Interest Rates and Future Outlook

skin Big tech has been having a bit of a wobble. On one day this week, Korea's tech heavy stock market dropped ten percent In the US, it was a similar, if less dramatic story with the suuper teechy NasdAak down two percent or so and SpaceX the newly listed thing from Elon Musk, struggling to cling on to its early gains Some spectacular results from Micron, another AI bigiggie, seems to have got the good vibes going again, but it's been a very up and down kind of week Today on the show, is this a random wobble or a sign that the AI trade has got a little overcaffeinated This is Unhedged the Markets and finance podcast from the Fancial Times and Pushkin. I'm Katie Martin, a markets colonomist at the FT in London, where the current temperature is one thousand degrees Celsius skeletons are dotted around the streets, the city is deserted. And everyone is grumpy because it's just too hot Joining me down the line from his bunker in New York City is that guy, Rob Armstrong. Rob, I gather it's cooler there. It's very nice. and I just want to note for the record that our editor Brian begged you on his knees not to talk about the weather in today's show And you would not be stopped Brian does not understand how hot it is, though man. Like everything is bad and wrong The English do not manage the heat well. It hits different over here, it hits different. It was nice to see you the other day at your home The weekend festival Yeah, it was a great event. And there were some un hedge podcast super fans there. so they were Heo to all of you. It's always nice to to see people in real life. I know. we have to remember that our listeners are real humans in real life So it has been a weird week on the tech stocks front. Where should we start? I think we should start with SpaceX. Yes. So was It was born onto public markets just a few days ago with like a valuation of ridiculous money one point seven five trillion dollars. and then Immediately the share price sprang higher, didn't it? Yeah. And this is something IPOs initial public offerings are supposed to do Indeed the people who design them buildu this in as a feature. So what is an IPO? The company has a bunch of shares to sell for the first time. It's basically offering ownership in its enterprise to the public and it goes to a bunch of bankers and they say to the bankers Please get as much money for each share of my company is possible, but I need certainty. In other words, I can't have my IPO fail. Right. And so they say, you know, the market will probably tolerate one hundred dollarars stock price The outside, We've got some demand lined up for you, but Let's offer it at ninety or eighty five. Just so everybody has a nice warm feeling. Everybody who we've sold this stock to as the initial buyers has the nice warm feeling of initial pop And there is a general aura of money making goodness around our pot generally eats itself, doesn't it? Like it doesn't it doesn't generally stick around. So this stock listed at I think it was one hundred and thirty five dollars and then it opened one hundred and fifty dollars and then it sprang up to two hundred and twenty something And now it's basically come back down to one hundred and fifty again. it's on the radio. And that says And that's pretty that's not unusual Right? We don't have good price discovery about a brand new stock Right? The stock market is a big, very diverse group of people trying to figure out ively what something is worth And everybody is kind of feeling everybody out, everybody else out when a stock is new. So it's normal that a new stock should be volatile. This stock came to life at a moment of such incredible hype That it makes sense that the figuring out what the thing is really worth process should be even harder and more complicated. Yeah, like the academic work on IPOs on those moments when companies list for the first time is that pretty normal and they can often be in the range of about eighteen percent, which is what we saw in the case of SpaceX. and they don'tormally they don't always last. O conclusion from all the kind of data if you go back decades and decades is that IPOs kind of suck as investments in the first few years. like there's a lot of dispersion here, so it's a bit difficult to draw general conclusions, but Newly listed companies just don't always do that well in their first one, two, three years even. They can trail behind the rest of the market. So It's easy to sort of point fingers and say, you know, Lol, isn't it funny that Elon Musk isn't a trillionaire anymore? And don't get me wrong, very happy to do that But I don't think we can read that much into the fact that the share price has come down after the pop. No, and it makes sense that IPOs not be particularly good stocks in their first six months or a year or whatever because of the point in the life cycle that IPOs tend to be at Th theseese are kind of nascent companies still building their business, still in the investment phase of their business rather than the They're sowing rather than reaping, I guess is what I'm saying. And companies in that phase are riskier So there's a kind of lottery ticket aspect of an IPO where Maybe you get a big winner, a really big winner U You really might not. and on average, you don't probably get a very good. You probably don't get a very good product No, I mean, the counterpoint to that is like these big monsters like SpaceX, they wait a long time