Title: The AI Trade, Rising Rates, and Why the Market Is Still Standing | The Real Eisman Playbook Ep 73 Show: The Real Eisman Playbook — Monday interview (Ep 73) Guest: Jason Trennert (founder, Strategas) & Chris Verrone (market strategist, Strategas); host Steve Eisman Date: 2026-08-17 (published; RECORDED "the beginning of August" — stated at 00:56 — so every "this week," "last week" and "today" in the conversation is ~two weeks stale) URL: https://youtu.be/hg2yuB7bsXA Length: 45:29 Note: Remove-only cleanup per skill Step 1 — the [music] / [laughter] / [snorts] / [clears throat] audio artifacts and the ">>" speaker-change tics were deleted, along with pure fillers ("um", "uh", interjected "you know" / "I mean" / "like" / "kind of" / "sort of") and stutters/false starts ("I I I think"→"I think", "we'll we'll"→"we'll", "isn't isn't going to isn't going to work"→"isn't going to work", "the the the"→"the"). No words were changed, added, reordered or paraphrased, and every (mm:ss) cue is preserved exactly where it was. This is a three-speaker conversation and the auto-captions carry no speaker labels, so attribution to Eisman / Trennert / Verrone is made on the analysis page, not here. The three ad reads (Long Angle ~18:32-19:44, Qwoka ~19:44-21:26, DripDrop ~33:53-35:37) are KEPT IN PLACE so the cue timing stays true to the video, but they are ADVERTISING, NOT PICKS, and carry no analysis on the per-video page. Auto-transcript garbles are LEFT INTACT here and corrected only in the analysis pages: "Rismiller"=Don Rissmiller (Strategas chief economist) · "Iceman Capital Management" / promo code "Iceman"=Eisman (the DripDrop code is read as his name) · "code.com/eisman"=quo.com/eisman (the Qwoka sponsor URL) · "Emcore"=EMCOR Group (EME — the mechanical/electrical construction contractor named beside Quanta as an AI build-out name, not the EMCORE photonics microcap) · "the thermos"=Thermo Fisher · "the Signas"=Cigna · "the CEGs and the Talons and the Vistra's"=Constellation Energy, Talen Energy, Vistra · "the straight"=the Strait (of Hormuz) · "the farmer"=pharma · "Worsh"=Warsh · "James, you shared a good observation"=Jason (the auto-caption mis-hears the name) · "personal community computing"=personal computing · "you're bringing out a deflation"=breaking out of deflation · "you had to into it it"=intuit it · "The move Franklin crude was pretty tepid"=the move frankly in crude · "economic club of New New event"=Economic Club of New York event · "Professor Zittrain"=as spoken · "it takes two to taco"=as spoken (a client's joke on "it takes two to tango"). UNCERTAIN, LEFT AS SPOKEN AND NOT TICKERIZED BLINDLY: "Ben's been a great chart" 12:22 sits inside a list of traditional asset managers — State Street, T. Rowe, Invesco — so it reads as Franklin Resources (NYSE: BEN); the analysis page tickerizes it as BEN but flags the read. Also unresolved: "I never found the table" 17:53 and "the unregulated use" 40:12 — audio garbles left verbatim, not guessed. =====
00:05 Hey, this is Steve Eisman. Welcome to another episode of the Real Eisman Playbook. So, lots been going on in this world this year. It's been war, AI, private credit, private equity, you name it, it's happened this year already. The market's up nicely, but has been very, very volatile. And I have two guests today to help me plow through all this stuff.
00:28 Jason Trennert, who is the founder of Strategas, and Chris Verrone, who is the market strategist at Strategas. These guys don't cover a particular sector. They cover the entire market. They have a nice overview. And we're going to talk about where things stand, and then afterwards I'll come back for some lessons learned. Hi, it's Steve Eisman, and welcome to another episode of the Real Eisman Playbook. It's the beginning of August.
00:56 This year, the only word I could say is tumultuous. So much has gone on. War, AI, private credit, private equity, situational awareness hedge fund blowing up. If I thought for another 10 seconds, I'm sure I could come up with another 15 things. So, I thought it'd be a great idea to take a step back and talk it over with two old friends, Chris Verrone, market strategist of Strategas, and Jason Trennert, founder of Strategas.
01:29 Guys, thank you for coming. Great to be here, Steve. Thanks for having us. So, like I said, boring year. Yeah. Nothing much going on. But Jason, let's start with you. Let's each take just a couple of minutes, try and put things in perspective, and then we'll try and dig deep.
