Structural Stimulus Has Replaced the TACO Trade

Transcript

who what do you think is going to give first? And I'd love for you to just also explain sort of this bliss trade and and whether or not that's going to be a determining factor. Well, the bliss trade for those who aren't familiar with it was stems from a really interesting opinion piece published in the financial times a couple of weeks ago by by as you said Steve by a former IMF chief economist and deputy managing director Gita Gobinath who's now a Harvard professor and it was again part of a this has to be read through the lens of someone that comes from the IMF but she makes the excellent point that the market assumption that there will be a a put if you will or a safety net is not to do with the taco trade anymore. That

that's part of it for sure and Trump certainly has given the market many things to bank the to hang the taco expectation on many things we want him to walk back. But her point is that this goes beyond that. The taco trade is temporary. it it's limited to Trump's term, but the bliss trade, which is the acronym for big, large, and lasting stimulus or support, is structural. Her point is that there is no administration now that will not spend to get people out of difficulties, whatever those difficulties may be. Be it a market crash, be it a banking crisis, be it high energy prices. We saw this in 2020.

We saw this in 2022 with the energy prices. We're seeing this again, especially here in Europe anyway with the Homus crisis. Governments are not going to be voted out of office because they are not spending to save people from whatever difficulty they may be in. And this is irrelevant. It's irrelevant which political party you're talking about is actually also relevant whether you're talking about a democracy or not because we've seen coups across the especially across the middle at the equator economies. Now, this is relevant for the outlook for currency debasement. Obviously, where is the funding for the stimulus going to come from? Well, it's going to come from somewhere. They're going to simply make it happen through one of the many tools in their box. And longer term, this does add moral hazard,

if that's the right term. It does add froth to the speculative side of the market. is one of the reasons I think why we're just seeing so much risk on appetite in this very uncertain environment as you pointed out earlier. But it's structural. The put is now part of the system that of course will add a whole different layer of fragility. >> Yeah. And I'm I'm really curious to see like when or if something might come to a head because every time anyone who's been trying to kind of uh predict the doom loop ends up missing out because the market always recovers often with like a like a K or a V or or or or or some type of of letter that that shows divergent returns. And and one area I'm really focused on I'd like to ask you about before we kind of move on to the

next segment is like what do you think all this means in particular for for the AI stocks? Uh I mean opening eye I think is expected to file for a confidential IPO perhaps as soon as tomorrow. Uh Anthropic is on the hook likely later this year. I mean these companies need to raise hundreds of billions of dollars in funding to build out all this infrastructure by by chips from the likes of Nvidia. Uh actually I think Anthropic it was reported they they made an operating profit this quarter which is pretty impressive. But OpenAI loses a ton of money and they're they're relying on all this debt to to build out for the future. But they're also the ones like this whole segment. This is the one these are this is the segment that's

driving stock markets higher. Like how do you think about that particular segment and its broader implications for the market? >> I follow the reports that insist that the earnings multiples the PE 4B are actually very reasonable right now. And what drives me mad is that everyone's assuming that the earnings are going to be met or exceeded. And while that has historically been the case, we can't assume that will always continue because again, what is built? What is the basis of these earnings expectations? In many cases, it's company guidance. In many cases, it's just simply extrapolating demand. We're assuming a ton of demand for chips and for AI infrastructure that may or may not appear. It again, it may.

I I'm not going to be claim to be an AI expert here, but we've seen before, Steve, many times that technological innovations have their hype period in which the expectations are out of proportion to the reality and they do eventually suffer a correction. Maybe this is going to be the very first exception in history possibly, but it's it's rash to bet everything you have on that and right now everything the market has is betting on that and that's an underlying fragility which I think is being very overlooked. You mentioned earlier Nvidia's earnings were good and the and the stock sold off. This has actually happened every single time Nvidia reports for the past I think eight quarters and this every single time everyone's like okay this is over.

Yeah, the whole AI play is over. But no, what it is is a sell the news event. This has become fairly normal. It it's rel it's related to expectations. Expectations before the report run up after the report. Okay, they were good. We're done. We're out. U and people sell. So, I wouldn't read anything into it yet, but you're so right. Eventually, you think something has to tip. And I will just throw out there that historically market tops have been tipped by very large IPOs. >> Yeah, that is a good point to pay attention to. And Nvidia, as you as you mentioned, is a really kind of funny case because I I think I read that it had beaten analyst expectations I think either 14 or 15 quarters in a row. But analyst expectations are I guess

theoretically should be rooted in reality whereas that the the Twitter hype machine can can just speculate wildly and um and those are the ones that are the momentum traders. So it is kind of funny. Uh, I found it interesting that Jensen Tuang, Nvidia CEO and the company, they pointed out how there's so much concern about like a degree of incestuousness between all these different AI companies, the the the chip manufacturers, the consumers, etc. that I think like half of I think they tried to point out that like half of their clients are not like the big hyperscalers to maybe assuage concerns about too much concentration in a few big companies. But it is really interesting to see how that's going to play out. Yeah, the con the concentration of clients in these

companies and these clients are no doubt also themselves dealing with higher input costs and increasing cost of debt. Are we certain the health of these clients is going to continue to be strong enough to maintain the earnings forecast that these hyperscalers and the chip manufacturers are selling to? >> Okay, great. All right, >> but I've been wrong. I've been wrong before on I've been expecting a market correction for a while now and I've been wrong on the timing. So, to be taken with a big grain of salt. If you've been loving Bits and Bibs, don't forget that the show is transitioning to its own feeds on X, YouTube, and your favorite podcast player. If you're not already subscribed to Bits and Bips on its own channels, go there now and hit that subscribe button so you can keep up with our twice weekly live streams and macro

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