before they list in public markets now. So they are more mature. But the point still stands that There's a reason why quite a lot of professional fund managers just do not touch IPOs. They're like I am very happy to sit back and wait for this thing to just kind of mature for a couple of years before I decide whether to get involved or not. If you happen to be the lucky person that gets into an IPO early and then it rockets and you know, you're one of the first investors in Amazon or Apple or something, then congrats But your chances of getting that right are pretty slim But I guess the thing about the SpaceX and then onpP was that it came at the same time as Some quite wobbly markets, you know, So like I mentioned at the top, right, the NSDAq had a really bad day. It was down about two percent. Korean stocks got absolutely taken to the woodshed And for like a day or so, there was this kind of thing where everyone was looking around going Oh, is the AI trade in some sort of here like what's going what's going on? And What do you think was going on? Well, when you talk about Korea, you are in effect talking about microchips. You're talking about silicon for all intents and purposes That is what you are speculating on when you are speculating in the Korean market So I think what you have seen is That trade the semiconductor trade, which has been by far biggest trade in the market for some months now you know, it's the data center. Silicon trade has kind of been everything in the markets And I think we arrived at a moment in the last week or two where people look at how far these stocks have run and the prices they're selling at and think, whoa, You know, now, now I'm kind of vulnerable Yes, I gather particularly in Korea, there's a lot of kind of retail investors who've come quite late to this rally and have jumped in and have borrowed money to get involved in this rally. So just means that these things get quite fragile and quite subject to some quite scary you know, downdrafts, I guess. Yeah, I was looking the other day at leveraged ETF's, which are exchange traded funds that promise you a multiple of the return on a given one So it's like the power shares NasDAQ one hundred two X ETF and these things use options to deliver that If it goes down, it goes down twice as much. If it goes up, it goes up twice as much And one now one of the largest and Definitely the fastest growing. of these things is a leveraged ETF on the Korean market They ready. And there is a very fast growing semiconductor leveraged one, etcera, et cetera. So these are things that are happening. There is leverage in this market But I also think there is a wider thing going on here that is probably worth discussing. Sometime in May The leadership that we counted on from the magnificent seven stocks Re evaporated You know, so a month or so ago, up until a month or so ago, the bull market could be kind of identified with Apple alphabet Google, Amazon, Meta, Tesla. did I get them all there? Is there something missing one but I don't know it doesn't matter. Microsoft, did I say them any case those seven stocks And those seven stocks had led the market and in a way have led the market for five years somethingomething like that That has stopped Th those stocks are actually not doing well And the market instead is being led by these semiconductor guys. And that is a shift in leadership that happened, you know, a month, two months ago. And you know, since I looked up, what's What are the best performing stocks sense, middle of May, the fourteenth of May, and you just read down The S and P five hundred leading stocks, Micron ied materials. Dell Uh, you know, and it just goes in and like, you know teen of the top fifteen stocks are microchip stocks or more broadly data center stocks. So the Mag seven is dead and we have not come up with a suitable little nickname for this new semis thing yet. And you know what are down double digits? Here's some stocks that are down double digits Since May, Amazon alphabet Interestingly, NVidia, which is a chip company came off So that's the exception to the rule, but Let me just make I know I'm rattling on here, but let me just make one final point. This change in leadership makes total sense to me because We know the data center boom is going to be darn good for the chip companies What it means for alphabet Amazon, Microsoft, the you know, the big Mag seven s, we don't know what it's going to mean for their businesses yet. But also I think there is a degree to which Investors are a little bit nervous. They look at the decline of free cash flow among these companies and just the sheer amount of money that they're spending. and a lot of this is money that they're now borrowing from the bond markets. and it's There is just a bit of a sense of CEx boom, this boom in spending by big companies is fun and everything. just a little bit too far And I think the other kind of key ingredient in all that is that We spoke about this the other day. We had a federal Reserve meeting the other day. So the US Central bank got together and decided on interest rates and kept them steady, but did offer a hint that they are serious about pulling inflation down, which means all things equal that you get higher interest rates. Again, you and I were talking to Richie Schammer about this on the last pod that we did in New York. like thing that pops bubbles is much more expensive money and rising interest rates. And so there