We need to have a big national campaign to get people to stop spending money and to put their money into AI bonds. War bonds. Right? Yeah. I mean, yeah, with people already putting some weight on doom with not liking the noise from data centers in their environment. I think what America needs right now is to be told to spend less so that the AI boom can more fully run its course. I'm not running as a third party candidate, and I'm also probably not allowed, but that would definitely be my platform. I would classify that under financial repression.
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal and I'm Tracy Alloway. Tracy, it dawned on me the other day, the market's kind of crazy right now. No, no, it's like seriously, we're sort of used to all this stuff and everything. And then one day, one moment I realized, oh, markets are really crazy these days.
I would say weird. I find them very weird at the moment, with the biggest tension being what's happening in the bond market and the stock market. By the way, I have a huge caveat for this episode, which is we are recording this on September 9th. I've been away for the past week on vacation. I probably should have put up my normal going-on-vacation warning, so something is about to blow up. Turns out it was the bond market. Yeah.
You know, actually, it's funny you say that because the way I think about the market right now is so much is happening and nothing is happening in the specific sense that it's like, okay, we're in the middle of a war with Iran. And so we're just like, oh, it's just this headline. Trump says negotiations are going good. And then it's like people move on. There's some crazy model leap, etc., by one of the AI companies, huge news, but also so regularly cadenced now that even that almost becomes noise. Obviously the movements in the bond market, I guess, that is probably the one thing that does feel novel about maybe just the last few weeks. But even there a lot of that angst has been going around a long time. So it's like there's so much of everything. There's no one thing that just, you know.
Like yesterday, September 28, it was announced that David Zervos was going from Jeffrey. I saw that. Time Warner in Connecticut with no electricity. And even I saw that ten years ago, if that is announced, that would be like a really big thing. People talk about people. It is who all this stuff. And it barely broke through. But there would have been a time where that would have been the biggest sort of market-related or Wall Street-related story of the day. It feels like stock markets are sort of overwhelmed and or inured to everything happening, except trying to make money. You know, that is the one impulse that remains that never gets old. No. And that's arguably the point of the whole thing. Anyway.
I really think we need like a sort of big rambling state of the markets episode. And we really do have the perfect guest, someone who used to be our colleague here at Bloomberg. We are, of course, speaking to Luke Kawa, head of markets at Sherwood News. So, Luke, thank you for coming back on Odd Lots.
Oh, great to be here. Thanks for having me.
Oh, you know, I will get me started on something new, actually, because there's so much going on suddenly lately. The market's having a great year. S&P up over 12% or about that as of the time I'm talking. What's up with, I see a lot of talk about breadth. This is sudden everyone. So about market breadth these days. What's that all about?
Yeah, I think why they're talking about breadth is because it's absolutely god awful. You know, there's been a lot of different stats to show, you can say, you know, the average stat is X, Y, Z below its high. Well, the S&P 500 is, you know, as of writing, about 1.5% off of its high. The one I came up with that bothered a lot of people the other day was, coming into this week, the S&P 500 was, you know, 0.5% off a record high. And just 51.2% of stocks were above their 200-day. Last time we had, you know, that proximity to a high with that few stocks above the 200-day was literally the day after the dot-com bubble peak. So, you know, that gets a lot of people mad. But then you have to point out, okay, wait. Breadth was also that bad in 1998. Market ripped for another two years after that. So it really is a case of, and I think to unify a lot of what you were talking about in the intro, is the market inured to higher rates? You know, a lot of the market isn't. The S&P 500 equal weight certainly isn't. The Russell 2000 certainly isn't. However, basically to me, there seems to be just this big bet that the AI impulse will continue to eat and swallow the world. Until who knows what puts a stop to it, whether that's kind of the credit conditions, the capacity to land, whether that's regulation. But right now, the pricing to me just looks like more and more betting on a singular factor to be able to drive growth. Like, think about it. When's the last time that there seemed to be more confidence in European industrials than the U.S. consumer during a period of strong growth? I cannot ever remember that happening outside of maybe like Euro boom. What was it, 2017 for a couple months?
I mean, it is true that in higher rates, rates are a blunt tool for the Fed. Right. And they're going to hurt something like a home builder a lot more than an AI company that is issuing like mega deals into the bond market, I would imagine. Is it the case that, you know, maybe the bet on AI makes sense in that environment? Maybe the AI companies are the ones that are less rate sensitive than a lot of other businesses out there.
