Title: Real Conversations | The AI Bubble and the Market Risks Ahead w/ Mike Taylor Show: Hedgeye — Real Conversations (host Keith McCullough) Guest: Mike Taylor Date: 2026-09-15 URL: https://youtu.be/UGq4BsQAsvQ Length: 58:09 Note: YouTube auto-transcript, two voices (host Keith McCullough, guest Mike Taylor) with no speaker labels. Fillers (um/uh/you know/right?) and stutters removed; wording otherwise verbatim. Auto-caption name mangles corrected in place: "Keith McCullen"=Keith McCullough, "Coral Weave/core weave"=CoreWeave, "Bessie/Pesent/Besant/Besson"=Scott Bessent (McCullough's nickname "Bessie" kept where used as a nickname), "Gunlock"=Jeffrey Gundlach, "Vinny importer"=Vinny and Porter (Vincent Daniel & Porter Collins, Seawolf Capital), "clod"=Claude, "frunk"=franc, "Mr. Rabada"=Mr. Roboto, "Cass"=nowcast, "Alton"=Altman, "Arbery"=arb.
00:06 Hi, I'm Keith McCullough, and that was Mike Taylor putting the crystal ball onto the table, so we'll get into that. We are going to talk about the bubble, the bubble that everyone knows that we have. The question is when it starts to pop and drop. We both agree on this, that that's already in motion. So the AI bubble fully loaded, we got a lot to talk about.
00:26 Yeah. You're no stranger to the show, so we're, you know what we're going to start with instead of... We will get to the New York Times, but we are not going to start with politics. We're going to start with this. I always say in macro, it's numbers, not narratives.
00:51 So we're going to start with this thing that you actually never hear an AI bull talk about, which is our semiconductor bull, certainly in this case at this point, or a CoreWeave bull. They never start with the math. So let's do the AI math according to Mike Taylor, because this is one of the better things that you've called me a lot of times with a lot of good stuff, but this is really good.
01:13 This is what I wanted to start talking about in May at your conference, but I had a modest medical issue. It had to be ushered out to the hospital. You're good now. You look great. So let's say March, April. It was right on that Oracle thing when the ARR, they got this huge commitment from OpenAI and their backlog just exploded for multiple years.
01:34 And I was like, holy crap, that's incredible. And then I went and looked at the bonds. And the bonds said, no. And they said, no, like from March, April. And I'm like, these stocks are moving and the bonds are saying a total different thing. This is exactly what happened in 06. We're in the housing bubble.
01:56 Stocks were good. Everything's great. The numbers are awesome. The earnings are fantastic. And the bond said, no. And then CoreWeave, Oracle, and that's what really piqued my interest. I said, what are the bond guys seeing? Currently, the unsecured CoreWeaves are trading around 12% yield. And for our listeners, it's kind of a crazy number given where we're at right now for something that is so secure and so wonderful and such incredible growth.
02:27 How can their debt be trading at 12%? That is meaningfully distressed. All right. And then when you look at the street models, they say they're going to triple their debt over the next two years. All right. Yet the unsecured trading. So I look at that and I'm like, no, it's not. You are not going to raise that debt because the cost capital is too high.
02:48 It's great. Who's going to eat that? Maybe insurance companies and annuities because they all have it. That's a whole different story of what's going on in the tape right now. But. I started thinking about, okay, forget about the nuance. And this is where a lot of the analysts, tech analysts, they're very quarter-centric.
03:08 They're digging through the trees that cannot see the forest. They rarely look at the dumbest thing ever is the top-down model. I mean, you're an analyst. You know this. You are super bottoms up. Now you can do a lot of top down. A macro top down model. Yeah, top down model. Keep it down.
03:28 Because I went through this and I was like, how can I figure out what an NVIDIA is going to guarantee and what they're not going to guarantee and what their cost of capital really is? And then CapEx has distorted everyone's numbers. So I just said, okay, erase all that. Erase. At the end of 27.
03:49 What does it look like? We got about $1.5 trillion of CapEx in the ground in the U.S. in AI, built in. Now, the price of that has gone haywire. And you look at everyone's commitments, and we got about $1.5 trillion to be built between right now and the end of 27. And so we're going to have about $3 trillion of CapEx in the ground.
04:21 All right. Well, we can argue what the depreciation is on that, because some say it's five-year depreciation, you've got to upgrade everything. Some say it's seven years, some say it's ten. So if you go crazy and you say, you go in the middle and say it's seven-year depreciation for this sort of thing, they have to cough up about $400 billion a year of depreciation.
04:44 Forget about it, to run this $3 trillion of compute that's in the ground. And then you've got electricity. Then you got people. Then you got AC units. Then you got the water people. And then you got the cost of capital for CoreWeave, 12%. You start adding that up, and it gets up to a trillion dollars or more.
05:06 But let's just say a trillion dollars. And then a profit margin. And so you get to a really, really big number. And then you look at, okay, well, what are the revenues to pay for that? Well, 70% of the AI market coming into this right now is OpenAI and Anthropic. And on a sequential basis, they've been doing pretty well.
05:27 But when you add it up and you come to kind of year end, where are they at? It's going to be like a hundred something billion dollars of revs. Now, they say that this is an 80% margin business. So that would leave, let's say, $40 billion to go to pay for that compute. That doesn't make any sense.
