The Bond Market's Revolt: Why Long Yields Keep Rising as the Fed Cuts

[music] Hi, I'm Keith McCulla and welcome back to round two of day one of the investing summit. We appreciate it. Uh, a little inside baseball here. Behind the scenes in the control room, they always ask the upcoming guest, do you have any, you know, stocks to disclose? And Bianca goes, I wish I did. >> [laughter] >> Welcome, man. Thanks for thanks for making the time. >> Thank you. Yes, everybody wishes they had more stocks on a day. It's an alltime high. >> Yeah, alltime highs. It is what it is. I mean, no offense, man, but I want to talk to you more about the bond market. Yeah, definitely how it relates to stocks, but the uh very few I mean you're in a I think you're in a league of your own in terms of being able to do uh you know multiple markets at the same time and have having a view that's fully integrated with Fed policy. So um let's get into it. I mean it's it's game time, right, Matt? Going into this uh I guess the midterms and the Fed the Fed meeting. Yeah, I mean right now, you know, we finally have, I think, the appropriate yield for the bond market. Let me back up, Keith. The problem I see with a lot of people when they talk about the bond market is they think interest rates are not a market. They don't have any fundamentals. They're kind of made up numbers. The president wants the Fed to make up a number that starts with the with one. Others have argued we've got, you know, too much debt and interest costs, so make up a number that starts around two. You can't do that. There is a fundamental in the bond market. And I've been arguing that that means that interest rates, the appropriate level for them is a five. And from the five-year note to the 30-year bond, they all have a five on them right now. And that's why I've said that I like the idea of tipping my toe back into the bond market, remembering that I've been hating on this thing for six years. And so I'm finally starting to get uh get warmed up to it one more time. >> Well, let's get into that because I mean I I've been uh I don't know if I've been hating on it, but I've been short it, you know, the bond market and it's making a lot of money. >> Hating on it. Today's like the first day where it didn't make money in I don't know how many days but you know shorting bonds and and betting on higher yields has worked. Now if we go back to to your point why do they work? You know the economic cycle stupid. So some people think that it's like a bad thing but if GDP wasn't running guys you can show our now cast. I mean we have GDP running north of 4% headline here in the third quarter and a nominal. It's it's a lot higher than you know that. So you know this is fundamental you know and I don't you know like I I go with the market signal if I if I went in 2007 and said okay look this is it due to some eval you know valuation model or whatever it was as opposed to the rate of change of the cycle you know I would have been in in a in a in a world of hurt. So um how do you think about that peak cycle? Do you think we were looking back at peak cycle? Do you think that had had a lot to do with it or not? >> Yeah. No, I think I think it definitely did. But I want to come back to what you were talking about with nominal GDP because that is what I think is the crux to the bond market. Nominal GDP, that's inflation plus real growth. >> Y >> so whenever people scream, but there is no inflation. Inflation's going down. So the economy can grow. In fact, the president has even said I could see the economy growing at 20% with a 2% interest rate. Um, mind you, the the country has never seen 20% growth. Uh, but you know what? I I'll give him a pass on that because maybe, you know, our robot overlords with AI can produce that. So, it's a nonzero number, but not likely. But if you have 20% growth, nominal growth, then the appropriate interest rate is 20%. >> If you have 5% growth, the appropriate interest rate is five. If you were Japan two years ago and you had zero, the appropriate interest rate is zero. Why? Because if you have a 5% growth rate, and that's what I think. I think the inflation rate's running around three-ish. I think real growth is running around twoish. And that's why I think that nominal growth is running five. And you're right, we're running a little hotter than that right now, which might be helping to push rates up. But if you have a 5% nominal growth rule, that means some inflation, some real. That means close your eyes and randomly pick an investment, a stock, a business, a limited partnership. just randomly pick them. What are you going to get as your return? Five. >> Yeah. >> What should be your borrowing cost? What should be if I'm going to borrow money to buy these random investments? They should be five. >> You should be punished if you buy below average investments and you should be rewarded if you buy above average investments. So that's why I say it should be five because I think nominal is going to be about five. Just to finish off the thought, what about a Trump? If we got 20% and two, what would happen? Everybody would buy would borrow a two and you would borrow as much as you can humanly borrow and even if you bought crappy investments that returned eight, you would still make money. Well, the problem is you drag down growth because you'd be subsidizing below average investments. So, it's not a bad thing if interest rates are with a five handle. And the last thought I'd give you, what I'm arguing here is there is a thing called too low an interest rate that can be problematic in an economy. It could create speculative excesses. It could create inflation. It could create malinvestment. But too many people think no, there is no such thing as too low an interest rate. Zero is the best number. And that's where we get