Title: Fund Manager Called Tech Wipeout, Now Reveals Next Great Rotation | Thomas Hayes Show: The David Lin Report Guest: Thomas Hayes, managing member of Great Hill Capital Date: 2026-08-12 URL: https://youtu.be/8kFLx1lEzU0 Length: 54:49 Note: Auto-transcript with verbal filler removed (um/uh/you know/I mean as interjections, stutters and false starts collapsed); wording, numbers, names and hedges otherwise verbatim and every (mm:ss) cue kept in place. Auto-transcript name garbles left as spoken ("Worsh/Warish" = Kevin Warsh, "Bessant/Besson" = Scott Bessent, "Diagio/Dagio" = Diageo, "Densly Serona" = DENTSPLY Sirona, "Alimter" = Altimeter, "Josh Dearo" = Josh D'Amaro, "appreciient" = prescient, "mñana" = mañana). The 07:41-08:25 block is a paid sponsor read by the host (Stellar Gold), not a guest pick. =====
00:00 I would be a seller of this move. It's a dead cat bounce. And that's why you see these waterfalls like you saw in 2000, like you saw in 2022 where retail keeps buying the dip based on recency bias. Everything went up in 1999, everything went up. And these waterfalls tend to persist for more than just a few weeks.
00:21 We're moving down the spectrum towards where I'd expected we'd be towards the end of the year, which is more likely a CPI data came out today on Wednesday, August 12th, and it is lower. Inflation is lower than the previous month. Does that mean the Fed won't raise rates later this year? We're going to find out the direction of interest rates, but more importantly, the direction of markets with our next guest, Thomas Hayes, managing member of Great Hill Capital.
00:45 Thomas correctly called the tax selloff in July. He was on the show back in June, early June, and he said a great rotation out of leadership is going to happen. He was dead on with this call. Now, he's saying that this huge rally is a dead cat bounce and that institutions are likely going to sell in to this rally and dump on retail investors, which is why he's also selling as well.
01:07 He's going to tell us what we should be going into instead and rotating into now. So, another rotation is happening as we speak. We're going to find out what that is. Thomas, welcome back to the show. Good to see you again. Great to be on, David. Thank you. >> CPI report first. In line with expectations, 3.4% headline CPI 2.
01:23 5% core. Both ticking a bit cooler in June. Futures ticked up on it. So, the S&P is up about 20 basis points. NASDAQ is up about half a percent. Gold is up 1%. That was the biggest mover on my screen. And yields are slightly down. The dollar is flat. Now, I think back in June, I think you had made a contrarian call with me that by the end of the year, people who betted on a hike would probably get at least one cut.
01:53 There's been three descents at the last FOMC meeting for governors who wanted >> I think it was four governors overall that wanted hikes, but three descents and as of this morning, markets are holding 62% hold 38% hike. There hasn't been a chance of a cut for a while. Are you still anticipating some sort of impetus for a cut, Thomas? Well, I think the consensus when we spoke in June was that there would be hikes.
02:28 And I think what's evident from both the jobs numbers and the employment numbers and the inflation numbers is that the chorus of hikes, people calling for hikes, is now diminishing and that usually precedes the chorus of cuts accelerating. We're nowhere near that yet, but I think the idea of a hike before the end of the year, which was consensus when we last spoke, is now dramatically diminished.
03:00 And the idea of a cut before a hike will start to become more material in coming weeks and months. And I think some of that's going to have to do with there's a dual mandate. So, one, inflation came in more tame than expected, and that's with a backdrop of elevated, relatively elevated energy prices, even though it's been fits and starts, and a generally weakening in terms of jobs, growth, employment numbers.
03:33 So you have to look at both sides of the dual mandate. But you've had equity prices holding in which has been supportive to the market, supportive to the idea that the economy is running hot. I think that as we get into fall and as we get into pre-election and we see a normal seasonality and a little bit of enthusiasm coming out of the markets, I think the possibility of cuts will be back on the table.
04:04 But to talk about it on August 12th, no one sees that yet. But just as no one saw the possibility of not having a hike in June, we're moving down the spectrum towards where I'd expected we'd be towards the end of the year, which is more likely a cut.
04:25 Certainly no hikes and whether it's before the calendar turns or in the first quarter is kind of immaterial. No one had that view when we were talking about it. Let's sum up inflation and ultimately I like to understand the relationship between inflation and how markets respond. Peak this year around 42% in May headline, I'm talking about headline CPI, and it's been coming down ever since.
04:50 Now the long end of the curve, the 10 year and the 30 year, they've been moving up since May despite the fact that the FOMC held rates the Fed funds rate unchanged. So I'm wondering how inflation impacts both the short end and the long end of the curve. In other words, the yield curve right now because it seems like the bond market, regardless of whether or not the Fed is moving, is doing the job for Kevin Worsh.
