Transcription
The leadup to it is going to be one of the greatest bull market equity runs we've ever seen. Again, this is generational. The NASDAQ will likely lose, in my opinion, half its value. It could easily be a 50% drop. This would just be cataclysmic for the whole entire stock market that will culminate in a recession, in a bare market that could last 1, two years, and then we just get a whole new cycle that resets and things have to start all over again. You don't want to sit there and just call a bubble and miss probably one of the greatest bull markets of our generation. And the greed phase is the phase that can make you the most amount of money as long as you're aware that you are in that. And that's the bubble part.
And the bell ringing that we're near the top is going to be the IPO of OpenAI. As you say, it began with Chat GPT and so it shall end with Chat GPT. That will be the cycle.
This is the biggest thing of our lifetime. And in history, whenever we've had these big things, the final phase is the biggest, that's when stocks will go up the most. And you don't want to miss that because you, if you're lucky, you see it maybe once every 20, 30 years. That will probably tip the scales. And you have to start being very, very cautious at that point. It's going to be a very brutal period. People will still act out of fear and it could happen much faster than perhaps other booms in the past. What is the catalyst, the trigger, the pin if you will, that bursts the bubble of this final phase?
This is the real story with Michelle McCrory. Hello, I'm Michelle McCrory. Thank you for joining us here on The Real Story, where we go beyond the headlines, beneath the surface, and behind the curtain to show you what is really happening with money, markets, and power. The Federal Reserve has delivered one of its most divided interest rate decisions in years. The Fed voted to leave interest rates unchanged for a fifth straight meeting, but three policy makers dissented in favor of an immediate quarter point rate hike. Now, prior to today, the last time that three Fed officials dissented in the same direction was in September of 2016 under then Fed Chair Janet Yellen. The Fed said that the economy, however, continues to expand at a solid pace, noting that inflation does remain elevated and emphasized the committee's commitment to deliver price stability.
Today, as you know, our committee decided to vote by a 9-to-3 vote to maintain the target range for the federal funds rate at 3 and 1/2 to 3 and 3/4%. The committee is continuing its policy of making ample reserves in the banking system. The economy is showing impressive resilience. Even with recent shocks, the trends are positive and reveal solid growth. Job gains have kept pace with the workforce and the unemployment rate has changed little. Inflation remains elevated relative to the committee's 2% goal. The committee remains resolute. You've heard this before, but we will deliver price stability.
Now, Chair Kevin Walsh did not provide many clues about where rates go from here. Instead, he emphasized that the Fed is moving away from forward guidance and suggested that higher long-term Treasury yields may already be doing some of the Fed's tightening for it. Now, markets are now pricing in a better than 60% chance of a quarter point rate hike in September. That's according to the CME Fed Watch tool. Stocks initially sold off sharply after the decision, but Wall Street is rebounding on strong tech earnings even as the 30-year Treasury yield remains near its highest level in almost two decades. So, what should investors make of all of this? Joining me now to give us his outlook on the Fed, the macro economy, and the markets and more is Jean Jo. He is the chief investment officer of Glassspeed Capital Management. The firm manages more than $100 million of assets and Glassspeed follows a long short equity strategy that combines macroeconomic analysis with fundamental and technical research to identify opportunities across changing market cycles. John, great to have you with us. Welcome to the real story.
Thank you, Michelle. Thank you very much for having me.
All right, let's get straight into it and let's kick it off with your reaction to the Fed leaving rates unchanged. What is your main takeaway from what we heard from Walsh?
Okay, well in the last 24 hours things have certainly evolved. Um the first market reaction sometimes is not the right one as equity markets plunged. The Dow was down a thousand points uh yesterday and um we had a really big rebound today and oftentimes the next day is really the the the the right outcome because people really have time to think about it and u the way I see it nothing has really changed from uh his previous meeting. Um I think Walsh delivered remarks that were uh very much as expected and that is the fact that um the financial conditions have uh slowly tightened since his last meeting because uh interest rates have have increased. So he's letting the market do his job essentially and I think that's the right approach.
All right, we'll dig more into that. But to your point, he said that he doesn't need to raise to didn't need to raise rates at this meeting because the bond market already did the job for them. And two things stood out since that last meeting. Treasury yields moved sharply on their own. One of the biggest moves in 20 years, even without a rate change, and uh AI related business investment surged nearly 20% this quarter. He did say that they looked at June's cooler CPI report, but that didn't really factor anything. barely moved the committee's thinking and that they're watching trends, not single data points. But I think it was interesting that he said that uh the market is doing the Fed's job for it. Let's play that sound bite.
Market participants are learning to play the ball, not the referee, and market prices will continue to respond in the direction and magnitude they see fit.
Right. So, I mean, what what do you make of the fact that he was saying, you know, there were tighter conditions, so the Fed didn't have to act? Does this reduce the need for future hikes? Is he hoping to signal a hawkish position so that the market continues to do this so that he doesn't need to raise rates? What's your read on that?
Okay, very good question. I think that's very important because in prior Feds uh post financial crisis, uh the Federal Reserve always gave guidance, okay, and he does not want to use that playbook anymore. So this is very important to understand. This is a very different Fed in that respect. He wants to let the market uh sort of make the decision as it should be. Now when you say interest rates, there's two parts of the curve. You have the short end um which had had moved up which are now uh four and a quarter at the two-year uh and then the longer term interest rates which have moved up as well. But this is not so much the Fed's control uh more at the shorter end of the curve, right? And the longer end of the curve has a lot of other reasons for it to go up. Could be growth, could be inflation. But at the short end, um, basically where they are now, which is about 50 basis points below the the two-year, the two years at four and a quarter, that funds at at three three and three/4ers. If that two-year continues to increase from now until, let's say, the September meeting, the market will essentially force him to to tighten, to have to raise. if he does, if the the rates stay stable and they remain where they are, um he will remain as is. So, he's in a wait and see approach right now. Michelle.
So again, um he did emphasize that holding rates at this meeting was not a pause. And I thought that was interesting because he sort of took a step back and said, "Hang on, hang on a minute. This is definitely not a pause." He took uh position on the term pause. Let's play that sound bite.
