The Most Interesting Macro Moment of My Lifetime with Jens Nordvig

12:00Because investors are busy, portfolio managers are incredibly busy, right? So they need to be told what data is relevant at a given point in time. There are exceptions. There are some quant funds that are extremely good at finding something in the data. But most people still tailor on a discretionary basis, and we find that a combination of having really high-quality data and some lay on top that tells people, okay, this is important right now, is the best model commercially and we're going to continue with that hybrid model.

12:31Downtown Josh Brown:You know what the corollary is for that to our business, the wealth business? I could give you an ADTF portfolio right now. I could do it off the top of my head without even thinking about it. Then what? Because that tells you nothing about what the environment is going to be six months from now, a year from now. It doesn't answer anyone's particular questions about their own finances. So the data is not the standalone thing anymore. It's like, what do we get from all this data? That's something that hedge funds want, asset managers want. And then I guess what we really want to experiment with is that this insight that comes on top of the data, in my career, I have provided it together with a team.

13:16I'm very proud of the team we have from Exanta Data and now Vanda. And the question now is whether there's some of this insight that we can generate in an AI environment. And we have to get that right because our clients still want to have the confidence that this is something that's been vetted. We're absolutely confident it's true. but nevertheless there's stuff we can do at a higher speed if we create a robot for it. So we really need to find the right balance between still having it vetted, absolutely driven by top-notch human conceptual thinking but then there's bits and pieces where we can say, okay, the robot can actually do this piece better and faster and then put the robot to work there.

14:06Downtown Josh Brown:Yeah, so there's parts of what you guys do that you can have a machine do like the heavy lifting. But the vetted part is important. In your business, people want your reputation. They want you to take a look at it. They don't want a black box where it's like, well, the machine said this, therefore we don't need an explanation for it. Just take it at its word. No, people want that final layer of like, okay, I get it, you're using AI, but what do you think? And then you have to have a point of view. We can actually see it even in, like when you run a business, sometimes it kind of goes full circle, like some of the things you thought a couple of years ago were a bad idea have actually become a good idea again.

14:48So we can actually see that there's some of the highest end clients actually more so than before actually want to get you on the phone. Which a couple of years ago we thought, okay, that's phasing out completely. But because there's so much information out there that is not vetted at all, there's actually some that really want to pay for having something that has like an extra layer of like total real-time personal color and vetting on top.

15:13Downtown Josh Brown:I have this heuristic where I tell people, rich people don't talk to robots. Rich people pay someone else to talk to the robots and then take whatever that information is and bring it back to them. Like within reason. Wealthy people don't plan vacations on Expedia. If their travel agent is utilizing Expedia for information, that's fine. but they want a person who's responsible. And I think that corollary is a pretty good one, both for hedge fund world and for wealth management world. You talk to the machine. Tell me what it says. Call me back. I think there's always going to be a component of that.

15:50And it's also a matter of making sure that the machine, even though if the machine is mathematically correct, the machine might get outdated. so we need to continually make sure that we know what's happening in the market there's a lot of our models that is based on what's the market microstructure that's relevant right now but it changes all the time so Korea is a pretty interesting country now because it's probably the country where the AI revolution is impacting everything the most. Obviously, in the US, AI is very important, but the US is a bigger country, right? So in relation to the size of the country, it is an enormous boom that is happening in Korea.

16:45Downtown Josh Brown:Half the stock market is memory. It's unbelievable. Like the trade surplus is just exploding. I've never seen anything like it. And by the way, the currency is having its best run ever now in the last three months. So it's all playing out. But in relation to this microstructure I was talking about, it used to be the case that the stock market in Korea was driven by foreigners. And now we've had a period where the stock market has gone up so much and is driven by something else that actually we have the stock market going up and foreigners have to sell to rebalance their portfolio. So the correlation between those flows and the cost is totally flipped.

17:25What happened?

17:26Downtown Josh Brown:The retail population caught stock market fever this summer. The local. The local. The locals. Yeah. So if you had a model that was based on foreigners in the past, you would have gotten totally wrong what's happening now. So you need to adjust your models all the time to capture what is new. And that requires that you continually just focus on understanding what's happening. and a gesture model. Sometimes the data isn't good enough to know when the environment around it has changed. I was reading about the thing with LLMs that is constricting what they can actually do. LLMs are great at taking existing information, synthesizing it, and giving you insights from it.

18:06Downtown Josh Brown:But it can't think creatively. Or if it does, it's getting itself into trouble with hallucinations. And somebody was saying, is a paper arguing that, and this is probably relevant to the research that you guys are doing now and what your end client actually wants from it. It's very good at induction, LLMs. It can't do what's called abduction. And it's like a thing where like the AI can do statistical pattern matching. It can do all the deduction. It can take all these facts and spit out a response, but it can't generate novel explanatory hypotheses. Like it will never discover Einstein's theory of relativity.

18:49Downtown Josh Brown:Like it can't make that creative leap. And we don't want it to. The way we've built this is we want it to be accurate. We don't want it to be creative. So that's where somebody like you comes in, where you can look at the output and then you could say, okay, here's what the machine says, but here's why that might not be the right thing to say to a client. I think that's exactly right. So there'll be new themes developing that we've never seen before. So where's the LLM going to understand those new things from? So that's one example. The other example just has to do with we're incredibly focused on actually having proprietary data as a part of our platform, which the LLM will not know about.