01:45 Well, listen, I think it largely comes down to a couple of — as far as the markets are concerned, I think there's a gathering storm a bit, which is the war, tariffs, which people forgot about, but they're — Totally forgot about — back. Right. You have the war and the oil prices, then you have this debate over hyperscalers and whether they're spending too much or too little on CapEx.
02:08 And so those are the thing and the Fed, of course, which is the other big war is really the big issue. So, all those things together. So, in some ways it looks like it's hard for the market to make forward progress, but the same token that what's driven the market so far this year or just in the last — because I and I were talking about this on the way over here — the last 72 hours people are saying it's a boulevard of green lights for the hyperscalers now because it doesn't look like demand for AI is slowing anytime soon. I'm
02:39 personally nervous because the market is so concentrated. When you say the market is very concentrated, flesh that out just a little bit. Yeah, so if you look at the top 10, I'm getting the number slightly wrong, but if you look at the top 10 holdings of the S&P 500, I think that's 39%. If you look at the tech sector, I think it's 36%.
03:00 Mhm. If you add in tech-adjacent companies — Like an Amazon — Amazon, right, that are not specifically in the tech sector, you're up over 50, 50%. Right? And then you see something like situational awareness, that happened with the VIX below 20 and a modest increase in interest rates, to 15, 20 basis point increase in long-term interest rates and you say, "How can that happen?" But how can somebody lose that much money in what seems to be a very quiet market? That's the question.
03:30 I'm going to answer that, yeah, because I've actually written about this. I give you an example of something very extreme. Imagine it's 1900 and you're very bullish on autos taking over the world. Right. So, you buy every auto and auto parts company that's public and you short every buggy whip company that's public.
03:53 Now, given what we know about history, obviously that trade is going to be correct. Right. But if you're four times levered and let's imagine there's a bad auto accident. Yeah. And all of a sudden people say, "That's a terrible thing. Maybe this auto thing isn't going to work.
04:13 " And so the problem is you're long X and you're short Y, but it's the same thing. Yep. And so if the trade reverses on you and you're four times levered, as South Park said in the classic Margaritaville episode, and it's gone. So, listen, I don't know, it reminds me of Long-Term Capital a bit, of course.
04:33 Sure. And the names of these — but Don Rismiller was in our office was saying, the names of these famous hedge funds that have gone under like Long-Term Capital, Situational Awareness. They're a little preachy. Yes. In terms of their name. Yeah, in terms of their — it's not like Iceman Capital Management.
04:51 It's like, I know better than you management. And anyway, pride leadeth to fall, as I say. Okay. Chris. When you think about whether it's Situational Awareness, a new Fed chair, maybe new Fed regime, that's just over in the last week. Right, it's just a week old. Right.
05:13 Right, these are relatively new things. I go back and I look at the course of the year. Every single opportunity where the leading stocks have corrected, right? We just had a 30 40% decline in some of the leading stocks, whether it was the semis or the hyperscalers. Say that again because I don't think people realize how much of a correction we've — went down very meaningful, 30 40 some 50%.
05:34 In like a month. In basically from mid-May, call it through last week. Okay. Money doesn't want to leave the asset class of equities. We're in this remarkably rotational tape right now and I think it speaks to the idea that until we find what level of interest rate is truly competitive to equities, you're going to stay in this highly rotational tape.
05:57 I go back to the prior S&P high on June 2nd. You only had about 50% of the S&P above the 200-day average on June 2nd. Today, we sit here today with 75% of the S&P above the 200-day. So, even as the market has churned for the last 8 weeks, the internals have gotten better, not worse.
06:14 Even as semis have corrected, the internals got better, not worse. So, this is a very rotational tape. I don't think we have yet to find the rate of interest that gets money to leave equities. Have a guess as to what that is? It's higher than most people think, would be my guess. We thought it was 450. That's what I thought.
06:30 Because in 23, 24, 25, it was largely 450, right? That's why we chose 450. But now it seems higher. And you got corrective periods from when we hit 450 in the past, but I think if we're really going to end the cycle, it's a level much higher than people think.
06:48 And I just go back to history on this. We've talked about it before. Look at some of the great bubble-like environments, whether it was Japan in '89, JGB yields went four to eight that year as the Nikkei was melting up, or Nasdaq in '99, US 10s went four to seven that year. I don't think 10s are going to seven here, but with nominal at six and a half, maybe it's a level higher than people think.