I wouldn't characterize what we did as anything like a pause. I would characterize what we did as a rigorous review of the economic situation. I would characterize what we did as a review of the big hard questions and I'd characterize it as a view of what our own homework is to try to resolve those questions in the period ahead. Um, if you were to try to force a description that this was a pause, I would say financial market prices would take the other side of that. Financial market prices in this intermedating period, they didn't pause. They reacted to the inflation data in one direction, strong economic growth in the other direction, um, and uh, nominal and real rates went up. Did the Fed take an explicit change in its policy rate today? No, but I think that's the beginning of the story, not the end of the story.
So, the beginning of the story and that's the story we're trying to uncover here. Jean, again, the CME Fed Watch tool says there's a more than 60% chance that the Fed will raise rates in September. What's your read? When do you expect rate hikes? What's your assessment?
Okay, so I'm going to give Walsh the benefit of the of the doubt. I'm taking a completely objective view. I I don't play favorites. Um I manage capital and so every time there's a new Fed chief, the market will test that Fed chief. And I will say I will give him a very strong grade on on his second meeting because what he's saying essentially is that um you know a pause could be dovish but it's really not. He is looking at two sides of the coin. Um there's inflation but then there's growth and the emphasis is on growth. We are not in a scenario where uh growth is slowing and we have inflation which would be stagflation. This is definitely not the environment that we're in. We have a productivity boom due to AI. This is the biggest productivity boom that we've seen in in in decades. GDP is still doing is still growing. Um unemployment we're at full employment. Um joblessness is is is not really going up. It's a good environment and so that will push prices higher. So sometimes you have what's considered good inflation. On the other hand, there's some sticky components to the inflation and that's really what he meant by we're taking a real hard look and a real hard view at this and those are the things that he wants to be aware of because that is something that they have a job to do and that would be the causes of that inflation. So energy prices is number one. Now lot Fed chiefs prior to him and other economists have are in agreement that um energy prices are transitory. they can move up and they can move down just as quickly obviously in this situation due to the war in Iran. That's number one. The second uh force in inflation is due to the AI buildout which he mentioned as well because there's such bottlenecks in the supply chain from the demand the incredible demand for for AI and that's causing uh temporary inflation because again at some point those those bottlenecks will open up and the demand will will be met. And the third and the third part will be food prices. So these are like the three main components that are that are causing the inflation. But the bigger thing is to understand is some inflation is actually good and that's economic growth. And so you want to let you sort of like a balancing act to allow the economy to grow but not to get too hot where it's forcing up inflation. So he's willing to be patient. Um my to answer your question directly, we're at a point where it's there's three more meetings left in 2026, most likely you're probably going to see based on my assessment of how I see things. Uh this this is contingent on the war not escalating before the midterms. I think there's probably only going to be one hike this this year uh in December. He may, it looks to me like he may skip uh on the September meeting and the October meeting is almost definitely a pause as well.
So you expect a hike in December then?
I expect a hike in December. But if I'm wrong and he does hike in September, a hike is not necessarily a bad thing. This is not comparable to 2022 where we had slowing economic growth after the aftershocks of the pandemic and you had runaway inflation CPI numbers of 7 8% inflation where Fed Fed pal was raising some meetings 75 basis points a whole different cycle at some point Federal Reserve has to raise to keep up with interest rates. rates go up in conjunction with the economy going up. It's not always because oh goodness this is so bad because of inflation. It's also because we have a growing economy and that growing economy demands rates going up and it's going up at the long end especially which is good for banks. That's why regional banks are hitting new highs. Lending is increasing. Um things are good. Just like Walsh said this is not a bad situation. There just some parts that they have to be mindful of which is some components of inflation are still sticky.
Well, I think he certainly was trying to sound tough on inflation. He was saying there's no soft inflation target. I think that was probably his headline message. He said that Americans have come to believe that the Fed is willing to tolerate inflation above 2%. He wanted to reject that idea that there's no soft inflation target. Um, not on this committee's watch. That's a direct quote from him. There's only a target and it's 2%. He said uh we will deliver the 2% inflation target and that is the committee's definition of price stability. But now he did also acknowledge that there five years of inflation that have damaged the Fed's credibility in some people's eyes. That uh he acknowledged that people have stopped believing that the Fed really means 2%. And that five years of high inflation have left a mistaken impression uh that the Fed's implicit inflation target was somehow above 2%. So some interpretation is that he's essentially saying the Fed has to rebuild its credibility here. Does that enforce your thinking that there will be uh a rate hike by the end of the year as you said in December meeting or is it as some say that this is just tough talk and that he's ultimately a dove in fox's clothing and he's hoping the markets take him seriously enough and continue to do his job for him.
Yeah, a lot of great points there. So, as we as we've learned over the years, over cycles, it's not always what the Fed does, it's what they say. Okay, language is very powerful at the Federal Reserve. And so, he knows that and he's using that. But he also uh very much has learned from prior feds of some of the things uh he doesn't want to do. And one of those things is he doesn't want to get boxed in. And I think that's a smart move. And that's why he's removing forward guidance. However, he did say that um in terms in times of emergency that uh the communication would be different. So, as far as like going forward and how things should look as far as monetary policy, once again, I'm going to reiterate what he's saying. The the market actually will determine that. Okay? The bond market will will tell. What he doesn't want to do is of course allow inflation to run away. And if that happens, he has no choice. He will just have to raise rates. There's no doubt about it.
We don't know that, right? How much of this inflation is actually within the Fed's ability to manage considering as you quite rightly pointed out that some of that is coming from uh global supply chain issues with the war in Iran that even if there is some resolution overnight and everything starts to flow at 100% capacity out of the Strait of Hormuz many would say that the damage has already been done because of the backlog of essential things uh like oil like fertilizer and that uh inventories have intact and that's distorting the reality of where we really are with that and we're going to have delayed inflation anyway.
Does the Fed actually have that much influence over that type of inflation?
