Michael Hartnett: I coined “Mag7” - Here’s What Ends Their Run

29:56Yeah. And the reason for that is because the AI cycle has moved from the spenders. two, three years ago, which is, you know, the Mag 7, to the builders, which was last year, the semiconductors, all the people that go to make the data centers, to the adopters. And of course, the adopter is anyone with a huge tech budget, and that's the banks and healthcare. So part of the broadening has also been an AI story, if you like. It's just the next sort of phase of it. But yeah, I think that also, you know, people have said, like, if you look at small cap, I mean, And hopefully we'll talk about it, even if you look globally international.

30:34There are stories there and they're unloved. You know, no one's there. And you don't want to be over concentrated in one theme. And so I think, you know, that has been one of the factors that has led to a broadening. But last couple of weeks, that move that you keep on talking about, that move in yields has really hurt the REITs, the banks, you know, the duration stocks. you know, the small cap and so on and so forth. So, you know, it's been a story that's been negative. And when you see those moments the last couple of weeks, like how many more weeks of that do you have to see till you start changing your calls?

31:13Are you worried by what you're seeing? No, because I think that they're panicking and I think that they'll win. You know, I don't think that you'll see, you know, the five-year treasury, the 10-year treasury sort of whiz, you know, drew 5 % up to 6%. I think that, you know, we also have this phrase, you know, markets stop panicking when central banks or policymakers start panicking. And, you know, I think, you know, the intervention and the buybacks and all this sort of stuff, they're starting to panic. The joker is the election. The joker is the election. And just dwell on that point about central banks, though.

31:50So have they, in the last week re-established their credibility enough and signaled enough that they will step in essentially when they have to temporarily yes you know that the you know the proof of the pudding you know will be if you know the inflation picture you know, starts to worsen again and, you know, the stock market, you know, starts to worry about that or the impact on financial conditions and the economy sort of, you know, starts sort of rolling over. If they then raise rates, that's extraordinarily credible, you know. But, you know, I think there is still this residual sort of thought that they're much quicker to cut than they are to hike because at the end of the day, they know that the stock market is too big to fail.

32:57You cannot allow the stock market to fail because of not just the economic or the financial consequences of that, but possibly also the social and political consequences of that. So I, you know, it comes back to what we were saying earlier. It's very tough to buy, to look at bonds and bonds, you know, clearly are the no one owns any bonds or any government bonds. Yeah, no one owns them. And so it's very tempting. But where's Volcker? Where's that guy that will raise rates into a recession to just put the inflation, you know, genie back in the bottle? And I don't believe, you know, I just know from the market, they're not convinced that, you know, there's that guy or that lady.

33:48Just in terms of what's worse for the equity market, is it worse to sort of hike into a potentially stagflationary environment that we could get in the six months ahead with wars on and oil prices high? Or is it worse to not and possibly even cut in that stagflationary environment and lose credibility? Well, it depends your duration. I mean, obviously, short term not to cut because, you know, you you you. But I think the key is the long end. You know, you know, it's not really what the Fed's doing. It's what the long end is doing and the speed with which it's doing it. Yeah. So I think that if the Fed is not reacting quickly enough to inflation, the long end will make it, you know, which is kind of what we saw in the last couple of months.

34:46You know, you suddenly get this speedy move up in yields of what's going on, you know, and people are forced to deleverage. which is what happened. But longer term, without question, you want a credible central bank because without a credible central bank, you've got no anchor for the long end. So it kind of depends on the duration with which you're looking for the market. But one last additional point to hear, Wilf, which is the really interesting one. And this is where you get, you know, you go to the railroads and you've got, you know, legitimate megabit bulls. Yeah, it's just forget about it.

35:35You know, this is just beginning. The megabears are more about the long end of the yield curve. You know, that, you know, if you get the economy rolling over, the stock market rolling over, oil rolling over and yields don't budge, they don't come down. That's what people that that's what the macro that that would just send the macro people into a complete sort of tizzy because then they would be, you know, massively short bonds and there'd be massively short equities at the same time because suddenly your release valve is not there. You've got no automatic stable if you can't make yields go down.