07:09 It's not 470. Yeah. '87, right? They went from six to nine, long rates went from six to nine percent while the stock market was up 30%. Right? And then it ended up, frankly, '87, I think it was up 3% or something for the year. Hard to believe it was up for the year. But that's the worst — I was saying this morning in our morning meeting, that's the worst sign, when stocks are going straight up, and they don't care at the same time long-term interest rates are going up, and the stock market seems impervious.
07:37 That's the point at which you have the most risk. The fact that we're dealing with this, I think speaks to Chris's point about the internal strength of the market. And Steve, what you had just said, go back to '99 or 2000. If I told you the leading stocks, Cisco or Sun Micro, were going to be down 40 or 50% over an 8-week period, what do you think the S&P or the Nasdaq would be down? A lot.
08:01 The fact that we've been able to withstand that over the last 6, 7, 8 weeks, I think it's a pretty remarkable thing. Economy. The economy is actually — okay. It's good. I think the PMIs show you that the economy is still expanding and actually pretty rapidly. And I think the one big beautiful bill, everyone's forgotten about it cuz there's been other missteps along the way, but it's a big incentive not just for hyperscalers.
08:30 It's a big incentive for any company that's making capital investments. In the United States. States. Because you get to write off the entire amount. Right. Right. And this may be what people have wrong about the Fed here, Jay, is there's this view that they have to tighten because of inflation.
08:45 It may wind up being they have to tighten because of growth. And I think that's a very different message than second half '21 into '22. And I think you see it in the leadership, too. The market — you're right. The backup in interest rates has largely been in real rates. It hasn't been in inflation, right? So, now to me that argues for not tightening, even though I think the Fed will tighten.
09:06 Before you even talk about whether the Fed will tighten, we got a new man — Yeah — in charge. What is he like? Everybody's writing about new regime. What is this new regime? What is that? It's an old regime. Frankly. Okay, well, what is that? Which is, so before people forget it, before 1994, there were no statements regarding policy.
09:30 Monetary policy. No statements whatsoever. You had to into it it from open market operations from the Fed. Okay, but there was no statement. There was no statement. Then in '94 they started a statement and then only in 2019, 7 years ago, did they start the press conferences after every meeting.
09:48 Right. So Warsh's view, which I agree with, is that it's been too big a free pass for the financial markets and capital to basically just take as much risk as they can. Explain that to me. Why is a press conference and an open communication give people license to speculate? Well, you're taking largely the risk out of, cuz there's a lot of discussion about the reaction function and last week Warsh said the reaction function when you're at full employment is inflation.
10:22 What more information do you need? Because I think the press and financial market participants have gotten very used to being spoon-fed what the answer is going to be as far as the direction of interest rates and when. Right. Now they're saying listen, you're on your own.
10:37 You guys have benefited greatly from near 0% interest rates for 15, 16 years. We're no longer going to do this. We're trying to make Fed monetary policy that fits the entire economy, not just what he believes, I believe, that is very much skewed towards Wall Street and not skewed enough towards — and QE was much better for Wall Street than it was and wealthy people than it was for the average person.
11:01 I would 100% agree with that. I agree with that, too, because people forget the average person just has a savings account. Right. Right. You have people obviously that have private equity holdings and venture capital. For them 0% money is phenomenal, right? But for the average — but the majority of the country is — They just have a savings account.
11:22 A savings, and then for a good part of the last 16 years they got zero. Right. I wonder if the markets are starting to figure this out cuz if you look at 2026, it's been about the E, not the P/E. All right, J, so the PE is down maybe two or three turns from where it began the year. So, you've entered this environment where it's much more earnings dependent, much more cyclical, which is a return to that prior Fed regime.
11:46 We've called it an alpha market, right? This is a market where I think stock picking and active matters a lot more than passive. I think it's interesting, we glean our views from the tape that you're seeing all these asset managers start to break out here for the first time in years.
12:03 And they've been on the wrong side of the passive trade for the better part of the last 15 years in this QE environment. So, I think there's some messages out there that speak to this alpha market. Have PE stocks — I haven't looked at it recently — are traditional money management stocks outperforming PE stocks? Yeah, you've seen everything from State Street to T.
12:22 Rowe to Invesco. That's really the leadership within the asset — Yeah, Ben's been a great chart. That's really been the leadership in the asset management space. Interesting. Yeah. And again, I think I can't think of an industry that benefited more from near zero percent interest rates than private equity.
12:39 Oh, none. I know, it's just guys buying the Magna Carta and they're doing whatever they're doing, right? They have so much money they don't know what to do with it. What's interesting is that in private equity, the monetization time frame is now like 7 years.
12:58 So, if you're an institution and you've put all this money into private equity because — That's right — you thought that it would look better because it would be less volatility because you don't have to trade. It doesn't trade. So, of course there's less volatility.