ourselves in trouble. We all understand too high an interest rates a problem. But I'm also saying that too low can equally be a problem. Yeah, that's um I agree wholeheartedly on that, if only because history does. I mean, this is um it's a really interesting debate. I mean, does it annoy you? Uh just for the record, as as I would, I mean, it it absolutely annoys me when you hear people certainly on in old wall media, they try to talk about bond yields going up as some kind of onedimensional calculus. Oh, it's because of the deficit. Oh, it's only because of inflation. Oh, we think it's because of growth. like like how much does that annoy you to hear like it's just one thing? I mean it does uh you know it can be to being fair it can be one thing now and it could be another thing later but it's not only always one thing but it does it does annoy me that you simp you simplify it because interest rates are the cost of money in our economy in a capitalist economy that is the most important metric I didn't say the best investment or the most important investment the most important metric Every decision we make from an investing standpoint, buy a business, buy a stock, expand a business, you know, even buy a home, starts with the very first question, how much does money cost? >> And then from there, you make the decision whether or not you should be doing it. So to so to simplify that down to what we like to call two-factor model, right? One thing goes up and the other thing goes down or vice versa is will lead you astray. It may be like for moments here in this past year, everybody was mesmerized by the price of crude oil, but that's not the only thing. It's going to eventually move on to something else. So, yeah, it's too important to just dismiss as, oh, the economy went up or the deficit went down or crude oil did this or diesel's doing that. So, therefore, interest rates have to do this. They're way more complicated than that. That doesn't mean we have to complicate it, but let's not overly simplify it. >> Yeah. I mean it like and and we didn't even talk about global interest rates and global inflation and global currencies. I mean you know we we show guys show slide 153. We did a big presentation on this uh last week Jim but you know it's it's not just dollar versus it's not just rates and dollar versus oil you know it's this thing called interest rate differentials and policy differentials. I mean you just you have a very interesting situation developing uh like to your point on Japanese yields or if you look at European yields relative to the European data where European data is actually slowing you know so you have this is a this is a very complex answer to a to a really important question I guess it's AAM's razor right people just want a simple answer because they want because that's all they can essentially boil it down to >> exactly and you're right that we are not you know most of the time the US market being the big market is kind of you know to use Besson's term is the house that kind of pushes every other market whether it's Japan or France which has been in the news lately their interest rates have been soaring relative to Germany uh but then there are times like now where I would argue the house might actually somewhat be what's happening in France and what's happening In Japan, French yields have been soaring because of political instability that the country has had uh and the fear of their ability to pay maybe a credit risk. Japan's interest rates have been soaring for different reasons and those reasons are largely their economy is finally rebounding off of zero. They no longer have zero inflation anymore. And maybe they're leaning on us and pushing us higher where most of the time it's the other way. what we do tells them what to do as opposed to where we're going. So, it's work. It they're leaning on us, but that doesn't mean that's going to be the way it is forever, but it is right now. >> Yeah. Well, thanks for uh thanks for saying that because again, I I sometimes it like I said, it just annoys me a little bit. But, um back to the the timing. Okay. So, let's say you're like me. Uh you're still above consensus on the next CPI print. Therefore, the Fed's going to react to what they said. Look, I don't re we don't react to every print, but we understand the trend. Okay. Well, the trend is going that way on inflation and it's going to be reported right before the Fed decision and right before the election. So, that's a bit of a pickle if you're looking for a dovish catalyst. Absolutely. And they're going to really run into a problem with that. Let let me just remind everybody that the probability that the Fed is going to hike rates on October 28th, a week before the midterm as we're talking right now is around 21 22% last time I looked a few minutes ago. But one week ago today, it was 70%. So this number vacasillates around all over the place. So, it's possible with an above consensus CPI, earnings reports come out next week, maybe we get some blowout numbers on earnings, maybe we get some decent retail sales and some other things that that number goes back about 50% that the Fed would hike. >> Now, what's interesting about that is that puts the Fed in a very difficult spot because if the market is pricing more than 50%, the market wants a hike. >> Yeah. don't hike and you disappoint the market. I've been overusing this line, bond traders can stop panicking when the Fed starts panicking. I think the bond market for the last two years has been trying to say we don't because in 20 in September 2024, the Fed started cutting rates and then they hiked them three weeks ago. >> During that period, they cut 175 basis points. The 10-year yield went up 130 basis points, 1.3%. That is the first time in 50 plus years that a cutting cycle produced higher