00:00The situation is that Anthropic, the proximate cause of the sell-off was Anthropic releasing this tool
00:05that was going to basically compete with legal services.
00:09But this decline's been going for a while.
00:11There's been about a year's worth.
00:13They sort of peaked in summer 2025, and software stocks have gradually been selling off since then.
00:18I think the idea is basically like when the internet came along and kind of upturned news publishing, music, high street retail.
00:27The idea is now it's the turn of legal services, possibly even medical services, financial services.
00:33I think that's what we're seeing.
00:35And I guess the interesting question is why this week has it suddenly happened as quickly as it has?
00:42And I think that is actually, there's probably more in the macro area that's helped with that.
00:48Yeah, and Paul, you had a great story.
00:49I mean, I'm not going to lie.
00:50So I was covering UBS in Zurich, and so we were reading the story, and I was about to interview Amari,
00:55and I was thinking like, wow, KKR got slammed last night.
00:58You know, same for a lot of the private equities.
01:00I mean, this was kind of unexpected by a lot of people.
01:03And you had this brilliant column also explaining that because we don't really know what's underneath this private equity owners,
01:10that, you know, there's maybe a lot more anxiousness out there.
01:13Yeah, and I think one of the issues is a lot of deals in the software space were done at peak valuations,
01:20in and around, and after the COVID pandemic.
01:25And then we had that sharp rise in interest rates afterwards.
01:28And then a lot of the financing for those deals ended up being done by private credit
01:32because we went through that spell.
01:33If you remember, you know, Twitter debt was the most famous part,
01:37but there was a whole lot of leveraged finance that banks got stuck with as rates suddenly shot up.
01:42They weren't being active in funding buyouts anymore.
01:44So you have this particular vintage of overvalued deals with, you know, very private credit concentrated financing behind it as well.
01:54And that's kind of, that's a bit of a worry for the future because it's just going to be probably a very bad vintage.
02:00When do we know, John, when we've fallen far enough?
02:03And I guess, again, these were meant to be quality stocks, right?
02:06So you're also upending kind of market thoughts in general.
02:10Well, I suppose the problem is these companies, now investors are worried that these companies don't have a moat anymore.
02:17And that's the thing that makes it a quality stock.
02:19And if your moat evaporates because, you know, AI has come along and competed it away,
02:23then that means that, you know, it's very hard to say, well, how far should it fall?
02:27At the same time, it strikes me that this has been very indiscriminate
02:32because, you know, it's very hard to tell the winners from the losers in any kind of boom like this.
02:37And I guess markets are in a kind of shoot first, ask questions later mode.
02:42Because, I mean, you look at what's happened to the financial stocks today
02:45because of the anthropic news about them moving into financial services.
02:49It's like, OK, but this is not, this is slightly a panic reaction.
02:55But at the same time, you know, catching falling knives is a good way to lose your fingers.
02:59So, that's a very, very graphic way of putting it.
03:03Yes, it's a sorting game.
03:04But, Paul, when you look at, you know, the risk of something being systemic,
03:08I mean, there's so much money being spent.
03:09I mean, I think we calculated like 600 billion, I think, in this week alone.
03:14I mean, is there something, if valuations collapse for some reason,
03:19I mean, how much does it impact private equity and banks?
03:23Well, I mean, we've yet to see how far this is going to go.
03:25I mean, I guess there's, you know, there's some real odd tensions here.
03:28On the one hand, people seem to be betting that AI eats all software.
03:32And on the other hand, they're also betting that AI spending is going too far
03:36and it's a bubble and it's going to burst and it's going to be wasted and so on.
03:38So, these are kind of conflicting.
03:40And I think, you know, what John was getting at earlier is there is been a lot of, you know,
03:44factors kind of turning over as well.
03:46Like momentum trades in stocks have just kind of collapsed very recently
03:51and especially this week and growth has collapsed.
03:53And there's a lot of people are just sort of rebalancing, you know,
03:57all of their expectations about markets.
03:59And I think one of the things with software particularly is people would have to think about
04:02how key is it to an organization?
04:05Is it something where a company is going to be very happy to let all of its staff
04:09just make up their own code all of the time?
04:11Is what they're doing auditable?
04:12There's a lot of kind of serious stuff that people have to consider here.
04:16But, you know, this is a – we could be in a very messy day today.
04:20There's a lot of kind of selling that could continue to come through.
04:23And in terms of, you know, banks, it's where it comes into, you know,
04:26leveraged investors and, you know, margin calls and all of that sort of stuff.
04:30And especially in the U.S. with a lot of very leveraged retail investors,
04:34that's where we might see some real, you know, issues.
04:37I know. I do agree.
04:38I think the deeper issue is there's a bit of a momentum unwind.
04:42And because if you look across the market, you've got Bitcoin collapse
04:45and you've got gold sliding, you've got silver collapsing.
04:48And I think an awful lot of that is to do with the kind of surprise
04:52that Warsh is going to be the guy that's running the Fed.
04:56And although Warsh is presumably keen on lower interest rates,
05:00there's not the same sense that he's going to be, if you like, a puppet
05:03or an ultra-easy money Fed.
05:05And I think that's still feeding through to the market
05:08because if you look at the dollar, it's bounced quite strongly.
05:11And, yeah, the kind of dollar debasement trade kind of peaked about a week ago.
05:14And I think that's also helping with this momentum unwind.
05:18I had the chief economist from BNP Paribas who was saying,
05:20actually, the dollar has behaved like it used to this week.
05:22Yeah, yeah, exactly.
05:23So what does that tell us also about correlations?
05:26Well, I guess it's kind of a risk-off.
05:27It's a risk-off trade, the dollar.
05:29You know, the dollar gets stronger, other assets tend to get weaker.
05:31I mean, obviously, you know, that's a gross oversimplification,
05:35but that's basically how it works.
05:36And I think that what it comes down to is people get overexcited
05:39about the, you know, the end of US exceptionalism,
05:43the dollar debasement trade in particular.
05:45That started getting questioned whenever Trump nominated Kevin Warsh.
05:50And I think a lot of that is what we're seeing now,
05:54the kind of heat going out of these momentum trades,
05:56and that includes gold, silver, and AI.
Comments