any other year. But the index was

like, you know, on in the toilet.

And so, um

that's that's that's kind of the dynamic

we're in right now. So, you need to see

tech reassert itself.

Um there have been some cracks in the AI

armor. I'm We're You know, and this was

again, back to the the conversation I

had with Jack. This was like a big part

of it was that we are big-time AI

believers. You guys have We talked about

Caliban. We've talked about our you

know, how Caliban it's our AI research

assistant.

It started internally.

Um it really it boosted our

productivity, and then we productized

it. We started selling it to the to our

clients and then to the public.

And so, we're big AI believers. And uh

but at the same time, there's a the

expectations have grown in the space.

You have these big lab IPOs up ahead of

us. And then recently, we had the ARR

numbers for Anthropic and OpenAI leak.

And I would say they undershot our We

our current best guess from

reading the tea leaves was that we had a

combined like 115 billion

of ARR out of the labs in our in

Fernando's last AI update report. And uh

I think the combined number that we had

for ARR our snapshot was 105 billion

here. And in this world, that 10 10

billion miss is huge.

And so, I think that's been weighing on

the sector

and everything since that point in time.

And there's been just some seizing up of

like, "Oh gosh, maybe things aren't as

good." And I think those lab ARR

numbers, that's

there's a lot of concern that all the

the the number all the money is circular

within this ecosystem. We get all I get

all that. We've talked about that. But

the lab ARR, that's the

that's how you pull in external capital.

That's the gauge of the external capital

that's coming into this AI ecosystem.

So, you need to see those numbers going

up. Those numbers need to go up to

validate all of the lab CapEx and

validate the compute build-out, which

goes into the data center CapEx and

everything else. And so, it's a very

important number. Clearly, the growth's

been great. Clearly, I we believe in the

tech.

Um but there is potentially

the this spread at the diffusion stage

now, adoption stage, and maybe it's

maybe we're hitting a hiccup. Who knows?

Maybe they're sandbagging. That's

another possibility that the the labs

actually have some a rabbit they're

going to pull out of a hat. You're going

to get the best model possible prior to

IPO. You're going to have some, you

know, pushing down expectations so we

can blow them away later type of

um scenario. That's entirely possible.

There's there's a lot of ways this could

break. So, what we do is we track in

addition to the lab ARs, we are

constantly moderating monitoring GPU

availability, monitoring

uh rental rates.

We I tweeted out last week that we did

see some cracks also in our GPU

availability data, which was a that

tweet was um

it I should I could

>> most hated.

>> It was hated and I got a ton of

traction, too. I mean, just lots of

people

jumping into the to get into my DMs,

even, too. I didn't know who have big

followings and are notorious AI bears

who like all of a sudden thought that I

was like on their team or something.

And um

I'm just following the data. I'm just

telling you what the data says. So,

like, you know, the data set the our

availability data spiked up. Our what we

call our fast availability index

was uh had like one of the fastest rises

that we've really ever seen and we've

been tracking this data since 2023.

When you dig into it,

it was really all the rise was almost

100% attributed to H200 availability

just a shooting straight up.

We track pricing for rental rates in a

lot of different places. Um

one of the places, it's hard to get H200

pricing.

One of the places we we look at is is

AWS spot pricing or we average out spot

pricing different regions. And that

showed over this period of time that

H200 pricing had gotten

a pretty high relative to Blackwell

relative to the B200 pricing.

And so, you know, just having an

understanding of how

inference economics works and tokenomics

works like it makes sense to see H200

price pricing it needs to come down from

that level. It doesn't it should not be

up there with Blackwell pricing. So, it

makes sense sense to see this

availability spike. So, when we dug into

it and started looking at the different

um kind of cross validating these things

like, you know, this data series and

that data series

it alleviated our fear. We're like,

okay, this looks like a benign rise in

availability. And the most important

factor when you just clear through all

that stuff is that Blackwell B200

availability is still at zero

from what we track. So,

and that's the that's the GPU everybody

wants.

You're going to you the the token

output's just so much better. The

economics are so much better. So, it

makes sense.