long-term yields. >> Why did that happen? Because I think it was the bond market has been trying to say for two years, you got the wrong policy. You're being too easy. Pay a little bit more attention to this inflation thing. Maybe the deficit's too big. All of these are problems. Quit cutting rates and finding reasons not to hike. So, if you roll in the se October 28th and the market is above 50% chance of the Fed hiking and you find a reason to not do it, you know, the Fed might slap themselves in the back going, "Yeah, guys, we we we walk through this one." Yeah, well, watch 10ear yields go to 550 is what you might be care be careful if they're about 525 right now. >> Or the market wants it. We understand if we don't give it to it, the 10ear yield might go to 550. In other words, the Fed needs to panic a little bit more. Yeah. >> So the bond market doesn't then go ahead and hike rates and then go back, put on a seat belt and watch your truth social account because the president's coming right at you. [laughter] So there are they are in a no-win situation if they get that number back above 50% right now. >> Yeah. I mean it's it's it's interesting, right? I mean at one point I think it got up to 70% after that wicked hot uh PMI number I think it was. Um because again it's it's it's speaking to the to the nominal environment you and I both agree on because it's just an empirical fact. So uh bond market understands empirical facts. It's >> can I make a quick comment about that PMI number real quick and why that mattered because >> if you look at the tracker GDP trackers you've got one Atlanta Fed has one New York Fed has one and others >> they were all running very hot. >> Yeah. >> Going into last week. Now, most of the economic data we've gotten right now is either July data or August data. We haven't really until the payroll report, we haven't really gotten any September data. And so, the PMI comes out and it's the first report for September, although it doesn't feed into a lot of these other reports, but it's it's September and it went through the roof and the market was like, this economy [clears throat] was doing really well in July and August. I wonder how it's doing in September. And the PMI said, "We stepped on the accelerator even harder." And that's why the bond market had such a bad reaction. So people have said to me, "I didn't even know there was a PMI. I didn't even know that this [laughter] number mattered." And I was like, "You're right. It normally doesn't." But what it was signaling or what the market is afraid it was signaling was September data is going to be even stronger than August and July data. And August and July data was pretty strong to begin with. And that's why rates reacted the way they did to it. >> Yeah. Put uh guys, put up slide 62 just so that everyone like Jim has this in the back of his head. Obviously every time series uh that we care about, but slide 62 just shows you the order of magnitude here. I mean this went from like we say frisky to in Fuego. I mean this is a massive spike in a in a data point to lead off. It's like your leadoff batter just knocks it out of the park and there you go. So um yeah, that got the >> Yeah. Right. >> Yeah. >> Right. And to stick with your baseball analogy, um, you know, maybe all the other batters after your leadoff batter gets a home run, start striking out, but you kind of feel pretty good, hey, we're going to start the game, you know, with with with a run and let's keep going with this rally. And that's what the market was afraid, the bond market was afraid of. Holy crap, this economy might, you know, well, everybody's talking about recession and everything else. All the data is going completely north. And um I mean it's like a problem. >> Instead, what they did was they like, you know, they went to the bullpen immediately. They brought in Williams from the Fed to talk down the concept of a rate hike in October. I mean, that was immediately in the in the new week is what happened there. And that and and Fed hike. That's the a bit of a problem. I I like I think on the one hand you can't understand and and actually appreciate AI and understand that the machine or people like Biano and my firm are reading and reacting to actual numbers rate of change numbers that are either hot or or hawkish or doubbish or not. Um and then on the same token go back to the old playbook like oh fed old old wall fed head guy comes out and says I don't really want one of those irrespective of what the data does. How did how did you you know how'd you how'd you think about that? >> Yeah, I you know I think what happened is let's remember we have a new Fed chairman. Worsh does not believe in forward guidance. Just so everybody's on the same page. Forward guidance is simply tell me what you're going to do. Are are you going to raise? You going to hike? You're going to hold? Give me a hint here. That's basically what forward guidance is. [laughter] He doesn't want to do that anymore because for every instance that hey you gave me a hint so that when you changed policy the market was cool with it then the other problem is every time you give me a hint the market takes it as a promise. You told me inflation is transitory. So all of a sudden the data gets really hot and to use a crypto term, do we rug the market after we told them that inflation is transitory and start hiking rates or do we just say, "Okay, we committed to not hiking rates and we wait and we wait and we wait." And by the way, here's a fun fact for you. March of 2022 is when they moved rates off of zero. What was the inflation rate? What was the inflation rate in March of 2022? Was eight and a half percent. That's how ridiculously long they waited because of forward guidance because for every time it helps it hurts. So I'm in favor of getting rid of it, you