05:54 Where's this trillion dollars going to come from to pay for the depreciation alone? And that's when I just did the old clutch the pearls, hold on, clutch, and the knuckles on the wheel. And I say, I get the sweat, and I say, what am I missing? And so I called all of my tech guys, and they called me crazy. And one of my right-hand guys, who's at the time a real tech bull, numbers are great, a very dear friend of mine, somebody I trained, somebody brilliant.
06:27 Former healthcare PM turned tech PM. I didn't want to reveal who it was, but he is brilliant. And he stopped talking to me for four weeks. And about three weeks ago, he started talking again. Repositioned and then yeah, that's what happened, and I call Vinny and Porter, and Vinny and Porter from the Big Short, they run Seawolf, brilliant guys, and they're friends with Steve Eisman, better known as Baum from the Big Short, and I talked with them about it, went through it, and they're like, yeah.
07:12 So I was like, oh, my God, no. All right. How does this play out? Also, how does this play out? And so, well, they need more money. OK. Anthropic, OpenAI. And they're out of private financing. Because, like, for instance, OpenAI's last round was like nine hundred sixty billion dollars or so in valuation.
07:35 And I think that the private money is out. The valuation is there. SpaceX went at $2 trillion. They're already like 10x plus in this private investment. But, as you know, marked to whatever the hell they want as a private is different than marked to market. And you want liquidity to get the hell out.
07:58 And that's what they're trying to do. And they need to raise money. OpenAI by my wild calculations needs about, and this is kind of the low end, like 600 billion dollars to get through the next two years. They have 400 billion dollars in committed capital commitments to help the neocloud build out for their compute. So do you think that has anything to do with the latest narrative of the...
08:27 You mean this weekend? Yes, the media's latest narrative. Do you think that comes out of a need to close this gap between $3 and $1 trillion? This is a pretty wide gap. I was like, oh, my God, they're in trouble. And I open up my, I get all the feeds of all the news. And I see New York Times front page on Bloomberg.
08:53 And they show you the front page of every big periodical, and I took a picture and I just showed it to Keith before we came on. I'm like, are you watching this psyop? And I opened it up and my wife, she's in bed next to me, and she's like, that's a psyop, and she's like, shut up Mike, I'm still sleeping. And I immediately, I was like, oh man. So the top four articles above the fold in the New York Times this weekend was all the same article about it's the end of the world because of AI, it must be regulated. And then
09:27 I get out of bed, I go down, Obama's on TV and he's like, it's got to be regulated. They rolled him out for this. So Sam Altman, I mean, total panic button because he can't get this deal done. All right. And so he called up every, what is really remarkable was all the left, so you can see now where he's really affiliated, was with the left, and they're all Bernie Sanders even, demanding regulation, and the whole point of the regulation that they want to generate
09:59 is to basically kick out everyone else. We want to kick out everyone else so that we can have pricing power. Yes. Because that is going to be the next really, really big problem. So if the government could come in and regulate and make requirements, the blue ribbon panel approval of requirements, then of course the Chinese and everyone else wouldn't fit.
10:23 You'd get dinged. And there would be like five, six players in the U.S. that get it. And so now it would be an oligopoly. And they can maintain that pricing power. So that's one of the huge problems with the model moving forward. Pricing goes lower. And by the way, when I was talking about my numbers or that top-down model.
10:40 I didn't talk about pricing. Why would you care about pricing? You need a trillion in revenue. You should consider the pricing? You should. When you look at the dollars per compute right now, it's like that. Yeah. It's actually way worse than our team would have expected. We analyze this data every day.
10:58 Yeah. Well, the companies are getting smarter. And there are more companies doing it. And not only that, but now we're having a huge movement of internalizing. Because they don't want to share their nonsense with the data center so people figure out what the hell they're doing. You're giving up your really important information when you're using that compute.
11:15 And so like Bristol Myers and Lilly, others, and I'm familiar with pharma, want to bring these sort of things in-house and have their own AI in-house. So your numbers don't include things that in other capital-intensive industries, let's say oil and gas or metals and mining, the whole concept of high grading.
11:36 The idea that the first trillion and a half in the ground might actually have higher pricing than the next trillion and a half. Yes. So you didn't even, you're just using, like you said, numbers that even the most rudimentary analysts can understand. Three versus one trillion. But us hedge fund guys, we rarely have to look at things like that.
12:02 It's very rare. These people have been in this business for 15 years since the last great financial crisis have never seen an instance where there's mass hysteria, where it doesn't make any sense. They've spent so much money on CapEx that it looks like it must make sense. It should. Because they'd be fools to spend this much.
12:29 Yes. So I don't think about that. They should know. They have their own internal model with an ROI and all that. Have you read the, I mean, even if they're just known knowns, if you know anything about Mark Zuckerberg and the mistakes he's made historically, but Sam Altman or... Hassabis, who is at Google Mind.
12:53 I'm not sure if he left or not. It doesn't matter. But these are young people who will make mistakes. Dario. It's like the Jamie factor. When everybody knows you by your first name but has never met you, they don't know shit about you. I know who you're talking about with Jamie. I know exactly who it is. E.F.
13:12 Hutton. But again, it's like this amazing thing. So we should trust the New York Times and these super impressive, intelligent entrepreneurs who are all paid together. That's who we should trust. We should trust their numbers. They don't have numbers. Nobody's talking about the numbers. No, we should trust their narratives. Narratives.