05:11 And so, if we have a situation where the Fed continues to not hike rates, especially if inflation continues to cool, I'm wondering if the bond vigilantes will eventually just keep raising rates beyond 5%. What do you think? >> Well, we saw it with the 30-year. I think there's latitude for them to allow that in a growing economy.
05:38 I think if it gets out of control, I think you'll see Bessant start to get involved and you may see an Operation Twist come into play. You've seen some recent articles in the last couple of months talking about the options that they have to act in concert. But keep in mind, Warish's idea of setting himself up to not hike and or cut is predicated on the idea of draining liquidity from the balance sheet side and reducing the balance sheet which has not begun in earnest under his stewardship, but I think we're going to
06:22 see more about that in coming weeks and coming months because as he adds that slowing and liquidity drain to the market, there will be more opportunities for him to substantiate the idea of cutting and bringing down rates. At the end of the day, they can refinance on the long end or on the short end.
06:47 They control the short end. And their incentive is to cut to refinance all of that and obviously spur housing which is 18% housing and housing related which is 18% of GDP and for that whole demographic of millennials and people starting housing and family formation that's a critical factor.
07:06 So, for us, this is all entertaining talk about guessing which way rates are going to go and predicting all that stuff. But we just like to buy good businesses at great prices. When the price is dislocated, they're out of favor, and sell them when everyone wants them and they're in favor and rinse and repeat.
07:23 We look for doubles and triples over a few years. And that's where we focus. So if we get the perfect prediction on rates, and we've been pretty good on that, or currencies or all that stuff, that's fine for entertainment purposes, but it really doesn't have a dramatic impact on how we make money.
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08:25 With a seasoned team, Stellar Gold is one company to watch. Scan the QR code here on screen or visit stellarold.com/davidlin to learn more. We'll get your outlook on sectors you like and dislike in just a minute. Yeah, I think where I was going with these rates is that nobody, look, equities investors don't like higher rates and I was wondering if this is an opportunity to sell off.
09:00 Now the counterargument here is that the yen intervention that we saw a week and a half ago by Scott Besson in the Treasury that can be interpreted as extremely bullish for equities because what the government is basically signaling with this move is that they're willing to engage in some sort of yield control.
09:17 Maybe not directly, but the logic here is buying the yen would backstop or prevent the Japanese from selling off a lot of treasuries, which would push yields even higher. So, indirect yield control. They're going to do whatever it takes to prevent interest rates from going up. Remember, Trump and his administration do not want higher interest rates.
09:36 >> Correct. >> This is an incredibly bullish move. What do you think? >> I agree with you 100%. I think that the trend prospectively and now you can see the alignment between the Japanese and the US is that the yen will either naturally or through some intervention stabilize and or actually appreciate relative to the US dollar over the next couple of years.
10:08 I would continue to play despite the short-term counter trend move. I would continue to play weaker dollar over the coming couple of years and stronger yen. So as we've seen whether it's going to happen naturally in markets or if the authorities are going to intervene, that trend will be intact and we've already seen the early stages of the carry trade. I wouldn't call it an unwind but a mitigation of the carry trade and that's been part of the reason for the underperformance. If you
10:46 remember a year ago when we were on your show, lightening up on the Mag 7, it was predicated on a number of factors, but one of them was the carry trade unwind and the Mag 7 has become the lag 7 and underperformed and then on June we said get out of semis.
11:03 Now I think this move in the last couple of weeks, look, there's canaries in the coal mine, okay? You don't get a month with this type of leverage. AI related exposure to leverage ETFs now has jumped from 26% to 58% in the last couple years. Major hedge funds, these are not amateur hour folks, Whale Rock down 21.
11:34 7% in the month of July. Lone Pine, 27%. Alimter, okay, down 11% in the month of July. Situational awareness which everyone knows down 67% in the month of July. Vera hedge fund down 44%, not year to, in one month. So there is a lot of leverage that's coming out of this and what people are mistaken is there were a lot of people that got aggressively short in the hole and now you're seeing this violent counter trend move in the last couple of weeks and I would be a seller of this move and people say well how could you be a
12:19 seller of this move when you just saw CoreWeave's earnings and you saw Nebius's earnings and you saw Taiwan semiconductor saying that demand is insatiable and Micron and all these guys and the answer is because that's known. So what you had, you have not seen revenue growth were earnings expectations at levels this high, 15% revenue growth since Q4 of 2021.
