- 2 days ago
Category
🗞
NewsTranscript
00:00Bill, I want to start off first with this idea of the bubble itself and sort of what the metrics
00:05you're using to, I guess, make that judgment call that this is indeed a bubble or bubble territory.
00:13Well, the first thing you see is just the equity market valuations are really stretched.
00:17If you look at the Shiller ratio, it's at 41.
00:22The all-time high was 44 in December 1999.
00:25The average over the last 25, 30 years has been about 17.
00:30You look at the real equity risk premium, the excess return you get for holding equities compared to Treasury Inflation
00:35Protective Securities, 1.1 percent, excess expected return.
00:40Less than half the average we've seen since 2010.
00:43Look at the Buffett indicator, which is just the U.S. market cap to GDP ratio.
00:47It's currently around 240 percent.
00:50Buffett said that the stock market was at a risky point when it was above 100.
00:54So we're at 240 percent.
00:55So the first thing is just you look at valuations.
00:58And then you think about what's actually happening in the cycle.
01:01There's a huge investment boom going on in artificial intelligence.
01:05And, you know, this year we're getting tremendous impetus to the economy from that.
01:10But the impetus in 2027 is almost certainly going to lessen because it's not the level of investment.
01:15It's the change in investment that matters.
01:17And the change in investment also matters for earnings growth of the suppliers to the AI hyperscalers.
01:24So I think that that's another thing that's going to start to weigh in the market is that you're going
01:28to start to see a slowdown in the boom itself.
01:31And when the boom slows, that means profit growth expectations are going to come down.
01:35And there's going to be downward pressure on profit margins.
01:38So just like you had a really great story on the way up, expanding profit margins, higher volume on the
01:44way down, you'll have slowing volume growth and more constrained profit margins.
01:48And the last problem you have for the AI is just the fact that are the AI hyperscalers going to
01:53be able to generate the $2 trillion of revenue they need to justify their investment?
01:58Yeah, well, absolutely.
01:59And we're going to get there in a second.
02:00But I do want to go back to the financing thing because and we know, obviously, these levels can't sustain
02:04themselves.
02:05But then you talk to the CEOs of these companies or the analysts who cover them, and they all seem
02:10to think, at least for the next two or three years, that we're going to continue to kind of see
02:14this type of spending.
02:15And there was a story that just crossed the wire before you came on on Broadcom, helping to arrange a
02:20financing deal for $60, $70 billion.
02:22It seems, I know it's not never ending, but when I hear, OK, 2027, that's around the corner.
02:29You don't think that some of these tens of billions, hundreds of billions of dollars that have already been announced
02:34and the idea that they keep raising their CapEx numbers, you don't think that that is going to continue much
02:40longer?
02:41Well, I think CapEx in 27 will be higher than 26, but the increase in CapEx in 27 will be
02:47smaller than the increase in 26.
02:49Also, if you look at the financing, it's much less by the hyperscalers doing it out of their own cash
02:53flows, out of their own balance sheets.
02:55So it's getting pretty incestuous as the suppliers are lending to the hyperscalers and private equities, obviously, private credits doing
03:03their own piece.
03:05So you're also getting greater opacity in terms of how this is actually being funded.
03:10The way it comes to an end, I think, is pretty simple.
03:13Profit margins, you know, the whole thing starts to slow, profit margins start to be compressed, and then the expectations
03:19of future profits get diminished.
03:23And, you know, the stock markets, you know, the discounted present value of future earnings, and you start pushing down
03:28earnings expectations, that flows back to the stock price at the present.
03:32Another issue that doesn't get a lot of attention is also the supply of equities is going to increase.
03:35We've had some really big IPOs this year, and the lockups on those IPOs are going to end.
03:40And so you're also going to have a greater floating supply of equities that has to be absorbed by the
03:44marketplace.
03:45Yeah, and speaking of which, I mean, we reported earlier today that Anthropic, which is looking to come to market,
03:50is now looking like it actually might actually be as big, maybe not bigger, than SpaceX.
03:57I do want to get your thoughts specifically, though, on this idea of the revenue and profitability catch-up to
04:05all of this CapEx spend.
04:07I mean, you can put the numbers on a piece of paper, and you can see how ambitious this spending
04:11is, and the idea that you do not have a revenue stream, at least right now, that's commensurate with that
04:17spend.
04:18Is this just kind of a redux of what we saw with the dot-com build-out or the telecom
04:23build-out or even the railroad build-out?
04:26Yeah, I mean, I think it is, because I think everybody wants to be first, because, you know, this is
04:30a winner-take-all kind of game.
04:32So everyone's putting all their chips into the table, and at the end of the day, what's probably going to
04:36happen is you're going to end up with overcapacity.
04:38And when you end up with overcapacity, you lose the ability to have a lot of control over pricing.
04:42And so your ability to charge what you want to charge to justify your investment starts to become impaired.
04:48Look, the railroads and the Internet, telecom boom, all those things did great things for the economy.
04:52So two things can be true at the same time.
04:55The technological innovation can be really transformative, but at the same time, you can have an investment boom and bust.
05:01And, in fact, if you look at history, it tells you that that's usually the case.
05:05So the question here is really just not whether it's going to be a turn from a boom to a
05:09plus.
