Is the Stock Market Sending a Warning?

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1:53Merryn Somerset Webb: Welcome to the Merrin Talks Money Market Wrap, where we talk about the biggest moves in markets this week and what is driving them. I'm Merrin Somerset-Webb, UK Money Editor-at-Large. And I'm John Stevick, Senior Reporter at Bloomberg and author of the Money Distilled Newsletter. Okay, John, there's a lot going on. There's always a lot going on in these days. But listen, one of the things that I want to talk about, and I'm not sure that you agree with me that this is a big deal, but I do think it is a big deal, is about breadth in the market. So quite a few people have written about this week, including our very own John Authors, who points out that on Tuesday, NASDAQ went up quite a lot, right?

2:26Merryn Somerset Webb: But of that rise, more than half of the rise was down to four companies, all four chip-making companies, basically, Micro and Thandisk, Advanced Micro, devices and video. Yep. So everything else is kind of basically irrelevant to this huge concentration. Now, we know that isn't new, right? But it just seems to be getting more and more intense that when the market moves, it's just being dragged along by a couple of big companies and everything else is either knocking around at neutral or going down a little bit or really just not doing very much. And that's not normal. It doesn't happen that often.

3:00Merryn Somerset Webb: He looks at it and he says that in terms of this kind of really extended period of outperformance by a couple of big companies. You've got to go back to the late 1990s to see. We all know what happened then, right? Narrowing of performance. And the more you look at it, the worse it gets. And he actually, John points out a tweet that I was looking at the other day, which first made me think, I'm a bit worried about this, which was from one of the traders on X. And so, there are two days in history like today when the S &P 500 rallies at least 1 % to us in 1 % of a new high and more of stocks fell to new lows, then highs July 23rd, 1929, and December 21st, 1999.

3:39Merryn Somerset Webb: So both before really, really, really epic, epic market fails, right? Now, as John says, and I agree, it's a very small sample sale, doesn't mean anything, but it doesn't feel good, does it? Having the market led by companies like this and people constantly think, oh, it's a new hire, it's a new high to new high everything's fine but underneath everything can't isn't fundamentally i agree and obviously i agree that the market is very very concentrated it's very pricey and like any measure that you you pick um really will show that the snp is expensive and the nasdaq's expensive so i actually don't disagree at all with the fundamental only i should be practiced but people talk about it a lot and quite often it then just goes on to widen out so whenever you get down to talking about these things which are almost kind of timing devices um and that's all because i sort of question like i but does it actually tell us that in three months time the market's gonna start crashing or whatever i mean i mean to be fair you know i've i've already got a marker i've produced a little graph in my bloomberg terminal to remind me that the economist had nvidia on the cover a couple of weeks ago and so i've just got a wee note of that with Nvidia share price because that's my kind of chosen timing indicator Glass houses John, glass houses Oh no no no this is not a criticism, it's because The Economist is so widely read and so widely respected that it works it's not because it's a bad title it's because everyone reads it so yeah I'm sort of like on crash alert for at least six months from the publication date which was about September earlier this month, so yeah this kind of adds to that feeling, it's just I don't know I've heard breadth is narrow a lot.

5:30Merryn Somerset Webb: Okay, I'll give you that. But when breadth is narrow and when there are so many things to worry about with the companies that are leading it. Yeah. Right? And you've written about this this week yourself, right? I've written about this week. Yes. Yeah. And what did you say this week? Is this a new worry, John, or are you just piling on top of our old worries about too much CapEx and not enough revenue? It's basically just the old worries. too much capex not enough revenue chris claudia over the capital gearing asset management wrote a white paper basically showing what a a wild level of spending is going into this and the correspondingly wild level of revenue that will have to come from it if it's actually to be to kind of make a reasonable return on capital and obviously chris's view is that well that's not likely to materialize and so at some point we're going to get a reality check although to To be fair, he's saying he wouldn't feel confident predicting a reversal inside the next 12 months.

6:29Whereas I must admit, I'd be surprised if we don't get some sort of reaction in the next 12 months because apart from anything else, the Anthropic IPO is meant to be coming anytime soon. So that's a kind of natural point for people to start thinking, is this going to work or not?

6:46Merryn Somerset Webb: Yeah, the thing that I keep seeing is the failure of data centers to be completed. So we talk about all these capex being thrown at it and the data center is going up all over the place, but they're kind of not. So there's an awful lot of chips sitting around in boxes. I saw one thing that were living in various suggestions about what percentage of the chips that people have been buying are not actually being activated. They're just sitting around waiting for the data center that's supposed to be going in to be built, and they're not being built at the speed that was previously expected. You've got all the protests against them.