13:14 But people did this because they thought they could sleep better at night. So, now they're sleeping, but they ain't getting their money back. They're not — Yeah, they're not sleeping that well, right? Because especially colleges and universities went — Notre Dame, I believe, has 50% of its endowment in private equity and venture. 50.
13:32 And again, they were geniuses — I'm big Notre Dame fans — they benefited from it tremendously. But on the way up. And now, especially if you build an infrastructure around, I don't know, a $10 billion endowment, and now you're not going to — it really is not very liquid. You have to tighten your belts a little bit.
13:55 And I think a lot of colleges are finding that now. Interesting. Let's move on to the war just for a little bit. Any thoughts on just the volatility given the back and forth or what it means for the market? It just seems to me that on a good headline the market rallies like this week, and next week we're bombing again and the market goes down.
14:14 Yeah, I think people — I have no special insight here. Frankly, I was shocked at how quickly oil prices came down when it seemed when you had this memorandum of understanding. Because a lot of the supply issues, in my opinion, from what I understand, are going to be there whether the war ends tomorrow or not.
14:34 So, you're going to have a bid in the price of oil, which is the main issue. But I think, Steve, you're absolutely right. I don't know if there's any rhyme or reason to it, mainly cuz it's a tennis match, right? It's one day it's on, one day it's off. And how do you know? It takes — One of our clients said it takes two to taco.
14:54 Everyone was hoping that Trump could just give up or say declare victory and move on. But the problem is the other side doesn't want to. They don't want to give up. So, unless we go away completely, it's not going to happen. I think if you look at the parts of the world where it has mattered more, maybe in Europe, right? There's a lot more reflexivity to higher oil prices in Europe where they don't have this AI capex story underway.
15:19 And you compare that to what we've seen in the US, and the war or oil is just not the main event. It is still the CapEx spend. So, I think absent — or parts of the world absent where you have the real AI impulse, the war has mattered more, crude has mattered more, net gas prices have mattered more.
15:39 Doesn't seem to be front page type stuff here. I would also note the last week and a half two weeks as oil rallied back up as the shots started to get fired again and so lie. The move Franklin crude was pretty tepid. We only recovered about 50 — like high 90s, that was it — 59 and right back, here we are back under 80.
15:58 I had a guest on who's argued that there actually is an oversupply of oil. That China has completely withdrawn from purchasing oil and so that demand is much much lower than people think. And then their other point was that these pipelines that are being built to obviate the straight are almost all done.
16:20 Really? There's another data point that speaks to that. If you look at the metals market around the world, copper new high, zinc new high, tin new high, Chinese iron ore is collapsing right here. Right? So, if you want a demand story, I think the strength in the base metals that you would traditionally look to for China for some signal is not a China message here at all. It's AI and CapEx.
16:41 Right. China demand is very weak. Iron ore I think made 52 week lows this week. Chinese market frankly has been very uninspiring over the last number of months. So, this seems to be a China demand problem, not an AI CapEx problem. Let's talk to the topic that's the topic, which is AI.
17:03 Cuz I want to know what you guys think. So, there's AI, there's a software SaaS-pocalypse, and then we should also talk about what did we learn last week from Meta, Amazon, and Microsoft cuz that was very interesting last week. So, two Fridays ago we put out a chart, and I thought I had a pretty anodyne sentence in the — the sentence was: it's going to be hard to continue to grow AI investments without further dilution of shareholders.
17:37 Mainly cuz you saw Google issue 85 billion dollars in equity and all the hyperscalers are issuing debt now. Oracle was just downgraded. And to make a long story short we got fired by a client. You got fired? Got fired. What do you mean you got fired? He said I don't want to read the work anymore.
17:53 At least he doesn't want to read my work anymore. Your work? My work. Maybe he wants to read Chris. Chris's work but not yours. So the firm wasn't fired, you were fired. Yeah I was fired. You were fired. And I thought, I'm very — I never found the table. I think so. I never found the table on anything.
18:07 But the guy was long, clearly, right, and I suggested that it might not work out or that you might have further need for debt and equity capital to do it. So I am worried about the cash flow. There is a big bet really on whether the cash flow is going to come through and the cash flow of the hyperscalers over the next couple of years looks like it's going to be negative.
18:32 Well just to give some statistics. So Meta's cash flow for the quarter was 785 million dollars. Microsoft's, which was the best of anybody, was about 19 billion but it was down around 25% versus last year. And Amazon was negative for the 12 months. Yeah. So — Let me tell you about today's sponsor Longangle.