12:53 Okay? And although people have a short memory, we all know what happened in 2022 right after earnings expectations were at all-time highs and revenue growth was at the highest rate in history is you had a cooling of the tech sector. Venture capital blew up. ARC blew up, all the tech funds blew up, the tech sector had a correction, a refresh in 2022 and I think what people are mistaken for a rally in semiconductors in memory, number one, none of them have made new highs by the way
13:37 most of them if you look at the charts which I sent you, about 50 of them, it's a deadcat bounce. And I think what you're going to see, this is normal seasonality. I think you're going to see into maybe the third, fourth week of August, this deadcat bounce.
13:58 But retail investors are now chasing this short covering move off the lows 20 30% on stocks that had fallen in the month of July alone, 30 to in some cases 55 60%. So now retail's all amped up and buying one day options and call options and there's a little bit of gamma squeeze going. But institutions who got caught with their pants down in July, which there's a lot more than just Whale Rock, Lone Pine, Altimeter, Situational, and Vara, this is just the canary in the coal mine.
14:30 They are using this quote unquote strength or deadcat bounce to get out. And that's why you see these waterfalls like you saw in 2000, like you saw in 2022 where retail keeps buying the dip based on recency bias. Like in 2021, everything went up. In 1999, everything went up. And these waterfalls tend to persist for more than just a few weeks.
14:54 The dead cat bounces are sold for multiple weeks, if not multiple months. Which leads me to the point that we're not generally bearish on the AI thesis. We think we're mid innings, but the return on investment is going to show up much later. We're not even seeing the bump that we should be seeing in productivity.
15:18 Productivity hasn't improved despite all of this investment. All that we're seeing is Mag 7 hyperscalers exhaust all of their free cash flow and now raise debt and now raise equity like you're seeing Intel diluted their shareholders by 20 some odd percent. Google did that offering and the ducks are quacking so they're going to feed them and in line with that we're seeing record equity issuance. At some point when you keep issuing equity the supply overwhelms demand and I think we're
15:56 going to see the effects of that in the next couple of 2 3 months headed into the election as you get this final bout of everyone calling new all-time highs. is you'll see the calls for 8,000 9,000 get retail all back into the boat after they got flushed in July and once everyone's back in pull out the trapoor into the election that's where we'll be aggressively buying this trade when people say the AI trade's over there's no return on investment and when that's consensus and some of these semiconductors are down another
16:30 30% we'll be swooping in to build our long-term list >> Before we talk about that. I want to revisit your June call. This was a rather appreciient call. So people should check out our last interview with Thomas in early June. June 2nd was the air date and you were talking about how a leadership in stocks, bonds, but particularly in the tech space that leadership is going to rotate and that was a spot-on call because right after that in July, as you pointed out already, the semis and several other
17:02 sectors but particularly the semis had a waterfall moment 24% down from the peak and now as you said the violent dead cap bounce. What were the signs back in June that leadership is about to start rotating, Thomas, if you had to recap, jot a memory for us. >> Yeah, look there were a lot of things.
17:21 Number one, first off you got to look at positioning and retail call buying and concentrated call buying in the semiconductor was at record all-time highs. So it was insatiable and all the demand was coming in. Most crowded trade in the world is semiconductors.
17:39 It still is, by the way, semiconductors in memory, which is part of the reason we think it's going to weaken a little bit here in coming months. There was euphoria and we're seeing very similar patterns on this deadcat bounce, which is also going to wind up punishing. You cannot have a situation where all these major institutions got hit that hard.
18:07 Look, every single one of these guys that's down 21, 27, 11, 67, 44 in the month of July, first thing that they got on August 1st was redemption requests. So, what they're going to have to do is create liquidity in coming months. But these are not emotional retail people who sell in the hole or buy after 30% rallies. These are guys that are going to wait for the deadcat bounces to create the liquidity that they need to meet the redemption requests and that's coming to a theater near you in coming weeks.
18:41 So unlike June where after the gamma squeeze was over and all the options. So when dealers sell these options to retail and people chasing up at the top and you had this parabolic move off the lows in April in the semiconductor trade, the dealers have to buy the underlying stock to hedge out their risk.
19:09 and that creates that kind of crescendo parabolic final move. This situation is different. You're now seeing after this 20 30% deadcat bounce, you're seeing all the retail folks jump back in in leverage ETFs, buying calls on the semiconductor, buying it on memory and justifying it with the recency bias of the earnings. These are all known.
19:35 The market is a discounting mechanism. So the smart institutions who got caught with their pants down in July are going to use this strength created by the exuberant retail class who has a short-term memory and use that liquidity to get the hell out and raise some cash to meet their redemptions and to maybe buy at lower levels in the fall with the money that they have left.
20:00 And that's what's going to surprise people. And for the next week, and by the way, we were out publicly week and a half ago. We were in New York and we said, everyone was bearish on semis. I said, "Listen, thanks for the credit on the call, but we're going to probably get a violent rip here.