36:24And the reason you wouldn't is because the bond market is saying, if we're going into recession, that deficit of 6 % of GDP is going to 12%. And what's your, what probability do you put on that? Low probability on that doomsday scenario? Yeah, I mean, I think that, I mean, it's not negligible just because of the environment we're in of war and deglobalization and, you know, disrupted capital flows. I mean, it's not negligible. I mean, I don't think it's 50%, but it's probably 20%. Yeah. 15, 20%, I'd say. It's significant, though.

37:22and market infrastructure. Learn more at goldhub.com. This episode is sponsored by Interactive Brokers. Building wealth starts with the right broker, and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com forward slash master investor.

38:00Often you have people say midterms aren't that important, bit of volatility, you come out to it, you set sail again afterwards. You're alluding to the fact that you think this is much more significant than your typical midterms. Yes. I mean, look, Trump governs by executive order. You know, he's not, you know, that partial to, you know, being told what to do by Congress. It's the midterms. It's not a presidential election. You know, it doesn't feel, as I said, as though it's a regime change. You know, 1980, Thatcher, Reagan, end of inflation, start of a great bull market in bonds. 2016 you get Brexit, Trump end of globalisation start of a great bull market in commodities and as I said the midterms are not being fought over the deficit so I don't think you've got a people, if you like today you think of Trump and Mandami meeting the other day You know, Trump is a sort of direct descendant of the Tea Party, really.

39:11And Mamdami is a direct descendant of Occupy Wall Street. You know, that's the lineage populist capitalism and populist socialism. But they're both populists and populists want to be popular. And that's why, you know, they continue spending money. And of course, the people, the UK, Germany, France or whatever, they're busy spending money to keep the populace on the outside. You know, they'll spend as much as they can without disrupting the bond market. It's like you want to keep the vigilantes inside the tent and the populace outside of the tent. So you can see, you know, when you see these leaders talking to cameras, you know, there's on the one hand is like, I got to please, you know, Main Street, but I don't want to hurt Wall Street.

40:01You know, you can see this sort of dilemma that they've all got. But, you know, I think the midterms where they become interesting is in two ways. One is the more obvious way. You know, the Republicans lose the Senate as well as the House. then the implications future implications for tax deregulation direction of travelers you like to say change yeah you know and that's not good for earnings you know medium term and you also sort of lose your sort of if you like your cheerleader in chief in terms of the stock market you know Trump wants the market to go up and feels that there is virtue in that and you know he's obviously right in that, you know, it tends to make the economy good.

40:46You know, I think there is a legitimate, I want to get young people in the stock market, you know, that's how we'll solve the deficit. You know, there's some, you know, some decent, you know, ideas behind that. But, you know, if he's got no political capital, it's very difficult for him to bully, you know, people into the market. So, you know, if they lose the Senate, Yeah, I mean, I think the stock market's going to probably dip probably 10 percent in the following sort of two, three months. Similarly, if I think the GOP hold the Senate, you're going to get this big pile on and the market's going to move into that bubble phase pretty quickly.

41:21The race, though, that everyone or the, you know, shouldn't say smart people, but kind of like, you know, the people that smart money sort of watching is the Texas governor race. Texas is Texas. It's a Republican state, Republican governor, very popular governor, has been for two, three terms, ABBA. He's created the conditions for a massive economic boom in Texas. A lot of the tech monies come in there. He's opening AI data centers like there's no tomorrow. I mean, winner, winner, chicken dinner. How can he lose? I mean, he's up against someone that's never no democrat that nobody's ever heard of and yet they're neck and neck in the polls oh he's a 48 she's a 45 why why is she a 45 she's got one issue stop the data center expansion and that's it and and so much so that to stop the decline in his polls you know one of the champions of ai data center abbott has basically said we got to have a moratorium we got to pause it.