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21:01 Always say hello with Qwoka. Try Qwoka for free, plus get 20% off your first 6 months when you go to code.com/eisman. That's code.com/eisman. One thing that is not arguable is that the business has become incredibly capital intensive. That's unarguable. It is the money and I talked to one of my clients this morning.
21:26 He's like, "I've never heard a more bullish conference call in my life than Amazon last night." And it sounds like they're going to need — they're going to spend way more on capital and they're going to need to spend a lot more on capital spending, all the rest of it. And it's true, but I don't see how you do it without hitting the bond and equity markets, right? Right? It's not going to come out of cash flow.
21:50 I don't think. The fact that Google raised $85 billion in equity is shocking given the fact that the last time they actually raised equity capital was in the 2000s. Right. Early 2000s. Yeah. So, to me, I wouldn't short it. We're market-weight technology and I do think the demand is exceeding the supply for artificial intelligence.
22:12 Whether they can provide an appropriate return for the shareholders of the hyperscalers, I'm not so sure. I'm actually a little more bullish, believe it or not, on the semiconductors in a way because I do think the hyperscalers are going to continue to spend money, but I think it could be a little bit of a race to the bottom at least for some of them.
22:33 I think what's interesting is this rotational market we speak of is rotational at the sector level as well and it's so sentiment driven. The attitudes towards some of the hyperscalers reached a fever pitch of negativity maybe two or three weeks ago and — When Oracle got to like 120 — And you think about this a little bit.
22:55 I think what people are struggling with here is for so many years, you viewed these as these cash flow machines. I think that actually is a euphemism. The cash flow monsters. That would be actually more accurate. And now I think what the analyst community or the PMs or the investors have been searching for is the right way to analyze them today cuz it's different.
23:18 And I think that's been mistaken for some deterioration in AI fundamentals when it's just been we have to think about them a little bit differently. You look at some of these moves. Google's basically back at the highs here. Amazon just made new highs. The 5-day change in Microsoft is the best we've seen since the IPO in '87.
23:38 Really? There's a momentum to these the last two or three weeks where at a minimum I think they're tradeable. Mhm. Whether or not they reclaim the baton of leadership over the longer term I think is to be seen, but the sentiment got super negative on these. Quickly. Very quickly. What — give me your — before we get to Meta.
23:57 So I just want to give you guys a statistic just to think about because I think you could argue the hyperscalers have a real business and they're real moats around it, but it's a lot more capital intensive. The Anthropic's or Open AI's of the world, that's where it's most questionable.
24:15 They're totally negative cash flow. Right. Right. Right. The Chinese are competing with them and I read this report by a firm where they basically said that something like 70% of the AI hyperscaler revenue is from just those two companies. So if this is the big if, if Open AI and Anthropic ever get in trouble, the ecosystem is in trouble.
24:42 That's what I think. No, I think it's undeniable. I don't know if that's going to happen, but I think that's undeniable. Hey, I think it's undeniable, right? Cuz you have at most — I think the hyperscaler index, UBS has one. It's five companies, right? Right. And again you can name them off the top of your — right? It's some — It's an index. It's five stocks.
25:02 It's probably taking in a lot of money and all the rest of it. But I don't know. This is — everything right now is a big bet on productivity. The one big beautiful bill is really a bet on productivity to bail you out of inflation. And all of this CapEx spending is a bet on productivity, that companies will continue to spend hand over fist to get an edge.
25:29 Steve, I think it's interesting after deep corrections in what I would call AI-adjacent or build-out type names, Quanta, Emcore. These probably down 30% from the highs. Caterpillar had a pretty big quarter. They've all responded over the last couple weeks. Quanta was up like 15% on earnings day last week. It was amazing.
25:50 So, I think you have to give these the benefit of the doubt until they attempt to rally, don't make new highs, and fail. And we haven't seen that yet. So, let's look at one that maybe you don't have to give the benefit of the doubt to, Meta. What was your impression of the quarter? I don't have a strong view.
26:08 The only thing I'm reminded about is in late 2022 it was the stock that got Zuckerberg to change course. Right, it was the stock down probably 50, 60%. In late 2022 early 2023, I think it bottomed. Spending. With the Meta — Metaverse. And I think the stock bottomed at maybe 90 bucks. Right. I remember I bought it at 100 and I sold it at 110 and thought I was a genius.
26:34 So, I think the question is after a pretty meaningful bear market in Meta over the last year, year and a half, was that enough of a market signal to get change? I think we'll learn over time. I went to an economic club of New New event here in New York with Dina Powell.