None. And that's why they they that's why they've always said like oil prices are transitory. remember in '22 when the war with uh you know Russia and you know and Ukraine broke out and oil broke there's nothing they could have done and then and then oil went back down and then it happened again uh this earlier this year back in March right we had this big flare up and then and then Trump kind of eased the tensions and now they're they're flaring up again but these these these are still things that are completely out of the Fed's hands um it's not good for the economy again you have to you have to grade the inflation There's even a reescalation in the Middle East and goes back up a certain amount of time assuming that we don't want to escalate things into a bigger much bigger war. But this is a whole another topic. I want to just focus on this the the the components that is causing the Fed to be uneasy and the bond market as well where we could have an issue and that is from really mostly remember the the bigger is the good part of inflation is labor costs have not gone up actually they've gone down because of AI because productivity has increased so that's the worst part of inflation is if you get labor inflation that we do not have what we do have is um things within the supply chain and that's to do due to AI. So on one hand AI is causing growth and it's a good thing because in every cycle in human history whenever you have a new technology and a boom and a productivity boom you had in the 80s with computers you had in the 90s with the with the internet and you're having it right now with AI it does cause uh problems in the supply chain and that is the kind of inflation that I think he's being mindful that he doesn't want to let run away.
And it was one of the more interesting parts uh his comments on AI because he did acknowledge that AI is driving a mass wave of investment with companies pouring money into data centers, chips, software and infrastructure. That's on the one hand uh supporting economic growth to your point but he also pointed out that it's pushing up prices for things like memory chips and AI infrastructure as you said. So to me, what he seemed to be saying is that the Fed is still trying to figure out exactly whether AI is inflationary in the near term because of all of this investment or whether over time the productivity gains from AI will ultimately be disinflationary. Uh let's play uh a clip which includes some of his comments in AI puts together.
The surge in high-tech capex has been remarkable. The most recent data shows four quarter growth rates of nearly 20%. This is helping to sustain the healthy momentum of manufacturing output. The business capex boom, for example, is driving up prices of memory and logic chips and associated AI infrastructure. Do these changes indicate a broader inflationary dynamic or do we just focus on them because they are under the bright street light? We're making a judgment about what productivity is and in some sense there's a race between supply and demand and the surge in business capex in around AI. It's making that calculation a little harder to judge but in the period ahead we're going to be trying to judge just that.
What do you make of that?
This is this is exactly what I'm talking about because remember there's only two ways to really grow an economy. It's either through productivity booms, okay, in cycles. You can go back to the industrial age and things of that nature. Um and then there's uh through stimulus, right? So um the pandemic was a fiscal and monetary stimulus boom. That's what it was. We flooded this system with a lot of money and it created inflation. This is different. This is good growth. Okay. And so that that's why Walsh wants to be very patient with this because he knows this is like part of it is is is good inflation. And that's that's what he's talking about, but he's also very mindful that this can create these nasty flare-ups um in the prices. Let's just use most recently memory memory chips because memory chips are in every single one of these uh products that we all use iPhones and cell phones and computers for example. But um this is causing prices to increase.
Before I continue my conversation with the Jean Joseph Glassspeed Capital, I just want to take a minute and thank you all for watching. If you enjoy these conversations, please subscribe to the channel and share our content. Keep in mind that full episodes are also posted on Apple and Spotify podcasts. Every subscription, every like, every comment, every share helps us reach more people and I'm very grateful for your support in helping us grow this community. I'd also like to extend a big thank you to my partners at Miles Franklin Precious Metals. For nearly four decades, they've been one of the most respected and trusted names in precious metals. And if you're looking to diversify your portfolio, protect your purchasing power, they have an experienced team that can help you fully understand your options, and make informed decisions based on your financial goals. Reach them at info@mfranklin.com. And now back to my conversation with Jean. So you know Jean you use the term transitory and that was uh a favorite term of former Fed chair Jerome Powell and that came back to bite him in the butt because he was trying to assure us that inflation during COVID was only going to be transitory. We know that that did not prove to be the case and we know that President Trump was very aggressive with his critique of Jerome Powell saying he needs to cut rates calling him too late Powell he needs to cut he needs to cut. So, a lot of the thinking ahead of Walsh taking this position is that if Trump picked him, he knows he's going to be his guy and cut rates. Now, without getting into any of the the political conversation of whether a president should be making comments about the Fed chair, but views on on President Trump, the reality is is that Trump picked this guy and he wants rate cuts. At least he was making that case very very clear uh during Powell's tenure and any kind of move before midterm elections would be seen to be political. If there was a hike before midterm elections, I can't imagine that would make President Donald J. Trump very happy. If there's a cut, which the markets are not even looking at right now, um that would be viewed as being political. So, can the Fed actually do anything before midterms without being accused of being political one way or the other? Is Is that another way that the Fed is trapped here?
Well, if I was if you were asking that question to the Fed, they would say that we never make decisions uh based on any political influence. And of course, people want to believe that that is the case and that he's, you know, Trump's uh whipping boy or whatever you want to call him. It is standard practice for the Federal Reserve before uh either a presidential election or a midterm election um to wait and and and not to do anything. That will be at the October meeting. Okay. The September meeting I still think is live. However, I'm leaning towards another pause, which means then a pause in October. And I don't think that's for political reasons. uh if if inflation does continue to move higher and even though we got a moderate CPI reading, if we get a hotter CPI reading and just keep an eye on the 2-year Treasury note, if it continues to increase and it moves up by the next meeting to 4.5%, I think at that point uh Walsh will raise by a quarter percent. But once again, the bond market will have done its job for him.
So if it's >> but but your most realistic scenario is a rate hike December.
By December, we should have a rate hike. Uh and the reason for that is it's actually a good rate hike. If he doesn't raise in December, it's not a good thing. And let me tell you why. The reason is is because we are expecting for the economy to do be doing well enough that it could sustain a 25 basis point hike. Markets don't just do so poorly just because they're hiking. You have to get through an entire hiking cycle. So if you bring me back on your show, let's say next year, by that time I would imagine Walsh has already tightened three, four, five times. We're in a full tightening cycle. But the stock market could be 20% higher from here. Okay. Um things could look much better. So it's not always in relation to inflation. It's also in relation to economic growth. And the Fed has to keep up with that growth.