13:35 We're talking about narratives. And I will submit, AI has transformed our lives. And that's what's convincing to retail investors. For instance, I have an insurance contract that I had to go through yesterday because my lawyer was too slow to figure it out and he's charging 800 bucks an hour. I figured it all out in one hour. One hour, 280 pages of legal nonsense with Claude, and I literally called our company and I said, put that lawyer on hold, we're done. I knew what I needed to know. I didn't have to pay this guy $20,000 to figure this out and then tell me.
14:16 Because he'd probably stick it in Claude now too and then just tell me. So it's transformed Claude. Yeah. That's it. I got other things that I pay for. But it's not a lot. So what is the... Now, I've used these numbers and like any good Mucker, I turn around and I use it on institutional clients. So I say, hey, have you thought about these numbers, like three minus one? And go through it. And there's really no, there's actually more silence than there is response.
14:49 And there's actually not much that's tangible other than narrative, which I don't consider tangible. But it's, but you don't understand. This is unbelievable. It's like, I believe that David Solomon believes that. Mining that gap, I think they were looking at $500 billion? $500 billion raised by like six groups of people.
15:12 Oh, you mean NVIDIA? Yeah, that thing. But like six, like Apollo, Goldman, like firms that wouldn't ordinarily work together. And his, if I recall correctly, which I think I do, he said, I believe deeply in these numbers. The qualifier. Deeply. Now, this one thing. To believe, but deeply. So now you know it's false. I mean, true.
15:41 So what do people say? I know what they've said back to me, which, by the way, this is for all of you out there, institutional clients, high net worth investors, people with common sense. We have a lot of people who have built great businesses. They're in Hedgeye Nation. Send me a bunch of notes, and I'll send them to Mike on why he's wrong.
16:02 Please do, because I'm crapping my pants. We don't actually want to be right on this. I mean, it's crazy because they're trying to scare the hell out of everyone politically with the end of the world. And we're just not even trying to scare you. We're just trying to level you with the numbers. Well, you know how it went. The phone call, the Times goes to the White House.
16:26 What do you think about this, Trump? Trump picks up the phone, calls Musk and says, hey, Musk, what do you think about this stuff? And Musk says, Sam Altman needs money. It's a psyop. That was it. And he'd know. Of course he'd know. Musk would know. These two are like mortal enemies. So what has been the most...
16:46 It doesn't have to be intelligent. It has to be mathematical. What is the mathematical response to Mike, you're wrong? How about... Oh, God, I don't know. I really want to know because I keep going through it. Well, you have people that will, your friends disagree with you. I disagree with you whenever I disagree with you.
17:04 I'm very, I promise you I will be wrong. Like my math is going to be off. But I think my margin of error for being a lot more right than wrong is gigantic. Excellent. And that's what's so scary. Because I won't know every single tiny little piece of it. And I mean, I literally can't model this. It's so bad. So that's why I just went to a top-down approach.
17:27 And I said, the bonds are telling me this doesn't make sense. Are we close? And then when I did it, clutch the pearls. And I was like, sweet Jesus. So what happens now, and that's what matters, I think Anthropic is going to get their deal done. They have to jam that down the streets. I think they're going to get their deal done, and I think Musk wants them to get their deal done.
17:53 And then I think the next part, right after the deal gets done, pricing. Because if they can't regulate it and kick everyone out. There's too many people eating the pie and the pie isn't big enough. And so they got to get rid of one. Guess who that is? Sam Altman. Yeah, OpenAI. Yeah, it's OpenAI. And that's the one that's...
18:21 Now, that doesn't mean the end of OpenAI or AI in general. It doesn't mean that at all. All these things can keep functioning in bankruptcy and get bought and persevere. So we get rid of – I mean, there's actually – You're just going to wipe out the investors. And there's a long history between Musk and Altman.
18:42 So there's reason to believe that that could be reasonable. Where do the Chinese fit into this? Where do you think the Chinese and all their efforts fit into this? Fast follower? Cheap? Yeah. And this is such a difficult spot. The reason why they want to slow it down is partially because it costs so much.
19:01 They're trying to one-up each other. They have to one-up each other because now they realize the pie is this size. And when I say the pie, guys, I mean think of it like this. The S&P 500. Who makes the most amount of money? The top 50 companies. The top 50 companies in 2025, they generated about $5 trillion of free cash flow.
19:23 And I'm using back to 25 because it doesn't include all the CapEx nonsense. It's some of it, but not all of it. And so it's a rough good fix. And in order to get them to pay for this, it has to eat into that free cash flow. Now goes to an expense line. And so what are they going to spend? 10% of that free cash flow on this? That's $500 billion. That's very, very hard to part with.
19:50 Very hard because your number is going to go down unless your productivity goes through the roof. And so for them to jump on and take a 10% hit immediately to do this is improbable. They're going to start out at three, maybe four. Some guys that really see it, five or six. And the ones that have shown an appetite to cut it, like Microsoft,
20:10 the market has told them that their stock can go back up again. So I've always thought about that as well, which is what happens under any CapEx assumption if the hyperscalers decide that their shareholders are right, and having negative free cash flow as far as the eye can see, upping your leverage ratios, and not really having anything other than a narrative on the revenue output that's going to come out of this thing.
