Big Short LEGEND: Buy this sector to win the AI bull market

Well, Phil, first congratulations on the show. It's fantastic. It's an honor to be here. You're jumping right into the most volatile asset class in the world. That's great. So, let's start with gold because they're two different animals, gold and silver. I've been on the gold trade for many years since the great financial crisis, kind of, and when quantitative easing iterations one and two and so forth. And the thought then was that if you keep printing money over time, you'll have inflation. That was kind of the gold thesis for years, used as a quote, you know, inflation hedge. And I think we've gone beyond that at this point, as we've seen when we have periods of inflation coming down a little bit, gold's still working. And why is that? I think it's because just fiat currencies in general and the ability to print money in any global central bank. What is your kind of hedge against that and devaluing the currency? So the quantitative easing and the printing of money in Japan and the US and around the globe worked for a period of time to keep asset prices higher, but at some point, you know, it's going to matter. And so I think that's kind of the overriding gold thesis. The thing that's happened in the last few years in gold is that the physical demand for gold by central banks themselves, you look, just look at China, you know, how much they bought, is what really is moving the markets. And that's what's different this time. Before it was an expression of a trade, of a hedge, you know, time. Now it's actually the physical demand.

And moved to silver real quick because the same thing's happening. And I was later to the silver trade. Really didn't really focus on it till last summer. So I kind of missed the first 100%, right? What was going on. And I wasn't really keen or aware of how much the metal was being used in EVs and solar. But then the real kick was AI data centers. These huge data centers use millions and millions of ounces of gold, of silver, excuse me. And so if you're out there procuring a data center and you're literally getting concrete and wiring, you're like, 'Oh, I need silver. Okay, I'll go get it.' That to me was what tipped the scales, I think, not just for me to pay attention to, but in general in the market and the mismatch. And so silver, just from a supply-demand perspective, it's different than gold. Yes, it can be used as a hedge against currencies, but also has industrial applications. And you just can't switch off silver once you've embedded them into EVs and, you know, into solar and into AI data centers. It's not that easy just to switch. The architecture's been created. And so you could argue, well, copper, you know, you can switch to copper. Sure, you can switch, but it takes, it'll take years. And the other thing I think people misunderstand about silver is you don't really mine for silver. Silver is a byproduct of other metals. So you're mining for copper, you get silver as a byproduct. So it's not simple. So I will, I will say this before you move on to the next thing is that owning the physical on both or physical expression of it using a closed-end vehicle or a fund to me is much better and smarter than using a paper, you know, GLD, SLV, or the miners themselves, right? You can own because at least you want to share in a company of someone that has hard assets. So I think you got to be very careful how you express it. I think both trades have a long way to go. You definitely have volatility. You could certainly be primed for pullbacks in either, but there's, there's nothing in either, either of those metals that tells me that we're anywhere near the top.

Yeah, I think listen, I like to look where things are versus where they've come from, especially on a re-rating of something. You can make that argument on some of these AI stocks and it would have been wrong, right? In terms of what is the kind of macro theme, what is it, what is the TAM, so to speak, and it's really just doing the math in silver, but there's more than that, I guess. And I'm not going to give credence to all these rumors that are out there. There's banks blowing up. You know, people are positioning their hedge. I don't think you really know any bank's true kind of hedging position that they have, but there's definitely truth to the fact that you had margin requirements continuously go up at the CME. What you have to post, and it has gone through all of those normal Hunt Brother moves they tried to make, you know, to try to get this price. So there, I'm not saying it's a conspiracy or anything like that, but there certainly feels to me that the financial engineering to suppress silver won't work, and that's what I see. All the iterations of silver coming down have to do with some technical aspect of, oh, got to, you know, you have to post collateral, whatever, but it's gone through all of it. So just do the math of how much silver is above ground, how much is produced each year, and how much is in demand, and it's that simple. And if you have people that have now bought silver and demanded physical delivery, that's just, it's different. It's a different animal. So futures don't work as much as a way to express these trades as they had in the past. And so it'll be volatile for sure, but I don't think it's over by a long shot.

I believe that's actually part of it. And people have asked what would the risk be? Well, if data centers start to get canceled and all that stuff, and just any type of a sell-off in the market, we've seen what can happen to Bitcoin and crypto, just have that retail component to it. The higher the silver's gotten here, and I think the more that it's picked up some retail trading activity, if it starts to drop, it'll be volatile on the way down, just that's just the way it's kind of last in, first out. That being said, it's one of the assets that I would buy on a dip. So if the AI trade were to kind of slow down, or we had some big news that there was a, you know, failed, you know, bond offering within this, within, since raising a lot of debt or didn't work, sure, if you saw, but even then, I don't know the exact math of data center, those data centers are going to get built, the ones that are already in progress, and that alone, silver is, there's just a massive shortage of it. It's just math, you know, so.