And and I do want to get your outlook on the markets and and the economy. But just before we get into that, I want to give you the counterargument about raising rates in general just at large because you do think that there is going to be a rate hike cycle. Uh we've had a number of guests on this program. There are a number of economists in general that argue that the Fed's abilities to raise rates today is far more constrained than in previous cycles because the US has almost $40 trillion in debt, $39 trillion plus in debt, an annual net interest cost of around a trillion dollars. And as Treasury debt matures and is refinanced, that pays higher interest rate, servicing that debt becomes increasingly expensive. At the same time, Washington continues to run large budget deficits, requiring the Treasury to issue trillions of dollars in new debt each year just to fund the ongoing government spending. Now, the Fed's mandate, sure, is price stability and maximum employment. Uh, but can they really ignore the broader fiscal consequences here? Because the argument goes even further that every sustained increase in interest rates raises the cost of refinancing existing debt. That increases the cost of financing new deficits. widens the deficit itself ultimately requires even more treasury issuance. And then they argue that the pool of traditional treasury buyers is not as dependable as it once was because we're seeing diversification away from US treasuries into gold. Uh and you know banks are also still dealing with the effects of unrealized bond losses, investors demanding higher yields. So basically you have this this debt doom loop, right? And then on top of that, you can say that high interest rates typically strengthen the US dollar and a stronger dollar can help contain inflation, but uh it can also make US exports less competitive. We do have an administration that wants to onshore manufacturing, that wants to make the US more independent, more sovereign. Again, Fed, that is not the Fed's mandate. But many would argue that those are real world consequences that policy makers cannot just completely ignore here. So where I'm going with this, the argument is no matter what the Fed is saying, it just cannot operate with the same flexibility it once had. That fiscal dominance is the name of the game. They cannot do anything but actually cut rates. What's your take on that?
Okay. Well, you made a lot of points there. Um I mean, they can't cut. No, they're not in a position to to cut. they they can only go by the data that that that that's coming in. And um when the Fed cuts, it means it's bad. Things are not going well. You're uh you're looking at economy that's contracting. Um you're looking at uh unemployment rate that's increasing. You are looking at just like some sort of credit crisis or something where people are not able to um to tap credit markets. These are the kinds of environments that cause the Federal Reserve to cut interest rates. And that is not the kind of environment that we're in. And so, um, even considering a an interest rate cut is just completely out of the question at this point at this point in the cycle where we're at right now.
And that leads me perfectly into my next question, John. Where do you think we are in the economic cycle? What is your big picture outlook? where we are in the economic cycle, where we're in the markets, give me your thesis.
Right. So, uh, so we are late cycle. There's no doubt about it. Uh, we're arguing when the Fed's going to raise, when they're going to pause. It seems to me, and this is good for equities that um, yes, Walsh is a dove, okay? And he is in no rush to tighten the money supply, and he is going to be patient. However, he will act when he needs to because he still has a job of price stability. But the way I would frame it is he is going to run it hot. And what's going to run hot is the most important factor of uh of this boom since um since the last bare market of 2022. And that's the AI buildout boom. Okay. Uh this is a a generational environment. We've never seen anything like this other than um the 1990s the build out of the internet, the 1980s, the buildout of of computers and 1920s, the buildout of railroads and the industrial revolution. So it's a big deal. Uh it's it's causing all the growth and it's causing the inflation. But uh we are in the late stages of this phase. So my assessment is that I would say sometime next year at some point the feds will be forced to really tighten the money supply and at some point uh this boom will top and will it it will end just like every other uh precedent in history.
And that's exactly what people want to know the when. Yes, people are sure that the boom will end because they always do but what is the timing for that? Well, I don't have an exact date, but I can give you certain things to look for. This cycle started in the fall of 2022 because of one invention and that was ChachiPT. Chachi PT just changed everything. All this inflation that we're getting because of uh really supply chain issues in the data centers are all because of all of the sudden the demand for compute grew exponentially. Okay. From chips to memory to uh cables, optics, um energy to power it all. It's it's it's all been part of the boom because all of a sudden we have this new invention that we've never had that never existed. Just like one day we didn't have the internet and then one day we did. And therefore, because it was born on this invention, it will most likely die sometime around. Now, when I say die, I mean it will end this cycle. the first AI buildout boom sometime around the time when open AI comes public on the stock market. Uh the cycle likely doesn't end until then. And so I would assess that being most likely in the first quarter or the first half of 2027. Now it doesn't have to happen right when that IPO happens, but it will be part of the cycle which will be the actual companies that are the beneficiaries of AI because for now we've seen the companies that have done the building out. Okay. but the beneficiaries are not public yet. Um, more recently we're going to see in October it looks like anthropic is going to come public as well. So once we get through the IPO cycle in addition everything we're talking about the Fed four, five, maybe six interest rate hikes that would take Fed funds rate up to as high as perhaps 6%. You could get up as high as that. that might that will probably tip the scales and um you have to start being very very cautious at at that point.
Okay, a lot to unpack there. So firstly, you see five rate hikes by second half of 2027.
By second half of 2027, yes, once once Walsh starts, he will the the cycle begins. Um I I just and again it's not because inflation's running away. It's just because we are going to be in in an economic boom. This is this is the economic backdrop is one of the best that I've ever seen um in my career. Now, I've only been around in the 2000s. I did was doing this in the financial crisis and I've seen everything in between, but this this boom due to AI is is going to continue and uh and the stock market will continue to make uh higher highs as well. And this has a knock-on effect as well because people start to look at their 401ks and it starts to do better and better and um and of course uh companies are in their margins increase, productivity increases, uh earnings increase and and and and things just go hotter and hotter and hotter to the point where at some point there's some sort of something tips over. Um, the danger that I see is that in order to continue to build out AI, you will have to borrow because they're running out of cash flow. Um, now they're borrowing. They're tapping credit markets, which is fine because of the growth, but at some point that could tip. And part of that will be this is why the you have to get the Fed right is that because as they tighten mon as they tighten financial conditions and as the rates go up it becomes more and more difficult to borrow in order to continue to build out AI in every big cycle in history. This is exactly how it's played out and most likely this will be no different. So I still see us in being a very good environment, very strong environment but you have to be mindful what is on the other side of this. So, the Fed's going to move relatively gradually in its tightening, allowing the AI buildout to continue before the cycle ultimately peaks sometime around uh the second half of 2027 is your thesis and the bell ringing that we're near the top is going to be the IPO of OpenAI. As you say, it began with Chat GPT and so it shall end with Chat GPT. That will be the cycle. Am I understanding that correctly?
That's right. This is the first phase of this is the first cycle that will become to be known as the AI buildout boom. It's the first one. There's more to come in the future. AI is going to be with us for the rest of our lives. It's generational what's happening. This is for the history books. Uh but this cycle will the first one will end just like that.