20:36 Like, we don't buy that shit. Google. I mean, there's a great example of a stock that has been terrible. What if Google announced that they're actually going to scale back or cut CapEx? They have a lot of OpenAI exposure. Yeah, big time. So does SoftBank. SoftBank's whipping around like a jackrabbit, up and down 10%, 12% a day.
20:57 Oh, it's on. He's going to get the money. No, he's not going to get the money. This is like, this redefines levered gambling, man. And then the other part to it is, like you said, every 48 hours we have a 10% spread. Tech versus software or AI versus software. Every 48 hours, I call my friends in the pod shops.
21:18 I'm like, how do you do this? Because if you're just offsides for one day, you can have a 3% drawdown if you just have the wrong mix. Last week, in particular, you guys showed the high beta momentum chart. But I mean, high beta momentum, the basket, as you know, it's defined as the peak of this trade, which I know you want to go through, which you've said multiple times, peaked in May and June.
21:41 The retail investor peaked on May the 28th, actually. We can show that chart as well, the high retail investor segment basket. In other words, the stocks most widely held by your home gamer at CNBC. Those things peaked on May the 28th. So all these things rhyme for a reason. But back to the high beta momentum chart, that is one of the most epic collapses in any style factor
22:08 exposure ever in the market in a short period of time. Then the bounce. Last week, that was up 13%. And again, it's semis minus software. So last week, semis were up. Software was down. And then that reversed like a hot mess this morning. And you're back into crash mode. South Korea's KOSPI looks exactly like that chart.
22:28 It's down 27%, but that's an index. We're long software. As am I. But, okay, so what's the message in a bottle there? Other than, and I know you wanted to take time on reviewing the bubble and why it peaked there. Select software are going to be, for instance, potentially ServiceNow, Palantir.
22:53 They're actually going to be the middleman. So they have access to tens of thousands of companies, and they're already there embedded. What if they come and say, hey, you're paying all this for all this compute? Why don't we aggregate it with 10,000 other companies and get a better price for you? And you can route it through us and lower the price.
23:17 And that's going to happen. That's going to happen because it's free business for them. They get more integrated with the company. They're saving their money. They're doing their service. But it lowers the price for compute at a time when the price of building compute is at levels that are astronomical, ludicrous.
23:36 The price of memory has gone up, what, 7x? That's like the biggest input. That, chips, 6x for NVIDIA. What do you think about the, like, go back in time to what was that moment? Like for, I just, you talk about the same thing. It's the same talking point. It's a data point, but it's real important.
23:57 You have hedge funds that represent a lot of the daily back and forth. Retail flow. Huge. Levered ETFs, lots of it. Yesterday alone, the SOXL traded down 17%. Sexy SOXL, three times levered semis long. Only professionals are in that. Right. This is only, I got that one. So you have all of it mashed together, but all their performance, you know the hedge fund performance numbers better than I do.
24:24 Didn't they all peak around the same time? Yes, they did. Yeah, actually the moment was, what really piqued my interest was the index arb event that happened at the end of June. Remember that? Stocks moving 15% in either direction that lasts like three days of June. I've never seen anything like it.
24:43 Big stocks. Yeah. I've never seen anything like that index arb rebalance. And I was just like, oh, my. Stocks can't move like that without people blowing up. And I think that that was the beginning that really jiggled a lot of books because you went way outside your limits very quickly.
25:00 And then we're OK. But then the damage is done in these books. And I think we're living through it now. This is going to be. I mean, now we're in the gladiator's arena, I believe, of hedge fund guys. And those are the ones that are going to survive. Because we haven't even gone into the hard part yet.
25:21 This is just the vicissitudes of hedge fund knife fighting. Now we go into the hard part. And the hard part is when you look outside of AI and that this has been driving the economy, largely debt funded. The consumer stinks. Housing stinks. Auto loans stink. Student loans stink. Wow. We're in real trouble.
25:47 We're in real trouble. And, of course, oil is where it's at right now, and I believe that will correct, but it's going to take a little time. They've got to refill the inventories. The inventories are all the way down. So there's a lot of layers to it. So we don't have a consumer that can turn around, yeah, but I can get that HELOC loan, and I can keep spending.
26:07 And then, of course, potentially you have a white-collar drag. Like, for instance, I just canceled one of my law firms because I no longer need it. $800 an hour. They have 60 people. I had two of them. Not anymore. And that's what's happening in law. So, yeah, if you're a lawyer, sorry. Well, I mean, that part of AI I absolutely believe in.
26:33 We disrupt and disintermediate the old wall on the financial services side every day and have for years now. Today, newsflash, Claude for financial services. So that's negative for the financials. That's today's narrative. So you thought that the 60-40 would last the rest of... Time? I mean... Oh, God.
26:56 I don't even know. Honestly, I don't even know what to do when you look at this because the sovereign governments are so levered up. And we're seeing it where they can no longer really borrow on the long end. Hence, yields are up everywhere. It was funny. One of my friends asked me, well, when is this going to happen where we've got this problem? I'm like, have you looked at world sovereign bond yields? They all look like this. All of them.
27:20 All of them. I'm like, it's happening now. It's happening, guys. Show the Japanese ten-year, I was tweeting it this morning actually, the, finally got a three handle there. Oh, it did. Yeah, I said here's one for you, this is tangential and related, but we got to get back to the discussion, but I started shorting Swiss stocks. Whoa. Because that's the low yield. Actually, it's not Japanese. Japanese three percent ten-year yield. The ten-year in Switzerland is the low yield, 0.