I think right now that's like a perfect encapsulation of conventional wisdom. To me, it's also, you know, very interesting that as we've had this latest explosion higher in yields and we've talked about like, oh, it's the AI impulse this, that, it's also come at a time where hyperscaler credit spreads, none of them are at their wides of the year at the long end. Yeah. It comes after a September of, you can tell me how much U.S. IG and USD issuance there was by hyperscalers. I believe that's a zero for September. So it's, yeah. So very, very interesting. You know, they got their business done to help because they got a little bit spooked with the CapEx response from the market. So that to me is something that like, hey, a lot of this in the bond market, both a response to stronger growth and, you know, the potential for issuance. A lot of this is like the classic Mark Dow belated overreaction to something we've been thinking and talking about for a long while. And then I think the, you know, the question is how long can the cyclicals that are doing well at, you know, operationally at least, how long can they be plumbing 52-week lows, a lot of these. And is it just because AI is doing so well? And I think that's the kind of important part to be making the important point, to be making that so much of this market has been dispersion. Helene Meiser calls it the either-or market. I've called it, you know, the Elaine George market. Jerry's friends. Only one can do well at the right time. But that's been a really, really defining trademark of 2026. At first it was, you know, semi software. I think more recently it's been like this idea of inertia stocks versus the year of the general AI beneficiaries. And I think that to me is a bit of an important twist. It's this idea that like it's not just one layer of AI that benefits. It's, you know, multiple layers through software, through the hardware providers that get to benefit from an impulse like muse, like tic commerce, and then others that get hit. So that, to me, is at least a bit of a nuance in how the market treats AI and the impulse. But for me, it's just really a sign of the mechanics that have continued to dominate and just continuing to play out.
It's interesting. I looked up a chart of McDonald's and that was doing really well up until, and then it peaked on March 3rd, and then it's been straight down. So it's like basically when the Iran war started, that was, wait, was that when the CEO ate? Oh, reluctantly I forgot about it. What, it's just like any consumer name you can think of right now, the stock is awful. Nike is the classic example that was a has. Crazy. There was a $180 stock in 2021. It's 35 now. I mean, there's just like, I mean, granted, in any huge run-up in 2021 too, but like any, like just sort of like regular business that is, they're just doing terrible.
It's crazy. Like, and when you look at Nike, one of the things that stands out, and I think you could apply this more recently to a Walmart, possibly to a Costco. And I'll tie this back to software, oddly enough. But these were relatively expensive stocks that didn't have exceptional top-line growth in a world where nominal growth has been accelerating. That's been what the bond market moves about. That's what stock market resilience is about. Like, why do you, well, why do you want to own the stocks? Why do you want to own the stocks that aren't growing that fast, that are expensive when everything else is growing very fast? So I think for what happened for a while is that a lot of these consumer names and, you know, Walmart and Costco in particular, they were stand-ins for the software stocks that were, you know, bound to be disrupted by AI. Because if you think about it, you know, if you're going to spend a certain amount at Walmart every month, that looks to me like an IRR kind of revenue profile that you've got there. A Costco is literally a subscription kind of membership. Yeah. In a lot of ways. So I think that was a stand-in for disruption fears. And as software has come back, you've seen kind of multiples there deflate. So I think it is, you know, we got to find someone to punish. Maybe it's just because everyone's very invested. But when AI is doing well, you got to find someone to punish.
What about just in terms of pure earnings expectations, what we're seeing here? Because this is the other thing that in theory should be happening, which is you hear about productivity gains from AI, you should be seeing people get excited about the possibility of cutting labor costs. I don't know, coming up with new products with AI or whatever. And in theory, you should be seeing that go into the earnings estimates for future years. Are we seeing any of that?
