00:00David Levitz of JP Morgan writing, we believe in the structural story around the adoption and
00:04implementation of AI, but recognize that the journey is unlikely to be linear. David joins
00:09us now for more. David, good morning. Good to see you. Good morning. How fractured is this trade
00:13right now? So I think what you're seeing is you're seeing markets and you're seeing investors begin
00:17to differentiate between all the different pieces that go into this. You know, chips are only one
00:22piece of the puzzle. You also have to build the shell for the data center. Then you have to run
00:25the data center. You have to get people to pay for the compute. And so it's not this view that,
00:30oh, you know, we love AI and we're going to buy everything that has AI associated with it.
00:35I think people are beginning to delineate a bit more between the different pieces and where there
00:39may be excess supply, where there may be robust demand and where, to your point, you may see
00:43challenges from a financing perspective to get things done at attractive prices. Give me the
00:47split right now. Excess supply, robust demand. What's the split, the divide for you? So I think
00:51that we're still in an environment characterized by very robust demand. I think that the risk to me
00:55around supply is primarily in the chip space and the hardware space. You know, this is where
01:00obviously a lot of investor enthusiasm is. And, you know, if history is any guide, when there's a
01:04lot of enthusiasm, people tend to get a little bit ahead of themselves. You can end up with too
01:09many chips. And that actually helps the people that are running the data centers because it brings down
01:12the overall cost where I think demand is going to remain quite robust and arguably more structural
01:17is when it comes to actually building that data center and then operating that data center.
01:21Right. Again, chips are just one piece of the puzzle.
01:23So if it's not going to be smooth sailing, maybe you should take some chips off the table.
01:27Oof, I'm so sorry. I couldn't help myself. It's really fun. I'm enjoying this. I just wonder,
01:33at what point do you prefer equity still to bonds, given the fact that increasingly bond investors are
01:39demanding an increasing premium for the privilege of lending, for the privilege of being able to borrow
01:45money for some of these investments?
01:46So I think when it comes to the equity versus debt question, it's really a three-part question. Do I
01:51want to own the equity? Do I want to own the investment-grade bonds? Or do I want to own
01:55the
01:55high yield? Because high yield is much more oriented towards the picks and shovels. And again, you can
01:59see some of the pushback on the hyperscalers. Free cash flow has gone to zero. Now they're trying to
02:04figure out how to finance this going forward. I wouldn't be surprised if we see them continue to issue
02:08equity the way that we have on occasion up until this point. For us, we find high yield credit really
02:13appealing here, not because we're going to see massive spread compression, but because effectively
02:17we can get paid around 7% with a third of the volatility of equities. When it comes to the
02:22equity side of things, a lot of enthusiasm around tech. When we watch the other parts of the market
02:27soften up and sell off, we actually view that as an opportunity. Because if we're right about this
02:31whole AI productivity story, a rising tide will lift all ships. And that'll be good for the rest of
02:36the market, not just the tech, which has benefited up until this point.
02:39Just to crystallize the point, are you seeing the pendulum start to shift away from the equity
02:43market to, say, the high yield market to more of a fixed coupon that guarantees a certain return
02:49at a time of incredible and increasing volatility?
02:52I do. And I think that there's also kind of the certainty, if you will. And again,
02:56they're junk bonds. And so you will see defaults at some point begin to pick up.
02:59But I think that that certainty gives people comfort and also kind of where it sits in the
03:03broader AI supply chain, right? This is what's building the data centers. This is what allows the
03:08whole thing to work. And that's very different than the debt that the hyperscalers are bringing to
03:11the market. And by the way, they've already backed a lot of this high yield debt. And so you have
03:15this
03:15implicit guarantee that if things go south, you're still going to get paid. I mean, if you're an
03:19investor, that's a pretty attractive proposition, given how much U.S. equities have moved over the
03:23past couple of years. Let's just take it back to stocks, the great rotation. Where are you and the
03:27team on the rotation now, given the restart of a conflict, renewal of tensions between the U.S. and Iran?
03:33So I think that volatility is a feature and not a bug of this administration. And so, you know,
03:38whether it's what's happening in the Middle East or whether what's happening with tariffs,
03:41right, they view volatility as a tool in their toolkit. I think that there's definitely been
03:46an interruption to the rotation here. But I think when you take a 12-month forward view,
03:51you think about what's happening in the economy. OK, we've got growth, which is pretty good.
03:56That's why we have some inflation pressure. Maybe the Fed needs to hike. Maybe they can hold.