20:18 We're going to be sellers of this rip." Okay, if you're had turned from excessively bullish in June to excessively bearish after July, and usually there's no sellers left. That's when you get these violent deadcap bounces, as you referenced, which should be faded. >> If you're a seller of this dead cap bounce, then what are you putting your money into? >> I think what you want to do when you started to see a taste of it in July, that trade is going to continue.
20:50 What dramatically outperformed for us and what we were talking about with you and June is get out of semis and get into defensives. So, you want to bet on the consumer, but what's unique about this situation is >> I think not only do you want to bet on defensives like consumer staples, I also believe you want to bet on defensives like consumer discretionary because consumer confidence is finally starting to bounce off multi-deade and in some cases all-time lows that were reached just a few months ago. Consumer
21:22 confidence is starting to turn up. So I think you want a barbell of the theme is bet on the consumer. The barbell is bet on it in a defensive way and in an optimistic way aka consumer staples on the defensive side which will do well if we get some weakness and fall into the election and consumer discretionary because the consumer has been counted out and you never want to bet against the US consumer when they have a job and with 4% unemployment rate even though job growth is slowing they do have jobs and their consumer confidence is turning up
21:59 and so long as energy prices stay in this kind of range of 70 to 90 they're in good shape and they will be spending and I think the flush is pretty multi-deade extreme. Certainly the flush in defensives relative to the S&P is like a 25-year generational buy opportunity in terms of consumer discretionary relative to the S&P 500.
22:28 It may be the best time in about 10 years, not 25 years. So half generational opportunity and that's where the opportunity is. I would be easing up out of this AI trade in the short term. I would be easing into or aggressively moving into defensive consumer and offensive consumer aka consumer staples and consumer discretionary. Bet on the US consumer here.
22:53 >> If someone were to ask you why are you both cyclally inclined and also on the defensive. So you got consumer cyclicals and defensive. How would you answer that? >> I think both are washed out. So what you've seen in July is a dramatic move in a lot of these defensive stocks whether it was healthcare. As a matter of fact there was a good article in Bloomberg yesterday that long healthcare is the new short AI trade and then they showed how healthcare has dramatically outperformed the AI trade in the previous
23:31 six weeks etc. We also have healthcare exposure for that particular reason. For simplicity, I'm talking about the consumer, but I would say a barbell of defensives aka healthcare, consumer staples, not so much utilities because that's kind of gotten a backdraft of being part of the AI trade.
23:53 So, I would leave that part out. Healthcare and defenses for sure and consumer staples is offense because that sector has been completely flushed out in the face of AI and part of the reason for that has been the Iran tensions, the prices of oil, the inflation expectations. It's funny you mentioned inflation coming down, 5-year inflation break evens have stayed relatively contained given the risks that have been created with the Iran situation and in that context and I think that's part of the reason you're seeing
24:35 the consumer start to regain their confidence. You couldn't believe the divergence between the equity markets and consumer confidence may be at a recordwide. We couldn't quite understand why the consumer was so pessimistic in all these surveys when the economy is doing generally well, the stock market's doing generally well.
25:01 And I think the fear was there was a lot of people worried about $120 and $150 oil. and consumer sentiment is directly tied to their expectations about inflation in the future. And I think on that first time when Trump was out saying, "Look, we're going to get a deal and when we get a deal, oil's going to plummet.
25:23 " And then they saw oil plummet on the perception of a deal several months back. Many were surprised by that. And I think what it told them is there is an element of this taco trade that things will only get so bad before it's walked back or pull out or a deal signed or whatever. And on that basis the consumer in general is feeling a little bit more confident about inflation expectations.
25:53 The other thing that you're seeing is two of the big components of inflation that had been so sticky and painful for years postco had been insurance premiums which really hits everyone hard. Those are softening. The insurance premiums and the insurance industry is softening against all consensus that it ever would and owner's equivalent rent and rents are stabilizing and coming down.
26:20 So those are two key components that had really dramatically hurt the consumer which are no longer quite as painful and in the context of inflation 5-year inflation expectations being contained and people feeling more confident in consumer confidence I think you have to have some offensive. If you look at restaurants have been flushed out a lot of the consumer discretionary items whether it's clothing etc.
26:46 I think back to school is going to be relatively stronger than expectations and that's only because the bar is so low and people are so pessimistic about the consumer. We love to be buying when no one's interested in these groups and when they're at 10ear relative lows in the case of discretionary and 25 year relative lows in the case of defensives.
27:06 We want to be backing up the truck. How much of the last quarter's good earnings was a result of Trump's tariff refunds? How significant are the refunds to their bottom lines and EPS? You think >> It certainly played a factor. Most companies were pretty explicit in their calls on the impact of the tariffs.