19:32Downtown Josh Brown:Would you do a deal with Anthropic? You're smiling. Would you do a deal with Anthropic if they said, we want this data as part of our model? This is a real balance. There's a real balance there, right? Because we definitely have clients that want to consume pretty much everything they consume via Claude, right? Right. And we obviously want to help those clients, right? But if we have something that's proprietary and we feel that that aspect of it being proprietary is threatened by us sharing it that way, clearly we'll have to balance those two things. Okay.

20:10Michael Batnick:Yeah, as you said, this is the most exciting, interesting macro environment you've ever witnessed in your long career.

20:18Downtown Josh Brown:Exciting, like we're all about to lose a lot of money.

20:21Michael Batnick:So I think last time you said that Besant was a client of your former firm. Are you surprised with his comments yesterday where he said, I am the house? And I assume this is the most interesting part of it is what he's doing, what interest rates are doing, what he's saying, what the yen is doing, the dollar. Is that everything? Is that at the crux of what's making this so interesting? We had Scott Besson speak. We had a 10-year anniversary conference for Exanta Data in March. And Scott Besson was one of the speakers. And he touched on some of the issues you're talking about now.

20:59he is a very unusual treasury secretary.

21:02Michael Batnick:Yeah, this is not normal. But on purpose. Yeah, on purpose. He has traded tens of billions of dollar yen personally in his life, right? Clearly no other treasury secretary has done that. And he's not afraid of the market. Like you would ask almost any other Treasury Secretary, right? They'd be very scared about the market kind of rolling them.

21:33Downtown Josh Brown:Currency fluctuation. Yeah, I think the currency market is pretty scary. But now we essentially have a form of intervention both in the currency market and dollar-yen, and we also have a form of intervention in the Treasury market with these long-end buybacks, right? So he said he doesn't want to intervene in the oil market. So that, for some reason, he thinks that's a little bit different. But he is clearly willing to intervene in a way we have really not seen for a long, long, long time. And I think what is happening with Japan is fairly logical in the context of his history. He's always been a Japan expert.

22:16Actually, the reason I know Scott Besson is that I was head of research in the Moral Securities, which is the biggest Japanese broker, right? And we always talked about Japan together when the abanomics started.

22:26Downtown Josh Brown:You were ranked the number one currency strategist by institutional investor for five consecutive years.

22:33Michael Batnick:Oh, yeah? What's the younger to tomorrow, smarty pants?

22:36Downtown Josh Brown:When were those years? Was that 2010 era? Yeah, that joined Namor in 2009, and those were the years, yeah. So there was that when the euro crisis happened. And you think what we're about to see might be even more interesting? than that. I think it already is because like investors really have to pay attention to a number of things that have not really been in play before. So obviously we have a productivity development around AI that is potentially totally unprecedented, right? We can compare with previous industrial revolutions and technological shocks, but this seems more profound than any of them.

23:16So that's that. Why? This is tech that improves itself. Yeah, and also it's just impacting all industries at the same time, right? Like we think about the railroads and it was important, but it was like one very specific thing. And this is impacting everything at the same time. Everything is software these days, right? And it's driven by that, obviously. So that's important. And then we can see what's happening with all the hyperscaler build-out, right? The build-out is now so enormous, and we're just doing these calculations and trying to make them very precise. But roughly speaking, we now have as much bond issuance by hyperscalers in the long end of the curve as the United States government.

24:06Downtown Josh Brown:What, this year? Right now. Not early in the year, but we're getting to this point. bonds that exist now, it's equal to what the U.S. Treasury has floated. I would say, let's call it the flow. How much is coming out right now? Wow. This is, and it's not that the U.S. government is not issuing a lot. The U.S. government is issuing a lot. We have a 6 % of GDP deficit, right? Which is also the, like, at par with the biggest deficit Reagan had when he was, when people thought he was going as hard as he can, right? And nevertheless, we have a few private sector companies that together are managing to issue as much debt in the long end of the curve as the US government.

24:49Michael Batnick:How much do you think that's pushing up yields versus all of the other stuff, the war?

24:54Downtown Josh Brown:The competition for treasuries versus a Google bond. Is it half? How do you think about that? I think it's hyper-important. Let's put it that way. Obviously, oil prices matter. Today, we had a massive move again. ECB responded to the oil prices and so forth, right? But in the background, this is something entirely new. We've been worrying about the US government issuing too much debt, and now we have another issue or a group of issues that is equally big. So like all these years where we were used to, okay, we have a low inflation environment, right? And if you have a little bit of carry in your credit instruments, you can always sell it, right?

25:41Those days are just gone. Now we have such competition for capital that yields are being pushed higher.

25:48Michael Batnick:Is that bad? Well, it would be nice to know whether those investments are going to be productive investments, right? Which ones? The hyperscaler ones? Yeah, hyperscaler investments. But I think what we can say with great confidence that the companies that are going all in on this, Google, Microsoft, Amazon, Meta, and so forth, they're not going to give up anytime soon. Like their CapEx plans for this year and next year have continued acceleration in them, right? And in terms of how many bonds they're going to issue, it's kind of like a nonlinear thing because initially they could fund it out of their free cash flow, right?

26:29So every extra$10 billion is mapping into the issuance with the higher and higher beta. So next year is going to be dramatically more than this year. So when I look at the long end of the yield curve, it's already pressured, right? We've seen multi-decade high bond yields now, even if the Fed funds rate is not at the high, but the long end is, right?