27:50 58 percent. Why not 1.5%? Why can't it double twice? And what the Japanese got from their boy Bessie out of this whole currency trade, which was brilliant. I know the Japanese. I could tell them what to do. I'm the house. They got a flaming bond market and a blowing up stock market at the same time. Well, but wait.
28:11 It would have been worse. But these Japanese guys, I mean, that's a bad trait. Well, if you look at the geopolitical landscape, and I do, because, I don't know, I read a lot. We think about these things. What are they doing and why? After you read the fold of the New York Times. Yes, I read that again. My wife, oh, she's still angry.
28:36 Lines are being drawn on the geopolitical landscape. And because when you look at the sovereign situation, so let's back up. In order to not have a global credit reset, M2 must be 2% to 3% growing. M2 is money supply. Money supply. Money supply must go up because companies have to pay the coupons. So M2 must go up.
29:09 But if you look at Asia. And you look at Europe, and you take out the recent immigrants in Europe that they're having a lot of difficulty with because they're not working. And I just take that out, okay? And look at the population that they had five years ago. And I model that out for the next 30 years, back it up to 10.
29:31 What does that population do? Because they don't have babies. The adult population between 18 to 65 is going to drop by about 7% over the next 10 years. So that means that your unit volume for coffee cups, t-shirts, gasoline, cars driven, tires, windows, houses is negative. 7% over a decade. And my whole point is that levered businesses, and they all are, are going to have an incredible difficulty paying that coupon if the growth is, the unit growth is just negative. And so they have to make up for it with dollar growth or their currency growth.
30:19 Money printing. That. M2 must be that. Actual demand is that. Yes. And we've run out of room on the long end of the balance sheet. So the only lever you have to prevent total panic is incredible amounts of printing. Now, the geopolitical lines have been drawn now. We are now in a currency union with Japan, our vassal state. Thank you very much.
30:50 Domo arigato. And I only know that from that song. It's Mr. Roboto. I don't know. I got it. So, and the whole thing, and you're a woodsman. People don't know this, but Keith, because he's from Canada, that makes you a woodsman.
31:15 And so you know the most important thing about running from a bear, you and your friends. You don't have to be the fastest. You just have to outrun the slowest. Okay? And I believe that we are designing a world where we are able to outrun the European Union. Our bonds and our paper doesn't look so bad if Europe blows the hell up. And if you have taken a look at the polling data in Europe for general elections that are starting next year, UK and France, there's others, and throughout the rest of the decade.
31:52 I don't want to say right party because the opposition party, okay, is polling like this. Right of the left. But they call, oh, it's the Nazi party. They're always going to demonize it and put a label on it. But it's giant. And all the other political parties are down here.
32:14 And so in these general elections, it is very, very likely that you are going to have a protest party come in. And we've seen this in history happen. When you have France, France is a tremendous example, where you have demonized and tried to isolate and cancel this protest party, but now it's so big that you can't ignore it.
32:36 They come into power with a coalition, someone's going to cave, and they will have a coalition government. They're going to walk in there. So by the way, for France, the GDP of France is about 59% government. So the government overspending is what determines the growth. And they've been overspending by 5%.
32:56 They're not supposed to, but Brussels really can't do otherwise. They're like, look, we either do this or M2 doesn't do that, it does that, and everything blows up. So, huh, take that. I believe that very, very quickly, as soon as they get into power, they're going to say the problem with the euro is that we can't control it and we're going back to the franc.
33:18 Thank you very much. That, I believe, is what we are gunning for. We need to outlast until that moment. Because when that starts in Europe, all of a sudden, the problem with the long end of our yield curve goes away. Nobody's talking about that. And Scott Bessent says productivity will be much better because of AI.
33:41 And I believe that. I think he's right. But that's the story that I think he's not allowed to talk about. Because they're our friends. Well, talk about the other story that Bessie is what I call him now, just for short. I like to give people nicknames. I'm a hockey guy. People say, look, it's really not nice that you give people a nickname.
34:00 I'm like, my name is Mucker. I will give people nicknames. I don't think I've ever coached somebody that doesn't have a nickname. So Bessie, I like Bessie. I like him a lot. One of Bessie's three arrows in his policy plan was to reduce their 3Ds. And one was to reduce the deficit. Now, can you go through the, you just gave quick 5% math on French spending and exposure of government spending to the total.
34:26 Can you give everyone just, we started with a math lesson, this is a real, actually, it's frightening that everyone still needs this math lesson, but a basic lesson on how much Americans are getting versus what they're paying and what the deficit is. Oh, Lord. Since the great financial crisis you've seen we've grown our deficit and it's really, we're actually not terribly different than France now, not where the GDP is all government, but it is the only thing that's growing. Our debt versus, the sovereign debt versus GDP is growing like
35:02 this, whereas the corporate debt versus GDP is flat. So as a proportion of GDP the government is getting bigger and bigger and bigger. And when you have meaningful deficit spending in a crisis like COVID, something like that, the companies, they know this. This is an ephemeral bolus of spend that's going through.
35:24 And so what they do is they don't build capacity to supply that because they know that it's not enduring. It is simply ephemeral. It will fade away and that's it. But that didn't happen. We kept growing the deficit and growing it and growing it. And it's really, whether they know it or not, it's part of their model.