26:53 Who is that? Dina Powell is married to Senator McCormick and she was also some superstar that worked for President Bush 43, worked at Goldman Sachs, became a partner, then part of the Trilateral Commission. Rockstar, right? It's a rockstar couple. And she's president of Meta now.
27:17 And — She's president — She's president of the company. Oh, wow. And it was very apparent to me — and they gave out free glasses to everybody, Meta glasses — it was very apparent to me she was there for PR and government relations. Right. So cuz that is a big part of — it is undeniable too that that's a big part of the AI game too.
27:40 Increasingly it's going to be Washington. Yes. And their willingness or propensity to try to slow it down in some way. Why they would do that, why New York did that I have no idea, but we did the same thing with fracking and — exactly. But that's another — I just put that out there because then you're making these decisions and I think they're right to do that but there are a lot of other things going on.
28:08 Steve, I would just say as practitioners or observers, the velocity with which Meta reversed the earnings decline in the last week is pretty notable. They had that stock down I think 10 12% after earnings and 3 days later it's recovered the entire loss. As someone who does prices and charts I have to respect a move like that.
28:28 The thing that I noticed the most, cuz I actually went over the numbers myself, was that I just found it astonishing that the revenue grew 28% which is powerful and the expenses grew 55% and I'm like, this is — we want the reverse. Right right, exactly. And there's no indication that that's going to change anytime soon given how much money they're spending.
28:52 And, oh, and the depreciation is starting to really explode, which is really starting to hurt. Yeah, so that's going to hit earnings, right? Right, it's just started. It went from like 4 billion to 6 billion, it'll go to 8, then 10, then 12. It's like a weight on your shoulders.
29:09 Absolutely, right. James, you shared a good observation a few weeks ago, I think drawing on the Microsoft example from the early 2000s of when — you're in court, you stay in court for a long time. That's right. So, that was — well, IBM in the '70s, there's a antitrust lawsuit.
29:27 I think it lasted 12 years. IBM won, quote unquote, but they really lost because it consumes so much of the — of their time — and effort that they missed personal community computing. Right, they were distracted. They were distracted. And Microsoft in the '90s, very similar story. Right. Well, Meta has a lot of lawsuits, all these social media lawsuits by people who are claiming that the algorithms are basically making them mentally ill.
29:56 Yeah, yeah, so that's another — That's a big deal. That's a big deal. Again in the context of a company that has hundreds of billion dollars of revenues, you might say, well, it's only 300 million dollars, but it's adding up. I think there's been two suits — Two suits have gone against them.
30:14 That have gone against them. There are hundreds. There are over hundreds. And again, that just — you're a lawyer, I know, right? Had a podcast about — I found a law professor at Fordham. I think his is Professor Zittrain and we had a whole conversation about all the lawsuits and the legal arguments behind them.
30:35 It was fascinating. Yeah, it's fascinating. I think one of your big heroes is — a lot was — Judge Richard Posner. Yeah, and he said the lawsuit was the punishment. He said about the IBM case. That was the punishment. That was the punishment was having to deal with — didn't have to win. Right. But they won.
30:53 They won. Precisely. Oh, I did hear one hysterical story about that lawsuit, that the government demanded discovery of all these documents and IBM showed up with a truck — with like 10 trucks with boxes upon boxes completely uncorrelated. And they said, "Here. Here.
31:17 Here." And so they had to actually litigate then — So you had to put the paper in the right format. That took another 2 years. Right. And so that's one of the problems. I'm a free markets guy and as Dan Clifton, one of our partners who runs DC, has talked about, the lobbying stuff is very important.
31:38 It can be an alpha generator. Let's move on. Well, just quick thoughts on the banks. How they doing these days? They just continue to carry the football here and it's not just US. Japanese banks, even with yen intervention and JGB yield, Japanese banks continue to lead. European banks have been absolutely exceptional throughout all of this and — Really? — What I think it has told us, when you go back to earlier in the year and there was all this concern about private credit and
32:07 it never was a message of some systemic threat pulsing through the banking system. Public credit remains very benign. Double B spreads I think made new cycle lows last week. Dan Clifton — speaking of Dan, as I said — I think this is very astute call on that we are in a extreme period of financial deregulation and really you can't really shrink the balance sheet of the Fed until you deregulate the banks.
32:32 And I think the charts know it and the stocks know it and they continue to exhibit it. The brokers have been excellent here. We've all seen Morgan Stanley and Goldman Sachs, but even some of the smaller ones, they are still leadership. And I just can't think of too many times in my career or historically where you're on the verge of a big problem and every bank stock around the world is at new highs.
