- 2 days ago
Category
🗞
NewsTranscript
00:00If you go back to last year when the sell America trade was all the rage,
00:05the fact is, is that this country continues to be the prime destination for capital in varying degrees.
00:14Now, look, the global portfolio reallocation after literally a decade of overweight U.S.
00:22is something that we think has begun.
00:24It's moving very slowly. But frankly, the sell everything, sell America type theory really doesn't tend to hold much water.
00:33You do, though, wake up to headlines like we saw on Saturday with President Trump threatening further tariffs on European allies,
00:43thinking, how do I hedge? Right. How do I at least protect myself on the downside with the VIX,
00:49you know, holding under 20? The move index just comes down, down, down, down, down.
00:54There's no volatility in this market. How do you protect yourself? Where is a safe haven?
00:58Well, it's options on literally every asset class globally have been extraordinarily inexpensive.
01:07I mean, we've been scratching our heads for the last two weeks,
01:10wondering how the VIX could have been 14 and 15 to start the year,
01:15how the move, to your point, is at multi-year lows.
01:19And essentially, from our point of view, option strategies puts in a lot of these things make a ton of sense.
01:26But the key is hedging, not selling, because the underlying subtext of this market is the same that it's been for three years.
01:36AI is going to drive equities higher when we get to the end of this year.
01:40Julian just came out with a list of market surprises, potential market surprises for 2026.
01:46And what I love about this list, Julian, is that not only do you highlight what could surprise,
01:53but also how to play it.
01:55And, of course, we protect the copyright of our guests.
01:58So go ahead and look at Evercore ISI website for that.
02:02But, or subscribe to Julian's research.
02:04What would you say has changed over this weekend?
02:08I mean, if you were going to write this list again this morning, would it be different than on Friday?
02:12Well, we would have probably bumped up the potential for the U.S. taking control of Greenland from number seven,
02:20a little higher in the pecking order, although the prediction markets are only incrementally assigning a higher probability.
02:27And, of course, our trade there is to own Eurostox 600 puts, which certainly have done their share of the heavy lifting these last two sessions.
02:38And then the other one, I think, and this complicates what's going on in Greenland a bit more,
02:45is our view that there's a potential for the U.S. 10-year yield to trade above 5% in 2026.
02:53Now, two things.
02:55Obviously, the surge in yields in Japan is difficult for our markets to digest.
03:02It plays into this more cautionary narrative around asset volatility with regard to Greenland.
03:10But, again, it just points out the fact, as it was last year, that part of the underlying strength of the U.S. market
03:21is our ability to keep interest rates in check.
03:25So does that mean that the sell-off that we've seen in Japan, how are you weighing it in terms of what has been the driver of the market for today
03:33and what that means for the driver of a market going forward on a down day like this?
03:37Is it more important to have the geopolitical concerns that maybe Europe is going to be hit with more tariffs
03:42or to have Japanese bond yields hit the highest on record?
03:46Well, on a down day like this, you would prefer to see fixed income acting as a shock absorber, not a shock accelerator.
03:55But, obviously, again, Japan changed that narrative.
03:58It's going to be, in our mind, if we get to that 4.5 percent level where, if you think about what happened last year,
04:08that was the type of level where the Trump administration started rethinking its approach to tariffs.
04:15Do you get that kind of rethink with regard to what's going on in Greenland?
04:21And, you know, today, Trump appears to still be in sort of acceleration mode on the subject.
04:28But, you know, things are moving very quickly.
04:31I want to focus in on the U.S. debt market because Ann Walsh said the fundamentals are strong.
04:37And it's almost like a throwaway comment that a Treasury secretary would make about dollar strength.
04:41I mean, are they really strong?
04:44Are they stronger than they were a month ago or a year ago as we have debt-to-GDP ratios of, you know,
04:50100 percent plus, 6 to 7 percent deficit spending outside of a recession,
04:56and that with 4 to 5 percent interest rates?
04:59I mean, it doesn't seem that strong.
05:02And the sum total of what you just said from time to time has certainly been something that's roiled markets.
05:11And again, and I go back to the establishment of the Peterson Institute, I think, 40 years ago to deal with the concept of the debt problem.
05:21And here we are 40 years later.
05:23It's a much larger problem.
05:25But again, it's going to not be a problem until it is, from our point of view,
05:33creating incrementally more geopolitical instability creates a greater chance that will be a problem.
05:40But we do not see that as a discrete problem in the medium term.
05:45Is it an issue, though, that we came into this year with a lot of bullishness, a lot of confidence,
05:49whether it came to overall markets, animal spirits, deals are back on.
05:53We were talking about this in the break that Bank of America's latest fund manager survey
05:57shows the lowest amount of hedges since 2018 for equities.
06:01Cash levels are at record lows.
06:03You were talking about this idea you don't sell, you want to own options.
06:06But it's an issue that people aren't doing that, that they don't seem to be protecting themselves to the downside.
06:11So our surveys team will poll clients.
06:15And the first week of the year, the question was, where's the next 10% in the S&P 500?
06:2275% of the respondents said higher.
06:25When we've seen that kind of one-sided viewpoint over the course of last year, we've had pullbacks.
06:32So in that sense, it's absolutely not a surprise.
06:36And again, for us, it's just a question of particularly at these valuations,
06:42because in the fourth year of a bull market at these elevated valuations,
06:48let's call it imperfect news, which we're facing this morning, is going to cause more volatility.