But, um maybe there's a little signal in

that H200 availability going up. Maybe

this all out

grab for compute might be ebbing a bit.

I don't think there's anything to get

too tied up about yet. We monitor it

like we monitor it every hour. So, we'll

be on it and we'll talk to our clients

if we see anything there. But, like um

our basic unders basically when you just

clear all that out is that this is a

benign rise. It was it was odd. It was a

little

concerning when we saw it. But, as long

as B200 stays where it's at, we're not

really concerned

that this is any kind of real change in

compute demand. That's really what we're

trying to get at.

>> So, you said tech, if we don't see tech

really start to lead again, it's going

to be hard for for the index. That it

too much broadness is actually kind of a

bad thing. Um I mean, what does that

mean? Because one participant in this

and part of the reason that the equal

weight index has outperformed so much

has been the lack of participation from

mega cap, right? The beginning of the

year, it wasn't This wasn't the year of

Nvidia. This wasn't the year of the

hyperscalers, at least, you know, by and

large in terms of the the equity market

performance. And so, I wonder, you know,

is it Can we even distill that that view

down about we need to see tech returning

to strength?

Do we need to see mega cap tech

returning to strength? Or can it

continue to happen with some of these

bottleneck stocks? They've gotten to be

so big that it's hard to talk about them

as like small caps or anything like that

now, but um I I guess do we need to see

mega cap catch a bid for for the the

bull market to continue?

>> I think so. Yeah. I think I think that's

kind of important. I mean, when you

start chunking I One of the things we

did earlier this year is we started

chunking everything up and looking at

You're seeing more charts and studies

like this, like the number of negative

beta stocks in the market. Like,

everyone's getting at the same

Everyone's touching the same elephant,

so to speak. You know, and I'd say that

we We looked at it initially as like

semis are kind of the core of this

market right now. Like, that's the

that's the group that, you know, is is

proper leadership for this bull market.

It's an AI The whole economy has gone

all in on AI at this point. And so, you

know,

you're going to 18% of S&P market cap

now is semiconductors.

So, you have that pool, and then have

hyperscalers. If I was designing the

bull market

mix going forward, like let's get

through this macro stuff that I just

laid out, and say, "Okay, we we need to

see

um we need to get these S1s, we need to

get these IPOs, we need to get through

this period of time, we need to digest

some of these macro risks, maybe reset

correlations, consolidate the gains

we've had. Okay, what's the next leg? I

think that the ideal next leg is that

you at you exit this period where

hyperscalers and semis were negatively

correlated, where you couldn't get

either of them going up together. You

need them both to go up together. And

so, to me, that's the real mix. So, that

requires hyperscale, it requires the

um not necessarily Mag 7, like Apple's

kind of in cons- Apple has become just

like a

another defensive play or offset, you

know, it's just a place to put your

money when this other stuff's not

working, like

but forget Apple, like I mean, like the

hyperscalers, the the spenders and

receivers for a chart that was going

so viral earlier in the year, they like

those stocks need to go up together

because all of a sudden the market has a

lightbulb moment where it's like the ROI

on the spending is actually very strong,

and we're seeing that in

cloud revenue growth and everything

else. And And that's I do believe that's

the truth. I think if you can get be-

beyond this and get back to a place

where we're really focused on earnings

again, and we got that for a short

period on this burst higher to like

7,800 on the S&P 500, we got that period

where semis put in a bottom,

hyperscalers reported, and boom, you had

you know, all all that stuff was working

together, and you saw how powerful that

kind of market mix could be. To me,

that's the recipe. Um but clearly, the

market needs a little bit more

uh

it needs to rebuild its confidence and

uh to to get there. And so, yeah, I I I

think

>> you think we have clarity on the the ROI

on the spend, or we're starting to get

clarity. I mean, to me, I I think that

that what the market is clearly saying

is that the ROI is still in doubt.