know, for in the long run it's it's fine. But when you get rid of it and Worsh doesn't offer it, then here comes the New York Fed President John Williams. Oh, he said that they're not going to raise rates. Maybe Worsh approved his speech. Maybe he's the guy we should be looking at for forward guidance. So you elevate him even more than he already was. Uh and then Philip Jefferson comes out. He's the vice chairman of the Fed. He says something different. Nobody listens to Nobody even knows Philip Jefferson [laughter] was the Fed. But because Worsh is not speaking, we go maybe these are approved Worsh speeches to kind of give us the idea of where things are going to go. And that's why we went from 70% to like 30% on just those speeches last week. So, we're kind of trying to feel around and try and figure out how this new Fed's going to work without forward guidance. And we for the moment have decided all the other people matter more. Maybe they're the ones that are going to give us the forward guidance. >> Yeah. All of it equates to one word. It's called volatility. I mean, if like the move index, guys, if you can show a chart of PFIX, we're along this ETF that's essentially a bet on bond market volatility, right? I mean, this thing has gone vertical, you know, over this whole circus act that you just explained, which is he said, she said, and is it true or is it not true? I mean, all I do is bet on market volatility if that's what the market's signaling. So, um, at some point I would I I would imagine again that you're going to get even more volatility if that inflation number says that you got to take the odds from 30 back to 70. I mean, that's it's just got to it's to me uh that's that's a I don't want to call it a layup, but it's been somewhat of a layup, >> right? And that's you're right that the volatility is going to come back and it's going to come back for a simple reason because we're finally starting to ask the right question. The Fed's target is 2%. Okay. When was the last time we were below 2% on any inflation number? 66 months ago. We've been above it for five plus years every single month. And every single month, Wall Street always says like the Fed, "Oh, don't worry. In about 6 months, 12 months, we'll be back to two." Uh, you know, and um, you know, to use the baseball metaphor, that's like the guy that goes up to bat, he's 0 for 40, and then he goes up at the 41st time and he gets a hit and goes, "Yeah, that's why I'm say maybe the problem is that you're in a slump. Maybe the problem is we can't get back to two. We've got a pro. We've got a real You're not a major league hitter to use the metaphor. You know, we have a real structural problem here on our hands and that will breed to more volatility in the markets because the markets have been operating under this assumption. Oh, this was just a supply chain postcoid blip and we're calming inflation down. It'll eventually return to its 2% target. And here we are almost in 2027 and we're not anywhere. In fact, the targets that the Fed uses, which are PCE, personal consumption expenditures, they're not even below three at this point. So now we start to ask maybe there's more going on here and and that will breed volatility because the market was for a long time under the assumption yeah the inflation rate is going to eventually come down and become a non-issue but it hasn't for over five years. Yeah, it's um and and what's worse is that macro tourists take that bond market volatility and they say because they're super smart humans that went to really cool schools, you know, well that must equate to equity market volatility, so I should short the equity market. Dead wrong, right? They totally missed, you know, the entire concentration factor that that drives the VIX, which are certain stocks that have gone vertical, therefore suppressing equity market volatility. I I have had actually a fair amount of questions on that from from our institutional clients. I don't know about you. >> Yeah. No, you're right. The the the construction of the volatility index and stocks and the construction of the volatility index and bonds are two completely different things. In fact, one of the things that drives the volatility of the move almost more than the direction of interest rates is the shape of the yield curve or the expectations and the shape of the yield curve. Uh and and so you got to kind of you know separate the two. There are times when we are all hyperventilating in a crisis like COVID that they move up and down together, but most of the time they don't um move move together. I think when I hear those questions from people, what they're really asking me is, >> are interest rates so high that it's going to start to bludgeon the economy or the stock market? Well, as we started off, not today, because we're at a new all-time high. But as I said in the beginning, if I if you're under the impression like I am that five is the nominal GDP growth, three-ish inflation, twoish real growth. Again, we're running a little above that right now. And five is normal and all the interest rates start with five. They're normal. They're they are not at punishing levels. So why is the stock market ignoring higher interest rates? Because they're not high. They were too low. They were way too low for too long. and we got used to that. Now that they're kind of getting back to normal, we're starting to say, "That looks kind of high, but we need to readjust our orientation and say,"No, this is kind of normal for where interest rates are." The stock market is signaling it to you. The PMI is signaling it to you. There's very little evidence that this economy is buckling under these high interest rates right now. >> Yeah, people um they get that wrong all the time. I mean, in our framework, guys can show the quads, but it's called