05:10It's really a question of timing and magnitude.
05:12Well, the hyperscalers, I mean, they would make the argument, they have made the argument publicly,
05:16that even if there is sort of some excess capacity from this data center build-out,
05:19the idea is that, meaning excess capacity for the AI-specific stuff,
05:23that the idea is that there's still enough sort of computing and cloud computing business,
05:28non-AI stuff, that all of this equipment and these facilities can handle.
05:33Is that just kind of a little bit of a red herring, in your view?
05:36Well, I just think the magnitude of the investment is so great relative to what we've seen historically
05:41that it's sort of hard for me to imagine that just sort of cloud computing it by itself could take
05:46up all this capacity.
05:47You know, we're talking about an extraordinarily large increase in magnitude,
05:52orders of magnitude increase in compute capacity.
05:54Now, it's fine.
05:56I mean, that can turn out to be very useful, but at the end of the day, is it all
05:59going to be needed?
06:00And two, are people going to be able to price for that correctly?
06:04With regards to the economic impact, do you not buy into this idea of the productivity improvements
06:09and enhancements that AI will bring or may bring or maybe has already brought for some companies?
06:16Well, I think there's going to be significant productivity enhancements,
06:19but it's not clear that the productivity enhancements necessarily all go to the AI providers.
06:26You know, historically, you know, you look at a lot of innovations, a lot of the excess returns get competed
06:31away.
06:32And why shouldn't they be competing away in this case?
06:34It's not like we have one AI innovator.
06:37We have like seven or eight different firms that are going all into this space.
06:42We're probably going to end up with, you know, two or three that are really turned out to be, you
06:45know, viable in the long run.
06:47But getting from the seven or eight to the two or three, I think it's going to be pretty painful.
06:52What about the cost of capital? That's gone up.
06:54We've actually seen some issuers that had borrowed at one rate maybe a few months ago,
06:59coming back to market and paying, you know, several, you know, tens of basis points more than what they had.
07:05And, of course, you have this huge move that we've seen in long-term treasury yields just over the past
07:10couple of months,
07:11to be honest, with a 30-year yield at 5.3%.
07:15Does that factor in to this maybe AI boom slowing down?
07:21Well, it weighs on valuation, right?
07:23I mean, obviously, if you have higher interest rates, that's a competition of bonds for the equity market.
07:28But, you know, the rising yields, even though it's getting a lot of attention because it's very different than what
07:34we've been in for the last 20 years or so,
07:37the rising yields really isn't that large at this point.
07:40Now, the thing that could obviously cause this all to come together much more quickly is if people start to
07:45give up on the U.S.
07:45in terms of the fiscal sustainability.
07:48The U.S. has a very large budget deficit.
07:51I think that's weighing on the bond market.
07:53If that were to come together more quickly, you could see a higher spike in yields.
07:58And then that obviously could be the precipitating event.
08:00I mean, it's hard to know exactly what's going to be the driver of the end.
08:04But there's so many risk factors out there presently, it's hard to believe that we're just going to skate through
08:09this unscathed.
08:12Well, with regards to those risk factors, particularly when it comes to obviously the $40 trillion on debt and then
08:17obviously the deficit,
08:19why name 6 percent of GDP now and some of the measures that Scott Besson has made with these buyback
08:24announcements to try to, I guess,
08:26keep a cap, if you will, on rates.
08:29Is that going to be enough, I mean, even in the short term, to address this issue,
08:35absent any sort of move by Congress or anyone else, any other policymakers in Washington to get the deficit and
08:41debt situation under control?
08:43Well, what Besson is doing is going to help very much at the margin.
08:48But, you know, reducing the amount of long-term treasury debt outstanding, you know, it's worth, you know, basis points,
08:55not percentage points in terms of the level of interest rates.
08:58So it's really tactical rather than strategic.
09:00I mean, really, at the end of the day, you have to fundamentally attack the budget problem, the fiscal problem.
09:05And that requires a lot of heavy lifting.
09:08And we have political paralysis in the United States where the Democrats want to do it one way,
09:13the Republicans want to do it a totally different way.
09:15And as a result, nothing gets done.
09:17I mean, just look at Social Security.
09:18It's not that many years now until where Social Security is going to be fully insolvent.
09:22And the fact that we're not even fully, strongly debating that and taking that up in Congress to decide how
09:26to fix Social Security
09:27is really quite unnerving, frankly.
09:31Well, I mean, obviously, this is a problem for the Treasury Department right now.
09:35Does this become a problem for the Fed bill, particularly against the backdrop of a new chair, Jackson Hole,
09:41about a week from today, I believe, where, you know, investors are going to want to hear something?
09:46I'm not sure we're going to get it, but they're certainly going to want to hear from Walsh and the
09:49others
09:50as to exactly what the game plan is.
09:53Well, the Fed has to take the world as it is.
09:55And if the U.S. is pursuing an unsustainable fiscal path, that just makes the job on the Fed a
09:59lot more difficult.
10:00If you start to have fiscal consolidation, that would obviously slow down economic growth,
10:05and the Fed could respond by lowering interest rates.
10:08But at the end of the day, the Fed is just stuck with the world as it is, not the
10:11world that it wants to be.
Comments