I mean, I would say in theory and in practice, what we continue to see more of is the AI hardware impulse as just the straight fuel for earnings. Goldman had a good note released a couple of days ago where they said, you know, about half of earnings growth this year is expected to be just driven by hyperscaler CapEx. So pretty, pretty big. Impossible. We're talking about how strong growth has been. Earnings growth has been this year. And you can just link it and distill it just down to that one factor. And then also if you look at, okay, they also ran in a separate note, what do we think explains multiples across Russell 1000 stocks. And the answer they came up with was more so than usual, it's three years forward sales estimates right now. The one year forward sales estimates. And those revisions have almost no explanatory power. So, you know, sales growth right now for the near future, it's priced in. We all know it. We see the backlogs, all this, all that. The real bet on what you're willing to pay for is the kind of three years out thing. And when I did a scan of stocks that, you know, were just both expensive and had, you know, so market's willing to reward them and fairly high sales estimates. You know, your Bloom Energy's, out of the optics stocks. Those are the ones that pop out there. So that's been kind of the way to earn a higher valuation right now in this market. It's betting on the continuation of the hardware trade.
Yeah, this is something interesting. Both Tracy and I love the hair charts, the Medusa charts of all the storage lawnmowers, where you see historical expectations of a trajectory. And one of the ones you're starting to see more is just the CapEx one. And so you look at like what, you know, what sell side had estimated hyperscaler CapEx should be in 2023 and over the next three years, and then that keeps getting revised higher. And it seems like it's continuous. And so I'm curious, like there is some number exists. Right. So maybe I don't know what it is. They'll say like, okay, they're expected to spend 1.2 trillion over X period of time and that's up. But like how much of the trade is essentially a trade that the estimates will keep getting revised higher for spending?
I gotta think a solid chunk right now. And there's at some point I think there has to be this handoff from that to a kind of more broader set. And when Nvidia, and it's either a quarter ago or one before that, they actually kind of rejiggered how they're organizing their earnings to account for the fact that, you know, we expect sovereign AI and robotics and physical AI on-prem stuff. We expect that to be contributing more and more to our sales going forward. It's going to be real small now to start, but we expect that to be a bigger driver than hyperscalers. And, you know, potentially NIO clouds. But, you know, they're doing all they can to support that going forward. So I think right now that is a huge, huge chunk of the trade. The bulk of the trade. But the promise of AI is that it has to be more applicable than that. Right. To your point, it has to have the productivity booms. It has to have the labor saving. If it doesn't, then, you know, what are we here for is kind of I think the question at some point.
Yeah. Did you see the chart? I think it was in Adam Tooze's newsletter this morning. I mentioned that the CapEx expenditure on AI is now like the biggest. Oh, yeah. Yeah. The great pay for all time. Yeah. I saw the economist Hannah Lustig. I'm not sure if I'm pronouncing his name right. He's saying that this is a, I mean, this is like that to justify all the spending. Yeah. They estimate like a handful of companies will have to get revenue that's like 9% of GDP. Yeah. In order to justify it, which is just like unbelievable. It's ambitious, ambitious, I'll put it that way. So I promised myself I wasn't going to talk exclusively fixed income in this conversation. But we can't have Luke without, you know, more about fixed income, bond yields rising. So these are the headlines that I saw when I was on vacation last week. You know, the ten-year going to above 5%, 30-year rising as well. What's your story for? I guess I should divide it up. Global bond yields rising and then U.S. Treasury yields rising specifically. Predominantly I think it's the same story for both are the same. Like if you had to do a principal component analysis or something, I think what would stick out across the board is it's the global growth impulse, it's activity. It's both in the U.S. and globally. I think we see, you know, the industrial side of every economy is doing incredibly well and expected to do so. And I think something you wrote a while ago kind of fits into this about, you know, that which can be repurposed for AI will be with reference to forward. Yeah, I believe that. You know, it seems as though the impulse is just getting more widely shared. If it's, you know, you have an impulse this big, it's bound to lift a lot of boats. And I would say that's kind of what's happening throughout the global economy. That is far and away, I would say, the one thing to think of if you had to, if you just had an elevator pitch with someone, why our bond yields are high because growth is really strong. That's putting inflation up. And central banks are expected to respond to that. You know, zooming out. But we haven't had a huge move in like break evens in the U.S., for instance. Yeah. But I think that somewhat speaks to the idea that central banks are going to be, you know, quote unquote credible in keeping a lid on inflation over time. You can believe that or not, because like, if you've been a hold the maturity buyer of five-year U.S. treasuries from at any point in 2011 to 2021, outside of like a little before the shale bust, if you got in there, you have negative real returns through that entire period.
