What does that mean more broadly?

Yeah, well, we've been underweight bonds since June, and it just made that adjustment to benchmark weight.

So we're not crazy bullish here, but I do think that, like you said, the tenure's at fair value.

So from our perspective, the Fed signaled that they have one more hike ahead of us and then a hiking bias going forward.

And I think that when you look at the SEP that they laid out, we have a pretty high bar to that third hike.

So under those conditions, I think you can start with the two-year and say, I think a two-year fair value is something like 4.75, maybe 4.85 if you want to price a little bit of a way to that third hike.

And then you have to say what kind of yield curve is appropriate for that, I think 30 to 40 basis points.

Just kind of give me a sense of how an equity investor balances the rise in bond yields and the potential for more hikes.

So one, what does that shock look like and where do you expect it to come from? And two, how do you square a vulnerable macro backdrop with your more bullish outlook?

outlook?Well, I, the, the shock we thought was most imminent was the Fed hiking, and the Fed, and the market wasn't ready for it.

And so I, I think that we were worried, number one, that the Fed was gonna hike, and number two, they were gonna guide to a full cycle.

And I think the guidance we received was, so if you go to the SEP, which is the summary of economic projections, so every quarter the Fed, the participants at the Fed, not-- voting members plus, they all write down their, their forecast for various economic and, uh, financial, um, indicators.

And so that we, we received one of those in September.

I was a little worried that the Fed would hike.

Warsh is, is such a, um, squirrely guy.

Is that a risk to Frontier Lab revenues and maybe the AI trade at large?

Why?

Yeah, thank you for having me.

It was a little over a month ago, August 10th, where we downgraded equities from an overweight to benchmark weight.

And our primary concern at that point in time was the market had underpriced the risk of a Fed rate hike.

And so our view is that as those probabilities shifted and we approached this September meeting, you would see a repricing in the rates market, and that could cause problems for equities.

And that's basically what we got.

We had two-year yield rise, 40, 45 basis points, 10-year rise, 30, 35 basis points.

So within this overweight, Warren, is it tech that leads us higher? I mean, we're in tech.

So the market... digesting this in the first 90 minutes of trading today as maybe a little net negative given what it means for interest rates?

Yeah, I think it is all eyes on the Fed at this point.

And so after Waller's speech yesterday, I think that the market had decided that the default was probably a hole.

I mean, it was 50-50 odds.

And, of course, the CPI that comes out next week is going to decide it.

If you read between the lines with what Waller was saying, anything that rounds up to a 0.3 month over month would be grounds for a hike.

Anything that rounds down to a 0.2, they would be on hold.

What do you mean by political hiccup? Is that the backlash that we've seen, the political backlash against data centers? And if that is the case, does the midterm election kind of represent a hurdle by which to surpass in order to get through it?

Are you more c- are you more constructive on stocks now because of what happened in Jackson Hole?

No, I'm less constructive, if anything.

I, I think that, uh, the equity market is still digesting this.

The initial move off of these Fed meetings is always a little tricky.

You saw the market try and rally at the beginning of the day, um, and that obviously faded.

I'm looking for more weakness from the equity market between here and at least till the next data card gets flipped over.

So we still have CPI, PPI, and a labor report that could save us.

S- so, so if, if equities is not the place to be, what are you looking at? Where's your holding pattern?

He made a great call on my podcast." So yes, you, you were, you were decidedly bullish coming into earnings season.

Yeah.

So for, from mid-April through into, I don't know when that was, August 10th or whatever it was, um, we had stayed overweight stocks.

And so that was our call and we've neutralized that now.

It's not that I would say I'm straight up bearish here, I just think the risks are two-sided.

I think that the concerns that were happening back in July were sort of misplaced and a little early.

And so, like, back in July, what I was hearing from a lot of clients was this worry that we have low correlations, internal correlations in the market, and that there could be a macro risk that emerges.

What did the market get wrong? Did they just over-index to the headline number?

He made a great call on my podcast." So yes, you, you were, you were decidedly bullish coming into earnings season.

Yeah.

So for, from mid-April through into, I don't know when that was, August 10th or whatever it was, um, we had stayed overweight stocks.

And so that was our call, and we've neutralized that now.

It's not that I would say I'm straight up bearish here, I just think the risks are two-sided.

