00:00The capex that is required to build these data centers using those chips is really remaking your world investment grade
00:06credit with
00:07certainly a lot of supply already happening and due to happen in the next couple of months and years. Yeah
00:13there's been deal after
00:14deal announced and rumored. So there's a lot of deals that are being rumored just now being backed by chips
00:18by some of these
00:19semiconductors that are making these with large hyperscalers as their tenants. So there's a lot of money that's continuing to
00:24pour into here. It's I think fueling the equity market in many ways. But at the end of the day
00:28if the fixed income market is
00:29not feeling comfortable with these transactions it's going to be hard for these stocks to continue to grow. And they
00:34need our
00:34market. And from our standpoint we're getting really attractive levels that we've never really been able to get within the
00:39tech
00:39space before. And there's a lot of nuances to these deals. And a lot of them are not in the
00:42index which gives us a chance to have
00:44some different alpha that we can provide to clients. When it comes to AI do you have to have a
00:50take on whether this is like the
00:52next big thing like people are saying like the new Internet like something that big. Or does it matter as
00:57a bond manager or are
00:58there other ways to judge it without having to sort of play out how big it will get.
01:03Yes. So because we don't get the upside we generally just think about what are the worst things that can
01:07happen. And so every deal that we're looking at we're trying to structure and make sure that we're
01:11protected on the downside. And that can be things like amortization on these chips as quickly as
01:16possible. Having very low loan to values on these type of transactions. So the other day if AI doesn't really
01:21turn
01:21out to change the world as much as we thought. At least we we know that we have the cash
01:26flow from these
01:26particular credits. But it's almost like real estate deals where at the end of the day if we if we
01:30know that
01:30there's a there's a solid asset underneath it even if it's really not used as much in the future it
01:35can
01:35still be a good investment for us. And that's really the difference between having the equity upside where you can
01:39make 10 times and us just getting our coupon and hopefully our principal back. Do you see any signs of
01:43buyer
01:44fatigue. I mean maybe not at the investment grade level but certainly when you go down in quality there might
01:48be some
01:49more hesitance to buy exactly what's being sold right now. There there's buyer fatigue and just really just I would
01:56say
01:56just concern that this is going to continue to happen. And so we were finding really attractive deals. But we're
02:00wondering is
02:01this the last one we're going to see. Should we use our last chips on this one because this is
02:05a use of the phrase chips. But
02:07this is our this is our last bet on this because this is something that's so attractive that we haven't
02:10been able to see before.
02:11And then next week there'll be something that's even more attractive. So we just need to make sure that we're
02:15really kind of spacing out
02:16our bets. We're using multiple different hyperscalers. And so I think we're saturated in it. But there's still some room
02:22because this is such a great opportunity. OK. Let's talk about the Fed and the new chairman.
02:28So I'd like to not overthink things. Trump picks this guy. He's going to have to lower rates.
02:34It's that simple isn't it. Like are people coming in. Oh no they're going to raise. I don't know. Like
02:40isn't that overthinking
02:41it. Aren't rates just going to go down over the next year. And how low will they go. So there's
02:46two parts of it. One is that that
02:47used to really seem simple. Now it's not as simple. But we'll come back to that. But two is that
02:52you always
02:52have to think about the bond is a full curve. So even if they do cut on the front end
02:56if nobody really
02:57believes that it's warranted the back end is going to go up and yields are going to go higher 10
03:01years
03:01and further out the curve which is not what the government wants either. So he wants housing prices
03:05to be more affordable which means getting mortgage rates down which you need to have 10 and 30 year
03:10treasuries go lower for that. But yes overall I would have said a month or two ago this was an
03:14automatic
03:14thing and all of a sudden we've priced out all the cuts and now there's even discussions on us having
03:19hikes on the table. And at the end of the day it's about inflation. So what we're seeing inflation wise
03:23is twofold. One is obviously the war and things that are going on with that in terms of commodities.
03:28We think that will pass. We think we'll get a resolution there. Two is the near-term effect of AI.
03:33All this capex spending we're just talking about. That is driving prices higher over the near term.