06:54Let's talk about AI for a moment, because you highlight that.
06:56Obviously, that's been the driver of these equity markets for a few years now.
07:00Is there a risk that the massive funding needs are difficult to meet,
07:07especially for a company like OpenAI, which wants to spend over a trillion dollars
07:12and only has, I don't know, $20 billion in revenue?
07:16How do you square that circle?
07:18So we look at the universe in general.
07:22And the spending, for the most part, from the hyperscalers is very, very sustainable as regards to the free cash flow.
07:32Obviously, at the private level, those numbers are a little murkier.
07:36But the deal pipeline continues to suggest that it is not an issue.
07:42And I think, essentially, what it comes down to is how do markets digest news.
07:50And I think, to the point, earning season share price reactions, particularly from the hyperscalers,
07:57are going to be very, very important.
07:59And from our point of view, the mood has soured in technology and AI over the last six weeks,
08:05enough such that the bar is set actually lower for tech companies than it is for the rest of the market.
08:12But is this debt issue a lot like the Treasury debt issue where it doesn't matter until it does?
08:19Is it that binary when all of a sudden someone says, oh, this matters?
08:23Can we see a total lack of confidence?
08:26Well, look, something like that is possible.
08:29But, again, go back to December, you know, the company that has clearly taken on, you know,
08:36very large levels of debt to finance its plans, it was idiosyncratic.
08:41That company's credit default swaps surged higher.
08:44But the rest of the credit space and the hyperscalers were largely unaffected.
08:49And when you look at the NASDAQ 100, the net result, as we've seen on several occasions during this bull market,
08:57it's just a sideways churn.
08:59And we think that's where we are.
09:01Ultimately, we do think all of that's going to resolve higher.
09:04But this gets back to something you put in your list of surprises.
09:06And I love how you started this, saying, have we as investors lost the capacity to be surprised?
09:11It does kind of feel like that, Julian, that you get these momentary bouts of concern about,
09:16momentary bouts about geopolitics or terrorists, but we end up buying the dip and we end up higher.
09:22Have we lost the capacity to be surprised?
09:24Do we just now have this Pavlovian urge to buy the dip and nothing matters?
09:28Well, that's why this morning is such a stark reminder, OK?
09:33The overenthusiasm was exactly that, overenthusiasm.
09:38But when you think about the fundamentals of a year where earnings are likely to grow at least high single digits,
09:46if not low double digits, where you're going to have lots of stimulus in front of midterm elections,
09:52and you're going to have an economy.
09:54We just raised our GDP forecast to 2.5%.
09:57And even then, the risks potentially tilt to the upside.
10:01All of that suggests that things are going to continue moving to the upper right.
10:07But this is just a reminder that it doesn't happen in a straight line.
10:11But do you worry that it's a fragile house of cards?
10:17I mean, as long as everyone's on board, right?
10:19There's no bears.
10:20As long as everyone from Ann Walsh to Ed Hyman says, it's OK until it's not.
10:26Like, we're going to buy the dip.
10:29And again, days like today don't concern us discreetly.
10:35This is a logical reaction to, you know, an unprecedented change in geopolitical configuration.
10:43Perspectively, it would be more concerning if the market just laughed this off.
10:48Then you would get to, you know, ultimate FOMO, you know, really overenthusiasm.
10:53There's still not a lot of change, Julian.
10:54You have the president of the United States.
10:56Essentially, threatening military action against NATO to annex a territory.
11:03And yields don't move.
11:04I mean, more than five basis points.
11:07Well, but again, you also have to remember that the interest rate markets has been very,
11:13very calm.
11:14Yeah.
11:15There, too, again, and obviously creeping up in the last week or two.
11:19There, too, again, you're likely to have further upside.
11:22Probably episodically, we need to see the next round of data accompanying whatever the, you know,
11:30the ructions are coming from Japan, coming from Davos.
11:35This feels like an awkward question to ask on a very down day when things like small caps are down especially hard.
11:40But if this is a year that's going to be led by earnings, that's going to be led by stimulus, is it also a year where leadership broadens out?
11:48So you've seen that these these first couple of weeks and our problem with where the market is right now is like we believe this can be and everything works here.
12:00But if you do the math, everything still needs to be led by technology, A.I., et cetera, whether it's the weight of the top 10 at 40 percent of the index or the weight of the hyperscaler slanted sectors at 55 percent.
12:17But, again, like we saw at the end of the Internet bull market the last year or so, you had an everything rise.
12:25The problem is now is that the first reaction in areas like small caps and cyclicals, where we've seen a lot of buying these first several weeks,
12:35is that this narrative of what's going on geopolitically is a bigger threat to the growth trajectory and the pricing in of greater growth than it is in terms of a technological headwind.
12:51By the way, I just want to bring it back quickly to WSL predict.
12:54This is the function on the Bloomberg that I've been looking at so much recently.
12:58Rick Reeder's chances of becoming the Fed chair now in the betting markets up to 20 percent over the weekend from like five.
13:06Does it matter? Does the Fed matter that much to your outlook for this year or would it be fine if it just stayed on hold?
13:12A fellow Emory Business School graduate. Great, great, great for Rick.
13:18Look, this is just another one of these things where the saga is ongoing.
13:24We're going to get a name at some point.
13:26And, you know, I think the market would be reasonably comfortable with whoever's going to end up crossing the finish line.
Comments