I think that the concerns that were happening back in July were sort of misplaced and a little early.

And so, like, back in July, what I was hearing from a lot of clients was this worry that we have low correlations, internal correlations in the market, and that there could be a macro risk that emerges.

What did the market get wrong? Did they just over-index to the headline number?

And in terms of the way the, the bond market has been kind of trying to navigate a lot of what's going on with the Treasury and the Fed uncertainty, what is it implying to you in terms of rate hike expectations? Uh, and is it mispriced in some way? I mean, is it, uh, uh, these level of longer term yields worrisome? How does that fit in?

Yeah, I think that's...

When you're talking about macro, you can really divide it into two big camps, growth and in- inflation, and inflation manifests through rates and, and interest rate policy.

And our view is that, look, set aside what the Fed should do.

That doesn't really matter at this point, but what the Fed's going to do in September, I think is, it's a coin flip.

And the market went from 75% chance, again, back in July, that we're gonna see a hike in September and they've taken those odds down to 30%.

Uh, our view is that it should be a coin flip.

I wonder if you could just shed light on that, what it might mean for that trade.

I mean, d- did the optics get in the way?

Ooh, I think that in, uh, past election cycles, maybe they would.

But, I mean, I think at this point, the, the, the a- the political, uh, uh, horse trading and optics have kind of gone to the wayside.

I mean, at this point, the Fed is political whether they like it or not.

They've been pulled into the whole fight.

And I think that they're gonna probably do their best to remain, uh, objective with their, with their move here.

But at, at the end of the day, I think they're all humans.

How broad do you think any potential weakness could be?

Phillips curve.

Yeah.

It's a Phillips curve framework.

So, you know, when you have a dual mandate, it im- it implies that inflation goes up as the labor market gets tighter.

But when you have the labor market getting modest, like, a little looser, and you have inflation going up because of an AI CapEx build-out and, and a, uh, an oil supply-induced spike, uh, that kind of creates a, a lot of tension in the Fed's mandate, and it creates tension on, like, how do you solve for this? It, it, it honestly calls for a time where you should be very transparent, uh, in explaining your reaction function, and that takes us to what the Fed's doing right now.

I don't think Warsh is the guy for the job.

That's been my, my view, is that he is, uh...

What do you, what sectors do you like? Do you think things like that can continue? What, what's Warren Pies thinking about the stock market sector-wise?

How do you see this market right now, Warren?

Yeah, I think Malcolm has it pinned, basically.

Like, our view was that we've been overweight equities since mid-April.

We're still riding that call for now, and we really wanted to be overweight through this earnings season.

We like the setup.

I know you're saying there are a lot of, like, targets getting raised today, but, you know, probably should've been doing that, you know, a few weeks ago in preparation of this earnings season.

It kind of worries me to see the targets raising now.

Yeah.

Yeah.

Uh, my, my, our recommendation to clients is that, uh, uh, to, uh, account for that risk you have to be overweight commodities.

I mean, really going back to the beginning of the Iran war and through it, we're saying we like equities, but the big risk here, as you point out, is another flare up in this unpredictable conflict.

And the time's not on the side.

You know? The longer this goes, the, the, the farther global res- in- inventory is drained and, uh, and obviously if you have a long position you're, you're benefiting from backwardation.

So we're pairing an overweight commodity with overweight equity position.

I think the reason it's so scary, it's not just about the consumer and how oil hits the consumer, but how it's impacting the Fed and, and leading to next week's meeting and then into September.

But then would that be a mistake if, if the Fed were to move toward tightening now?

I mean, this is a pretty sizable bounce.

Yeah, I mean, I...

To me, when I zoom out and try and make sense of what's happening in this market, it's really about seasonality.

So this is kind of something we talked about going into our H2 outlook, is that July is a seasonally positive month.

Everybody knows that, so we expect this market to make new highs this month.

But under the surface, the momentum factor struggles every July since COVID.

And leading into this July, the momentum factor, which is synonymous with semis, has had a Crazy three-month run.

You, you must feel pretty optimistic heading into earning season.

What happens next?

I, I think that Ju- we, I'm not so concerned.

I hear, I hear the concern in Mike's voice.

I'm not so concerned about this, this rotation we're seeing.

I actually think it's positive.

We have the Equal Weight making new highs.

