A very warm welcome to the Risk Reversal podcast. That's the sexy man you see, you know who he is. That's Danny Moses, the great Danny Moses. Of course, The Big Short fame, but so many other things. Hello, Danny.
Hello, Guy. Good to see you. Happy summer. Happy middle of summer.
That is so good. You used a phrase before we were talking about the horse races. You used a term, but the Italian term.
Intermezzo. He said, 'What's going on?' And I go, 'This is like the intermezzo. This is before the big Saratoga races, then the Breeders' Cup and all that. This is kind of like the three-year-olds are maturing, you know. This is an interesting time.' And the horse sales are coming up, Guy. And I'm sure you're buying one this year.
Yeah, well, you know something? That is one of my goals in life, a goal that has not been achieved. And people are probably saying, 'I wish Guy would mature a little bit.' But it's probably not going to happen at 62 years old. But let's take a look at sort of some of the things that transpired this week. We're taping this on a Friday, and what we think is going to happen in the ensuing week. We obviously have some earnings, we have a Fed meeting. So, let's take a look back. I will sort of throw in my two cents and say moving yields in a word is troubling, Danny Moses.
Yeah, the yields certainly were kind of back to where we were about a year and a half ago, maybe even longer. Yeah, about a year and a half ago. And you're at 4.7%. I know Carter Worth has been talking about kind of 4.62 was resistance. But Guy, obviously it's not just the yields here, it's globally. And you look at Japan, and they're doing everything they can to hold their 10-year yields down, and their currency keeps weakening. I don't mean to front-run the stuff we're going to talk about here, but no, mortgage rates are going higher. Everything's getting a little bit more expensive again. And I know we're going to talk about kind of the Fed next week. They're certainly in a pickle. But I think if people believe that Trump is going to stay quiet on the Fed and leave the war chill alone, I think we're going to see some activity next week.
I agree with that. And listen, we're not going to jump anything. Let's talk about what's going on in Japan because, you know, I've brought this up. I know when you and I were podcasting together more frequently, this was something that was concerning us both, but what's amazing is, you know, we've been talking about this for the better part of a couple of years. All of our concerns have been warranted through the lens of what's going on in Japan, but for some reason, it has not made its way into our equity market. I will say, you know, their currency continues to weaken. I think you're talking about a yen the weakest it's been in 40 years. You just mentioned the bond market. That is a relationship problem, as Elizabeth Thomas says, a deteriorating bond market and a deteriorating currency, and they're going to have to sort of pick one, and in picking one, it's going to screw up the other. So, I don't know if there's an elegant way out of this thing.
So, there is a relationship with the largest foreign holder of US Treasuries. They have been selling. Oil for them is really the stress point. They import it all. And so, when you have a weakening currency with oil going higher, everything becomes more expensive and inflation, careful what you wish for. For decades they were trying to get inflation. Well, now they have it, and now they have an issue. So, we have the Fed next week and the BOJ is next week as well at the end of the week, and so it should be quite a week. And let's not kid ourselves. Scott Bessent is all over this in the sense of what he needs to do, talk to Japan, and figure it out. He can't afford to lose a buyer of our Treasuries, and he can't afford to have this carry trade potentially unwind on him. And so, we're back to those kind of levels, Guy, where everything's at its limit in terms of how much this market can take. Certainly where the S&P 500 is, right? Certainly where the economy is, and all those affordability issues, which many are just self-inflicted, to be honest with you. And so, we're kind of there, Guy. We're hitting the stress point.
You know, I'm glad you brought up Treasury Secretary Bessent because he definitely knows. Now, I don't know if other people are fully aware of it, but I know that he knows about it and I'm sure that behind the scenes there are conversations going on about, you know, when do we have some sort of concerted effort to sort of stop these things? The problem, of course, is, in my opinion, as crude oil's been ticking higher, they can't really push against that because, as you know, a rising crude oil price for Japan specifically is very problematic.