7:17Merryn Somerset Webb: You've got the problem with the electricity hookups. You've got problems with the heat, problems with the water, problems with all sorts of things. That means that while the money is being technically spent, it's not necessarily clear that the infrastructure is being built at the speed it's supposed to be. And if I was going to worry about something beyond Armageddon and that kind of thing, that's what I would worry about. The data centers not going up. I mean, where I live in Scotland, every time anyone talks about a data center, the protesters come straight out. And I see that's the case across a lot of the US.

7:50Merryn Somerset Webb: And one of the things I was looking at today is the amount of heat these things generate. So, you know, we've all talked about the cooling systems and that kind of thing. But there's now an idea that if you live near a giant data center, you're just going to get hot.

8:06Maybe people shouldn't be objecting to it so much in Scotland. I don't think that's the Scottish issue. This is more a Texas issue. yeah i mean i think that's a really good point because you know any other time we talk about infrastructure if it's nuclear or if it's rail the first thing that comes to anyone's mind is well is this even going to get built whereas with the kind of hyperscaler stuff it's like they click their fingers and we imagine that it just is magicked out of thin air and yeah you're absolutely right the chances of any infrastructure project getting built on time into schedule are relatively low if you take the average, I think, across most infrastructure projects.

8:47So it's slightly weird how we seem to have this slight blind spot about this kind of aspect of the AI build out.

8:53Merryn Somerset Webb: Yeah. Well, I think that it is interesting that a lot of people still forget that, well, previous things, I mean, take the internet bubble, that wasn't hardware to the same extent. AI is very, very physical, right? Everything about it is physical. and we think of it as being digital, but it's simply not. So if you want to see what's going to happen next, you probably need to stop paying attention to the digital side and really look at the physical side. See, this is interesting though, because what would that actually mean on the investment side? If you've got delayed capacity, but then you've still got the capacity, presumably that wouldn't be bad for the hyperscalers because they're the ones who are benefiting from any actual shortage in data center capacity because they're the ones that kind of own it and rent it out.

9:49Merryn Somerset Webb: Sure, but a lot of their forecasts are based on having more data center capacity. Yeah, yeah, yeah. I mean, so higher price data center rentals may be okay, but we're moving outside our area of core competence here, John. Well, no, because I'm just thinking it's got to be good for someone if there's a shortage somewhere. Yeah. So I'm assuming it just jacks up the rents or something like that. But yes, yes, we will need to see what we can do some digging into that one. Yeah, let's think about that one. Let's think about that one. Of course, I suppose the other thing to point out is that chips don't last that long.

10:21Merryn Somerset Webb: I mean, as we were saying in the show in Edinburgh, there was a lot of talk about how previously when you've looked at infrastructure build out and you've gone, well, the thing crashes, but we still got the infrastructure. And Alec Cutler pointed out that that simply isn't the case with data centers because you might still have the building, but the chips inside are outdated very quickly. Yeah. So you just have a big building. Yes. A big empty shed full of obsolete chips. Okay. So let's move on to worrying about debt, shall we?

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15:09Merryn Somerset Webb: Obviously, we can worry about the private debt, there's all that, but let's look at public debt. Obviously, we had horrible borrowing numbers from the UK this week. We borrowed much more than we OBR thought we were going to. We're spending an absolute fortune on debt interest. It's going to go up to about 4 % of GDP. 4 % of GDP, John. It's ridiculous over the next year or so. So insane. I think in the 2010s, it was more like 2%. And I know this is not all because we're spending more, it's because rates are going up, of course, but it doesn't really matter. It doesn't really matter where the rise in spending is coming from and where the rise in borrowing is coming from.

15:46Merryn Somerset Webb: It's still horrible and it's still the responsibility of the government to do something about it where they are demonstrably not. It's depressing but entirely expected. We're getting all the same sort of kite flying now as we did before the last couple of budgets. Are they going to do this with capital gains tax? But no one's talking about cutting spending. And actually, the other thing that I have to say is that the other parties, or certainly the Lib Dems and Reform, they have both said that they want to raise the personal allowance to£15 ,000. And you're kind of like, have any of you looked at the debt to GDP figures recently?

16:22Do you need to get a grip on this? You can turn around and say that we're going... I mean, I'm all for lower taxes, but A, our tax base is too heavily concentrated on people on high incomes, and there's nowhere near enough coming out of actually the lower income side of things. Partly because we all need to be in it together, but also partly because the only way to actually make up the kind of figures we need is to take a bit of money from everybody. And so the idea that they're going to then do these effective giveaways, and then they're going to pay for them with things that they haven't actually costed out so for the lib dems it's a magical eu deal that won't happen and for reform it's spending cuts that they still need to spell out so i think that this kind of like basically it basically feels as if we're in a run-up to an election and everyone's kind of like bidding for voters rather than taking the situation seriously and i would like to think the bond market would have something to say about it but for now it seems to just be drifting along, responding to the oil price more than anything else.