>> In my mind, that it is settled. Like,

the market is we're going to get back

back in and filling and all this stuff,

but like to me, those quarters were

pretty conclusive when you saw you saw

what Microsoft did, you saw what Amazon

did, even Google was like it was down

and then up. I mean, like

I think that the

I I think you can do you would We've

done this. You can model out the

total cost of a data center and then

with a little bit of understanding the

GPU rental rates, where they're at, like

GPU rental rates can have gone up this

year. That's not supposed to happen.

Once these data centers start

recontracting at these rates, like this

is going to be This would be a

stair-step higher

for for cloud revenue, for data center

revenue. And so, to me

um

it it's I mean, it's never settled

because you could have like we talked

about. You could have a downturn. The AI

story could could run out of gas, like

the tech itself could run out of gas.

But, if you believe the tech is out here

and that's what we believe, that's like

your North Star in this, then you're

going to continue to see the compute

spend and demand ratified via the

technology. It's just a matter of what's

that path out there. I do think that

this period with IPOs and

elections, too, which is kind of like a

more realistic risk. I mean, data

centers have become a political issue at

this point in time. And that could

become

uh something the market worries about

more. Like, one of the things I'm

concerned more and more about as I look

out to year-end is like

maybe the seasonal pattern, everyone

expects this post-election rally, well

given the amount of

you know, data center dependency within

the market, if that becomes a big part

of the the election results, then do we

break that tendency? I, you know, that's

in the that's it's too far out for me to

to actually act on it right now. I just

play with these ideas. But outside of

the politics and some turn in the the

some negative turn in the technology,

which I I highly doubt.

Um yeah, I think that the the data

center

ROI question was basically solved this

earning season. That's what I would say.

>> Okay. And what about I mean the the

political risk I mean if you do get that

that blue tsunami that you're talking

about, is it just chatter and concern

from the market or is there actual real

policy consequences that you could see

that could derail the AI buildout?

>> Yeah, it's hard to say. I think that you

could just slow the data center

buildout. You could you just

who knows what form it would take, but

it just

um I look at it I've been talking about

that. I think again going back to the

conversation I had I believe with Jack

or with someone else around spring

>> We'll just say it was Jack.

>> Okay, so it's like spring this year and

we're what are your risks? And it's like

what I said at the time is like

these the spokesmen

for the labs are horrible. They're

horrible and they're losing they're

losing

the hearts and minds of the public, you

know, like Dario's presentation of

the future of AI is not enticing to

anybody.

Um the public has heard and decided they

don't trust Sam Altman.

Um and that's a

those are those are major

>> Elon already Elon's already you you've

already made your mind up on him.

>> Yeah, Elon's polarizing as it is. I

don't think he really represents like

the the uh

you need

they need to quickly start talking about

what positives are going to bring and I

do think there's going to be positives.

They need to highlight the positives is

what I would say. They need to get some

quick wins. This has been one of our

reasons we've said within sectors we

like

we've been saying it for

some months now. It's like healthcare

was going to be that next

place you go because like those that

would be a place to turn your focus as a

lab or as an AI

um someone operating in that space that

could find some very tangible quick

wins. And you can already see it. Like

if there's a drug development, like

anyone wants to try and say that they

did AI help with this or something like

that. Um

so they're they're going to work to get

that out in the front and center, I

believe. Um to try and shift public

opinion.

But to the ex- I don't know what the

what the

we'll see what the election results

bring. And I I just I don't know what

they're going to do. I don't know if

it's all bluster, you know, this new

crop of um

Democrats doesn't seem like the old

Democrats. They seem to to be

you know, much more true believer types.

You know, they don't really seem to

they don't seem like capitalists, you

know? And so to the extent that reflects

public opinion, I think that you have to

take that risk seriously. The market can

price in risks that never come to pass,

too. So, you can you can have that

happen and then you get a discounting

um in process. So, we'll see. I think

you watch the prediction markets and

watch the polling and where public

opinion is going, the market might move

before the election.

Um

but it's a it to me that's the most real

risk because I think everything else if

we just keep going in this direction

with the tech and and uh

and demands for computer are going to

continue in a linear fashion.

>> Okay. Now, what about the issuance? And

And we'll talk about equity and debt.