03:37The longer term and what Warsh is going to argue is that the productivity increases from AI are going to
03:42outdo any of the near-term price increases and will be so much more efficient and productive
03:47than we've ever been and therefore he can cut rates. It's just really hard for him to say it
03:51right now. Right. I mean it's hard to do that when oil prices stay at the levels that they're at.
03:55What we're seeing right now is elevated rates not just in the U.S. but around the globe.
04:00A global sell-off and it really took root at the end of last week. Some people are saying this
04:04is the
04:05return of the bond vigilantes especially in the U.K. where there's a political crisis
04:08and Japan where we saw wholesale inflation really surge. Is there a bond vigilante return and is it
04:15now seeping into the U.S. as well? I think there is a little bit of that happening globally certainly
04:20around fiscal responsibilities. It's topics that are coming up. You've had Japan that's been really
04:24have no inflation forever. All of a sudden they have some inflation coming and they need to start
04:28increasing yields over there faster. But overall I think it's more inflation focused for now and budget
04:34deficits come up from time to time. If the treasurer will move things to being more front end loaded in
04:40terms of issuance. So I think they have ways around this. But we do need to see some fiscal
04:44responsibility and that it's just really not on everybody's minds right now. But at some point you're
04:49going to get some more balance there. But overall once you start to get yields at these attractive levels
04:52five percent on a 30 year treasury there's a lot of corporations that are doing 30 year bonds at six
04:56percent
04:57investment grade names. These look attractive to investors. So I think there is a bit of a ceiling there
05:01because there is so much demand for yield from pension plans, insurance companies, annuities,
05:06etc. Okay let's talk about bond managers which you are one. Okay you run GTO, your benchmark to the ag.
05:14Now you brought this up because you heard me talking about it. Bond managers are they that much smarter
05:20than stock pickers because you guys are beating your benchmark by 58 percent of you. Only 26 percent of
05:27stock pickers are beating their benchmark. This is over five years. Are you just smarter or is it possible that
05:32the
05:33benchmark isn't good. I compare the ag to playing against the New York Jets every week. It's weighted by debt
05:38whereas the S&P is full of momentum. Did you guys just pick the right benchmark. So I would love
05:43to say we're smarter
05:44in over 10 years. Those numbers are even better for for fixed income. So longer term it absolutely plays out.
05:50But the ag
05:51is a flawed index. Absolutely. There is a lot of very high quality paper in that index and you don't
05:57need as much quality of
05:58that as we don't think. So we can put other things in like high quality corporates in there. We can
06:02put a little bit of high
06:03yield. We can put high quality triple A structured credit in there. And that's an easy way. But you know
06:08it's sort of like beating the
06:09Jets. I'm a Falcons fan. It's pretty easy to beat us over the last several years as well. But you're
06:13probably going to be able to do it.
06:14But the thing is that is the most important to know is that AGG, B&D, the large passive ETFs
06:19still have over
06:20$100 billion in them each. And so it's not as if this is a benchmark we made up that nobody's
06:24using. This is a benchmark
06:25that people are using, have a lot of money in, and we think we and others have invented other products
06:30that are better.
06:30And that's why we're starting to see a lot of inflows into active ETFs as well. Speaking of active ETFs,
06:35given how much
06:36supply is coming out from tech companies or companies in that industry, how do you ensure that you don't have
06:41too much
06:41tech? I I'm guessing with all these new issues, it's a constant game. Yeah. So that's all one big trade
06:47in a lot of ways
06:48right now. But you really do need to isolate your tech exposure, particularly things like the hyperscalers and they're
06:53high quality. But at the end of the day, there are going to be correlated to this tech boom. But
06:56the areas that we're seeing
06:57the spillover to and we think they can do well with or without an AI boom is your classic industrials.
07:03Middle America, this
07:04build out of AI is really, really positive for these industrials. And then two is the bank, the banks. The
07:09banks are a
07:09derivative of the economy and they're making a lot of money on origination fees of all the debt and equity
07:14that are going on
07:14in IPOs that are going to be hitting the market later this year. And that's a great way to play
07:18the market as well. So I
07:19like the banks. I like the industrials. But then kind of capping this tech space around five or so percent
07:24of your portfolio so that
07:25you're not so concentrated in the real focal center of the focal point of the of this AI boom.
Comments