Why would OpenAI want to IPO and raise near the top of the cycle?
Why would they choose that timing?
That's a good question. So, we just had a massive IPO from SpaceX. Right now, SpaceX is a much longer term view because the view behind that is data centers in space. Realistically, we just don't see that happening uh for for for quite a number of years. Okay. And so, um, in hindsight, because that's the since the IPO price, it's down 50%. But we've seen this with other IPOs. When Facebook first came public in 2012, it lost 50% of its value. It just the timing was still too soon. The ones that I believe are going to sort of ring the bell. Now, ring the bell doesn't mean ring the bell at the top, but the the clock starts ticking, the one to watch is going to be anthropic. Okay? Anthropic is showing us uh at least based on the data that we're seeing growth rate that is just incredible. We've never seen this a company just just growing at the rate that they're growing uh due to the success of AI agents. Okay. And so once they come public the clock starts ticking and then of course OpenAI but then there's going to be uh I'm expecting hundreds of IPOs. So from anthropic in this fall in Q4 all the way until second half of of next year, you're going to see an IPO boom like you haven't seen since the late 90s, okay? Or the pandemic because we also had a lot of IPOs late pandemic. And this is the hallmark of of of the end of a cycle. Um, so OpenAI will have no choice. They will go public because why they need more money. They need more compute. They're growing. They need they need you know they're at the point where coming public was is going to support uh their needs because at some point in the private market it just can't go on forever. I mean their market their valuation is over a trillion dollars just like anthropic.
Okay. So your uh warning signal flashing red that the party may be over is when open AI lists uh I think there's like it has a trillion dollar valuation. Correct me if I'm wrong. Will will there be liquidity to warrant that kind of uh demand if we're well into a rate hiking cycle which you're also predicting is going to happen?
Yes, there will be plenty of liquidity because once again the backdrop is so powerful. Um it's similar in some respects and also different than the late 90s. Okay. Um, in 1999, in June of 1999, uh, Alan Greenspan started hiking. Okay, he hiked 25 basis points in June. And he kept hiking until, uh, May of 2000. And it's not a coincidence that, um, that final hike was the end of the bull market, which was actually a 50 basis point hike. And so he was able to hike all through the most exciting bull market that we've ever seen since 1929. Now, I'm not saying it's going to end the same way. Um, one big difference about the AI companies of today are that these companies are wildly profitable, okay? In '99 2000, the dotcoms just were not. They were basically promising uh the future. But uh it will rhyme in the sense that um they can hike and the stock market can still go up until it can't until it's just uh financial conditions have tightened because remember when you when the Fed moves it takes time for that to work into the system. It doesn't happen right away. And so for money really to become tight it's going to take six months for that cycle to really play itself out at least.
Okay. Okay. So, you're saying that this AI cycle is different from the dotcom boom because these companies are already profitable. You could say sure, some are uh but profitability doesn't necessarily justify these valuations, right? Some of them are just like through the roof and and some are profitable. Um, not all of them are. I mean, we're starting to learn that uh, you know, companies utilizing AI are seeing that the cost of the agents and the tokens is so excessive that they're they're cutting back on how much of that they're they're tapping into. Now, now granted, the chip makers have been profitable, but again, some profitability. Do you really think that there is sufficient profitability here? And and does that even necessarily justify these valuations that we're seeing? like what gives you confidence about that?
Right. So, you brought up the tokens and that's a that's a good point and um because of that token spend because of the price that gets back to our inflation talk, right? That was the problem. All of a sudden, you know, you're using an AI agent in the in your company and it's costing you so much money to run these AI agents and and and you know, your boss is saying, "Wait a second, this is costing us too much money." So that's we just hit a we just hit a wall and that's why you just saw a recent correction in it's one of the reasons that we saw a recent correction in in AI AI stocks because we sort of we sort of hit a wall as uh the pricing has just become too much and when that happens and the demand slows then the pricing pressures come off and that's why once again I think that these pricing pressures are are transitory as far as the companies being profitable. Look, remember there's only there's the three components, the three groups of AI stocks. You have uh the chip companies, right? So there are the infrastructure, there are the companies these companies are wildly profitable, okay? But their hardware, their infrastructure, of course, their cycle will end and slow at some point in time once the AI AI buildout boom is essentially completed or it's reached a point where it's the growth has slowed down, which I anticipate at some point next year is likely to be the case. That's number one. The second one is the hyperscalers. Okay, they're the ones providing the internet uh the internet the AI and that's your hyperscalers namely Microsoft, Amazon, Google who just reported earnings and they're continuing to spend like crazy but they're actually uh making a profit. Microsoft just came out yesterday and told us that you know hundred billion dollars in in profit just from their AI cloud business. Google the same and Amazon after the bell. I don't have the call in front of me but I'm I'm sure it's it's about the same. But the third components who are not public, they're the beneficiaries, the ones that are actually using the AI, the open AIs, the anthropics, the perplexities, all these companies, data bricks that are yet to come out and and be public. Um, they are profitable, they are making money, and we're going to see them as publicly traded companies in the not too distant future. And that's the next phase of this AI bull market and the final phase actually.
The Well, that's just it, the final phase. So what is the catalyst, the trigger, the pin if you will, that bursts the bubble of this final phase?
Right? And I want to be clear, uh, you can define this as a bubble. Okay? I'm very much a bull. Um, you don't want to sit there and just call a bubble and and miss, probably one of the greatest bull markets of of our generation. But it will be a bubble because in a bubble there's always uh uh too much money goes into one place and and and there's a reason for that and that's because companies cannot this is existential. Okay in the sense that companies cannot afford to miss this moment in time with AI because it's going to change our lives forever. every single one of us human beings um will be using a variation of this chat GPT that looks wildly more advanced in the years to come where we'll look back and be like essentially a robot will be walking around as a chat GPT and the companies that are in there that are making the software that are making the hardware that those are going to be the companies that are going to thrive and then the companies in the enterprise that are using it they absolutely have to use it. So all the money is going towards there and whenever there's such an imbalance of money that goes there's overspending and then you get a bubble and then you happen to have all all all ships rise and companies that are not good get thrown in the mix just like you had in the dotcom days and you get unprofitable AI companies and all kinds of things and people make mistakes. they start using leverage u we just saw a hedge fund blow up today situational awareness using too much leverage in AI but this can be done on a much broader scale.