35:44 Coca-Cola is building capacity to service a growing deficit. And this is why. If you take our deficit right now and you divide it by the number of people in the United States, each individual is receiving net of, well, it's our deficit, is $7,000. That's what you're getting, $7,000. And now people are very upset because they can't make the ends meet.
36:11 I can't buy my blueberries for $4.10 or $9.10 unless you go to Walmart, which I recommend. And this generation of investors do not realize that they have a fire hydrant in their face of money being redistributed through the government to them ultimately. They do not know that.
36:39 And if that has to give, okay. So there's just so many clutch the pearl moments that are happening right now. I am like. Now, granted, look, we're going to make a lot of money doing this, okay? We're going to make a lot of money because there is going to be unbelievable trading opportunities that occur, long and short, and eventually they're probably all going to...
37:03 print money. And the issue that I have with the printing money, and this started all the way back to COVID. If you recall, when we talked on COVID, because like all great trades, it's like a decade in the making where you see it and you're like, oh my God, is this going to happen? And it has. Where when we started printing money on COVID and borrowing so much, ultimately printing, but let's say borrowing and spending, I was like, Keith, my biggest fear for my children is that they will not be able to stop.
37:32 And that. Here we are six years later. We're going to be eight years later. And they can't. They physically can't stop because Coca-Cola and everyone else expanded their capacity to service that deficit spending that keeps going. And if we did this, Coca-Cola would now have excess capacity and pricing implodes and all that sort of stuff.
37:53 So we can't stop spending. And that is the cardinal sin that they made is that they regularly spent so much. We're over $40 trillion now in debt, just straight up, that it has changed the capacity plans for companies because now this is not an anomaly, it is a feature. They have to model it that way.
38:19 And that's what I'm really, really worried about. So net-net, I believe, for next year is going to be the beginning of negative pricing power. We're going to see negative pricing power. I think we're going to see inflation materially down at some point next year. We have it getting, I mean, our inflation nowcast, which is the squirrely part about this for a lot of people that are still missing that inflation,
38:46 nominal growth is leading bond yields higher. Like these numbers, every inflation report that they get, what we call Quad 2 inflation reports, i.e. the rate of change or rate of inflation goes up, the Fed's response is going to be, oh, you have to maintain credibility. You have to fight the inflation that you guys never fought.
39:07 So after three years, they're going to have some like, it'd be like Canada fighting the U.S. kind of a thing. They're going to come in there with their blaze of glory tomorrow and they're gonna raise interest rates. But if you go back to 2007 when my model did the exact same thing, I mean first of all inflation, we have it going from three, guys you can show our inflation nowcasts on a quarterly basis, we have it going from peaking around 3.75, 3.74 percent this year to getting cut in half by the second quarter.
39:38 Like, that's our inflation nowcast. The blue bars are our estimates. So that would agree with you. Like, we would, so, and unlike, not unlike 2007, like you recall, the 10-year yield went to 5.29. Boop, stop, and then just went straight down. So people forget that dynamic, is that when bond yields start to go down, that's one thing, but when they come down off a cycle peak and then go straight down? Disinflation. Fed panics.
40:11 They start cutting aggressively. So you could go from this environment where everyone's trying to handicap a number of rate hikes, because they're going to fight that war, to essentially, at least what I just said, I'd expect inflation to get cut in half and then eventually panic rate cutting next year.
40:29 Well, I'll tell you something funny about the expectations versus that. Let's go way back in time. One month ago, if the Fed hiked, what would happen to stocks? Oh, they'd go down. They'd go down. It was going to be a crash, a disaster. What happens if they don't hike tomorrow? We crash. Do you realize that that's the setup? If they don't hike, we're going to crash? And I'm thinking...
41:08 Oh, my Lord. How do people do it? I mean, OK, yes, I have to do it. But I was thinking sitting in the hedge fund chair of Millennium, and I'm talking to Izzy on the phone, and he'd be like, Taylor, you remember last time, which was four weeks ago, you told me the exact opposite. I'm like, yeah, and I'm still right.
41:30 That conversation is literally happening today with Izzy Englander at Millennium. That very basic point people struggle with. I mean, never mind getting below the fold of the New York Times or whatever propaganda you're reading, right or left. They just can't change their mind. And even if they could, it probably would make it worse because they don't have a process.
41:57 They don't have an inflation nowcast. They don't have a real market signal. They have the elites coming from upon high, promising the one thing you should never promise anyone. Certainly, I wouldn't even promise it in life, but definitely not in markets, which is certainty. We will bend and smooth economic gravity.
42:17 We will control the yen. We will control the Japanese. We will control the deficit and the debt so everything's smooth. This is like, no. And I want to congratulate, though, our good friend Bessie. Yeah. He has done an incredible job. And folks are telling me left and right that he is the worst treasurer of all time.
42:42 What? Oh, yeah. Oh, he's the worst. Yellen was the treasury secretary at one point. He is hated. He is loathed. Worst ever, though. That's pretty low bar. We had Geithner. We had Yellen. Kind of everything that he said hasn't worked. Worse than Geithner? Well, it was easier then. You could actually place paper on the yield curve.
43:01 He can't. So these are Democrats telling you that he's the worst ever? I don't know. But the noise out there is he's the worst ever. But my cadre of people think he's actually the best ever. And the reason why I think he's the best ever is because he walks into the White House, Trump hands him two cards, and he picks them up, and he's like, 2-7 off suit. Nice.