That's right. And so, we'll see what their options are, what they can do. Obviously, deficit keeps growing with financing the war among other things, and God forbid the economy were to start slowing and tax receipts were to, you know, start coming in. But these are all issues I think that will rear their head again, maybe post-Labor Day. I mean, there's talk of another government shutdown potentially. All this stuff's going to come into the midterms. So, there's no rest for the weary here, Guy. And speaking of intermezzos, you know, we're in this volatility phase. We have seen many Augusts in the last several years that have been the most volatile month of the year, and I think this one will be no exception.
Well, I'm glad you mentioned that because it was around this time, you know, late July in 2024. It was a Thursday morning. I think it was a CPI print that came out at 8:30 a.m. on the East Coast, as it typically does. Dollar-yen at the time was trading 161 or right around 161. The CPI print was soft, and in about a 5-minute period of time, dollar-yen traded down to 157, which for you currency folks out there, you will know that that is a significant move. I mention that because by early August, I think it was August 5th, we saw our equity market cascade lower and the volatility index spike higher on the back of this yen carry unwind trade. Now, things are a lot different now. In some regards, things are sort of worse because now they have a bond market problem, but to your point, this is not unprecedented in August.
That and the reason that is, is because normally earnings, you know, start to go to the kind of the back half of earnings season. The big companies have mostly reported by then. I know we're going to talk about that, kind of what we've seen and what lies ahead. And this market has been able to ignore a lot of the macro because of how strong the earnings growth has been. But now it appears this earnings growth is going to come at a cost potentially in the form of free cash flow for some of these big companies like Tesla that has CapEx needs, like Google that has CapEx needs and all these hyperscalers. And so we're kind of in this weird period where you can't justify kind of the valuation any longer or depend on them. So what do people do? They pull their head out of the sand so to speak from earnings and look around and it's not a rosy picture in terms of what the macro looks like. So I think that's what you see sometimes is a shift back towards the macro. So we're in a precarious time here.
Who in The Big Short, obviously you did not have a speaking role in the movie.
I did have a walk-on speaking part. It got cut. Obviously.
Yeah, I'm kidding. I loved, as I have said, I did not watch that movie for a long time because I knew how upset I would be and I subsequently did watch it and I was right. I was extraordinarily upset. But obviously Steve Eisman was a pretty big character in the book and the movie and what was going on at the time. Now Steve has turned into bullish Steve, happy Steve, thin Steve, like all things that I don't think any of us ever thought would happen. But recently, and you probably know this, you know, he's voiced some concerns around exactly what you're talking about. This capital intensive sector and you just mentioned free cash flow. I know that's something that you talk about and you look at in your entire career. It's not something that comes up a lot in sort of business media, but it's making its way into the vernacular. And now people are laser focused on it. And when you go from huge amounts of free cash flow, they're just sort of spewing out free cash flow to negative in a quarter or two, that is something that I think is taking the market a little off guard.
I think people know that some of these well-financed companies like Google can kind of turn off the spigot whenever they want potentially, and I think the fear is that you're spending all this money, and here comes an open-source thing coming out of China potentially, right, that may make all the spending look dumb.
Yeah, superfluous, great word, Guy.
And so I think what's really interesting about what happened yesterday in the market. So as we sit here, obviously we're recording this on a Friday, the aftermath of the relief in the semiconductor world that, oh, thank goodness these companies are going to keep spending so I can, you know, look at my 2027 and 2028 earnings and feel okay. You know, in the semiconductor, I guess we're kind of at the limit on valuation potentially on some of these semis. I'd be buyers. I'd flip it. I'd probably be buyers of the hyperscalers into weakness over time because they're not stupid. They'll be able to shut it off. And if it turns out that their ROIC is a little bit less than what they thought, okay, but they have to play this arms race game because you're damned if you do and you're damned if you don't. And one of the names you know that we're going to see next week is Apple, right? And Apple has found itself in this perfect spot of they don't have to spend a ton of money. They're the conduit potentially for AI. They're now the safety play. Look at what the stock has obviously done. You guys talk about it all the time. And so I think the ways to express kind of the AI trade, you're going to see a much safer ancillary way to express it going forward and not have to deal with all this noise. But you're right, when big companies, and by the way, borrowing tons of money, you know, obviously. And let's not forget while SpaceX has gone public obviously and the stock's down over 50% from its highs. You have very large private companies that are still out there, whether it's Anthropic, OpenAI, whatever might be, that's still coming. And so, I'm not saying those are marked down yet in the private markets, but what we've seen in the public markets, you have to assume. And that goes into kind of the wealth effect or what some of these funds own potentially. So, it's not just a stock market, Guy, of public stocks here that's going on, I think, from volatility. I think you're going to start to see it in the private market.