26:55Downtown Josh Brown:The 10-year is at$492 ,000 the last time I looked. The last time it hit that level was October of 2023. People were nervous about it then too. And it got over five. It got over five for a cup of coffee. And then the stock market rallied 80 % as it fell. Now it's back up at those levels. Stocks have not given up much. We had a momentum wipeout last month. But the hyperscaler equities are sort of stable. They're not at highs, but they're not at lows. and now the question is if we go through 5 % on the 10-year this time and we're already seeing 2007-era highs on the 30-year, what does that do to the market mechanically or how does that change psychology?

27:40So I would say when you compare with like in 2007, we got close to this level, right? 2003 is the right number now. Okay, it sounds like, oh, we've tried this. it's only 23 years ago we got there.

27:56Downtown Josh Brown:Real rates. No, 2023, we were exactly where we are now in the 10-year. But real rates were higher in 07. Yeah, but the bottom line is it's a long time ago since we've really been at these levels in a sustained way. If we look at the last time we were at this type of level, which was before the global financial crisis, the debt levels are totally different. So what we could handle back then with that level of yields, it's hard to imagine we can handle it now. And this is why Scott Besson is buying back bonds, right? At this level of bonds, and the 30-year is meaningfully higher than the 10-year, right?

28:38Curve is pretty steep. They don't want to see those bond yields going any higher. Mortgage rate is like 7%, also not that great for that sector, right? So really what's different now is the debt levels are so high. I just wrote a report on the way in here on the train, and the CBO, right, which is supposed to be a bipartisan conservative… Congressional budget office. Yeah, like a nerdy outfit that just does numbers, that objective numbers, right? That everyone then ignores. I hope that the director is not listening. He's a great guy. So, no, it is a compliment. Like, if you look at their debt projection, right?

29:23We got above 100 a couple of years ago, right? It's going to 200 within, like, a couple of decades. Like, the trajectory is so steep now. So, this is why we really have to start to look at these debt levels in a different way, right? And there's lots of people who've been scaremongering about debt levels forever, right? So it's easy to say, oh, we've had the wolf crying for a long time. But I do think you can really see assets start to behave differently here, right? Which assets? So I think you can already see it in terms of the long-end behavior over the last three, four months has been kind of divorced from economic data.

30:10It's just doing its own thing. It's not anything the Fed is really saying. It's also happening globally. It's also happening globally, yeah. And then I would say currencies. Currencies, you can see it. If you do kind of a basket of who has not a lot of debt and a lot of debt, it's starting to really favor the ones who don't have a lot of debt. So who is that?

30:34Downtown Josh Brown:Switzerland, the currency looks better than all the other developers. Yeah, it could be Switzerland, Singapore, Australia. is a country that actually doesn't have a lot of debt. So if you have long exposure to those, you've done very well. Places that have a lot of debt, like, okay, you can rank the top 30 economies in the world. Guess who has the worst debt metrics? Japan and us. It's actually the United States now. Japan used to be the worst. But isn't the worst the best?

31:03Michael Batnick:Like, we are able to sustain such a gigantic debt load because of our - Yeah, like, it's a tricky thing, right? Because the dollar is obviously still the reserve currency, the main reserve currency of the world, right? So is it special? Yes. And it certainly is more resilient than everything else because of that. But it's not trading fantastically well now. So I think you can start to see some kind of correspondence between when the 30 and US starts to wobble and the dollar starting to leak. When I say leak, what I mean by that is that you can have a model for, okay, what are the standard things that drive the dollar?

31:41Obviously, short end rates, maybe risk sentiment and so forth. And what you're starting to see is that there's some little residual that is hard to explain with those normal things that is leaking in a weaker direction. And that's what's happening in the last couple of months.

31:54Michael Batnick:Is something going to break? Are you like nervous that something's going to happen? I'm nervous. I think definitely also. So now I work in a company now where we have a lot of equity focus, right? Massive, like Eric Lewis is the head of our equity efforts, right? So massive focus on whether we are getting into sort of a non-linearity in terms of the 10-year or the 30-year moving to a degree where we really have an equity puke. So we're very close to an amount of move in the yield curve where the equities get very vulnerable.

32:25Downtown Josh Brown:Just explain what Besant is doing. Not with the yen. We'll just focus on the U.S. explain to the audience what Besant is trying to accomplish by buying longer-dated treasuries in the open market and then tell us whether or not you think it's meant to succeed or is it kind of Besant getting his boss off his back and doing something very publicly so that he can tell Trump, look, I'm doing all the things. What do you really think this is about and do you think it can succeed? So I think what's important here is that if you did not have a lot of debt and you had a few coupons you had to pay in the long end, you would just pay, pay, right?

33:16Retire it. Yeah, it wouldn't be a big issue, right? But because the debt is a problem and because they don't want to issue at higher and higher yields, they're trying to do something to save themselves money. So the essence of what is happening is that they fear that the debt dynamic is going to take over and it's going to be a negative spiral. And they're trying to stop this negative spiral by holding the yields via these buybacks.

33:49Downtown Josh Brown:Is that what he means by I'm the house? Meaning I can buy more treasuries than you can short? Does that ever work? So it's a strong statement that was made in the context of the yen. Here's the statement. I am the house now.