04:00We think that they'll hold. But again, I think that we're going to need to see a few hot inflation
04:03prints before they do anything. I mean, this is one of these environments where if the Fed does
04:08feel the need to hike before the end of the year, they're arguably hiking for the right reason,
04:12right, because growth is well supported. Inflation is a little bit hot and they're
04:16just trying to bring balance back. And I think as investors kind of digest all of that and as you
04:21see things hopefully settle down from a geopolitical perspective, that breathes life into the broader
04:25equity market and allows that rotation. So does the rotation, is it independent of the rate hike
04:29debate or not? I think it is. I think unless we were to see an inflationary environment like we
04:34did in 2022 when the Fed's sitting there and the UCB is sitting there and they're like,
04:38oh man, we really missed this one. We've got to catch up really fast. That's very different than
04:42a maintenance hike, right? A maintenance hike is saying, you know what, we feel like things are
04:45a little bit too hot. We're going to try to cool them down, not we're going to go from zero
04:49to five
04:50and a quarter over the course of a couple of months. So you don't think what we've seen over the
04:53past
04:53couple of days, which is the outperformance from tech, really persisting. You think that the path
04:58of travel for the next six months really is equal weight, continuing to outperform regardless of
05:02what happens with oil prices and regardless what happens with the Federal Reserve? Look, I think
05:06tech is going to remain well supported. Again, we view this as a structural story that's going to play
05:10out over the next 10 to 15 years. But I do think you will begin to see that rotation. I
05:15would also
05:15highlight that one of the other ways we're playing this tech story is through markets that haven't
05:19necessarily appreciated as much as the U.S. And so for us, looking to places like EM, parts of China,
05:25that's an interesting way of getting this tech exposure at a more favorable price. And I think
05:29at some point, valuations will become an issue for investors. That'll support the rotation. That'll
05:34support non-U.S. markets. If a Fed rate hike wouldn't curtail the outperformance potentially
05:39of the equal weight, what will a rate hike actually do? Will it slow inflation if it's exogenous
05:45factors that are coming in and bolstering prices?
05:49So here's the thing about a rate hike. What the Fed is worried about is a labor market that
05:55tightens further and wage growth that reaccelerates. And I don't think we're on the cusp of that. I
06:00think the labor market is tight. I don't think the labor market is particularly strong. And so
06:04to see wage growth begin to accelerate, which is what would precipitate a series of Fed hikes,
06:09I mean, to me, that's possible, but it's not necessarily all that probable. This is going to be
06:14more to address lingering inflationary pressure from tariffs, a little bit of inflationary pressure
06:19from oil, because, again, it hasn't gone back down to where it was pre-conflict. And we know the
06:23longer energy prices stay elevated, the more that price pressure broadens out into the economy.
06:28Those are things that you can manage. It's when you see that labor market begin to heat up,
06:31that's when you really have a problem.
06:33EM equities up 19 percent so far yesterday. How perform the NASDAQ and the S&P?
06:37Yeah. EM meaning what?
06:39AI.
06:41Well, I mean, that's a question. Some people are saying if you strip out South Korea,
06:45if you strip out those names, there still is outperformance in the EM story just simply
06:49because they were ahead of the curve when it came to the rate hiking cycle. And now some
06:52of them are actually cutting rates. Also a question of which emerging markets are tied
06:56to hard assets. I was dead in Brazil and the shocking amount of resources. I mean,
07:01they have rare earth minerals that they could potentially develop. I mean, how much do you start
07:04to see some of this tapped into? Of course, there is that tricky issue of government, but whatever.
07:07I mean, these are the things that people are looking at.
07:09These were your channel checks in Brazil, right?
07:10I did lots of channel checks.
07:12I have no doubt about it.
07:13I did channel checks in the monkeys. Very cute.
07:15Yeah. Do you have a good time? Still living on it, aren't you?
07:17I actually think that, you know, I should probably channel check again sometimes.
07:20Yeah, yeah. I agree with you. Maybe I'll come along for the ride.
07:23Okay. Let me tell you, it's really beautiful.
07:25I have no doubt about it.
07:26And each of the cabana is really lovely.
07:27Good stuff. All right. David, do you get to do that over at JP Morgan?
07:29Yeah. Just pick a destination and go there.
07:32Hey, do some channel checks.
07:33Unfortunately, not as much as I like, but I want to latch on to something that you said.
07:36You were talking about, you know, resources and rare earth minerals. The thing that I'm
07:40recognizing is that everything is becoming an AI trade, right? Whether you're going to reap
07:44the productivity benefits of using the tools, whether you're part of the supply chain that
07:48allows the thing to come to life. I mean, AI is everywhere. And so it's how you play it,
07:52not whether or not you play it. I think that's the big question for investors going forward.
07:56Okay.
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