I'm actually very curious. I find this the stability of break evens to be very surprising, because usually what people say is like, well, yeah, naturally, people think the Fed is going to take its dual mandate seriously. And okay, we're going to, they're going to have to raise rates to roughly and think, and therefore inflation will be a little over 2%. Are you surprised that after years and years of the Fed missing its inflation target, there hasn't been more like, no, we do not think that the Fed will be able to, we do not have the confidence that the Fed will be able to maintain stable inflation in the years ahead, or why isn't it manifesting on their chart?
I would say in a word, yes. I'm genuinely surprised that I find this show surprising. I think it is an odd dynamic. The best explanation I have for it is just thinking back to, you know, when I'd be in meetings, we were discussing asset allocation, especially during 2022 at UBS in 2023, high inflation, high inflation environment. Basically bonds become the residual at a certain point. Like you buy bonds when you're worried about growth and you don't think there's going to be that much inflation. If you think growth is fine and it's inflationary, well, you know, it's, you know, cash or short term and a lot of stocks and or, you know, stocks, commodities, a little bit of cash. So it's like bonds are kind of the thing you make the final decision on. So I would say the fact that a lot of this is driven by real yields might come back to a, I think of like, how do we get bonds to be more attractive relative to stocks? And a lot of people will do the, you know, your earnings yield less the plain vanilla yield on bonds. You should probably be doing it versus the real yield. Stocks are, you know, stock earnings more of a real stream of assets. So I think in order to get bonds to be a more competitive asset with stocks, you do need to see reals rising. And that a lot of the move is effectively saying like, hey, I can't, I can't justify buying a, you know, 2%, you know, 2%, even real return, 3% real return when this is what I think is on offer. And I, so I think you're having it come through realsies is part of that story and part of why, you know, part of the decision-making process in terms of how a cross-asset investor would be looking at bonds.
Or you go the financial repression route and just make everyone hold bonds, right? That's like, that's an actual possibility. Or we need to have a big national campaign to get people to stop spending money and to put their money into I bonds, war bonds. Right? Yeah. I mean, yeah, with people already putting some weight on doom with not liking the noise from data centers in their environment. I think what America needs right now is to be told to spend less so that the AI boom can more fully run its course. I'm not running as a third party candidate, and I'm also probably not allowed, but, you know, that would definitely be my platform. I would classify that under financial repression, but I'm sure, you know, it is a form of oppression. Yeah. Yeah. Totally. It, yeah, just make it patriotic that it's like, like we are in. No, this is actually worrisome. Worrisome dynamic to me in this sort of like thinking about the economy, which is people perceive that AI supremacy is going to be crucial for national security. Right? This is a, I believe this is a widely held view in Washington. It's cetera. If we actually then, like, took that idea seriously, like, we would be saying like, yeah, we want to depress the non-AI parts of the economy to free up real resources for the build out, etc. No one, clearly no one can say this or like articulate this or say we are going to tax consumption of this, we're going to tax consumption of boats, anything that could be stripped for its parts to be put into a data center, etc. But if it is a matter of like existential national security, that would be the way we would be doing policy, right? Almost certainly. And then you have to go like with, man, if I'm being told I can't, I still can't buy a house because of the AI, that's, that's going to bother the hell out of me. So I think there is. And it's not like, it is not like the nuclear, the nuclear race where once a country has achieved a bomb, it is then in the club of nuclear powers. There's like, it's never ending because it's like there's no like reason to presume. It's like, oh, we got the capabilities here. And when I, when I hear that, what I immediately think of is, damn, we don't know how easy we had it. Speaking as a policymaker, back in the post-GFC era, there were no like, the trade-offs exist. No, no, trade-offs did not exist for an entire cycle. We still probably didn't do it optimally, but, you know, pretty, pretty darn close. And now I'm, you know, I grew up hearing about how central banks, just by virtue of saying inflation was going to be 2%, that was one of the important factors that would help it be 2% over time. I think now we're learning that, you know, that's junk, that completely junk that, you know, you got to prove it over time or else, you know, you will be in a situation we are right now where, you know, people really apparently don't like the old bonds.
Joe described this as a crazy market. I described it as a weird market. Can you choose your one word for describing the market? And then, you know, you're over at Robinhood now. I'm sure you see some interesting retail investment trends and color and maybe a little bit of flow. Like, what are you seeing at the moment?