34:04Michael Batnick:So when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do. And you can bet against me if you want. Whenever, I mean, this is a lot. Whenever people say, oh, well, Treasury Secretary is taking a risk, well, it's my dream. I have asymmetric information. So he's saying that he knows.

34:23Downtown Josh Brown:Doesn't that sound like a speech that Oliver Stone would write from one of his characters?

34:26Michael Batnick:He knows what the Bank of Japan is going to do. It's almost like Gecko-esque. So he's saying what? You're right. That they're going to raise rates. What is he saying?

34:38So I've known Scott Besson for a long time. It's extremely unusual what he's doing. but when the intervention happened, the question we got from clients was, okay, how can they intervene when the Bank of Japan has just passed on hiking rates? They did not hike in July. Why would they intervene if the Bank of Japan was not serious about getting rates higher? And the explanation is very simple and it's embedded in that statement you just read out. And that was, Scott was pretty confident that he essentially could somehow orchestrate that the hike would come at the next meeting, right? So he was willing to do the intervention on the expectation that the hike is coming.

35:21The hike in September, right, was priced by three or four basis points. So nothing was priced when the intervention happened. And now it's priced like more than 90 % probability, right? So fully priced. So he wasn't wrong on this. But the yields haven't stopped moving. So in the long end, you mean? Just right, the tenure is screaming higher right now. Sure. So is he doing this Japan intervention because he wanted to achieve something specific in the U.S. Treasury market? Or is he doing it because he actually want the dollar to be weaker? this administration is facing a pretty complex mix of challenges, right?

36:02Because they only have so many, you know, policy steps they can do and they need to solve like 100 different problems with those different steps. So I think they would like to have a weaker dollar against Asian currencies because they feel that could help manufacturing in some parts of the country. So that's the sort of weaker dollar. Well, isn't it two things?

36:22Michael Batnick:It's one, on-shoring. If Japan exports are suddenly more attractive, it works against us. And also, my understanding is that this is a cheaper way to influence policy. So Japan, I think they had to sell, what was reported, $94 billion worth of treasuries in order to finance what they're doing. If he can prevent that, that is a more cost-effective way to step in. Agreed. So clearly, it is not really in the U.S.'s interest to have the Bank of Japan or it's really the Minister of Finance in Japan. It doesn't matter. Are they wizards?

36:56Downtown Josh Brown:The Wizard of Finance. It's not in the U.S.'s interest to have them sell a ton of treasuries, right, their precious up yields, right? So clearly by sending some kind of signals where the intervention is successful with less ammo being spent makes some sense from a treasury market perspective. There's also been talk about them being able to use kind of some kind of lending facilities more aggressively so they can get the funding to do their intervention without having to sell treasuries. So all that makes some kind of sense. But I think there's a currency dimension that is interesting. And it's pretty interesting that we have this kind of currency dimension where the administration is willing to endorse currency weakness and even actively pursue it while we have inflation problems at the same time.

37:51Downtown Josh Brown:Right. Those two things don't seem to go together. No. And yet. That just tells you that we have so many conflicting goals and policies. The administration's attitude toward inflation has been sort of like, well, as soon as we get the Iranians under control and we unblock the Strait of Hormuz, WTI will crumble from 100 back to 70 and everything will be fine again. So that has not happened yet. But like that seems to be what they're saying, even if they're not saying it that way. But it's already gone on for too long. And now higher energy prices are embedded, like are the new like inflation expectation.

38:34Downtown Josh Brown:And it's hard to shake that once it starts. Yeah.

38:37Michael Batnick:Do you guys think that it's strange, given everything that we're talking about with yields, just screaming higher? and mortgage rates are about to hit 7%, although that's been a problem forever, so maybe that's not moving the needle. Gasoline, national average keeps bumping up. And yet the VIX is at 18. S &P equal, it is like 4 % off its highs. There's just no fear at all. Oh, and we just had the nastiest tech momentum crash on record. And yet the stock market is just yawning. Yeah. Are you surprised by that? I will be surprised if we have a couple of more weeks of this yield move. I'll be very surprised if there's not a reaction in equities.

39:23And I think the point you make about oil is important, right? Because we're now more than six months into this. Right. And it was supposed to last a couple of weeks. We had a deal on the way, right, that is obviously totally falling apart. And… He called it like an interlude. Yeah.

39:44Downtown Josh Brown:Or something, like a day trip to Iran. And I think it's also increasingly clear that the U.S. is expending quite valuable resources.

39:57And the opponent is sort of deliberately doing something to make that problem bigger. So that's not going to make the situation any easier. So this could go on for a while. I think we've also had rumors from different people in the administration that they know this could be a multi-year thing. now.

40:14Downtown Josh Brown:So that's what's being priced into bond yields then. Yeah. And you can see it as well. Like if you look at the bond market, right, there's a concept called break even, right? You can split the bonds into what's the real yield in the bonds and what's the inflation that's expected that people call the break even. And that has also started to move in the last couple of weeks. If you look at five-year break even, right, it was 2-2 now, it's 2-4, 2-5. So that's also relevant for this Fed meeting that's coming up, right? Like how chill can they really be? The AI inflation is here. The energy inflation is there.

40:49And they're coming from an inflation level that is already above target. Like it's hard to be too relaxed.