32:51 It seems a little out of step. Well, I think it goes back a little bit to the private markets, too, right? Because with Sarbanes-Oxley and Dodd-Frank and all the rest of it, or Dodd-Frank particular, right? I think private credit was largely a regulatory arb. No question, right? Banks were — They came from nothing.
33:09 Put out of business. And the banks were not allowed to do certain things and private credit stepped in. Right. So, if you have a new cycle, I guess the good thing is it won't be that systemic, but it could be big, and it could be big for — And I would say it was disproportionately good for wealthy people and now it might be disproportionately bad for wealthy people if it goes the other way.
33:32 Cuz they're invested in private credit so much. But so, the banks in general — First of all, I think the curve is going to steepen. Secondly, I'm largely of the view that the economy is strong, so I think the credit losses should be pretty minimal. I would say at least for the foreseeable future.
33:53 And then Chris tells me the charts are just fantastic. So, I look at all those things and I say, "Looks pretty interesting to me." Let's move on to Europe for a little bit. Summer always reminds me how quickly hydration can catch up with me. Between warmer weather, travel, and long days, I can feel when water alone isn't enough.
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35:17 com and use promo code Iceman. That's dripdrop.com, promo code Iceman for 20% off. Stock up now at dripdrop.com and use promo code Iceman. Give me your thoughts about — I have my own thoughts about Europe, but give me your thoughts about Europe. Leave aside the banks, because the banks are more international than your typical European company.
35:37 There's been some of our clients have really been hot and heavy on Europe, mainly because it's cheap. And my view is that they're cheap for a reason. The reason why it's cheap is that they're not dynamic economies. They don't have AI, they don't have any of these — they basically are just trying to stay in the game.
36:03 They're not trying to do anything special. And so, I'm a little cautious about — And as Chris said, they are more sensitive to moves and oil prices, and I don't know. I'm not particularly — I'm not a big fan. I would rather stay here at home. I like Japan a lot. Personally, I like Japan a lot better as an investment, and I'm invested there.
36:27 Because they're fine. There's two things. One is you're bringing out a deflation for the first time and that's been over the last couple of years. But decades, right? And then the other thing is they've really gotten religion on this idea that you shouldn't go for market share, you should go for return on equity.
36:44 Because for many years Japan was largely about just a market share. They have no return on equity. It's almost a little bit reminiscent of what's happening in tech here in the US. But right now they're delisting companies that don't make certain minimums in terms of price to book or return on equity or all the rest.
37:02 And so to me those things are powerful. Chris? I think what's interesting about the Japan Europe comparison is equally energy sensitive yet one acts very different than the other. How have the European markets done this year? So, believe it or not the Euro Stoxx is at a new high right now as we speak, but it's much more focused into a few groups or names.
37:21 The European auto industry is in a multi-year bear market. European luxury remains in a multi-year bear market. So, what's gotten you to new highs? It's been stocks like Schneider Electric — AI buildout. It's been names like Siemens Energy turbines. Buildout. Right. So, there's a consistent theme plus banks.
37:36 Plus banks. Once you — in that as I think — are a much bigger percentage of the market in Europe than — They are as well. If you look at parts of the economy that rely on Chinese demand, autos and luxury, you're in prolific bear markets in both of those. So, I think this juxtaposition between Japan — I totally agree — versus Europe, Japan has so many more of the themes that the market has craved, whether it's chips, whether it's AI buildout, a bigger defense industry as well.
38:09 So, I'm right there and I think one of the mistakes that people have made in analyzing Japan is mistaking the move in bond yields as the start of some big seismic world event. Higher JGB yields I think entirely reflect this reflationary animal that's been unleashed there.
38:35 Yields fell for 30 or 40 years. It wasn't particularly good for Japanese stocks. So let's try higher yields. Until the Japanese insurance stocks or until the Japanese bank stocks start to really weaken here, I'm not concerned about higher JGB yields. Yeah. Did you know that German GDP basically has not grown for the last four five years, not a dollar? Well, I'll give you a data point on that.
38:57 How about Japanese 10-year yields are about to cross German 10-year yields for the first time in decades? Wow. Yeah. Okay. Now, but Europe sadly — It's sad. It's sad because it's a great place. It's the greatest place to spend money. Okay? Our mom was born in Italy and I spent a lot of time there, but it's a very hard place to make money.
39:16 And they've also done studies about the richest families in Europe are largely the same richest families in Europe from 400 years ago. Right. Right? There's not — America, there's a lot of turnover. Right? Shirt sleeves to shirt sleeves in three generations, that type of thing.