43:21 Nice. And that he has dealt the most impossible hand. He took this job, I mean, honestly, out of charity. And I think he will hold on to it all the way to the end, maybe even into the next administration. Because what I believe about Scott Bessent, he is a patriot. He loves this country, and he is doing the absolute best that he can with the tools that he has under this environment.
43:50 And more power to you, Scott. Keep trucking. Yeah. I know him, and I would say I agree. That's why he's doing this. Oh, man. But when tasked, even if Jesus Christ himself was Scott Bessent, I would still struggle, and I struggle. God knows I struggle to see the light in this one. Like, you can't, man.
44:17 He's trying. How about this? But I don't think it's in the cards. I mean, you go to your boss and say, do I tell everyone the truth? Like, no. Knowing Scott, he does tell the truth. But then he'll say, but this is what we're going to say. Yeah. Okay. Yeah, I get that. Trump wants to know the truth. At least we have a Treasury Secretary.
44:42 Or at least what they think the truth is. We have a Treasury Secretary who's at least playing the game of Go. And that really matters against the Chinese in particular. We had Treasury Secretaries who weren't even playing, never mind Go or chess, were playing checkers. Yes. And I just named a couple.
45:06 So you're in a very different world, and you're going to need it, I think is what you're saying. You need him. So that's like a thing. Do you think he wants the dollar to go? We know that he wants the yen to go up against the dollar. But what do you think he wants it to do against the euro, given your view on the European political situation? I think that we just want to get through the next two years.
45:30 And Europe might be in an incredible amount of trouble geopolitically in the next two years. And that's really it. And that's, he won't say it, but that's actually the light. The light is, and remember, it's not light and darkness. It's simply a process. All right? The people want more. They vote more. We're having a...
45:54 20 years of populism, where there are no fiscally conservative Republicans anymore. You pull the lever that will get you voted in, and that's more money from the fire hydrant to the people. They don't realize that it's borrowed. They don't understand finances. They don't understand the risks, but they will.
46:14 And that will simply be another process where that next generation, after we go through this, go into this, and we're going to have meaningful upheaval, probably all over the world at some point, that generation will now understand what money means. That's it. So it's just a process. Education, lack of education on it, don't care.
46:39 It just keeps going like that. I mean, think about King George III. Think about Louis. I think about him all the time. And Rome. This happened, the same thing happened with Rome. And this is just, it is simply a cycle and a process. Our job, Hedgeye's job, is to navigate it. And what do you say, the pile? Keep the pile. Yeah, preserve and protect the pile. Like we're in actually, from a broad market perspective, whether it be certainly from a credit market perspective, treasury market perspective, equity market perspective, you are in preserve and
47:21 protect mode now. If you can short stocks and hedge like you and I can, then like you said, we're going to make a bunch of money. Yeah. But the people are, again, you are going to, in this scenario, you are already eviscerating the comeback of the retail investor. That took our entire career to come back after it went away in 1999, 2000. Yeah. This is way bigger.
47:44 It's really sad. They have the attention span of eight seconds on TikTok. They're not watching this. And they're all going to be sitting there saying, what the fuck? These guys keep getting rich and this thing's imploding. How did that trade work? I think a consequence of that in the very near term is going to be even more passive investing versus active as these retail active investors potentially get eviscerated over the next two years.
48:11 And you and I are good friends with Mike Green, and he has something wonderful planned for us all. So he sent me a box and the ideas inside of it, but I'm not allowed to open it until Christmas. Well, you just gave people a hint on, we only have a couple more minutes here, but you gave people a hint on, and we want that.
48:31 You want that for Max. I want that for Jack. I want that for my three daughters. I want them to understand the value of money. I want to understand the basics that we were taught. It's a Gen X thing. We're screwed up, I guess. Not really. So once we, like, you just made a case essentially for
48:53 gold, I think, especially if you have a completely debilitated euro and the popping back up of different disparate European currencies. Yeah, that's a very bullish. If you could short, I mean, you buy gold in euros. I mean, you could do. The way you can do it, you can short euro long gold. Yep. That is going to be a gigantic trade.
49:16 That's one of your big ones for next year. I don't, there's going to be a moment next year where I, because I don't know if it's now, but when I see it, I'll know it. Well, right now you don't see it because bond yields are going up too fast, and gold doesn't like that. Gold does not like that. There's going to be a moment where – oh, I'll draw your attention.
49:36 Gold likes money printing a lot. One thing we didn't talk about was – and Gundlach came out with – he's only done three of them so far. And Gundlach, that guy can make a chart, okay? He really – and I went through his whole deck this weekend. And there was one chart that burned a hole in my face on inflation.
50:02 And he goes, imports and exports from the U.S. averaged are plus 7% on price year on year. Now, that's very painful for the public on their inputs. And this might be what they're complaining about. But I sort of look at that and say, well, forget about that. Look at that comp. 7% inflation comp? Whoa! That's going to be really hard to outdo.
50:33 Well, this is what a lot of people screw up in macro, including Gundlach. Anyway, that's a separate topic. But again, just because one speaks does not mean that one is generating alpha. But one can show you a chart where you could see, especially if you have a long-term cycle chart, which I'm assuming Jeff had.