40:55Downtown Josh Brown:Do you think the administration was hoping that AI would be deflationary or disinflationary because it would cool down the jobs market, which really hasn't happened? And now they're looking at this like, Like, all right, so it's a CapEx boom. It's great. Great for photo ops. Every time they open a new data center, we can put an official there to cut the ribbon. But it's not disinflationary at all. And if anything, workers in the bottom 10th and 20th percentiles are actually seeing more meaningful wage hikes. People working in the trades have never been more employed. And it sort of is not playing out the way maybe they would have hoped as recently as nine months ago.

41:37Downtown Josh Brown:So there's some element of that. Absolutely. This technology has been pretty hard to forecast. It's moving so fast, and it's hard to compare to these previous technology shocks. And Walsh did a lot of public speaking before he was appointed, right, where he talked about deflationary effects of AI and kind of used that as an argument not to hike rates. And it's probably one of the things that made him a bit, what should we say, schizophrenic in terms of like sounding hawkish at one meeting and dovish at the next one. Disinflation is not showing up anywhere that it matters. No, so I think where we are is that there's a technology that has a promise of being deflationary in the long run, but the technology is being built.

42:26And as we already discussed, building is so expensive, right, that that demand is creating incredible pressure on DRAM. That's why Korea is benefiting so much and some other things as well, right? And at the moment, we're just experiencing those inflationary effects. And if the CAPEC is going to continue to ramp up into 27, which seems highly likely, right, it's very hard to imagine that this inflationary force is going to go away anytime soon. There's a guy called Elon Musk. You might have heard about him, right? So he knows something about some of these issues. So he said, yeah, we're obviously going to get a supply response, right?

43:08So we're going to get a supply response, clearly, like you can make a ton of money making deep.

43:12Downtown Josh Brown:Meaning they will build more memory plants to satisfy all the demand. And by the way, that's what's happening in Korea now. We're going to have a massive investment boom in Korea. I think growth is going to surprise in Korea in a massive way. But his point was, okay, if you really step on the gas and build a lot of extra capacity, Maybe within a year or two, you can get a 20 % increase. And what we need is 100%. That was just quoting him. But he's built some data centers himself. I think it's not irrelevant to get these projections from people who are actually in the data center business themselves.

43:50And I think it's going to be very hard for supply to match this demand. And therefore, the price effect is going to be there for a sustained period of time.

43:57Michael Batnick:So that's it. I mean, to not overthink things in terms of why is the market looking past all of these geopolitical interest rate risks, it's because the stock market is not particularly expensive and earnings growth is 20 plus percent. And it's expected to be that way for a while. Now, obviously, this could look foolish in three weeks if stocks do fall 20 percent. But you just said everybody's saying the same thing. They're not going they're not slowing down. No. And until somebody says otherwise, the market will act as if they're telling the truth. Well, could we have bond

44:30Downtown Josh Brown:vigilantes show up in the debt market for corporates? Meaning, could Alphabet or Meta or somebody come to market with another debt offering that instead of being two to three times over subscribed, it's actually underwhelms, the rate goes up or the deal gets canceled? Like, that has not happened yet, but wouldn't that be the ultimate signal that the party's over? I think the A lot of people have been looking at Oracle as the less strong player in this space, right? And their credit spreads have also been volatile. But I saw today, like, there was a major bank that upgraded Meta. I think the price forecast got raised by 25 % or 30 % because that company is, like, having all its existing businesses.

45:18And now they'll actually have, like, an enterprise AI business on top.

45:21Downtown Josh Brown:They launched Muse, which is going to be like an open-weight model, I guess, like a free-to-use model that they'll make money from people using it. Yeah. So there's a lot going on. So I agree. When you look at some of these companies, right, like actually their valuations, if they are going to be the winners or one of the winners, like the valuation is not that extreme, right? The trick is…

45:46Michael Batnick:The matter was like 17 times forward earnings. Nobody wanted it two weeks ago. Exactly. Yeah. So the trick is, okay, whose lunch are they going to eat?

45:55Downtown Josh Brown:Well, but so this has been a rally in three stages. The initial stage in 2023 was Mag7. The consensus was the hyperscalers are going to win AI. They are going to be the engine behind it, and that's where the profits will accrue. And then sometime mid-2024, late-2024, everyone's minds were changed. The hyperscalers stopped going up and the semiconductors became, I don't know, 20 % of the S &P. Biggest semiconductor rally in history for half of 24 and all of 25. And then this year, it switched again. The semis are now reporting blowout numbers and the stocks are falling. What's going up? The software layer.

46:37Downtown Josh Brown:Now, the market seems to have become convinced, actually, same as ever, it'll be the enterprise SaaS companies who sell the most AI shit to people and they will be the winners. So we've had like a horse race with three different horses leading in three years. The narratives are changing so fast. I wouldn't even rest comfortably on this new software thesis just because Salesforce came back. What are they going to decide is the AI winner next week? I don't know.

47:07Michael Batnick:If you zoom out and you look at a ratio chart of IGV divided by SMH, obviously it's in a long, long downtrend. it bounced back to its 200-day barely. I mean, if you zoom out, the rally looks like nothing. So we could easily, in six months, be talking about this all over again. Actually, software is f***ed. I would add a fourth wave, right? So this is a little bit harder to see, but we deal with a lot of hedge funds around the world, but we also deal with people who take more long-term investments like pension funds, sovereign wealth funds, and so forth. And I think their main focus has been on the energy, right?