Um

Bassant came right out and said that

that he thinks that some of the issuance

in the in the AI buildout is impacting

the Treasury market. I mean, do you

think that's realistic? It doesn't seem

like that train is stopping. And so, you

know, as it relates to

uh the the the buyback program, all of

the things that they're implementing to

try and stabilize the bond market. I

mean, if it is really what's happening

with the AI buildout, does it does any

of that even matter?

>> I really don't think that's moving the

Treasury market. If you've gotten to a

place, like here's here's like so

there's a real answer, there's a

technical answer, and there's like like

the more um functional answer, I should

say. Like so the the very technical

answer is that like to the extent

there's one single person who's deciding

between buying a Treasury

and

uh

a

IG corporate bond linked to one of these

hyperscalers, and that next incremental

corporate bond comes out with a more

attractive risk reward, and they put

their money there, then yes, they could

be taking a buy away from Treasury

market. But when you zoom out and say

like

the net issuance that's been taking

place quarter to quarter, when you say

hyperscalers and everyone else in S&P

500, it hasn't been abnormal. It hasn't

been all all that large. You look at

gross issuance, non-financial gross

issuance this year, it's tracking high,

it's higher than every year on record

that we've seen other than 2020. But if

you were to adjust that for GDP or

adjust that for market cap or equity

market cap, um

it's

down towards the bottom of all calendar

years. So this is

we've had a long period a long period of

like like uh

um

private balance sheets in general have

been recapitalized in a positive way

post COVID in a in a positive way. And

so this is just like a in the scheme of

things, this is like a tepid re-entry

into tapping the the debt markets from a

large cap segment that has been

hasn't needed them, hasn't wanted them

for many years. And if you're the

Treasury, if you're the 800-lb gorilla

in the bond market, and you're in 250

uh billion of net new issuance coming

from these hyperscalers is really going

to get you nervous about what's

happening on the the

in on the bond the 30-year yield or

whatever then you had problems before

that ever

>> more about the Treasury market than it

does about the the credit market.

>> It's not the reason. It's the reason

that's not the reason, you know. And and

I don't and I think causation's all

turned around there, you know, I think

if anyone's driving anyone's cost of

capital up it's the the federal

government's driving up everyone else's

cost of capital because they they've run

pro-cyclical deficits for six years

post-COVID. And so that's it's um

it's a weird my my theme for this part

of the cycle I it's not I haven't

written about it. I talk to people about

it is like scapegoating. I think we're

in the process of finding a scapegoat

that we're going to pin a lot of things

on. And so like everyone's doing that.

We're testing out scapegoats. Will it be

tech? Will it be Trump? Will it be, you

know,

right now that's what I feel like

Bessen's doing. He's looking for a

scapegoat. He wants to pin this on

tech issuance is his own problem. It's

his own fault.

>> Well, the one that's that's usually the

big scapegoat is uh the energy sector

and they tried that earlier in the year

and earnings just continue to be great.

I mean of all the sectors that have just

kept powering along it was actually one

of the better performers. It's the only

thing alongside tech that really

performed well in H1. It's continued

here in H2 and we've got all of these

other scapegoats to point to now. I mean

do you think we just continue to see

uh positive surprises in the in the

energy sector? I know you've you've

written a lot about how you think it

deserves a more permanent position in

the portfolio as we we digest these

problems in the bond market. I mean is

that is that still your view?

>> My view, yeah. It's it's been that way

really since uh

2022 when we the

really then we had the the

Russia-Ukraine war and uh

when you start doing running the numbers

like if you flip from a disinflationary

to an inflationary regime, you know,

bonds and stocks are going to move

together more often than not. If you're

going to have a problem in your equity

portfolio, it's going to emanate from

your bond portfolio. So,

trying to find diversifiers is a real

issue in this world and I and the one

that always crops up is energy-based

assets.

And so, to me, you know, energy sector

has such a minuscule portion of the S&P

500,

it just makes sense to run a just a

constant overweight within your

portfolio. I mean, every year and yeah,

the gluts form and you can trade around

that position and have and have views on

oil price and things like that.