17:29Merryn Somerset Webb: Drifting along at quite a high level. Remember, by the way, John, when you say the Lib Dems want to raise the personal allowance, this is already all their fault. This was a Nick Clegg policy. It was a Nick Clegg policy to keep raising the personal allowance because he had this idea that people shouldn't pay tax, that people shouldn't participate. And I remember having these arguments with him about this thing, you know, but surely democracy requires participation. Even if it's very small participation, we, as you say, we've got to be in it together. And that's how you keep a tax base steady and stable is by requiring everyone to at least in small part participate in it.

18:07Merryn Somerset Webb: The more people you take out of it, the less stable the whole thing becomes. You always have a more sensible view on that than I did, because whenever I was young and idealistic and stupid, I thought, well, what's the point in taking money away from people if you're just going to give it back to them in benefits. But yes, as I've grown older and less idealistic and hopefully slightly less stupid, I've realized, well, yeah, because you take a bit away from people and they realize, oh, hold on, somebody's got to pay for this stuff. Yeah, yeah. Like every single young person when they see their first paycheck.

18:36Merryn Somerset Webb: You what? But what's that? That's your tax, honey. Anyway, I'm not sure you've got all these things that have happened to you, John. I think you've just been listening to me for 20 years now, you know? finally getting there. No wiser, just with better influences. Is this what you're saying? Maybe, maybe. Anyway, you were worried in particular about France this week, right? I mean, not worried. I was sort of like gazing with curiosity across the channel. I mean, yeah, I mean, it is interesting because France obviously, in many ways, actually, France is in a worse state than the UK And probably the two main things that have kept its yields lower than Britain's is because inflation's lower in the eurozone.

19:23And also France is underwritten by the German taxpayer via the European Central Bank in a way that Britain isn't. But yeah, the price for France borrowing over 10 years has blown out to more than a percentage point over the cost for Germany. so the spread has got a bit bigger and this is the first time the spread has been above 1 % for I think since 2012 and it's just a sign that markets are starting to actually get genuinely concerned about France because obviously there's a big election next year none of the parties there are keen to cut spending either and the fact that the far left guy is saying why don't we just burn all the debt that the Bank of France holds which is equivalent to the Bank of England saying see all these bonds we've been selling in QT we're just going to set fire to them and we're not going to worry about them.

20:16Merryn Somerset Webb: I'm kind of down with that to be honest. It's just moving deck chairs around right? No it's not moving deck chairs around if you actually just destroy the deck because that's just that's basically monetization and also on top of that that would blow up the euro. It's coming anyway. So we might as well just dive in. The great global devaluation And it's on the way. So we might as well just burn everything. You've got to do it more subtly than that. Okay, I don't think I'm up to the job of these podcasts anymore. Turning into a nil-hiller should we look at government debt levels. You should go and stand for election.

20:56Actually, the thing about it, stand for election in your local constituency, never mind France, and you'd probably get a few votes for that.

21:02Merryn Somerset Webb: I don't know, maybe any friends. Look, guess what? Someone pointed out to me today that if you look at how much UK government debt is, it's roughly the same as the total revenues of the Mag 7. Our GDP and our debt, which are basically the same thing, are also roughly the same as the revenues of the Mag 7. It is so humiliating. It is. It is. And I can see why people sit there and say tax the billionaires, but none of those billionaires actually live in this country. No, sorry. That doesn't help us anyway. The last thing I wanted to point out this week is that, okay, so we're worried about the markets.

21:43Merryn Somerset Webb: We're worried about AI. We're worried about breadth. I am, you're not. We're worried about public debt. We're worried about global devaluations. We're worried about fiat currencies. And at the same time, you saw the numbers out from the World Gold Council this week, pointing out that China is back in the market big time, spent$158 billion on gold so far this year, which is way more than last year. And they're also producing quite a lot of gold themselves, nearly 400 tons this year. And they're cutting back their holdings of US Treasuries. Just signals. These are just signals. Well, I think the China thing is important.

22:18I was talking to somebody yesterday and just pointing out that obviously gold used to have a genuine place in the kind of global monetary system. And if you did want to internationalize the Yuan, than a very obvious way to present it as being a parallel system in the US dollar system for countries that would rather run on Linux rather than Windows, then having a yuan backed by gold is actually a pretty good way to do it and make it, if you like, a feasible alternative to the dollar.

22:54Merryn Somerset Webb: Excellent. Thank you, John. There's no better way to finish this podcast than with a minor conspiracy theory.

23:10Merryn Somerset Webb: Thanks for listening to this week's Merrin Talks Money Markets Wrap. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also be sure to follow me and John on X at MerrinSW and John underscore Stepak. This episode was produced by Sam Asadi and Moses and questions and comments in this show and all our shows are always welcome. Our show email is merrimoneyatbloomberg.net. And it's not a minor conspiracy theory, but by the way, it's entirely possible.

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