42:31Do you see what I mean? So again, coming back to the railroads and Pullman and the electorate, you know, they can control the bonds, but they can't control the voters. And if the voters now, and again, I doubt Texas is going to go, you know, Democrats have some doubts about that. But were it to, then it becomes much more of a regime change election. And do you feel like there's a regime change possible? Where's your probability on it in this tech trade, this AI trade? Obviously, if the Democrats win big in November, you know, that sends a signal to the presidential candidates. You know, they start running in January, February.

43:15They're going to be running on stop the data centers. So, yeah, I mean, I think it's it really would be a major you'd see a major reversal in big tech. I think you'd probably see a major reversal in the dollar, you know, too. I mean, it doesn't matter what my probability is. You know, who cares what I think? But if you look at polymarket right now, it's a 60 percent probability of that, although the probability that Abbott loses the governorship of Texas is much, much lower. So I think people are starting to worry about it, think about it, but they're not going to act on it until they're absolutely sure it's going to happen.

43:58I guess my question, though, as well is absent that, do you think this regime change for the stock market away from the AI trade is somewhere else? No, no, no, no, no. Again, I think if I'm right that they can hold the line at 5%, I think that reincentivizes it. I think right now people are clearly long equities and they've got no bonds. But what they've done within their equities is try and play breadth, which has been legitimate. It's been right for much of the last year. I worry that all of this stuff, war, I worry that actually the next move in equities is going to be much more concentrated.

44:44It's back to that AI only feel to it because of what's going on in the long end. That's my belief. But again, as a critical, the elections for them. Let's touch on some of the other areas that you've been seeing opportunities and do commodities first. As you said, been a great run for commodities for a decade or so. It's taken off in particular in the last 12 months. You generally bullish commodities still? Yeah, look, a gold, you know, you get some right, you get some wrong. But again, I think there's a hedge against populism, a hedge against anarchy, a hedge against debasement. You know, I think all of those things are legitimate reasons that you have to have gold in your portfolio if you don't want gold.

45:32And, you know, you're young like you or rather an old like me, it would be crypto or something like that. But you've been a bull on gold for a long time and you've been right. It's very nice of you to say so. But I mean, but again, did you want to take some off the table at 5 ,000? Did you want to take some off the table at 5 ,000? Oh, yeah, yeah, yeah. And again, after that happened, we said it's not going above 5 ,000 before the midterms. I mean, I think that the way you got to in terms of positioning and, you know, silver and gold trading, you know, X percent above is too, you know, it was just too frothy.

46:08Right. And the frost now come out. But I think there are still, you know, those reasons that I touted legitimate reasons, it will go back above 5000. You know, I think that that's that's very likely. And I think just commodities generally, if the AI CapEx boom, you know, continues to be a big stimulant, you know, so far as growth is concerned, it's not disrupted by the bond, you know, the bond market. But, you know, AI, you know, consumes commodities, right? Just absolutely. I mean, this is why America's foreign policy is about resource, natural resource monopolization, Greenland, Venezuela, Iran.

46:52I mean, how can you what's going on? Well, what's going on is that America needs to beat China AI and therefore needs to, you know, monopolize, colonize as many sort of resources as it can around the world. So I think that one of the things we've observed about this decade is what wins is what's in short supply, not necessarily in high demand. But commodities are in short supply. And yeah, I think that commodities will continue to do very well as an asset class. They're in a secular bull market and it'll continue. And what about energy, which is obviously done very well in light of the Iran war this year?

47:28If we get peace deals, does that correct? I think so. But it's got to the stage where, you know, people are almost thinking that, you know, there may be sort of longer term damage done in terms of, you know, Russian supply or Middle Eastern supply such that, you know, partly again, you know, if America, you know, how does America think it beats China or AI? Well, if the world is totally dependent on U.S. energy, maybe Latin American, some of Latin American energy as well, the Monroe sort of doctrine, it wins again. But again, I think that that to get to a place where that's the only source of energy, you know, oil prices can go from A to B.