Um and we had a big glut last year

leading into this year, but

when geopolitics really hits, this is

there's no other place that's going to

buffer

your your equity portfolio. And

increasingly, if the Fed's going to

react to to oil prices, now you're

really in a place

um

where which is what I think we the first

part of this conversation was hitting

at, then you're really at a place where

you need an energy

uh overweight as a diversifier. So,

yeah, I'm I'm 100% with that position.

I don't really see that changing. I

don't know what would change that.

>> I mean, with the performance recently,

do you think we've hit that that period

where it is a little stretched, you

might you might want to trade around it

or is it the type of thing you're you're

comfortable with where

you know, where oil prices are, where

crack spreads are?

>> Yeah, so in our fund in our RAA fund, we

have we are overweight we just have a

structural overweight we have So, we

have our S&P weight, which, you know,

that flexes up and down, but obviously

energy is what 3 and 1/2% of the S&P 500

right now, 4%. And then we have another

within alternatives we put in another

energy sleeve because we just consider

that as an alternative. Like when you're

talking about when people say, "Oh, we

have a ne- again, going back to the

There's a lot of these same concepts

that keep coming up where like, "Oh,

there's so many negative beta stocks."

Well, the reason there's been so many

negative beta stocks we went through

we went through a correlation of one

event where not everything was a one. We

had a correlation of one event through

with the Iran war.

But energy stocks spiked and so you saw

you see weird stuff in the data.

>> negative one.

>> Right, exactly. Some of some stocks had

their best days ever and some and the

rest of the stocks had their worst day

ever. So,

um you know, it was it it creates

interesting statistics and things like

that. So, we put energy as an

alternative in that sleeve. So, it's a

perpetual overweight. Everything moves

up and down. If you were going to ask me

kind of on an ad hoc basis, you dig into

the energy sector.

Um obviously everybody knows refining

margins are at like

crazy high levels right now. You you

know, no matter what happens, there's

ideas that the

the US is manipulating

um

oil price and things like that, but they

can't force more refining capacity out

into the world. And And so you see those

spreads blow out. If I was going to take

take a shot here though, I would

probably take weight off the refining

segment

and move it back to some like more

general integrated type of play because

uh the next phase of this is like you're

going to run through that SPR

That's what I think is going to be on

the headlines next if this if this if

we're really settling into

a different flow pattern in the Strait

of Hormuz, then I think we're going to

start hearing about what's next for the

SPR. This release is basically over.

That's been plugging the hole. That's

been helping refiners. So, you probably

need a higher oil price once we get to

that phase

of the um of the conflict if there's no

resolution.

>> Okay. Now, uh I I want to ask about

Anthropic. We had SpaceX earlier this

year, and we really did see the space

sector sort of rallied. I mean, it was a

it was a great period of just general

bullishness in the market sort of

leading up to that SpaceX IPO. But,

right after it, a lot of the uh space

pure play stocks did not perform very

well. It it sucked a lot of capital out

of the sector.

Right now, the pure play exposure to AI

is by and large been in public markets,

the semiconductor stocks. And so, I just

wonder with a sector that is struggling

to regain its strength right now, um

do you think that a a flashy company

like Anthropic coming to market that

people view by and large as a pure play,

I mean, it is a it is the true pure play

on AI. I mean, is is that going to

create a a tough environment to get that

semiconductor strength that you think we

need?

>> I think it would be if anything a

negative for the software sector.

Um as Anthropic comes to market. Like,

we've looked at if you like

Well, Fernando wrote his annual state of

AI report a couple weeks ago. It was a a

great report. And uh

he had a interesting chart in there

where he put the market caps and how

they've changed with the whole entire AI

stack from hardware to

software and then to the labs and like

we've seen like uh uh it's interesting

cuz you've seen like a two two and a

half trillion dollar hole

blown out of the software space. It's

almost like it's making room for these

labs to come in there and take that

space. I think that's what's sort of

funny. It's like a $30 stack, and you've

got

I don't know where we're going to end up

at with the IPO right values. It could

be anywhere from two to four trillion or

whatever in combined value.