Just math, yeah.

So again, the macro trade is certainly here, the secular trade that's here to stay. And I think it's great in terms of advancement of technology. Again, let's do the math again. Can the math, does the math work, right? Can, can you actually have that many players in it building that many data centers using that many chips? What is the end-user demand going to be? So I think there's going to be winners and losers in the entire category, just like we saw in the dot-com, right? I lived through this in '99, 2000, the circular financing, the vendor financing of Lucent, Nortel lending money to people so they could buy their products, that's not new. This rhymes, it's not the, you know, certainly not the same, but is OpenAI going to make money? Like, what, what is the endgame going to be? What are they going to charge you? What is it better than Gemini? Is it, are they going to keep up? So I think the monetization of the asset itself is still yet to be determined. Like, what is the, so we know what the uses are going to be, we know the power demand's going to be, which is a whole another issue that we can talk about, but I don't know the economics of it yet. So depending on where you sit in the AI food chain, whether just the construction and the, you know, the side that's getting the power and producing it, it's the utility side of it or the infrastructure picks and shovels part of it, okay, get that right. If it's, if it's the software companies, you know, that are in there, the hyperscalers that are in there building out, okay, they have other aspects to their business. So if AI were to slow down a little bit, they'll be okay. The stocks would drop. And so I prefer to express it in a way of like Google, Alphabet, right? Is a way kind of where it's a piece of their business. You know, they're going to be around. They're the best search engine in the world. People, data, Gemini, you know, so to answer your question, it's, it's trade. It's real. Do I think Nvidia can sustain mid-70% gross margins? No, it can't. So is that this year, next year, the year after? I don't know. But at some point it gets commoditized, the product. And you're hearing stuff out of China, you know, whether, oh, you don't need as much chip power as you thought because the software can do. I'm not, I'm the wrong guy to ask, but I would rather express it in a way that I pick up a piece of the AI trade without a direct thing. And so, you know, when you start to see memory chip companies start to move like this, you're not old enough to remember. I'm old enough to remember those are the most commoditized cyclical things in the world. Doesn't mean that they're bad companies, but, but it just catches up to production. You, you increase capacity in semiconductor land to mass-produce product. So long-winded answer of, um, do your homework and know where all the bodies are going to be. Well, not bodies are going to be buried, but where everybody kind of sits at the table. And so.

Sure. Well, it takes a lot of energy to power these data centers, that we know, and a lot of electricity now is generated by natural gas. I mean, we've switched over the last several years. It's almost half the power in the country is, is basically powered by natural gas. So when you see these moves in natural gas during this storm, and hope everyone okay out there, but, um, you see natural gas spike. So it lends itself to being a little bit exposed to power moves. We, we know the grid is stretched. We know the grid needs to be built out, right? We've seen stuff out of Washington now to say, 'All right, we don't want this to all to go to the US consumer on their power bills. How are we going to, okay, Microsoft needs to pick up some of the cost. Amazon needs to pick up, Meta needs,' and they're doing that, right? So, but it is going to be a huge demand on the, on the existing grid. And so from an energy availability perspective, they'll get it done. But it is one of the issues that can hold back kind of the acceleration or deployment totally of AI. So when you're looking at numbers in '27, '28, '29, some people are ignoring, I think, and then we take it a step further is nuclear. Who would have thought you'd have a bipartisan support for nuclear energy as a clean energy and underutilized? And so now you have, but again, that's a five, seven, ten-year build-out from, you know, beginning to, so now you have, now you're getting move, you know, these type moves in other metals like uranium, right, that are happening that are, are going to be the source of power for that. And so again, look at the overall mosaic, take a picture, but energy is crucial in this. And, um, energy stocks are a separate topic which we can get into, but I guess the irony with that, and Larry McDonald did a great job pointing this out, um, a year ago, I mean, months, several months ago, if not years, um, that when you look at the technology sector as a percentage of the S&P and you looked at the energy and the infrastructure sector below it, you can't have a single-digit percentage and a 40 to 50% percentage when the 40 to 50, you know, percent weighting is dependent on the single-digit weighting to have them succeed. And so what you, you're seeing right now, which is a healthy rotation, I think, in the market as we started the, you, the year off, has been the equal-weight S&P outperforming as you've seen some money kind of come out of tech into energy and some of these other sectors that are going to be crucial to kind of building this, building this trade out. So I probably went too far and deep and took one of your questions away, but I do think it's all related and you, you can't just look at one thing without the other.