27:28 What I thought was really interesting in the case of a few companies we own is that we do a lot of turnarounds and turnarounds are often reluctant to do a lot of buybacks because they want to use all available capital to reinvest in the turnaround strategy and reinvest in growth etc.
27:49 But we have one company called Densly Serona which is defensive which is healthcare. They do largest supplier of dental supplies since the late 1800s. It's a GDP growing business. The stock had been hit due to bad management etc. And they used a good slug of that, their refund, for buying back stock in the hole.
28:09 And I think you're seeing watch what people say but watch what they do is more important. And a lot of these companies in consumer discretionary you can't give away the stock. And some of the defensives were using those refunds to buy in stock because they felt that their stock was cheap.
28:31 Whereas on the flip side, with some of the AI companies, you're seeing more selling from the inside than buying. Certainly equity issuance versus equity recapture. You've seen all the charts about buybacks declining among the companies that had been historically the premier buyers of their own stock.
28:53 They can no longer afford to do so, the hyperscalers, cuz they're free cash flow negative. And that's not expected to inlect until or start to turn up until late 27, early 28. And that's predicated on, we hope and expect that we'll start to see a return on invested capital. There's no explicit signs of that yet.
29:18 And honestly, everything else other than an increase in the productivity rate is noise. So if they're saying we're going to get this, we're going to get that. And if you look at productivity numbers every month not going up, then there's no return on invested capital yet for the investment in AI. It's like we all have and that might just be a function of the investment creating better models that actually start to do things better, etc.
29:51 and we'll get there and it will be like a hockey stick move, but we're all using AI and it saves us time and it does all the stuff that is great, but can you really say that you're more productive per minute and it's led to more increase in your bottom line in the last 12 months because of the use relative to the amount that you've spent on it.
30:14 And in some sense, you've been subsidized in the early days because they're getting you hooked on the product like every good drug dealer. It's like, we'll give it to you for free and then a year from now, they're going to start charging you for it. And the answer I think for a lot of people is in particularly large companies they were kind of shocked by their token expense which is what has led to the interest in the open weight model because you can get this capacity for onetenth the cost
30:42 in some cases 1/100th of the cost but the first thing was we got to use AI we got to use unlimited tokens then they got the bill and they didn't see a return for that bill and then they started saying we need other alternatives. The answer to the question is I think as they move more and more to cheaper models they'll start to get a better return.
31:07 But a lot of this AI trade is predicated on the two frontier models succeeding, open AI and anthropic. So if there are models that you can get for onetenth or 1/100th of the cost, they've got 1.5 trillion in unfunded commitments related to those two companies. And then you look at other earnings from all the people holding the stock in anthropic and open AAI.
31:30 So they're dependent on them in terms of revenues as a customer, but those companies don't have the income to fund the commitments of capex that they've put out there which the entire finance industry is relying upon. So the answer to your question is the indicator to watch whether this is all going to work out in time to substantiate all the investment that's going in on the basis that it is going to work out in time aka the return will come before the bill comes due is productivity growth and there are no
32:06 signs that all of this investment has led to any productivity growth yet. We're all betting or people that are crowded into the AI trade are all betting that productivity increases. If productivity doesn't increase, it's all for not. And then you wind up with a 2000 situation where we as the consumer 5 years out will be better off for it.
32:27 But all the people that invested in it like the global crossings, like the MCI Worldcoms, etc. they'll be in trouble because they can't pay the bill, but we'll get the benefit for the bill that they paid without paying any out of pocket. So ultimately, we'll have a better standard of living 5 years from now if the robots don't kill us all.
32:51 But the good news is we're not paying for it directly. The question is will the payers of this see the return or not? And right now consensus in this deadcat bounce is of course they will. The demand is insatiable, but the demand will only stay insatiable to the extent that there is a return. And productivity growth will tell you whether or not there's returns. And so far, the answer is no.
33:17 I'm of the camp that the answer will be yes. But it will take another 18 to 24 months. And there will be a point in time during that period where people stop believing that the return will come before the bill comes due and that will be the time to buy the AI trade >> and investors are scrutinizing when and if the AI capex buildout is going to slow down even just a tiny bit because that's become such an embedded assumption AI capex growth and any indicator of slowing down maybe sentiment indicator overall for
33:56 slower growth in the AI sector. Take a look at this story that was released just two days ago. Nvidia and AI compute $500 billion of third party capital. Nvidia today announced strategic partnerships to establish independent compute financing platforms with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR to mobilize over $500 billion of third party capital for the buildout of AI infrastructure over time.
34:22 This is just a short statement from Jensen Huang CEO. In AI compute is revenue. NVIDIA compute is uniquely suited for this role. It is broadly adopted, flexible across models and workloads, fungeible and transferable across customers and operators and continuously improved through CUDA software. That is why we are bringing the world's leading long-term capital providers together to independently underwrite AI infrastructure.