47:41So they would invest in the power plant or grid infrastructure. No matter who wins, it all needs energy.

47:47Downtown Josh Brown:Yeah. Or even in the metal space, right? Copper is going to be a part of this as well, right? So there are a lot of kind of derivative expressions. And some of those plays will be maybe not so much in the public market. So you need to have a very big checkbook to participate. But very big investors have definitely been doing that aspect of it for several years now.

48:09Michael Batnick:You mentioned copper and industrial metal. Earlier, we didn't speak about gold, which traditionally has been the debasement trade. All right, I don't like what's happening. I don't trust the government. There's too much debt. I just don't like this. I'm going to buy gold as an alternative. Problem is, when real rates are going up like they have been, they're the highest they've been since 2007. That is a legitimate competitor. I don't really want to own a precious metal. I'm going to own something that has a very positive real rate of return. So that further complicates matters. So gold has been a lot of fun to analyze in the last couple of years.

48:43I never really found that gold was a particularly exciting asset until 22. It moved with the dollar, it moved with real rates. And if you knew what the dollar was doing and you knew real rates were doing, you know roughly what gold was doing, but it wasn't doing anything on its own. But since 22, and especially middle of 23, gold has been doing something that's totally different. So I'm not saying that real rates are not relevant, but there's been something else.

49:10Downtown Josh Brown:And we think it's central bank buying and speculators betting on more central bank buying. Yeah, we've been through different waves, right? So there was, I would say the liftoff when that correlation to real rates really broke was China. China started to accumulate a ton of gold. Is it the Chinese central bank? China is incredibly skilled at not being totally transparent about what's going on. of finding which specific balance sheet it's on. It's hard, but we can see the trade. Either way, you know it's coming from Bayesian. They're absorbing it somehow. So that was the first wave. Then there's been broader central bank buying.

49:46Then last year, we had an incredible kind of spec wave that both played out in ETF space and also in all those GLD options.

49:56Downtown Josh Brown:Silver took off too. Yeah, this is what we do on a day-to-day basis, like tracking all those flows in incredible detail, right? So I would say right now, it's hard for you to imagine that we're going to get the same level of bonanza in option trading, retail option trading in gold. So I think that means that the targets you want to have for gold in the next couple of months needs to be tempered from, okay, we already had the biggest bonanza ever, right? And they're probably not going to repeat what we had in January. But the ETF flows have been incredibly strong, especially out of Europe, actually.

50:29So there is some very persistent demand that I think is going to mean that even if real rates continue to go up, gold is going to have some support. And it's to do with what we started speaking about, right? People are not comfortable buying long-end bonds, right? So they feel that there's some kind of hedge involved in the gold trade. And I think on a multi-quarter horizon, that demand will be there.

50:54Michael Batnick:You mentioned earlier that when you're feeding data into a model, as the world changes, we might be using an outdated playbook. And I think one of the things that I don't subscribe to anymore is that discretionary stocks tell you a lot about either the stock market or the consumer. So yesterday I saw a guy, Q Capital 2020, that's a satirical account. I don't know if he's kidding or not, but it doesn't matter because what he's showing is real. A lot of the consumer stocks, specialty retail, have been blown to smithereens, right? Like American Eagle today, down 15%. Dix in the last month, down 38%.

51:36Michael Batnick:Burlington guy, Casey General Store. I mean, a million. They're all getting killed. Advanced Auto Parts, whatever it is. You name it, they're getting killed. So I brought some charts that I want to go through. Let's start with chart 11, please. So this is the United States Redbook Index and retail sales, right? Just retail sales year over year. Nothing really in here that is noteworthy. I had the guys take a look at all of the names of companies that reported same store sales going back to 2001. So we have like a decent data set here. Chart 12, please. So this looks pretty similar to this latest chart.

52:15Michael Batnick:So in here, it's a composite of Ross Stores, Bath & Body Works, Starbucks, Costco, Target, AutoZone, Dine Brands, Brinkler, Williams-Sonoba, Walmart, Macy's, Gap Home Depot, Abercrombie, and Kohl's. And same store sales, all right? It's up 5.1 % year over year. So where I'm going with this is chart 13, please. If you look on the left at an equal weight, discretionary relative to the S &P 500, this thing is at the lowest level. It's crashing. But guess what? It's been crashing. It's been going from the top left to the lower right for the last decade. And it's told you nothing, nothing at all about the stock market.

53:01Michael Batnick:This has happened while the stock market, equal weight and otherwise, is at an all-time high. So instead of looking at the stock price, which has all sorts of information in there, it could be valuations. It could be idiosocratic risk. It could be -

53:12Downtown Josh Brown:I think it's like portfolio managers just don't want to own those stocks. It could be a million different things. No matter how well they're doing.

53:17Michael Batnick:What does Nike say about the consumer? I don't know. I don't know. So I looked to Bank of America as a set of charts that they put out every month. I'm sure you're aware of this. Let's go through some of these. Consumer spending eased a little in July, chart 14. But the overall picture remains robust. Bank of America total aggregated credit and debit card spending per household increased 5 % year over year. Next chart. So that's spending. This is household savings. Inflation adjusted relative to 2019 levels. Of course, coming off the sugar high of all that money printing. But still.

53:59Downtown Josh Brown:It looks like back to normal.