39:34 And as a result, it's messier, but it's far more dynamic. It's better. Let's finish up with defensive sectors, which I'm assuming haven't done that well this year or they certainly didn't do well last year. How have they done this year? Is there any hope anywhere? So I think we got to be a little specific when we talk about some of these because there's again everywhere there's this AI theme that runs through so many of these.
39:57 You take the utilities for example. Yes. Regulated utilities have traded poorly all year. They continue to trade poorly. I think as a group they're making new lows here. The unregulated ones, the more power producers, the CEGs and the Talons and the Vistra's have also started to weaken here.
40:12 So I think it speaks to this idea that Jason's been writing on, that the politics are starting to consume the utility sector here a little bit cuz the unregulated use what you would expect to be great in this environment are really starting to weaken. Right. When you go to the staples, there's maybe some hints of life after a just devastatingly bad couple years.
40:31 You're kidding. Where is the life? Kraft Heinz, Hershey's all starting to bottom here. I think they're worth a look. I would hardly call the sector leader in the market, I'm sure there's a — And then you look at health care which I think is an animal of its own.
40:50 Pharma and biotech and life sciences have been leadership. They remain the leadership. They act great. I think these reversals in some of these left for dead life science stocks are particularly notable. The thermos and the Danaher's and the Illumina's which haven't been looked at in years. I think they put in major major bottoms.
41:07 So if I'm going to rate defensives, health care comes at the top of that pile. Staples probably still near the bottom. You are getting very fast. How's health insurance? These put major lows in. I missed it. They put major lows in late last year early this year. The UNH's of the world, the Signas.
41:26 I got too dogmatic on those and I missed it. We try not to do that. But the farmer and the biotechs I think are where the leadership is right now. Well, it's tough, man, because that's again a place where the expansion in the role of government actually is working — worked for them for many years.
41:46 It's obviously working against them now because you have really anytime you get any sort of pricing, it's going the other way. And as we've talked about before, whether it's from the left or the right, I think the politics in this country is increasingly getting populist. Yes. Right? And so there is a reaction against big anything.
42:08 Big media, big academia, big pharma, big banks, all of those things. And even this morning Donald Trump's not exactly — Went after big oil. Right. Went after big oil, right? Even though big oil companies really don't control prices at the pump. Those are controlled by — no control at all.
42:26 All right. What else should we talk about before we end? Anything you guys on your minds? I'll end with one thing I came across today. I think there's a lot of hyperbole out there right now just given the administration, the war, we hear all the time about how explosive this move in bond yields has been.
42:44 If you look at the 400 days since Trump was inaugurated, this is the narrowest range in 10-year yields that we've ever seen. The range of the 10 years 85 basis points over the last 400 days. It's been a remarkably narrow range. It doesn't feel like it for some reason. I just don't think this move in yield is as explosive yet as it's going to need to be if it's going to disrupt the equity market.
43:06 Right. I frankly I'm just shocked at the whining about forward guidance and the Fed. You mean people complaining about it? Yeah, and there are people that have a big self-interest in the Fed giving forward guidance. So it's people in the media that it now going to have to work a little harder.
43:24 And it's also some of the hedge fund community which is saying, "No, I want — I want to be spoon-fed — Yeah, I want a green light all the time." And so you reap what you sow and the Fed sowed a lot of certainty into relatively low rates, but it's changing now.
43:45 And I think that's important as we move forward, that it's not going to be as easy. There'll be more volatility. Good companies will still get rewarded. It's just going to be — I do think there's going to be more volatility and I don't think Kevin Warsh minds that whatsoever. Okay. Thanks, guys. Thank you.
44:01 Thank you, Jason. It was really great. Thanks. Appreciate it. And we're back. So my biggest takeaway from the conversation with Jason and Chris is that the economy is actually quite strong despite all of the volatility. The big issue is whether all this money being spent on AI is going to prove to be good, but we won't know that for a while.
44:23 Until then, the economy is, without question, quite strong. And the surprise to them was that they thought that if the 10-year got above 4.5% that would really put a kibosh on the stock market because bonds would be much more appealing. That has not happened, and so their view now is that the 10-year really has to go significantly higher.
44:44 How much higher? They don't know, but significantly higher before this market really has a correction or the AI story really falls apart. If those two things don't happen, I think they're pretty bullish on the market for the rest of the year. See you soon. This podcast is for informational purposes only and does not constitute investment advice.
45:12 The host and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial advisor before making any investment decisions.