48:24You know, they'll hit 200 before they come back down again. And so very political energy, clearly. You know, there are a lot of politics, geopolitics involved, less so with gold, less so, if you like, with the industrial metals. But, yeah, again, I think that it will continue to outperform as a theme commodities. I do think that's the case. Small caps and the breadth argument. Talk us through where your level of conviction is on at that at the moment. I love it longer term. You know, I love commodities. You know, I love, you know, but I also want to participate in deep contrarian areas. China, bonds, real estate.

49:16And I think, you know, up until a year ago, you know, I'd have thrown in small cap with that as well. um so i i'm a fan of small cap um i really really like small cap tech because i think that you know if you remember in you know when the nifty 50 which is kind of like a decent i mean everyone thinks 1999 is the only bubble that ever happened but actually the nifty 50 is probably a better analogy for the mag 7 the ai 10 and so on and so forth um you know everything got crushed but then after, the adoption of technology was really, really strong in the late 70s, the start of the personal computers and stuff like that.

50:01And small cap tech had one of the greatest bull markets of all time. So I think that where you can find people that can adopt AI, grow from very small to very big because of it, fantastic. So I think that that's going to be a very, very good story. But generally, I think that, again, the irony of everything I was saying right at the beginning, globalization to isolationism and monetary policy to fiscal policy, all this sort of stuff. It kind of hasn't worked. Like you've still got a lot of the electorate that's really angry, you know, which is what you were meant to be doing all this stuff for.

50:39And so I think more will need to be done there. And part of doing that, I think, is good for smaller companies. is you have to carry, you know, and you can see it from, you know, any electorate right now is kind of like, I'm the prime minister or president. I'm going to give all the money to the big company and none. Forget about it. What are you, crazy? Do you see what I mean? So I think that the policy will be skewed towards those guys as well. But short term, you're saying it's kind of done all right already. The small cap theme or it's more one that takes off. I mean, you depend it last couple of weeks.

51:10It's got hit very hard because of this rise in yields. But again, if they can hold the line at 5%, small cap will be a winner. Real estate will be a winner. You know, some duration in X, Y and Z will be a winner. And yeah, so I think I would stay with it. International, as in world X US, still very attracted to that? Yeah, I mean, 18 months ago, you know, we said buy international. It's worked in fits and starts. You know, it was Europe first and then there was a bit of EM. This year it's been Asia. So, you know, it sort of works in fits and starts. But I think, you know, your starting point is, you know, a U.S.

51:53equity market. It's no longer 70 percent, but was almost 70 percent of the entire world stock market. But, you know, if you're going to be overweight, you'll be at 75. I mean, it's just so I think the opportunity set has has just grown. There are themes, you know, there's European defense, there's Korean, Taiwanese, you know, Japanese technology, there's Chinese AI, there's resources in Latin America. You can just have a much more diversified global basket. And of course, you know, whether you like Trump or you don't like Trump, you know, you get if you want to go mano a mano. with him, you better bring your A game.

52:31And the A game is a confident economy that's doing well. And so, you know, Trump has sort of spurred this fiscal spending elsewhere. You know, the Germans are now spending. It hasn't happened for a long, long period of time. So I think that global rebalancing theme is still supportive. So, yeah. The biggest contrarian call is long bonds, without question. Probably the second is long China. But I think a lot of the stuff that was in secular bear markets, the international, the small cap, yeah, I think they've reversed commodities and that will continue. So going back to your framing of regime shifts, is that opportunity big enough and some of the probabilities of rolling over in the US big enough that we're in a regime change where people should be thinking non-US really meaningfully for the next five years?

53:32I think the short answer is yes. And again, part of that's the dollar. And I think that part of that's the debt and the deficit and the spending of the US. And unless there is a regime change in debt and deficits and spending, it's very difficult in a world where, you know, the U.S. needs foreign capital and you're doing things in the world, whether it's, you know, the Europeans. And again, I live in the States. You've lived in the States. You know, and I do that the perception of America can be very warped outside America. It's very different from really what's going on on there. But, you know, perceptions matter.