Uh, and when we step back, you know that July, everyone talks about it, July is a bullish month seasonally, so you can kind of check that box.

Now you have some of the other, you know, big names outside of the tech orbit that are, are sputtering a bit too.

Uh, why is availability basically a cleaner read than CapEx announcements or revenue and this FAST Index? I wanna talk about what that's telling you.

Yeah, so this is something, uh, go- going back again, being, uh, very fortunate to have, to be working with Fernando.

This is something that back in 2023 when the AI story was really taking off and we were doing the back of the envelope calculations on what this meant for the, the economy and the labor market and white collar displacement, we were pretty big skeptics to begin, to be honest, back then.

And so Fernando started compiling data where he'd go out to the various NeoClouds and on an hour-by-hour basis every day of, of all these years going back and starting in 2023, we would check how available, um, each GPU was.

And we've done this starting back with the A100s and going through with the Hoppers, and then now with the Blackwells, and we're testing it always and tracking, um, how frequently we're able to obtain a GPU from a NeoCloud.

And then we compile that together and we average it and basically have a, an index and, and it tells us, it, it gives us a good read on supply and demand, or GP- GPU supply and demand, you know? And this is kind of the bleeding edge of the market, is like on-demand GPUs from the NeoClouds.

And so that's what we look at, and, uh, again, we, we initially started collecting the data, saying with a, from a place, a posture of skepticism.

What's the data show?

So you do still think they cut first, although maybe not till next year?

Yes.

I think we're on a true hold right now, so that's a big change.

So, you know, going into the Iran war, there was 75 basis points of cuts built into the SOFR market, and now we're at, like, one and a half hikes, so 37-something basis points of hikes.

And so the market has tightened significantly over the course of this war, and now we have the price of oil coming down.

I think that when you really look through the true, what is the true nature of this economy and the labor market to a certain extent, we haven't seen the unemployment rate plunge.

It's just held steady.

Do you make much of this, uh, breakdown in correlation between short-term Treasury yields and oil? Is, are they, are they gonna meet?

At the same time, the AI trade, you know, it's really strong, but you wonder if it's getting a little tired.

Yeah.

I think you, you had mentioned it either earlier in the show or at the top of, uh, the last hour was you, for this broadening to happen, you need lower rates, right? And that's, that's a big part.

You need the ec- economy to hold up and lower rates.

I think the linchpin to a lot of this is the fall in oil prices.

You know, I do think that the market overreacted, the two-year overreacted today.

I expect that the next move out of the Fed will be a cut.

So I'm curious, Warren, then, you know, you think, do you think now is, like, the right time to fully engage in that broadening trade even though a lot of investors are, are scared that that might not materialize because Kevin Warsh was clearly, or at least jawboning, to be hawk, to appear hawkish?

Back in 2000, we had, what, 22%

Yeah, that's right.

I mean, that's the age-old debate that's going on.

It's like, are we in a bubble? And if we are in a bubble, how far into the bubble are we? And everyone, you know, we want to recency bias.

We all go back to the last tech bubble, 1999, 2000, and worry about whether we're in 99 or even 2000 at this point in time.

And so I think it's good for us to try and create metrics to understand where are we along that path.

I...

I'm just curious, you know, the psychology of the market as you see it and as it pertains to just the ability to kind of flip or wobble on a dime.

And if that is the case, Warren, what happens to the composition of the markets in terms of the gainers? Do we continue with the AI leadership? Do we broaden out? Do we have both at the same time?

Yeah, I think that's one of the things we've been looking at to try and get this thing to broaden out is that once we get...

And my view is that the war is done.

There's no appetite for further escalation.

And it's just a matter of how that MOU gets massaged for the public.

But I think the market's sniffing that out.

I think the loan market's sniffing that out.

But do you, you know, in order for your bullish market call to take place, do we need to see more backing off in yields at this point? And should we expect that since the big part of the increase that we've seen since the war began in yields happened in the real yield component, not inflation expectations?

What's your thought here, given what we've witnessed in this market over the last month and now how we're ending this week?

Yeah, I think, uh, we've been recommending the same posture, which is to be overweight stocks and overweight commodities, and I think we're seeing exactly why, is that the, the straight over moves has taken a backseat in everyone's mind, but it's still out there as a risk.