Until you get to the point where um something pricks it and my guess will be a combination of things one will be uh some AI company will not be able to pay its debts something along those lines they borrow too much um if you look at Oracle there's some stress there with uh credit default swaps have just been going up so the risks to a company like that. Some company will default on its debt and this will be because of because of the Fed eventually having to tighten and it's all going to play out together and some crisis will trigger it. Something will set it off and then one of the big hyperscalers Microsoft, Amazon or Google will come out one one quarter and say that's it. we're slow in spending on AI and then the bust will happen and that will be uh that will culminate in a recession in a bare market that could last one two years and then we just get a whole new cycle that resets and things have to start all over again. Um this is the way it's happened since the beginning of time and this will be no different. So the market is going to continue to rally even if we see rate hikes from the Fed. One rate hike doesn't deter this market rally. Two rate hikes do not deter this market rally from what I understand. Uh perhaps four rate hikes and the market still continues to go higher. But then something breaks and you're saying we're not sure what it is, but that tighter economic uh financial environment will contribute to the pressure leading to that to that break.
Then what? What happens on the other side of that? What does the market look like on the other side of that?
"Okay," you said, "bare market. Paint me that picture. What does that look like?"
"Well, then it's going to be a very brutal period because, um, so much of the S&P 500 depends, how you look at it. Um, some companies that may not be like tech, but they are. Like, you take Caterpillar. You know, Caterpillar is not a technology company, but actually, they're related to the AI trade because they're helping build data centers. Okay? So, my guess is something like a third of the S&P 500 is very much dependent on AI. So, can you imagine if we had a bust in AI at some point? This would just be cataclysmic for the whole entire stock market. And then it feeds on itself because then what happens? As stocks go down, then, uh, consumer confidence drops, and then people start to look at their statements and they start to think, well, I have less money, and then maybe I should, you know, sell my house or think. People start thinking like this. It's a reinforcing sort of mechanism that happened in 2000. This is very much what happened in 2000. You know, it was a once, once the internet busted, then things slowed down and then ultimately went to recession. Um, and then some outside event that nobody predicted, 9/11, happened in 2001. And, you know, these things, these things can come out of nowhere. But this is the way that the cycle most likely will play out. And then, um, eventually, the big companies that did all the spending, they're not going to spend as much. So they'll ultimately be the beneficiaries, not right away, but eventually. So you take a company like, uh, Meta, which has been spending hundreds of billions of dollars, okay? Or Amazon, which just is now negative cash flow. Uh, those companies will do well because once their spending slows down, then their cash flow will go positive again. But not before, I would say anything along the lines of, uh, the NASDAQ will likely lose, in my opinion, half its value. It could easily be a 50% drop. Okay. So after the second half of 2027, assuming the OpenAI IPO happens, uh, you think that that starts to signal the top, not necessarily the top, but that's your warning. And thereafter, you see the NASDAQ dropping 50%. But over what time period? Is this going to be like a sudden crash, or does it play out? Uh, I think you said a two-year bare market. What kind of timeline do you foresee there?"
"You know, things, a lot of things repeat themselves. I'm a big believer in cycles. I'm a big believer in, uh, history repeating itself in a lot of ways. I know we have technology. I know we have things today where we can get information much faster. But one thing that doesn't change, Michelle, and that's human nature. So, um, people will still act out of fear, and it could happen much faster than perhaps other busts in the past. The market in 2000, when it busted, it really didn't bottom out till 2003. So it was like about a two and a half year bare market. I don't foresee that happening for so long. We don't have dot-com stocks of that nature. Something along the lines of, let's call it a year, year and a half. It'll be longer than '22. '22, the market bottomed by the fall. Um, but this, this will likely be worse. And I, I want to remind you, you know, OpenAI, it's not about just OpenAI. It's really, uh, in every cycle and every bull market, the end of a bull market always comes with a lot of IPOs. Okay? It happened in the 1980s. It happened in the 1990s. We had it recently in the pandemic. Um, and the reason for that is because companies know that they have a certain window to come public. Okay? And that window opens and then it shuts. And that window has been closed since 2001. We have not had, the IPO market has been dead. And so it's reopening now. They try to, you know, we've had two IPOs this year. Two, well, two bigger IPOs. We've had more, but the two big ones were, uh, Sara, which is down 50% from its IPO, and of course, SpaceX. But once you're going to start to see Anthropic and more, that cycle then opens up. And that is because there's enough demand in the market for the supply of new shares. And once all that supply of shares is completed, that is when the cycle ends. The scales tip over because that's all the market is, is just a weighing machine of supply and demand. And this is a scenario where we're going to see a big boom followed by a bust. So I'm assuming when that bust happens, that's when the Fed, uh, reverses course, according to your theory, and starts to cut aggressively or stimulate or QE, or what kind of response would you expect from the Fed in that environment, which again, if you're saying this is the second half of 2027, it starts to begin? It's not that far from now."
"Right. And remember, I'm only naming a few things there. There are things that are unpredictable. The way I manage money is I formulate an opinion, but I always let the market make the decisions in real time with data and things that I'm seeing because things can change in a heartbeat. Uh, the Chinese, for example, could come out and they've already shown it with Deepseek and now with, uh, this new model Kimi, I think it's called, that is way more efficient, where all of a sudden they could run a ChatGPT for a tenth of the cost. This changes a lot of things. Okay? So there's all kinds of things. My pushback on that would be the Trump administration, in my opinion, likely will ban these models. This will be, this is a big win for OpenAI and Anthropic. This is a whole another subject matter, but there could be some other event that is going to do that. But I'm putting a lot of emphasis on the AI boom because, yes, that is the one thing that can continue the boom, but also inevitably create the bust. Not everybody works in AI, right? And they might think, like, we're going to go into recession because of AI. Yeah, it will do it because it will knock the stock market down, and then that has knock-on effects, and then companies start to have issues, and then the economy slows down, and unemployment rate goes up, and then, yes, the Federal Reserve will begin to act, and they'll start cutting rates again. But when they cut rates is because things are not good. The stock market's already down a lot. Unemployment's up. It's not going to feel good. People won't even care that they're cutting because it's going to be a dark time."