54:01Michael Batnick:Above where we were in 2019. Inflation adjusted. Next chart. We're looking at total card spending, excluding, it's not just gas, excluding gas and online retail. Still growing. Now, there's inflation here, okay? So if you strip that out, it's whatever, it's flat. It's not crashing. Lastly, and this is maybe my final, this is my final point here. Necessity spending versus discretionary. And Bank of America serves the nation. It serves millions, tens of millions of American households. and discretionary spending is doing, it's hard to say a bad thing about this. It's freaking booming. So I don't think, chart-offs, please.

54:43Michael Batnick:I don't, on the one hand, it is a little bit disconcerting to look at all of these discretionary stocks. Not all of them, Target's working, Admin Company's working, but there's a lot of them that are down 30%. So I don't want to completely dismiss the stock market. But if you go to the source of the truth, I don't know that it says a lot. I don't know that the consumer is cooked because the stocks are. Yeah, so I think one thing that's pretty tricky this year is that we had these big tax refunds, right? So the big Trump 2 budget giveaway was— The big, beautiful bill. Yeah, was the fact that we had the no tax on overtime and no tax on Social Security and those types of things.

55:28and whatever happened last year only got refunded when you filed your tax return this year, right? So there was a lot of people who got refunds and you can file really in February, but most people file around the deadline in April, right? And then you get your money maybe in May. So a lot of people got money in the bank in May and then it takes some months to spend it. So I think some of what you're seeing in these charts, your show there was sort of the juice from those tax refunds. And then the big question is, over how many months is it going to be spent? If it's just a couple of months, then there could be something coming after that.

56:06If it's spread over six months, we have another couple of months of it. But I think that's one thing that worries me a little bit, that we had some extra juice from those tax refunds.

56:16Michael Batnick:Well, we have$5 ,000 coming. What are you going to do with yours? Yeah, let me put it this way. I don't think I'm going to spend it before it's in the account.

56:23Downtown Josh Brown:I think you're dividing the charts wrong. So no, no, you're not making a mistake. I'm saying the way that the market thinks about consumer spending when they look at stocks, they break it up into discretionary versus staples, right? Like consumer staples, mostly food and tobacco. But the reality is if you were to break up the discretionary sector by experiences versus items, you would find that the experiences chart tells the same story as all those credit card spending charts. So if you just had a bucket that was golf courses, airlines, hotels, Live Nation, like things that people can do versus items at Dick's that they no longer want to fill their garages with, I think that's more close to the truth of what the consumer is doing with their capital right now.

57:13Yeah. You get that from the airlines as well. Right. Like I think Delta is expanding the business class.

57:20Michael Batnick:They had record spending in Q2, like during all of the shit.

57:26Downtown Josh Brown:Moynihan was on TV today. He said, I forget the exact wording, but it was literally like, or maybe this is yesterday. He said, so Moynihan is Bank of America's CEO. And most of the credit cards run through his hands. And he said, the bank's data shows consumer spending and credit remain healthy. Despite rising gasoline prices, quote, consumers spent in the month of August about 4 % more than they spent last August. Last quarter, it was 5%. So it's kicking along. That's consistent with a strong, growing economy. He would love to be able to come out and say things are slowing. I think he would love to be able to say that because it's easier for him to make his numbers for next quarter.

58:14Downtown Josh Brown:It's just not what he's seeing. And people are dying for him to say it. But he's not saying it. Citi's not saying it. JP Morgan's not saying it. None of them are saying it. I trust the credit card data more than I trust the stock price of Dick's sporting goods. Yeah, we've obviously had a big debate about what's happening in the labor market, right? The labor market has surprised massively on the upside in the last couple of readings, right? So the economy is not falling apart, right? And that's also why we have these inflationary pressures, right? and if the labor market is not soft, they have to respond.

58:49Michael Batnick:Yes, it's amazing how much shit has been thrown at this economy. Sure. Tariffs, inflation, frozen housing market. I mean, a frozen housing market. Gas prices. Gas prices. And nothing is budging. The terminated economy. It's unbelievable.

59:05Downtown Josh Brown:Yeah, we have been through a lot. What are you worried about? Is it the bond market? Is it currencies? Is it somebody saying the wrong thing in front of a microphone that's in a position of authority? What's the thing that people are coming to you and saying they're worried about? Yeah, so people are definitely worried that we're going to just have all prices continuing to go up, right? They've gone up in the last couple of weeks substantially, but we could go up more. There's not really any solution around the corner. So continued rise is there. That's number one. Well, I don't know. I don't know.

59:41I'm not ranking them. So I would say the bond might - You're hearing that from a lot of your clients. Yeah. We have trading clients all around the world. Clearly, there's hyper-focus on the oil price now. The long end is really concerning people and concerning equity investors. You think it's concerning equity investors? Yeah, I think it is. I think it's making people nervous that there's this non-linearity. When the long end moves quickly, 20, 30, 35 basis point we get into danger territory. So we're very close to that danger territory. So that's the second one. And I would say people are also worried that, okay, is this election going to go okay?

1:00:23We're getting a lot of questions. Is the election going to be all right? Like the sanctity of the election? There's that. Assume no. It's also a long time since we've had a Dem sweep. So there's some investors that are concerned about, is that going to move markets too?