Um

and so, like, I think you're seeing the

market kind of make room within that

software space. So then I think that's

where Anthropic will land. It'll be a

GICS a software company within GICS

classification. And so um if anything, I

think it'll be it'll weigh on on

software and be positive for semis and

hardware. I think that the semis

hardware are are servicing Anthropic.

But you never know. I mean Dario told

somebody or he's known to say like

Anthropic might be the only company in

the world at some point in the future.

And so

you know, in that case it's crowding

everything out. Um he needs to work on

that messaging, man.

>> I I was going to say if if they've had a

messaging problem so far, wait until

>> How do you think all those guys like

Alex Karp feel when they hear stuff like

I mean there there's there's not just

the low guys that are worried, too, you

know. It it's it you know, that everyone

in that software space I mean I've got

clients who are software VCs and talk to

them in in private at least they'll

they're nervous. This stuff this is a

nervous time. This has been a very

nervous year for them.

Um and so uh did you there's a lot of uh

there's gamesmanship going on even

within the tech space. But I think that

the real pain point will be software

initially with during these IPO periods.

>> Yeah, I mean what what do you think

about software's relative strength?

Again, I

Caliban last week when I was thinking

about this and I just said let's just

start with Q3. I think it ran the data

through Thursday's close last week. So

August 20th and

um

I was like how how much has software

uh outperformed relative to semis and

you know

through Q3 software and services were up

19.99%

semiconductors and semiconductor

equipment down 7.47.

Basically, you know, that's

that let's call it 30% relative

performance between the two

at some point last week. Do you think

that was technical in nature just

continued, you know, unwound of of these

leverage positions or cuz a lot of

people were saying, "Well, this is the

the tech earnings strength. This is the

software earnings strength finally

playing through. Now that people aren't

chasing AI higher, they're able to to

reward these earnings." I mean, do you

think it's fundamentally driven or

technical driven?

>> It's technically driven. I'm almost

certain of it. Um yeah, that's been like

why I said and we wrote a lot about this

this year and looked at a lot of studies

on this.

Um

why I said that this is a the

semiconductor group is the

that's the straw that stirs the drink in

this market. And everything

it everything has all trades since going

back to the

spring

um with the the Mythos model fable

announcement and the leak there and like

all that stuff from like it was like

April 8th

V-shot higher, a lot of trades were put

on.

And the trades that were put on were

some variation of long semis,

long AI build out trade,

and short

something else. So, we saw we saw pair

trades coming through that were like

short consumer staples, short

financials, short certain utilities.

Uh definitely short software. We saw

some long long

uh hardware, short short hyperscalers. I

mean, these were pairs trades and they

they That's why you see the alligator

jaws open during that period. You know,

it was a a period where mostly you saw

um chips up, software down. And I think

that's a proxy for like the the market's

belief in AI.

Um and now you're seeing that unwind.

And so I do think it's technical in

nature. I don't think it's like

there's been a real fundamental shift.

But I think it all comes from the

semiconductor move. Like semis are

moving things. So semis are down,

software's probably going to be up.

That's just how it's been going. Until

you have that macro event that we're

talking about where everything goes down

together. Like if semis are down, you

can almost guarantee I can You tell me

what SMH is doing on a day

and I can tell you what else is up. If

you tell me it's what's it's down by 1%.

Like, okay, then a whole bunch of semi

some unrelated stocks

should be unrelated. I can tell you if

they're what they're doing. They'll be

up, you know.

And like I play that game often where

you

just go look at the SMH, can tell

yourself

okay, guess what else is happening in

the market today. Pull up your heat map

and you're right.

>> So how do we get this world where people

are saying, well, correlations are low,

but we can all see these sector-level

correlations plain as day.

Is it just that we've kind of just found

an equal balance between these two

trades

that that is causing this? I mean, cuz

again, some some Caliban data that I

looked at was

you know, just how the sectors were

performing through Q3. Energy was the

top, health care, financials,

materials then. But at the bottom

actually was industrials and utilities,

which by and large were beneficiaries of

the AI build-out trade.