54:20And, you know, clearly there has to be some investors in the Middle East and some investors in Europe, which is like, why do we keep feeding, you know, the beast? And, you know, it only needs less of that. And suddenly you're much more reliant on Japan or Taiwan or Korea. And, you know, that's why you've had the intervention. So I think they're on thinner ice in terms of financing the debt. And therefore, one way what you have to do to finance the debt is make the dollar cheaper. Yeah. And so the dollar going down is an opportunity to have more in international. So, yeah, I think we're in still early stages of that.

55:02But again, it's not going to be America going down 20 % and the rest of the world going up 20%. That never happens. These are correlated markets. It's just a better performance from the international. It's interesting you say that because also going back to something you said earlier, that, you know, where's the Volcker, the person that's going to aggressively hike into a slowing economy, and they don't seem to be there yet. But to your point about the dollar and monetizing the debt, it's almost as if we're just five years away from that point, and that we've got to go through the 70s first and really inflate away the debt.

55:36I mean, you hit the nail on that. I mean, look, you're absolutely right. The way that the Trump administration, and again, they may be right, But the way that they are saying this is how we reduce debt is via growth. It's via a boom. You know, you've got debt, you've got GDP, you just need GDP to be growing much more faster than the debt. Yeah. And so you get that growth as up as far as you can, as quick as you can. And that's kind of been the policy. Yeah. But I think, again, what you speak to is, again, a nagging doubt that there is everywhere is will there be this moment where the bond markets say enough is enough?

56:15We have to change your ways. If you do not change your ways, you're going to get more moments. So in the UK in 2022, in the US in 2023. And again, those moments can be very devastating for an economy built on wealth and an economy built on AI, you know, capital spending. So I think that there's no doubt that I feel very confident that in coming months it is too important for them to fail in terms of stabilizing yields. But of course, there is that nagging doubt that if you make an error and something breaks in the system, yeah, that disorderly final move to the upside that just is the regime changing level of yields or the regime changing move in yields is feasible.

57:14And again, I think that's partly why at the end of the day that there is I'm long equities, I'm short bonds, because in bonds, I'm still worried about that final thrust higher. And in equities, I'm still worried about that final thrust higher. Do you know what I mean? I mean, that's kind of like what the deep down the psyche is. Michael, it's been an absolute pleasure unpicking your thoughts on markets for the last best part of an hour. And to round things off, as I flagged you in advance, like I ask all our guests, what is your overriding piece of advice for our listeners? I always like the phrase, our phrase, which is buy humiliation and sell hubris, which I think you've been touching on.

58:02You know, you know, the hubris is US, you know, it's AI, you know, it's tech, you know, that that's so that and the humiliation has been China, it's been bonds, you know, to a certain extent, it's been, you know, commodities for a while, real estate. So I think when you're thinking longer term, you know, I'm always really interested in where is the humiliation? What does everyone not just despise, but just couldn't give a fig about, you know, just doesn't get. And what is the catalyst to unlock that? And then what is the most popular thing that, you know, everyone's talking about, you know, and how does that, you know, unravel?

58:44So, yeah, I think that you should always have a piece of your portfolio that is nibbling at humiliation and just taking a little bit of profit in the hubris. So if you really want a piece of investment advice from a longer term perspective, it's buy humiliation, sell hubris. I adore that. It's a great sort of message for life, I think, as well. things are never as good as they feel when it's going well, and nor are they as bad as they might feel when the night is dark. Michael Hartnett, what a pleasure it's been to catch up with you on the Master Investor podcast. Thanks so much for joining us.

59:25Pleasure, Will. Pleasure to be here. Next up on the Master Investor podcast, we'll be talking to Jim Bianco of Bianco Research, who will be rarely in London as well, like Michael has been. So make sure to hit follow or subscribe on your podcast app if you haven't done so already. Thanks for listening. The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, the World Gold Council, and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation.

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