Correct.

I think it's a, listen, I said before, back to kind of more of a macro picture. I said last year energy stocks in general and maybe the underlying price of oil, whatever you want to look at it. If you didn't believe we were going to go into a recession, then you needed to own energy stocks because the only thing that was going to force oil down below kind of 55, 57 to me would be the economy really slowing down. So take that mindset and now let's take it to the next level, uranium. If you believe that AI is going to deploy and you'll realize these forward earnings and projections that are going to happen, how are you going to power it? To what I just mentioned before, it'll be nuclear energy will be a huge component of it. You can trade uranium differently. You can trade it in the underlying miners, you know, CCJ being one of those in that chart. I probably, what I should have picked instead of uranium, right? But they're much more volatile. And so again, now people are going to start to do the math, or now they're doing how much uranium is there? Comes from three different countries. Can you really get it? Now you're seeing future contracts being locked in, right, over time because utilities need to make sure that they can get it. So I think from a risk-reward perspective from here, I think there's very little downside because nuclear is now here to stay, in my opinion. And so you're getting more, more announcements, more contracts, and again, hyperscalers are literally building, going to build these facilities, and so money is being deployed, and I think it's a great trade.

Yeah, different reasons on that, but ExxonMobil, as you know, has been a name I've been pushing. So it was around $100 and just felt like, again, the energy sector had been left for dead. The ESG stuff that went on for years obviously forced these companies to rely on their own balance sheet and not outside funding. And so, you know, I always call like a beauty pageant, so to speak. When a stock comes up for earnings, you take a look at it, or someone portfolio manager hasn't been looking at the sector for a long time. You're like, 'Hold on a second. This company has cut its debt dramatically, increased its dividend, buying back stock. No one's telling them to drill, baby, drill if they don't want to. Rig counts are at all-time lows in the go. What am I missing here?' You know, and so you saw just what a move in oil from 56 to 62 did to the sector. And again, I go back to portfolio managers. I just always like to just go to Boston, use the example, and if I'm at Fidelity or Wellington managing billions and billions of dollars, it's my job to outperform the S&P. That's what I do. And am I going to overweight tech, underweight tech? Am I going to overweight energy, underweight energy? And it doesn't take a lot to just get a market weight in energy. And historically, energy has been the median, you know, weighting in the S&P is between six and 7%. You know, it's been, it's been higher than that. It's been, we were hovering at, at 3% the end of last year. And so to me this is about risk-reward, and meanwhile you're getting cash returns on some of these companies while you're waiting. So to me it was ripe and no one was there. So again, if you told me, if you said, Danny, oil is going to sit at $60, these stocks have a long way to go up from here in my opinion. All the energy stocks do. And that gas, the widowmaker, is going to be volatile from time to time, but again, it's, it's, I go back to it's math, you know. So it's bottom-up stuff. What's the rig count? How much can you produce? What's going on in the Permian? I'm not an energy expert by any means. I know just enough to be dangerous on it, but I know it's an underloved, underappreciated, and underowned sector for sure.

Play one on TV.

I mean, it's pretty much every other. I mean, I think there's certain areas that we see today as we sit here, healthcare, you know, it's just, it, it, it's so political in terms of you have to worry about regulations and stuff. So policy changes on certain sectors make it, certain sectors just hard, even if you do the bottom-up work perfectly. So energy is certainly one of the sectors, the miners, when you know, you look at chemicals and materials, again, such a small part of the S&P. Just look, the reason they're such a small part of the S&P is obviously over time other sectors have run in tech and so forth, and these haven't. So you look for underfollowed, underloved, you know, sectors. And I think also, I think that dividend-paying companies in general, if you're running screens across the board without mentioning any on the top of my head, means that they're, you know, getting great return on their cash over time, which means by definition they're healthy. And you see this rotation on certain times when we get spikes in volatility. They go into names like staples, consumer staples and so forth. So I've owned Walmart, as you know, for a very long time. So there are just, and that's obviously not under, you know, at this point, but, but you know, you can find a lot of underappreciated sectors and then the names within them, try to find the best ones, and that's kind of, so they're all over the place to answer your question, but you want to kind of avoid sectors where there's stuff outside of their control in terms of policy changes and so forth.