1:00:40Michael Batnick:Yes. Does all these worries make you worried? Or do you take a little bit of comfort in the fact that there's so much worrying that the market does it for you? No, I think I do. I don't think I've been like a debt scaremunker my whole career. But I do think at some point you have to take it seriously. And I think we're starting to sniff that it's starting to impact the asset allocation. Right. So what matters is when investors respond to it. And I think we can start to sniff it.

1:01:06Downtown Josh Brown:Don't you think there's enough demand that a 10-year above 5 % gets aggressively bought by allocators who have been waiting for something like this? Or we might find out the emperor has no clothes and there are no buyers? Yeah, I would say the fact that we have to eat the bonds, both from the U.S. Treasury and the hyperscales at the same time, is a bit game-changing. So I think that makes it harder to say, okay, what kind of level is this? So why isn't Besant saying that? Yeah, is the White House going to say to the hyperscalers, hey, assholes, no more. Calm down. But this has to do with the conflicting objectives.

1:01:44They want the AI sector in the U.S. to be strong. They want them to come and rescue the growth of the U.S. economy. And it is a big source of growth now. Probably part of the reason why we have resilience is that that growth is there. So they don't want to hamper that. So that's why they're doing these buybacks, right? to make sure it doesn't go off the rails too quickly. But I do think heading into next year, it's going to be a problem. It could be a massive problem for housing markets. And so like, what if we have mortgage rates that are 8%, right? What's the difference? Don't forget. The housing market's already out of business.

1:02:19But don't forget that a lot of people have mortgages that are 3 % and 4 % that eventually have to roll. And it's almost like because there was so much QE and so forth when we locked in those mortgage rates, we have the hangover of those mortgages resetting to a higher level with a huge lag. So there are going to be housing sector issues that are going to be exacerbated.

1:02:44Michael Batnick:But on that point, there was so much financial suppression in the last couple of decades that was pissing everybody off. The same people that are pissed off now about government spending were irate about how much interference the Fed and the Treasury were having with the bond market. I'm not saying that this is awesome and it's all roses and sunshine, but this is a lot more of a normal yield curve in a healthy economy, in a growing economy. This looks a lot more normal than that shit did. Well, if you look at historically, it's certainly more normal to have a 4 % or 5 % bond yield than having one or whatever we had.

1:03:18Michael Batnick:Trillions of negative rates? Sure. That was abnormal. Yeah, agreed. And you can also see it like in Europe, right? We now have yields that are more normal in Europe, ECB hike rates today, right? And banks are making money, right? So it's very hard for banks to exist and make money. We've seen in Japan as well if there's no yield at all. So in a way, it is a more normal situation we're in. The problem is that if this hyperscaler issuance continues to accelerate, then we might get another percent or another percent on top of what we've already seen, and then there's probably some non-larities kicking in.

1:03:56Downtown Josh Brown:It would be very ironic and interesting if the bull market for stocks comes to an end because the hyperscalers went from being like the biggest cash-generating companies in history to being the largest debtor companies in history and they did it on purpose to themselves. It would be very poetic if we say the market topped when finally... Yeah, I don't know if we've clapped. The market topped when finally, like somebody said no to Amazon in the bond market. Yeah. That would be sort of a poetic end. That would be the signal. Yeah. So we're not rooting for it. Just pointing out that it's possible.

1:04:35I think that's something to think pretty hard about because if you look at the flows,

1:04:38Downtown Josh Brown:that's the direction we're going. Okay. Last question. What's the most interesting trade right now going into 2027? Maybe something that you're hearing people putting on themselves or something that you're thinking about. what's something that no one's thinking about that actually might be a good trade? Well, I think one of the most important and pronounced macro trends is playing out in Korea. I think that trade can continue to go in a massive way. Equity market in Korea? Or do you want to see the one? Both, both. I think it's just such an extraordinary situation that it's probably the biggest macro country shock I've seen almost in Canada.

1:05:19How do I buy that?

1:05:20Michael Batnick:At the mall?

1:05:20Downtown Josh Brown:Can I buy Korean mid and large caps that are going to benefit from a richer consumer? Or do I have to buy these memory stocks? I think you can do both because it's like the workers are getting paid. The dividends are coming out. The growth is going to be there. They're going to invest. It's like on all cylinders.

1:05:41Michael Batnick:Dude, we're going to JFK on Sunday. Let's buy the one at the airport.

1:05:45Downtown Josh Brown:Good call. We could do that. Jens, did you have fun on the show today? Yeah, absolutely. All right. We were super excited to have you back. As always, we've learned a lot from talking with you. I want to tell people where they can learn more about the work that you're doing at Vanda. I know the company officially changes over in October. Is that right? So we called Vanda Macro Research. So yeah, we have the Vanda Macro Data, and we have what we call Vanda Macro Intelligence, which is all the insights on top of it. Yeah. So vanda.com is the domain now, and you can find me on Twitter, X, if you want to do that.

1:06:22That's Jay Nordwick. That hasn't changed.

1:06:23Downtown Josh Brown:All right. Awesome, guys. Follow Jens for sure. Check out Vanda, of course. Thank you so much for coming. We appreciate you. John, what do you think? Good? Daniel, good job? All right. Guys, thank you so much for watching. Thanks for listening. Back with you very soon. We're out.

1:07:00Downtown Josh Brown:Have you heard that McDonald's spicy chicken McNuggets made with spicy tempura and a blend of aged cayenne are back? Remember to grab a few extra napkins. For a limited time at participating McDonald's.