is just a sense that, okay compompanies are kind of running too fast and they are spending money too fast and there's a lot of leverage money and retail money in this and it all feels a bit oververe excitable. If that were to combine, still an if, but with a big rise in interest rates That's where this can go up is That is no question about it easiest to imagine nightmare scenario, right We did have the Persal consonsumptions expenditures inflation report This morning. It's very hot if you include energy up above four percent And it's still above three if you strip energy out. So I mean, I don't the way I see inflation is that we're fortunate, it's not getting worse But it is just plain old above target Right. And I think we can kind of live. I don't think inflation at this level evenven if the Fed has to do a little bit to fight it. pops a bubble, But if we get another shock or another leg up Whh, that's scary I don't think that's and I just want to emphasize, I don't think that's especially likely. I don't even I don't even know why that would happen. why inflation would get worse from here. But that's the scariest scenario. there's no question. Well, let me tell you, the saving grace here is The market has decided that the war in Iran is just over It's just we are finished Yeah. Like that whole thing is just done. you know. So as we said in the newsletter this morning, they think it's oil over. M Father's D was just the other day and you've just made a dad joke. Well done, Katie So the oil prices come right down. Yeah. So you know there's still a lot of haggling and arguing to be done between the US and Iran over the terms of this supposed deal to end the conflict Whatever, markets just moved on. the oil price is closer to seventy dollars now than anything else That whole spike that we had up to one hundred and twenty is like ancient history. And the good thing about that in terms of what it means for stocks in general and tech stocks in particular is this is pulled down Bond yields Yes. So it supported bond prices and pulled down the yields on government bonds from the US, UK, you know everywhere helped And that helps because when yields are really high, then investors think, Hmm, do I want to bother buying SpaceX or should I just take like five percent on this US government security that's not going to default. You know maybe this would be the easier thing to do. So It helps that yields have been tracking lower over the past few days. I have two comments to make. Comment number one is that the lower yields at the long end of the rate curve, longer term bonds being down I think Kevin Worsh is ish performance actually helps there. L he He's the new fed chair, right? He's the new fed chair, the new guy and he came in at this meeting and he pounded his chest a little bit and said, you know, we're going to get price stability no matter what. And that I mean, that might bring term interest rates up a little bit because people think the Fed is more likely to tighten than to stand still where it is. But in the long term bond If you think you have a credible Fed who's really serious fighting inflation, that can bring the long end down a little bit So and and if he does that That's of course, exactly what Kevin Warsh wants is to scare the long end of the rate curve down. I'm not sure That's the real Kevin Warsh We're going to find out. He's had one meeting. He's done one performance There are several other performances to come this year. You know, when the real Kevin Warsh stands up, we'll know something. So what we're saying here, Rob, basically is that an aggressive rise in interest rates are for tech stocks. The Wash case scenario Is that what we're saying? It's certainly not I feel like we've exceeded our quota of Dad Jsest today. so we are going to be back in just one second with Long short Kidoke, it is time for long, short that part of the show where we go long a thing we love or short a thing we hate. Rob, what you saying? So Katie, I have a challenge for you. You will have noticed that the two assets which we like the least and are most often wrong about Cin and gold. We've been falling together for the last month or so They've both had quite bad months. And the challenge is in the next month. Which of those two assets is going to do worse It's a slam dunk for me. it's Bitcoin. I mean, based on nothing but a hunch, I think that yes, I don't like Bitcoin very much, and I think it's going to do worse Okay, I will take the other side Not because I like coin because I think the shadowy Kabal of frauds, villains and weirdos who support this asset. are going to do what they can this run downwards So you've got gold I've got Bitcoin, see you in a month. Okay, Rob is a Bitcoin bro now, boys and girls. You heard it here first. He's going to put laser eyes and his little avatars. It's exciting times for the unhedged podcast. Let us know what you think, which is the worst assets gold or bititcoin unhedged at ft dot comot In the meantime, we'll be back in your ears on Tuesday. so listen up then Unhedged is produced by Jake Harper and edited by Brian Erstatt. Our executive producer is Jacob Goldstein. We had additional help from Topra Forehead Special thanks to Laura Clark, Gretta Chn, Natalie Sadler FT premium subscribers can get the unhedged newsletter for free and a thirty day free trial is available to everyone else. Just go to ft d. com slash unhedged offer I'm Katie Martin, thanks for listening.