"Um, we have had many guests on the show that are predicting dark times ahead, pretty much saying that this market rally needs to end at some point. What does this mean for gold prices? What's your outlook on gold? Because if we do see a Fed that you think is going to get into a rate-hiking cycle, right or wrongly, that seems to impact the price of gold, even though many people would say that that's not the correct way to look at gold prices because ultimately there will be a cutting. Um, how do you see gold price action through this thesis of yours?"
"Okay. Well, look, gold is a safe haven, obviously. Um, I, I just want to re-emphasize that, uh, even though I'm making a call for an eventual bust, because historically that's what's happened, uh, the lead-up to it is going to be one of the greatest bull market equity runs we've ever seen. Again, this is generational. So, I want to be clear about that. The really big thing to focus on is the bull market going higher, making higher highs. Stocks that might have done much over the last year are going to go higher. So, this is still a golden era. I'm just being mindful of what's on the other side of that. And how that affects gold is that gold, look, I mean, you had the war in Iran, right? Higher oil prices, interest rates going up, all these bad things. And gold has dropped this year, right, since its peak at $5,000. And there's a reason for that. And this is not the environment that's conducive for gold. Gold needs, uh, a lower dollar, and it needs an easier Fed. And it also needs a lot more uncertainty than the uncertainty that you're seeing now. Because what's more powerful? The uncertainty in Iran or the optimism and productivity boom, generational productivity boom that we're getting for AI? That's obviously more powerful. And you saw that back in back in April and May. Um, when the reverse happens that I've been talking about, when the Fed is done their tightening cycle and we go into the doom and gloom period, right, gold will perform very well. That's my assessment. So, you know, if in the meantime, if the Fed runs it hot, because remember, I'm suggesting that they will get into a heightening, a tightening cycle. They're not getting into a loosening cycle. That's for sure."
"Into a tightening cycle."
"Wars is being so patient that I think, in my opinion, he should already be starting to raise rates. But that's fine for me as an equity because I'm an equity guy and I want the stock market to go higher. But if he continues to be patient and he doesn't raise really until December, that's going to be good for gold. Okay. Uh, dollar, I think goes back down. Um, technically, gold has found a floor of support at $4,000 an ounce. So I do think that it's going to turn back up. It does very well in Q4. Uh, the fall tends to be a good time because one reason is because of, uh, India tends to buy. It's, it's wedding season in September. If you go back and look, that's, it's a bullish time for gold. And, of course, there's uncertainty around the midterm elections and any other event that maybe I'm not mentioning, even perhaps a re-escalation of the war in Iran. That is also the case. But ultimately, looking out with a more bird's-eye view, because I'm giving you a two-year assessment, ultimately gold will do well. Because when we do get to that bust period where stocks go down, rates will go down, economy is going to weaken, people are losing money on stocks, that will be, of course, a great time to be in gold, just like after the dot-com bust happened."
"But you're saying there's a phenomenal rally still ahead in equity markets before that. That any kind of pullback that we're seeing right now is just a healthy correction, not a signal that the cycle is over, and you don't want to be sitting out because you're going to not make money if you're not exposed to the market upside."
"Yeah, that's right."
"That's right."
"So, but then off to the bust, you're saying the next wave of AI kicks in anyway, and that AI, as a fundamental change to our lifestyle, infrastructure, economy, existence, is here to stay. We're just riding the waves through the various elements of the AI buildout. Is that correct?"
"Yes. You hit the nail on the head, Michelle. Everything you're saying."
"You're voicing my opinion. That's good."
"Um, again, I am, I'm just looking at it. If I knew nothing about this market or anything of that matter, I was just looking at history. All the greatest inventions. You know, one day man didn't have fire. Then all of a sudden, we discovered fire. That changed everything for a long time. Then we discovered, you know, before we had to light candles, now we have, uh, the light bulb, right? These are big inventions. I believe, and it's not even a belief, that ChatGPT is that big of a deal. It's, uh, AI just in general, because man now, or woman, has actually discovered a way to replicate human intelligence. It's incredible. This is the biggest thing of our lifetime. So, the stock market should behave in this way. But it's such a big deal, and in history, whenever we've had these big things, the final phase is the biggest. That's when stocks will go up the most. And you don't want to miss that because if you're lucky, you see it maybe once every 20, 30 years."
"So, Jean, because you said you're confident that this plays out the way it's always played out because of human emotions, let's just unpack that for a bit. If AI is taking over the trading, as we've seen with quants and algorithms and AI apps, I get a new ad on my phone every day to invest in this AI, to just give my money to this AI app. Do the AI investment tools, are they immune from human emotions? Do they not fall prey to the fear and greed cycle that has controlled markets throughout history?"
"Okay, I'm not clear on your question. As far as the AI tools..."
"The question is that you're saying that human emotions ultimately guide the markets. But if we're now using less humans to make the trades, right? If we're using, uh, quants and algorithms and programs, and even some AI agents are actually making trades for you. They're like a ton of apps that have, put money here, the AI agent is going to run the money for you, right? Are they immune from emotions that guide previous cycles? Are they immune from fear and greed?"
"Okay, that's a good question. But, um, those algorithms, the risk to that is if they're crowded, you can have a situation like you had in 1998 with Long-Term Capital. If one side of the market is acting all the same way, then the behavior of that market gets very, very risky and dangerous. Um, you had it recently in, uh, Korea. Uh, their stock market just dropped 40% because everybody was buying the two AI memory chip companies at the same time, all the time. And so if those computers are acting much the same way, even though they have no emotions, like you said, they are still going to lose money because nobody's been able to come up with an algorithm that can just always, always beat the market. I mean, in some respects, Jim Simons did it for a certain amount of time, but he was always capacity constrained. They, you know, they hit a wall. But as far as, um, as far as human emotion playing out, we are going to enter the greed phase. Okay? And the greed phase is the phase that can make you the most amount of money, as long as you're aware that you are in that. And that's the bubble part. Okay? Uh, and, and, and that's what I foresee happening because of all the things that we've been talking about. Um, everything is there for that kind of thing to transpire, just like it has in the past."
"What can derail your thesis?"