50:54 You can look at a chart that's upward sloping and say, wow, the problem is that it's up 7%. Or you can look at it within nine months when that is your base effect modeled against it and say that is your disinflation. I mean, that's how you and I do it. But it's an amazing thing. And I was warned at one point because we bought a company where the ex-vice chair of the Fed, Don Kohn, was part of the deal.
51:20 And he's like, Keith, I appreciate and respect your rate of change work, but the Federal Reserve is, that's not what they do. And I'm like, I see that. The rate of change analysis is going to be, I would love to see, never mind Bessie doing a good job with a two and a seven in his hand. I would love to see one of our kids go in there and run the damn thing with the real tools, the real models.
51:49 I can assure you Max Taylor will never have a government job. So I apologize. They're friends. There will be a point in time where you cannot. Let's try to end on this. Lioness. Have you watched it yet? I have not. Okay. Got to watch that. Lioness. I know. I got one. It's Landman, Lioness. You've got a great list of stuff. Landman's Lioness or Seal Team 6.
52:16 Have you seen that? Nope. I watch very little TV. What's hot right now is us versus the really bad guys. Okay. The Belarusians, the Iranians. This is Lioness. Okay. You'll love it. So the CIA is the good guy. Yeah. And the FBI is the bad guy. Oh, that's rare. It's interesting.
52:37 Okay, I like that. You'll find this very interesting. It's Taylor Sheridan. He's phenomenal. But I do believe, and I've always believed, that the most popular thing people are watching, the social zeitgeist of that, is a function of what people really believe or want to believe. So you have, can you imagine Zoe, who's like the, she's the star of Lioness, she is the Lioness.
53:01 Can you imagine if, like just voluntarily choosing to put our finest, whether they be in the CIA or in the Navy SEALs, into battle with equipment from 25 years ago? I cannot imagine that. We have these tools. They're sitting right there. Our assets are right there. AI is empowering these assets.
53:24 We have a real-time inflation nowcast. You want to know what inflation is? You subscribe to Hedgeye. How does one answer that to their kids? We're about as militarily equipped with the most sophisticated thing that you could imagine to protect lives. But when it comes to protecting your hard-earned capital, eh.
53:46 We'll go with the slide ruler. Yeah, well, I mean, look, you and I have been through this. When we had the last meaningful crisis, we were young guys. And we had an inkling of what was going on. But I didn't know that that's how banks really worked. But now I do. So we have an entire other generation now that doesn't know how it works.
54:14 And they won't know until they see it. Because it's really hard to go back in history and read what happened and understand it with granularity. They can actually do it now for that time. But the time before and the time before and the time before. Not terribly well understood. Like, why did the crash of 87 happen? Very few people know that.
54:36 It's amazing. I was talking, I was coaching in a hockey tournament in Boston, and all of a sudden, dinner on the patio of the Marriott Courtyard turned into, of course, the book 1929. And a couple people are like, yeah, I read it. I didn't totally understand it. And then somebody else pops up and says, well, you know that that's just one person's account of that history.
54:56 Another person pops up, yeah, and he's from New York Times. I'm like, no, it's Sorkin. He's kind of from the New York Times, but he's Andrew Ross Sorkin. But it's an amazing thing to watch. People really do want to educate themselves on that. But this history won't be written until it's crashed, fully crashed.
55:13 This AI bubble is completely, take this full circle. If you're right, which your numbers are a heck of a lot closer to reality than anybody else's I've heard, the $3 trillion versus the $1 trillion, then they're going to get an education. And it's going to be painful. And I guess the only good thing for the kids is that it's not them that's going to blow up.
55:33 They're going to watch their parents blow up. That's what happened. But it's all a process. We'll get through it. We'll be smarter for it. Unbelievably great thing that we have in the United States generally is creative destruction, which you don't find in Europe or many other places because it's really a top-down process of who is going to be the king. We have creative destruction and we have contract law that is enforced and we have IP law that is enforced, okay, and we try. But it's better than anywhere else.
56:12 And those are really the pillars. And we also have an incredibly educated, maybe not so well in recent years, but educated populace. And maybe it is really educated, though. We've seen all the universities have really tilted one way politically heavily, and there is that incredibly large cadre of individuals that hated it.
56:34 And they are now in the workforce, entering the workforce, and they are frustrated and angry about it and thinking. They went to a school of indoctrination and some became indoctrinated and others are truly rebels. And those are going to be very, very important people. Freethinkers, the true freethinkers that have rebelled against the indoctrinating thought that's been taught to them.
57:01 So the whole point is that we're allowed to have a diversity of thought, and then it's enforced by contract law, IP, creative destruction. So we have incredible pillars in this country that I think is going to make the U.S. still be, I'd say, the best place on earth, and some would say the least dirty shirt in the hamper.
57:22 Still works. Yeah, really good. That's a great way to end it. Thank you. See how positive we can be after telling you the whole bloody thing is going to blow up. And not having to be short everything, nothing like that. This isn't, I don't think you were trying to be Michael Burry. Michael Burry would be Michael Burry. Mike Taylor can be Mike Taylor.
57:39 I can be Mucker. You can be you. And that's what it is. This isn't some Big Bang Theory. We're not trying to make a movie. We're trying to help you risk manage what's already, number one, happening. And number two, what's probably going to happen next. So thanks for joining us. We appreciate it.