34:47 These financing platforms will help customers access scarce compute at scale and build the DSX AI factories that will power every industry and country in the age of AI. This I had to bring this up because you're talking about issuing equity. What do they need to when they have kind of deals like this? What's going on? Because I'm not really sure what the structure of this $500 billion third party capital is.
35:08 >> Yeah. What's going on is it's back to the future. Securitizing an asset is not something new. Okay. You've done it from legacy music albums, okay, where you have a stream of income from the music that get played over and the artist, the creative artist says, "Okay, I don't want the recurring.
35:32 I want a lump sum now." And Wall Street will securitize that. You had it with housing as it relates to mortgage. That was a productive asset until it wasn't and it didn't work. This is all going to be the problem with this type of securization is, when you lend on a house and the person doesn't pay, the real problem in 2007208 is that they were basically doing 100% financing in some cases or 10% financing on inflated values.
36:04 So when you got the house back, you kind of didn't want it because the house was worth less than what you lent on the house. If you're thinking on the side of the lenders that got screwed and why it brought down the whole financial system, autos is a similar situation. Credit cards is a similar situation because those are all tied to people performing or you get the asset back or you have a lawsuit.
36:28 In the case of lending on effectively data centers, let's just get to the brass tax of it, semiconductors, Jensen is strongly trying to make the case that the useful life of these assets is more than 5 years. And the reason he has to make that case is because the success of this $500 billion is going to be solely predicated on convincing the rating agencies to put investment grade ratings on this so they can stuff all the insurance companies and all the retail investors full of this product. Okay? And the problem is
37:11 is in normal lending, if you don't get paid, you take the asset, you take the manufacturing company, you take the factory line, you take the inventory, you take the house in the case of a mortgage. In this case, what are you going to take? You're going to take a semiconductor chip that is 5 years outdated and already has significant use on it and may be obsolete in whether it's 3 years if technology advances or maybe it's seven years if Jensen's case is right.
37:46 But the issue is if you don't get paid back, you're basically not secured by anything useful. And that's what's concerning about what they're doing. The problem is or the opportunity is depending which side you're on is that people aren't going to figure this out until 5 years from now when they realize they lent on something that's not secure.
38:13 So it's a mñana problem. And the five guys at the table who are coming in from the Hamptons in the middle of August to do this meeting, which tells you the urgency of it because they've realized this whole entire thesis has now run out of financing if we don't create another source of financing, is they say basically we can do this all over and we won't get hurt because we're just going to collect fees brokering the securization and laying it off to institutions and retail investors, provided we can convince the credit
38:49 rating agencies that this is a secure asset, which it's not. And the fact that they're all sitting at the table tells us that they think that that's the case. And the rating agency's incentive is to agree with them because they're going to get insane amounts of fees by rating this quote unquote new asset class.
39:08 So, this conversation clip will not be useful for us to refer back to 3 months from now, but it will be very useful for us to refer back to 3 to 5 years from now. >> One more question on the AI buildout. So, Google, this is what you were talking about earlier. We're referencing this issuing equity, right? Google it raised $85 billion or, yeah, upsizes equity capital to $85 billion from $80 billion.
39:35 It's now the largest US, largest raise in US corporate history. They're going to use it to fund the AI infrastructure and global compute buildout. Now at what point do investors think too much capex is bad for the valuation of the stock? That was the case for SpaceX when their latest earnings revealed that they beat revenue expectations by a tremendous margin, but they spent way too much money on stuff that had nothing to do with the core business, AI for Grock, and investors didn't like that and the stock went down. And so at a
40:11 certain point investors going to start asking themselves whether or not like you mentioned this capex is productive. What are, you're a fund manager. What are some of the signs you're looking for if you're going to parse through the 10K or 10 Q to see whether or not they spent $85 billion productively? Well, look, the results in the short term have shown you that it's a bad use of capital. Okay.
40:41 Now, what the market is betting on and the market is a discounting mechanism is that Mñana is going to be a brighter day. And I'm kind of in that camp. I just think that the runway to that brighter day is a bit longer than the market thinks it's going to be right now. and in that kind. So if you look at the semiconductor trade in the last big generational tech runup from 1995 to 2000 during that period there were three, count it, three 50% drawdowns in the semiconductor, the socks index, from 1995 through 2000. So all of the things that
41:30 the internet revolution promised were delivered times 10. The issue was you were paying in 2000 as if all of it had already been delivered, which is why many people that crowded into the tech trade at the end or even before the end wound up with nothing because the NASDAQ then subsequently corrected 80 90%.