"Well, one is the Federal Reserve. Uh, if, if, if, if Walsh decides that it's not important to let this run hot and he wants to cool things down immediately, he can kill the AI boom very rapidly, uh, by starting to just aggressively tighten money supply. That would definitely be a, that would be one problem. Second would be, uh, these new models that are coming in from China. People start using that because they're cheaper. Remember what you said about AI, about tokens. Tokens are more expensive. Well, they're cheaper on the AI models. Well, that's going to cause a lot of problems because all of a sudden, you don't need your OpenAI. It's not going to have a trillion-dollar valuation. That would cause problems because of a lot of the circular financing. So there's, there's, there's, there's triggers where I could be wrong, where this is the peak. But, um, there's a lot of other things that I see that suggest to me that even though, yes, we are in the late innings, we just didn't, because this is such a big deal, this usually ends with just an absolute boom. We've seen it before. It doesn't have to be just like '99. We've seen it in other cycles prior to that. And, and, and this is just not it, in my opinion."
"And, you know, it's interesting, though, you don't think that the markets are going to freak out when the first rate hike hits or the second rate hike hits?"
"Uh, no, because remember what Walsh said, and again, I have to say, so far so good. You know, usually the markets test the Fed, and that's why I wanted to give it a day before I came on your show because yesterday was a lot different reaction. Um, he's saying this is, this is, this is not a pause. We're just, we're just assessing things. We're, we're evaluating, so to speak, right? And so, uh, once again, the market has done the tightening for him."
"But when he does actually hike, because you're saying that if it's December or if it's even in, you know, next year, that you do see a tightening cycle."
"Oh, absolutely."
"The market carries on rallying through that."
"Yes. As long as I'm right about, as long as earnings keep expanding, as long as productivity boom keeps going, and as long as, you know, the economy starts humming along. As long as we don't get a spike in unemployment, then, uh, everything's fine. We can, look, why do they cut rates? They cut rates because we need funding. We need money to get out of this bad situation. But when things are good, you're willing to, I mean, what are you going to do? You go to get a business loan, and now it costs an extra, you know, 25 basis points, but your business is booming. Your AI business is booming. So, what are you going to do? You're not going to borrow because it's an extra 25 basis points. I don't think it changes much. It's a, you need a cycle to break a market."
"You're confident that the economy is strong with, I mean, we just had GDP growth coming in at, I believe, one and a half percent instead of the 1.8%. You're that confident that the fundamentals of the economy are strong? I mean, the Fed seems to think they are. So do you, then?"
"Absolutely. Everything I'm seeing, I'm on conference calls with some of the biggest companies. Now, of course, you have to understand that our economy and the S&P 500, Fortune 500 is dominated by technology. So that's my primary focus. Um, there are other beneficiaries that are not necessarily technology. I mentioned one, Caterpillar. Um, there's energy companies, company like, you know, General Electric, uh, GE Vernova, making batteries for, you know, for AI and things of that nature. There's other beneficiaries and trickle-down effects. But within technology, which is, that is our economy. Our economy is basically comprised of the biggest technology companies. Uh, this is a boom. We are in a boom."
"Still in a boom. And, you know, you've mentioned that you look at history, and I know that your background is unique in the investment world because you studied history and philosophy before moving into investment management. So that gives you a different background. Um, and studying past cycles is shaping your outlook, it sounds like. Um, you know, it's interesting because one of the greatest commodity investors of all time, Jim Rogers, the guy who started the first hedge fund with Jim Soros, he always tells me that the best advice that he can say, and that a line that sort of crystallizes his thinking is, 'The biggest lesson of history is that people do not learn the lessons of history.' So it sounds like you are learning the lessons of history. So when people tell you, 'This time is different,' you're like, 'No, you're not buying that.'"
"Okay, that's a good, that's a good little bite soundbite right there. Jim Rogers, a man I very much admire, and, um, probably one of the greatest market operators in history, is very much, is very much right. And, look, people, there's two kinds of people that may view this. One, they're saying, 'This can't go on forever. We're in a bubble. This is the, the earnings are way overinflated.' And what I'm saying is, don't miss this. This is, we're lucky to have a time where, uh, I was younger. I'm in my 40s, so I was still in college when the dot-com boom was happening. But to see this kind of technology and what it's doing in our world, and the way I foresee things, is truly transformational. And to be in it in real time is amazing. And, and, and we want to take advantage of this. But however, like you said, and like Jim Rogers said, is that, um, inevitably, unfortunately, greed will take hold. And, uh, once everybody is in on the AI boom, and the stock markets just keep soaring, and the AI stocks are coming public with AI IPOs every single day, then, uh, inevitably, there's a give-back period, and that will be the bust. And so this is likely to be very much a similar. And then on the other side of that is, I think, a reset, and then it's going to usher in the second wave of AI, and that will be the age of the robots. And that's a whole another discussion. But the robots, which is, I think, not till the 2030s, is really just the hardware of a robot with your ChatGPT inside the robot. Okay? And so that is will be the biggest invention ever of our lifetimes, which is the AI robot, the physical humanoid walking around, talking, thinking, acting, helping us, living with us. The world changes forever. But it all started with this first AI boom."
"But yeah, that's the second part of the AI boom. So, you know, you're saying, don't miss out on the party while the party is raging, but make sure to get out because all good parties come to an end, or at least a reprieve or a pause before the second one begins. We're out of time. Jean, final thoughts as we wrap up here."
"Final thought is, this is a bull market. So bull markets have pauses but continue on. The Federal Reserve, I think, is doing a great job considering the environment that we're in. And I'll leave it at that."
"All right. Thank you so much. Appreciate your time, Jean Jo. And as always, thank you for watching. Thank you for spending your time with us. We know your time is valuable, and we really appreciate you choosing to spend it here with us. If you haven't already, please subscribe. Please share our content and help us grow this community. Also, follow me and Miles Franklin on X and on Instagram. As always, leave us your feedback. We may not always agree with your comments, but we like reading them. I especially like the spicier ones, as well as the sweet ones. So, feel free to praise, whine, or just opine. And if you would like to learn more about building a precious metal strategy, reach out to info@milesfranklin.com. There's a team of specialized advisors and brokers that can guide you according to your own circumstances. Make sure to check out the website milesfranklin.com as well. Until next time, stay sober."
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