quad two. when the when both growth and inflation are accelerating at the same time it's bond yields are going higher and corporate profits are going higher too at the same time it's bullish I mean I don't uh I get that rate sensitive I mean we're short rate sensitive companies like again housing utilities you know pick your pony it's been you know you can make a lot of money just understanding this very basic relationship without like burning you know your eyebrows off thinking that the stock market has to crash >> you know if you start with the premise that interest rates You know, the president's premise, he's my whipping boy here, is down is always good on interest rates for whatever reason, and up is always bad. Reject that. That sometimes higher interest rates reflecting stronger nominal growth is not a bad thing. We then you start with you don't have to fear why interest rates are going up. you need to ask why are they going up because maybe they're going up for wrong reasons like way too much inflation and not enough growth. Uh but the fact that they're going higher does not mean we need to ring our hands. Just like I would say on the opposite if we woke up one day and interest rates were plunging maybe you should worry because [laughter] what that says what that says is that growth is disappearing because everything is falling apart. And so, you know, plunging interest rates are not necessarily good, but that's kind of the trap we're caught into is we we complain when interest rates go up and we celebrate when they go down, but they're a little bit more nuanced than that. >> Yeah. What you just described, like to take away the nuance is the difference between quad four and quad 2. I mean, quad four is where the economy is slowing big time, corporate profits are slowing in rate of change terms, stocks are collapsing and crashing. It's happened many times in our career. I mean, so it's not like it's a foreign con should be a foreign concept. Markets aren't bell curves as Jim uh Jim Rickards just reminded everybody in my in my discussion before this, but let's take this to that to that part of the movie. I mean this is what makes the game so much fun is at least in my model the probability is rising that the middle by the middle of next year you know especially when you have to lap these base effects on on headline inflation you're going to have inflation go down quite a bit actually uh you're going to open the window uh for the other side of the trade which is like if you're saying you started by saying which I appreciate because every single day I have to measure and map and stay on top of that I'm like still short bonds At some point you cover the short, you know, the the the cycle high for inflation's in. The cycle high for growth is looking backwards and we're going to quad 4. And that's going to be like if you go back to 2007, as you well know, I mean, the 10ear yield peaked at 5.3%. By 2012, I think it got down to 1 1.4%. Okay, that that's a long way down. I mean, it doesn't just kind of stop going up. Have a cup of coffee if you're coming off the peak of the cycle. No, you're right. You know that that is always the concern. The way I've explained it is uh there was this economist in the 70s, Rudy Dornbush at MIT, and he had this famous line, economic expansions do not die of old age, they're murdered. So if I [laughter] was >> Yeah. In other words, what he means what he means is I I I'll put it I'll put it for everybody simply. What he means is the least qualified person on the planet to tell you we're having a recession is an economist. And and the reason is is because usually it's an event that causes a downturn. You know, uh 9/11, um Saddam invading Kuwait, uh a housing uh crash, uh a pandemic shutdown, these are the things that usually cause recessions. So in your parliament, if we're in quad two and yeah, things are going good and interest rates are going up and earnings are expanding, I would in your parliament wake up and go, okay, today we're in quad 2. When do we go to quad 4? And is there am I going to wake up and read a headline on the news and go, oh man, we just jumped all the way to quad 4 today because this event happened. In other words, we murdered the economy. That's what I worry about going forward. Now, I don't know what that is. I don't know if it's going to appear. There's been a couple of those events in the last few years that I've been worried could have just been, you know, push us over this side like um uh liberation day um uh like the Iran war uh you know those type uh those types of events where you wake or like Silicon Valley Bank failing. You wake up one day and go uhoh, forget where you thought we were. Forget all our models. We just jumped right ahead to the end here. Yeah. Uh, but we didn't. We didn't. But that's the proper way to think about it. When these events happen, you ask, "Did we just murder things?" And sometimes the answer is no. But, you know, that's how you got to start to think about this stuff. >> Yeah. You went from quad 2 to quad 4 between the end of ' 07 and obviously 2008. You actually did most recently from 2021 raging quad 2 meme stocks, crypto, Melaniacoin, Fartcoin, the whole nine yards that you were not enthused with. I remember having those conversations. But again, >> right, >> 2022 didn't just like, you know, the economic slowdown didn't come out of thin air. It got murdered from the base effects, the 2021 quad 2 acceleration. So to me, this is like pretty obvious, man. Like you have the mother of all bubbles in AI spending driving not only the market cap inside the index and the narrowing of the index, but the corporate profits of the index fully loaded with paper profits, which include AI things that may or may not be true. Did you ever think in your career when you were trying to be a