42:00 Even though everything people were betting on happened, they had just paid as if it had already happened, but it wouldn't actually happen until 10 or 15 years later in some cases. And I think that's kind of what you're seeing now is people are paying as if the returns will definitely come and they're going to get impatient in coming quarters or sooner when they find out it's going to take longer than expected or they've already paid for it and even though it's coming, they've overpaid for that result.
42:37 And at that point, there's going to come a time, David, I don't know if it's in the next few weeks or the next few months or the next couple of years, where people will be despondent about the AI trade and we will only be halfway through and that will be your opportunity to buy one of those three 50% drawdowns like we saw from 95 to 20,000 in the semiconductor index.
43:02 So this is, there's nothing new under the sun. These have repeated throughout history and even if this is not like a 2000 top which we believe it is not, there will be pain along the way onto that final parabolic move which time whether that's five or seven years out when people realize the emperor has no clothes and they've securitized hundreds of billions if not trillions of dollars by then secured by something that has no value, we'll worry about that later, but that's not a today's story.
43:36 That's a down the road story, but it's the same game played all different again. New rapper and the ratings agencies will be initially reluctant because of what happened to them during the housing crisis, but eventually they'll be pressured because they'll want the fees and they'll want the earnings and everything will look fine.
43:55 and productivity will be increasing and then all of a sudden when it slows and they're not cash flowing the way and they'd lent on depreciating assets. It's one thing to loan on real estate, real estate goes up over the, you cannot make a case for me, if I lend on a house that's overvalued today and I get it wrong and the housing corrects 20% it's still a productive asset in 15 years from now, if I got to take it back, I'm going to probably make money when I liquidate the thing. You cannot make the
44:30 case if I lend on a 2026 vintage Nvidia GPU that in seven years it's going to be worth more than it's worth today and I'm going to get my money back. You can't, you cannot, they're going to sell that story, but it ain't going to be true. I can tell you that 100%. Bet the bank on it. >> Okay. Well, let's see in seven years.
44:54 I'm probably in agreement with you. Final question before you go. You mentioned earlier, right? Your business is picking good businesses. That's what you do as a fund manager. Are there any, again, this is a long-term story here. Are there any businesses or types of businesses or sectors, entire sectors that you think will no longer be good businesses in 5 to seven years because AI will make them borderline obsolete.
45:20 And these are trends that people follow and should invest on. >> What I'm spending all my day on is finding businesses that AI will be beneficiaries of AI and not disintermediated by AI. So look, I have a value tilt. I like turnarounds. You can't help but notice the carnage in software.
45:48 And I cannot, I look at the price relative to free cash flow, what it's cash flowing today. And honestly, every time I go to do something in software, I just can't be damn certain this is not going to be fully disintermediated 5 years from now. I think if you put a gun to my head, I'd probably tell you that it's probably not as bad as people think it is right now.
46:13 And some of these are generational buys, but it has to go in my two hard box because I'm a investor, not a psychic. So software, as much as I want to buy these things like crazy, I can't be 100% certain that I'm not going to have capital impairment. So, on the flip side, I can tell you one thing.
46:40 AI is going to help businesses like Diagio, which is a leading purveyor of high-end spirits and Guinness beer, and it's not going to get disintermediated unless AI can figure out a way to help you forget all of your troubles that's better than having a cocktail with a friend at a sports match because they were a huge sponsor of the World Cup and Guinness was flowing everywhere.
47:10 I think if anything AI is going to help them increase margins over time and that's what drastic Dave the new CEO who came from Tesco, Dave Lewis, and Unilever has done. He has cost discipline. He's done many turnarounds and brand management. He's applying the same principles to Diagio. Look, Diagio was cut in half.
47:31 I mean, during COVID, people were paid to sit home, get money, and drink alcohol. Okay, after that, they said, "Okay, now we're out of the house. Oh, there are these things called GLP1s. Now, we want to be healthy and lose all the weight that we gained during COVID." Problem with GLP-1s is so far the data says that 85% of the people that get on it are off of it within two years.
47:52 So whether that's cost or side effects or just entropy or whatever, people don't stick with it as much as one would think that they would want to stick with it based on the results that we see that they deliver in all the scientific studies. And Diagio traded down 50% off of its 2021 highs.
48:15 Still generating $3 billion in free cash flow. Drastic. And by the way, growing double digits everywhere in the world, whether it's Africa, whether it's Europe, South America, etc. The only place that it's really struggled, which has hurt the stock, has been the US has a tequila problem. Okay? And there's the country song tequila makes her clothes fall off.
48:38 In the case of Dagio, Tequila makes her earnings fall off and they're fixing that and they're getting it resolved with drastic Dave and it's starting to inflect. It's generating billions of free cash flow. It's trading like it's going out of business. So that's where we want to have money invested.