And I think the fact is, even if we were t- to open it up and have things, quote unquote, "normalized" there, we're now in a place where the elevation of oil prices and commodity prices in general have taken the Fed out of play.

So our view is that what's happening right now, bonds are the least favorite asset because we came into the year expecting Fed cuts, and it's impossible, politically impossible, for the Fed to cut in the face of triple digit oil and just so many supply shocks that we've had over these years, and just generally high inflation since the pandemic.

And so we won't get any Fed cuts, and that means that yields have to reprice.

I think fair value in the 10-year is 475, 48.

And, uh, you know, the...

I mean, what, what makes you believe that the market is gonna digest all of that and not to be... and I'm sorry to, to be like that, but not puke it all up? I mean, how, how can we just digest much higher rates than, than we expected, which in a growth-led run would be more susceptible than some other places, wouldn't it?

So the idea is, Warren, how can this be a broad-based earnings boom that's so bullish if it's just like a handful of companies and then also oil companies, which cannot be bullish for the S&P because, yes, high oil benefits oil companies, but it hurts almost everyone else.

First, like it's, it's true.

Like, so what you're saying is, is true.

There is a huge spread between the median industry earnings estimate growth versus the index level, and that's really what you're talking about.

That there's only a handful of stocks driving these estimates higher.

So we went back and looked, okay, when does this happen? And it's not like it's something that happens at market tops.

This is the concern that, oh, this is how things splinter at tops and, you know, it happened in 2000, which it did kinda happen in 2000, but it also happened in '97 and in '98 and in '99, and it also happened in 2009 coming out of the GFC, and it happened in late 2020, uh, coming out of COVID.

Just how tight is this market? And, you know, what's, what are your fundamental observations about AI right now?

So, so now what, as we go into a weekend and then we really get heavy into May?

Yeah, I think from my s- point of view, there's two big forces opposing each other, and it's the AI bull thesis that Mike and Oliver touched on there, and still the Strait of Hormuz is lurking out there.

And clearly at this point in time, the equity market has seized on to the AI thesis.

I mean, from our perspective since, since early in May, the right position has been to overweight your equity along with an overweight commodity, because I think that's still the only real risk, the fly in the ointment, is what could happen with oil prices spiking.

So that's my concern, but I think that everything has really changed with the, uh, the compute story and the semi-led rally and the reaffirmation of all the CapEx that we've seen from Mag Seven this week in, in just the belief in AI.

So that's what the leadership is, and I expect it to continue without a huge disruption in the Middle East.

I, I, me- could probably point to four or five different areas of the market that people who, who watch this stuff for a living say, "I'm getting a little queasy."

Yeah, I mean, I, I think there are pockets where things are overdone, but they're overdone kind of for reasons.

Uh, y- look, you saw the way clear to, to raise your equity, uh, allocation, uh, last evening, so clearly you're seeing something in the market action or the fundamental underpinnings to latch onto here.

Yeah.

I, I mean, I think this is a, a...

Quite frankly, if it wasn't for the straight over moves, I think that we'd be in m- max overweight equities here.

It's an extremely bullish outlook if you could remove that variable from the equation.

And I, I think that's what's happening, is the market's trying its best to look through what's happening.

And just to reiterate some of the, the bullish cases, we can all...

It's not trading as a, just a solid monolith, almost like the semiconductors are.

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How much longer you think that goes on and, and how can investors use it?

Uh, yeah, thank you for having me, Jon.

I, I think that it's, I mean, it's all dependent on how the, the talks go, on how the, the ceasefire negotiations go.

I'm sure you're gonna tell me that.

Yeah, I think that, uh, th- look, this is like a headline-driven market, so it's hard to put a bunch of risk on or take risk os- off, as we've seen the last, uh, couple days with this face-ripping rally.

But I think, so you have to rely on technicals.

So we broke out of this long-standing consolidation, and, uh, the good news is we've reentered into that range, which is actually a pretty good sign when you break down that maybe the lows are behind us, that, that number is 6538.

The next thing we're looking at is the 200-day at [metal clanging] 6640.

And then a 50% retracement of that correction, that almost 10% correction we have in the S&P 500, would take us to six six, uh, six zero.

That would ma- that would basically say, if you go back to history and look at 10% corrections, that, um, by most cases, that we're done, we've seen the lows.

What do you make of the money that's come back into tech?