responsible professional that we would have a conversation about fartcoin? [laughter] >> But but we did. But we did. >> And by the way, I know that you took a shot at economist. I mean, there's a reason why I don't identify as a Yale economist. I identify as a former hockey player to be very clear. Okay. >> Okay. [laughter] Um but to to your point about AI, let me make this comment. Every technology that's ever been created will end its first wave in a bubble peak. And this one will be no different. Now the question is when is that bubble peak? Is it upon us right now? Is it three years away or where is it going to be? How do we know when we get to the bubble peak? I, you know, looking at like the railroad bubbles all the way on through. Um, usually the skepticism gives way to optimism that you get to the point where everybody thinks trees are going to grow to the sky. The example I've used in 2000 is Global Crossings. Maybe you remember them. >> Yeah. Yeah. >> They were Yeah. They were a company that was laying fiber optic cable for the internet through the oceans. >> And by the time by 9697 we had Greenspan irrational exuberance. we're overdoing it. But by the time we got to 2000, Global Crossings could raise however much money they never needed to raise because there was no optimistic forecast for internet growth. That was too optimistic. So they w up laying a 100,000 miles of fiber cable around the globe where only 2% of it was being used. And by 2022, they were the largest bankruptcy in American history. And that 100,000 miles of cable, not only has not some of it never been used, now that we have Starlink, it will never get used uh at that point that we so overdid it. So where are we going to be when we get to the bubble peak in AI when the skepticism gives way to optimism, which gives way to we have way too much of this stuff. We overbuilt it so bad that we could never meet those expectations. That's the That's how you know we're at the bubble peak. Now, are we there now? I would argue not quite. We're not quite at that optimistic phase, but I would tell you it's really hard to figure it out. And you've also got the >> the other complication in trying to figure that out in that you have technological advance. I'm there might be a data center and you said this data center is 100 megawws and then all of a sudden somebody says you know what I know how to take a 100 megawatt data center and make it do 10 times the compute with a 100 megawws. Oh we just woke up and we now we have massive overcapacity because of a technological advance. So that's how I think you you want to look at it. So when you look at and we talk about all the spending and all the borrowing and the massive data center buildout, we're asking the right question. Have we gone too far to a massive overcapacity like we were in 2000, like we were in the 1880s, 1890s? By the way, um we have 40% less railroad track now than we did at the peak, which was 280,000 miles. And a lot of that railroad track was only used twice. once when they built it and then the second time when they tore it out because we basically made way too much railroad track because we thought there was no limit to the amount of trains we're going to use. Like we thought there was no limit to the internet, you know, and we'll eventually get to the point where we think there's no limit to AI and that'll be the bubble peak. >> Well, it's just a it's a very well put, man. But that that's and and Wall Street to Washington is begging for that over supply. They want it funded. They want to have uh meetings where revenge of the nerds walk in, you know, multi- trillionaires allegedly, you know, they're all going to solve and, you know, solve for our child's safety. You're going to have the whole nine yards. I mean, people, if you show any del in capex or revenue growth, your stock gets murdered. So, just by virtue of the fact that the S&P is making a new all-time high after the NASDAQ printed one yesterday, you know, is Wall Street cheering it on? They they will and always have cheered on over capacity. >> You know, you're going to have to invent a quad five five. That's when [laughter] Skynet Skynet becomes conscious and ends humanity is quad five then at this point, you know, but you know, yes. And you could see how we're going to get there, right? Because and look, count me in here too. I I believe this, but this is you two things could be true at once. It could be right and it could lead to over capacity. We can't decelerate because China's not going to decelerate. And we don't want China to overstep us. Why don't you want China to overstep us? I'll try and keep it as simple as I can. At least when we invent Astra 6.1 or Fable 5.1, the first thing they do is they say, "Hey, Treasury Fed banks, pharmaceutical companies, power companies, and non healthcare companies and hospitals, you got 30 days. White hack." White hack means figure out your vulnerabilities with this model and patch them before we give it to the public. And so then they're they we could stay one step ahead of them. If if China jumps ahead of us and has a model that's better than that, are they going to do that or are they going to just hand it to the North Korean hackers and say knock yourself out? So that's why we have to stay in front of them. But that's how you wind up getting this massive overcapacity because it it's a rational argument. We just didn't do it because we could. We did it under good pretenses, but then we wind up with way too much of it. >> Uh pretense is a good word. What What do you think about the pretense of this whole show? Like America, you know, Trump meets with all these guys. They're all the rich guy, the new rich guys. It's like I mean, if you're trying to identify what a picture of a bubble looks like, I mean, I I I tweet them all the