48:58 It had a 13.4% return on invested capital for fiscal year 2026. So, we don't have to worry about getting our money back like we do with some of the other trades. And we're buying it with a large enough margin of safety, even if the new baseline is lower than it was at the COVID peak, people are drinking less.
49:19 What is the case is while it may be true that people are drinking less, they're drinking better. And Dagio is the premier high-end spirits category purveyor in the world. 1.4 times revenue of its second largest competitor. So we like that as a safe play because you're going to get your fits and starts just as you did from 95 to 2000 where the semiconductors corrected 50% three times.
49:48 You're going to get more of those and when those things happen people look for a place to hide and they don't have to worry about hiding in something like Dagio down 50% of its all-time highs generating that type of cash. And yes, you can look at the chart and just see what's happened to it since July. It's moved from like the 70s to 100 in a minute.
50:08 Now it's resting because the deadcat bounce in AI. Everyone's cramming back into AI short term. When that rolls back over, Dagio takes its next leg higher. So we love that trade. We love the long-term free cash flow. We love the return on invested capital. We love the new jockey, which is critical in a turnaround with drastic Dave Lewis.
50:27 and we think there's a lot of upside there. And then the second thing, so that's defensive consumer. Now, where's offensive consumer? I think it's Disney. And you'd mentioned my vacation early. I was able to take with my family. We went to France and we had a day to kill coming off the redeye.
50:45 We went to Euro Disney and just like all the US parks, it was completely packed. And they had a whole new branch of the park there which was Frozen. If you go to the parks in the US, it's all the same old stuff, Space Mountain and everything else. Now they're adding Avatar. But in Europe, they just finished the whole new Frozen thing, which is the huge franchise for the young kids. Park was packed.
51:11 Everything was great. And the good news is the new CEO Josh Dearo comes from the experiences side of the business in Disney which had the highest return on invested capital for many many years and that's where they're allocating all their resources moving forward. So streaming had been a drag now it's free cash flow positive growing.
51:35 The entertainment's doing fine. Live sports ESPN everyone had written it off for nothing. Now they're saying wow this is pretty valuable. They're crushing it in the box office and they're investing in the experiences, new cruise ships, new investment into the parks. And I loved it. Everyone thought Disney was going to do poorly on earnings cuz Universal's parks were crap.
51:55 But guess what? Universal was crap. Disney was up. Disney is the key. Everyone loves it. It's a cultural phenomenon. And they're expanding all over the world in experiences. And they're putting the money now continually in the highest return on capital businesses. So, this is a cheap long-term play. This happens every 15, 20 years.
52:13 The stock sells off 50%. Everyone says it's over and then they realize, oh my gosh, they have the greatest IP library in the history of mankind. And they find new ways to monetize it. In the 80s, they went from movie theaters to VHS. That was a huge monetization period that lasted two decades.
52:33 Now, they've gone from DVD to streaming. First, it was a huge investment. low return on invested capital. Now it's starting to cash flow positive and the parks have just been a long-term staple and the cruise business has been a monster. So, we're excited about Disney because price is what you pay, value is what you get.
52:50 Good business at great prices and that's what Dagio and Disney are. So, you want to be in consumer discretionary on the offense of consumer, consumer staples and healthcare on being defensive. And when you have the fits and starts and the AI trade backs up, these groups are going to do just fine and in many cases exceptional.
53:12 >> Buy tequila companies. Don't drink it yourself during trading, I think, is the takeaway there. Thank you so much. You've gave us a lot of tips now, Thomas. We appreciate that. Where can we go to follow you for more tips? >> Yeah, so look, our day job is we run money for ultra high netw worth and family offices.
53:30 That's greathillc capital.com. We do a free blog every week. We talk about two of our holdings and go into analysis at hedgefundtips.com. And we're known pretty well for our podcast hedge fund tips with Tom Hayes. You can find on YouTube or anywhere you get your podcast. It's top in the hedge fund category, which is a narrow category, but we're happy about that.
53:52 For people who like to invest on the basis of fundamentals, knowing what you're paying for, price is what you pay, value is what you get. If you want to invest on price and the flavor of the month, that's other podcasts where you'll get tremendous value. But if you want, we've always just tried to buy good businesses, turnaround situations that can double or triple in 3 to 5 years.
54:16 And that provides a high RR to compound and double capital and multiply capital over the long term. That's what we're good at and we hope we can be helpful to you. >> All right, appreciate it. We'll put the links down below. So check out Great Hill Capital and also Hedge Fund Tips. Great website.
54:35 Thank you so much, Thomas. Good to see you again. >> Thank you, David. >> Thank you for watching. Please do like and subscribe. Follow Thomas. Links down below.