Yeah. So if I had to summarize cross-asset, how I see it, like last era was Tina, you know, and this is no alternative. Yes. There is no alternative. This is too fast to fade both prices and earnings. Just moving. That's good. I like the fast to fade. And speed is something that I think has completely defined 2026. If you look at, you know, the monthly change between semis and software, those have had some of its like its most violent moves in either direction this year alone. You know, I remember when silver was going crazy with that was, that was this year. Like, oh, yeah. Yeah. Absolutely nuts moves all over the place. And, you know, to, to make this, and I think we were being told AI compresses economic time. And I think that was both because, you know, the power of the technology, the need to be able to look forward and see what has disrupted. And now because of agents who, you know, can work when we're asleep. So this idea of a compression of time and speed manifesting in the markets is really, really what sticks out to me. And in terms of the, the retail side, the trading I've seen. So I can describe net single stock purchases at Robinhood. So the absolute peak for that, the rolling 21-day peak happened right about at the, in late June, let's call it. So, you know, around Micron's earnings then that was the, the overall peak. There was, you know, one before that in early November 2025, which coincided roughly with a really big spec asset peak, in my view, in October 2025. That's still, you know, in some senses, we haven't fully recovered. So I do a spec, a spec asset like a lot of things like, you know, Palantir, Bitcoin, quantum stocks, so many of these things. Yes. And even call option volumes in total, those peaked for a while and rolled over. But that was a huge spec top that, you know, we're still kind of clawing our way back from in some senses. So there's that. And more recently, what we've seen is supposed to be traditionally a slow month, September for retail. It's really rebounded quite, quite strongly. September. Last numbers I have are about 89% of the peak that we saw in, in June. We're back to. So it's been a really strong month for buying because I went on vacation and spent a lot of money. And it's like a lot of it's the names you would suspect. It's, you know, your Microns, your, your SpaceX's, those lead it. But, you know, every day when I look at this, there's a name in the top 25. I consider myself someone who knows a lot of tickers. There is a name that I do not recognize and have to look up very often. You know, it's fun. It's, you know, people are, it's a sign of how people look for volatility. People look to get rich quick. Look at options trading. Stock market is a place where we go to express our views about the long-term earnings power of corporate America, and we do it with options with four days or less to expiry. Like that's, that's the story of the world we live in now.
I like this, the October 2025 speculative assets boom does not get talked about that much, but it's fun. It's a good chart. Like if you just pull up Bitcoin and Palantir, how close their peaks were together around October. They both recently sort of hit a low in June. I'm sorry, so I was like, I don't know which, but I love, like actually I love the framing of speed because it seems very relevant to even how I introduced this. And one of the things that like the AI singularity type people talk about, Kurzweil talked about, etc., is this notion of like, okay, if you measure time by how many, you know, how long it takes for the world, the Earth to revolve around the sun, that's like stable. If you measure time by how long does it take for there to be a headline-worthy event, which is a different, legitimately different way to measure time. This is like extraordinary because, and it goes to the intro, which is just the pace of headline-worthy events is just extraordinary. And then you see it manifest, therefore then in the speed of the movements of the whatever underlying asset you're trading.
Yeah, it's blues and blues should have been like all across my Twitter feed yesterday, and it probably got drowned out within, you know, a couple of minutes. That's for the uninitiated. That's, you know, David. Yeah. There goes all the right old motto there back, back in the day.
Where is it headlines, though? Or is there also an element of market structure in here? Because the other thing that's happened is we have a lot more shops that are out there that seem to be affecting the market and causing, you know, sharp swings. We have a lot more products, we have a lot more zero-day call options, things like that. And this has been an ongoing trend in the market for a while, where we see the mean reversals happening really, really fast now, much faster than they used to.
I certainly think both the higher participation of retail, the increased, you know, AUM, if you, if you want to call it that in, in the pie chart models with, with tighter, with tighter stops, even a gigantic trading, which, you know, from what I can see so far seems to be a little more momo-driven the most in terms of the, you know, the rules people will put in to do this. Yeah, I think all of that in your overlay, the dispersion trade on top of that, I think all of that does contribute, you know, to an environment where you do get a lot more single-stock volatility and a lot less at the index level. And, you know, that means even the markets are doing absolutely nothing. It's the classic, you know, duck with its feet underwater going crazy. We always have something to talk about even when the stock market is completely aimless for months.