This is the healthiest, you know, call it a flat, not a flat market, but it's not up that much obviously for the year. I don't know where it is we sit here today because it, you know, it's up again. And I know we're at record highs, but it, that's a very healthy thing when you can have these, you know, tech volatility and we've had a lot of moves, but money stays in the market. I also think that what you need to watch is rates and, you know, bond yields are, 10 years are, are, you know, hovering around that 420, 425 level. And I said a few months ago that four and a half is the new five. In terms of where people thought, oh, we're okay as long as the 10-year yield doesn't get to five. I think it's four and a half at this point because the direction, because inflation has come down a little bit enough, but if we get back to four and a half percent 10-year yield, I think it does change the dynamic of how people kind of view the markets from here, you know.

Yeah, I just think that, so we were worried about what would be the reason that rates would go back up. The healthy reason would be economic growth, like good. I don't think we'll have enough economic growth. So back to your question of why is the S&P broadening out, I think, first of all, the time of year is always ripe to find new ideas and take risks early in the year. The valuations are very full on these tech companies. You can love them and hold them and not sell them, but to get incremental dollars coming in them, you kind of need the next leg of margin expansion. So we'll see. We're right in the middle of earnings season here. We're going to get a bunch of them in the next few days, right? So I don't want to jump the gun on any of it, but I think there's more excuses to sell some of the high-flyers and more excuses to rotate and buy. And that's a healthy thing. And I think that was underutilized and underappreciated in all of 2025 for that matter. And it has been a stock-picker market for the last three or four years of underfollowed, underappreciated names. And sometimes you need some type of catalyst to get them going. And sometimes it's just eyeballs, you know, that come on certain names. And so I think it's healthy and I think it's bullish actually to have that money stay in the market. But back to the point on the bond yields, four and a half, you know, there's a lot of debt in the system, okay? And the debt, most of the debt in the system, which I know we're going to get to, is sitting at the US government. And so that's so crucial because everything is predicated on the US government's ability to keep financing itself. And again, back to gold. All roads lead to gold. But that's why it's not just the corporate, corporate impact that it would have. I think it would have, I think it's more treasury impact on the US government.

I mean, at some point, listen, so what you're asking is, can you really trade the end of the world? And so you don't want to even think about it because why, what's the point? Why? You can't trade your portfolio as if the US is going to default. Okay, you're 100% right. But let's just do the math for a second. Okay, approaching 39 trillion in debt. The current debt ceiling is 41.1 trillion. We'll hit that in 2027. We're running a $1.8 trillion annual deficit, right? So, where can you cut? A trillion of that goes to interest costs. 1.6 goes to Social Security. You got Medicare, defense spending. 75% of the spending that goes on is mandatory unless you're thinking about cutting Social Security, Medicare. That's a whole different issue. That's not going to happen anytime soon. And so that's math, right? So we're going to grow that. Can you grow your way out of it? Okay. Can GDP be enough for your economy to be able to do it? I don't think so. Not enough. Can it certainly go to a trillion dollar deficit? Maybe. But you're cutting taxes right now. And so just again, just math and balance. And whether that's pro-business, which it is, and whether you think that that'll end up working its way through the economy, maybe. I think you're playing with fire. And the reason I say that, if rates were to start to go up — so what are we doing in response to that? We're issuing more short-term paper, right? We've seen that essence going, or, you know, issuing more T-bills, right? That's the strategy. That's fine. So the game here is to get the Fed to lower rates or go into a lower rate regime, which can stave off a lot of the stuff and lower interest cost over time. Certainly, again, you can't control the long end of the curve. So if the long end of the curve decides that it wants to move higher, there's not a lot you can do. Yes, another round of QE. We'll announce we'll start buying too. So again, we're talking, and as I'm saying here, all roads lead to gold. And so yes, they're going to pay their debt, the US. Yes, over time. But your debt to GDP, if you want to calculate just total debt or just, you know, outside-owned debt is 30 trillion, 31. The internal is like, you know, 7 or 8 trillion, whatever method you want to use, we're over 1:1 debt to GDP. And the last thing I'll say with this, which ties in, is look at Japan, which owns $1.2 trillion in US treasuries. Why are we so concerned making daily calls to Japan? Why is the New York Fed watching their currency like a hawk? Why is Bessent talking to them right now? One, because we don't want them to sell our paper to defend their currency, right? So you're now dependent. So it's not just us. So there's a global mechanism which goes back to 2008 again. And so it's not us on a relative basis. We look great next to Japan, but if we're not careful, we're going to head that way. So that's kind of my view.