Yeah, so I love that. So, let's dissect this a little bit. And I agree with you 100%. And by the way, to your point, as poorly as SpaceX is trading, and it has traded poorly, you know, you wonder what it means for sort of the calendar going forward. A lot of these companies waiting on the sidelines to go public. And overall, what it means to market sentiment. And I think that's yet to be sort of determined, but it's obviously not good. Now, in terms of Apple, I think you bring up an extraordinarily great point. Remember, there was a period of time where Apple was being punished for not spending, for not sort of putting themselves in the middle of this whole AI thing. Apple's behind the curve, all these different things. And now here we are in late July, and it appears as though Apple's being rewarded, Danny, for sitting on the sidelines. So, my question to you is, I think you believe it to be true, but they reported earnings on Thursday. I don't know what the setup is. You know, I'm trying to figure it out. Apple's probably as expensive on valuation as it's ever been. It's probably trading close to 33 times next year's earnings, and they don't have nearly the commensurate earnings growth, in my opinion, to back that up. So, sort of thoughts on Apple into earnings given the run.
Yeah, it's almost a consumer staple at this point. I think a lot relies upon, are people going to pay a lot more for the phone going forward? Will they need the phone? The answer is probably yes, because features on that phone will allow certain things that you can do AI-related. But again, it goes back to have we reached the limit on what they're going to pay for memory chips in the phone and things that they're talking about that they're just having to absorb and they have to raise prices. So, there is an element of consumer spending to Apple here and I don't think we've seen phones be this expensive, obviously, so we'll see what the adoption's going to be. I think on the media side they're doing fine, but you're right, Guy. People are hiding in it. It's defensive in nature. We saw what happened to Walmart, right? People were hiding in Walmart because it's the opposite kind of Apple, right? It was absorbing kind of middle and high-end people coming down to it. Apple's dependent on, I think, low- and middle-income people spending up to it. So, Walmart stock reached its peak as a place to hide. We've seen it down, obviously, substantially from its highs. It's a little dangerous when you're depending on Apple, to your point. You bring up a good point trading at 33 times because it's a consumer electronics company.
Well, as Don Corleone once famously said, 'Your business is a little dangerous.' If you recall.
[music] On Wednesday, this is a pretty big day. Now, I'm going to go to Tuesday in a second. I'm going to work backwards. Mr. Softy, which obviously is Microsoft, and Facebook, which people call Meta now, I will not be that person. You throw in Arm, Qualcomm, Starbucks, and Robinhood, and you got a pretty big day. I want to focus, if it's okay, on Microsoft quickly because this is a stock now going back to the aforementioned, you know, what happens in August sort of stays in August. I think it was August of last year-ish that this stock made an all-time high, and here we are sort of at 383, floundering in earnings. I will tell you, for those that are playing our home game, the April 2025 low of sort of 355, and then subsequently again this March of about 355, man, that is critical support. But Microsoft, Danny, which I think, again, I've said this, is one of the, if it's not one of the three most important companies in the world, it's one of the five most important. And this is a stock that if it was just a Microsoft world, we'd talk about it every day. I think that now that AI and semis and storage have come to the forefront, we don't talk about it, but there's no denying that this has been problematic now for a while.