time. Believe me, I I won't let at least my version of history forget. Remember Sam Bankman? fraud, you know, hanging out with Mr. Wonderful or who, you know, Scaramucci, all these guys sitting around the table 2021. This is going to be great. I mean, it's like this is scary. I mean, if you've read I've read every one of their biographies, every single one of them that that where it's available. Um, including the guy Habis who who did Google Mind. But it's it's it's these they're just human beings like us. Like I don't I'm a religious guy. Yeah. You and proud to acknowledge it. But I mean, I personally don't believe that God put these these that room of people on the earth to uh to be the answer. >> Yeah. And uh by the way, how did you like you can't you can't make this stuff up, right? You you have the room with the with everybody to talk about super intelligence, which is what Trump is calling AI, and then spells president of the United States wrong on the document that we're talking about with super intelligence. Uh so maybe we're not as super intelligent as we think we are uh at this point. But look, you know, the the technology is the technology is a powerful thing and it's a dangerous thing, but we overstate it. Is it going to end humanity? Look, did anybody say airplanes might crash and they're going to end humanity? So therefore, we you know, yes, if you're if you're not careful with an airplane, it can do damage. If you're not careful with AI, it could do damage. But let's not jump all the way to the end that it's going to make a whole species extinct. That's where we're kind of overselling this this thing. So yeah, you have to be careful with it just like you have to be careful with a an airplane or an automobile or a knife, but that doesn't mean that we have to start talking about it, you know, being a extinction level event. That's where I kind of push back with it and that's where they kind of get these these religious overtones to themselves. >> Yeah. Yeah. I mean I if there is a a an existential threat to markets. I I I think you and I would agree that it's market structure itself, the short- termism, the participation. Yeah. Maybe just to switch to that because that too it's it's all part of the same thing. I mean, when it starts to come unwound, we saw what happened with the O the SO XL or you know the three times this or the three times that levered ETF. I mean, it happens so quickly. And again, that's the whole point of of AI. Everything happens faster. >> Yeah. And and you're right about market structure that that worries me as well. And as a matter of fact, as a byproduct of market structure, what are we down to like 4,000 odd public companies now? We used to have like seven or 9,000 at the peak like 30 years ago because nobody wants to go public early in the process and have their stock, you know, gyate around like a Kelsey betting market because that's [laughter] eventually what it becomes and then have to explain to their board or to their investors why that's happening. So you just stay private until you're worth $2 trillion like SpaceX or Enthropic and then you come public. So I think at this you're right. I wish we were more of the idea that this is capitalism. This is about rewarding good ideas, taking away for bad ideas and investing for stuff that could be economically viable as opposed to degening in and degening out of a lot of this stuff. We have way too much of that for my taste. I understand it. Um, you know, I I wish that 60% of all options that traded were not zero DTE. That's zero days to expiration. That means the ex uh the option expires on the close. But don't worry, the the Chicago Board Options Exchange has an answer to zero DTE options. Hourly expiration of options [laughter] now. They're coming now as well, too. So, yes, the the problem is is this is this is outright gambling and it's no longer investing and u gambling can get in the way of investing and that's why I'm kind of worried about it. >> Yeah. I mean, there's the gambling component, you know, that's just essentially what I call like post-pandemic keyboard warriors. They all became, you know, tried to become David Day Trader, eviscerated in crypto. Now they're back doing, you know, all the above that you just cited. You know, that's going to be part of it. Like when you look at whenever this bubble actually starts to, you know, pop and crash as opposed to make all-time highs on the broad index, that's going to be 100% something people blame. Mick, this is not like like why aren't we having an open meeting about that? I mean, then the president would have to have people like me and you in the room and nobody wants to listen to us. >> Yeah. You know, it you know, in fairness to the United States, probably the biggest degenerate gambling market, DJ market in the world is South Korea. And so because you know they've got Samsung and SJ SKH Highex as 50% of their stock market and everybody's doing way more of all of this zero DTE triple levered quadruple levered uh and the like and it's so human nature when that market was roaring in the spring and into the summer and people were warning about it >> and the regulators zero meetings. Hey, everything's fine. It went up. But then the minutes start going down then we have the emergency meetings and we start pointing fingers at everybody. Uh but you know you you you've got to be careful with these markets because if you let them get out of control and you're exa you know we see this in crypto all the time. This doesn't look right. Well what do you know went up you know okay fine and when it goes down then you'll understand why it didn't look right when it was going up in the first place. So that's why we have to be careful with some of this stuff. Fortunately, we're not as bad as South Korea and maybe a couple of other market