>> Yeah, I mean, I think if you you really

got to build the basket different from

the GICS sectors because there's like

there're beneficiaries in industrials,

but then there's losers in industrials

and there's certain utilities that

benefit and there's certain utilities

that don't benefit and

there's rates risk in that, too. You

know, I think that part of the most

interesting side of the

equal weight going up is in the face of

rates going up cuz I usually think of

like in order to get an equal weight

breakout, you need rates to come down.

It's a much more rate sensitive sector

because things like REITs and things

like utilities and things like staples

get it get the same weight in that. So,

um

it's the it's hard to operate from the

GICS sector level and draw really strong

conclusions.

Um I just think that this is the theme I

I don't have like a great academic

answer. I just look at the market and

can tell you this this pattern is is

very much in place at this point. I

think that it's probably a combination

of

the multi-strats that are putting so

much money to work on a day-to-day basis

and they like to pair trades together

and they want to have they want to be

long AI they want to be long AI or get

out of the AI trade. They are going to

go into the names that we know, the AI

basket. And if you're going to go into

that and you want to be short market

risk or you want to be short some other

factor,

that leaves your your you can do it by

saying like, well, I want to short

software cuz I get more juice there. You

could also short totally unrelated

things like Campbell Soup and Hershey's

chocolate and

um just just you're like, these things

have nothing to do with AI. They're just

overvalued rate sensitive general

stocks that I can, you know, pair a long

position with. So, that's been what I've

thought we call them funding shorts.

Funding shorts they they they're kind of

all over the spectrum.

In my view, like, what you need is

something to break that. In order for

the market to get out of this grind

higher period, you need something to

break that, which goes back to the

either a macro risk on the downside

um or an earning story you can tell

yourself

uh that propels things as a group

higher.

>> All right. So, I I want to close with a

final question about if we do get that

macro risk to materialize,

the trade has been

to fade that risk and to pile in to what

was working before prior to the risk

that has has by and large been the trade

going back to the tariff tantrum

um in 2025.

Uh do you think that if we do get this

this materialization of correlations

spiking to one event, that that one is

the market going to react that way? Are

we going to have the same reaction

function of people piling back in? And

And two, do you think that's going to be

the right trade?

>> I'll answer the question, but I don't

think it's smart to plan these things in

advance because you have to see how that

macro if the macro risk really happens,

then you have so many other sub

questions you have to answer to get

there. But I my general zooming out like

let when the dust settles, I want to be

long the AI trade. That's I That's the

theme. If you want to If you're managing

just going back to like why are all

these multi Why are the pods trying to

be long AI and short something else?

What's going to push this market higher?

How does How does this thing end? Like

you either believe in the AI story you

don't at this point. Either you think,

you know, this is just like a big

malinvestment bubble.

And

or you or you believe or so my view is

that that's all roads lead back to those

AI trades. Um

and you know, like that's that's the

leadership spot and that's where you

want to go. Obviously, there'll be like

a general bounce at first, but like if

you really want to

if you really want to fade that macro

risk, that's the place that's going to

give you the best bang for your buck.

>> Yeah. Well, I will close with just

saying if you are somebody who's in the

in the money management space, you're in

financial research, uh you know, Jack

and I have gotten a tremendous um

tremendous productivity out of using

Caliban AI from 314 Research and we had

do have a special offer for for

listeners. If you go to

314research.com/monetary-matters,

you can get special pricing for Caliban.

So,

the thing that is nice for for me is is

trusting the data. Just trusting that

the data is there, that these are

questions that it's working through all

the time. It's not a new question that

it's it's trying to attack for the first

time. So, uh we'll just throw that out

there. Um Warren, thank you so much for

joining us again on the podcast.

>> Thank you for having me. Thanks for

tuning in. Looking into HFGM by

Unlimited? Head to

unlimitedetfs.com/hfgm

to learn more. That's

unlimitedetfs.com/hfgm.

Until next time.