Chinese stock market's kind of like that as well too that it's got a lot of that DGEN mentality to it. >> Yeah. The the other side of it of course is like real sound money. Gold would be at the top of the list and maybe we can finish up on this. I'm going to have a a conversation with Melaney after this who runs a gold business. You know, physical gold uh buying and selling. But you know, like most rational people that understand everything you just said about DGEN, gambling, zero days to expiration, you're like, "Okay, this two shall pass. I saw what happened coming out of the internet bubble. This is 5,000 times worse or pick whatever number you want at this point." And there's gold. And gold's not going up anymore. And nobody's out there trying to save gold. There's no meeting at the White House to save gold. There's no there the if I say gold is bearish trend on our model which it currently is because interest rates are bullish trend you know people kind kind of come at me they get a little upset or whatever but don't you actually need the whole isn't it all the same story we need interest rates to stop going up dollar up rates up is not good for gold there's absolutely no correlation that supports that so I need those two things to stop I need these people to completely implode and then gold can resume and go back to where people didn't think it could go before which just did, by the way. >> Yeah. You know, the problem with gold, too, is what we were just talking about. There's gold. It's sound money. It's 5,000 years old. So, how do you own it? Oh, we've got I've got options on an ETF or I've got double levered ETFs and derivatives and futures. So, we've paperized it. I mean, to give you the example, I can remember this dates back to 15 years ago. I was at an investment conference and John Pollson, the guy who made a gazillion dollars, you know, uh, from the financial crisis, was was talking and his big idea was gold and he went through gold and he went through about how he was worried about the instability of the financial system, how he was worried about fiat currencies. Okay, I hear you. I'm with you. And then he gets to the point where, well, how do you own gold? And he said, I own GLD. And I said, "If you're worried about the instability of the financial system, owning a couple of pieces of paper on the New York Stock Exchange isn't gonna cut it. You better buy you better be burying it in your backyard. Uh otherwise, it's not going to be doing that good." And that's the problem with gold right now is that we've overpaperized it. So, what happened last year when the fundamentals for gold and silver turned positive? Did it go up? >> No. It went up 80% in gold and 120% in silver. And then when the fundamentals got a little bit ahead of it, what happened in February? It fell 40% in a day. Silver did. And so we so overdue all of these moves. So I understand that there's kind of the the both sides of the equation. The the gold market can be this fundamental, but when we we lop on top of it all these DGEN instruments, we just so overdo it in every different direction with this market. You wonder if it's any different than crypto after a while because of the way that it starts to trade. >> Well, it's all the same behavioral thing. I mean, it's like, right, >> that's the real >> it's the same people. It's the same people. Yeah. >> And it's the same lack of oversight and it's the same I mean, if you want to actually have a real conversation about the safety of the economy, you know, I don't think you can detach from the safety of financial markets and how they've been weaponized with all these different short-term tools. I mean, that's that to me is would just be something a government person would say, maybe. So, um, anyway, thank you for, uh, [laughter] coming in hot. Everybody loves your, uh, I I had the younger guys on on our desk are actually some of your biggest fans. So, I don't I don't know how you got the young generation to to to like you more than they like me, but they definitely like you more than they like me. So, so well done. >> Say something nice about crypto and you'll be on their side on [laughter] their side. >> They actually did ask me I'll I'll leave with this. They said, [clears throat] ask him what he thinks about the Bears new stadium. Oh, the Bears new stadium in Hammond, Indiana. Um, you know, I'm fine with it because it's actually Yeah, because I if you know the the geography of Chicago, it's only about 12 miles away from where the current stadium is, but they want to keep it in Illinois at a place that's 35 miles from where the new stadium is. Okay. >> So, for me, for me, it's less of a drive, but right now we're all into the White Socks. Um, maybe this is a sign that the world is ending. Apparently, the Chicago White Socks are the hottest ticket in baseball and they've only been around for 150 years and that's the first time that's ever happened. I think that's in the book of Revelations that when the White Sox become [laughter] the number one team in baseball that the end of the end of the world is near at that point. >> Yeah, there's a great uh not a great history about the Chicago White Socks with a gentleman having an altercation with the White Socks by the name of Nolan Ryan. I' I've been citing this book lately. Uh, Mr. Robin Ventura. Yeah. Wow. That's that that that book just came out. If you love baseball and you love history, you got to read this this book, Nolan. It's phenomenal. And there's a big part [laughter] a big part in there for Robin Ventura and and the White Socks. So, >> good. >> Thank you. >> All right. Good to see you again. Uh always appreciate it. We're g we're going to be uh rolling into the third session next. We're going to have, like I said, a discussion with Mr. Melaney on gold. Heat. Heat. >> [music]