Markets Are Entering A New Era Of AI-Driven Disruption | Weekly Roundup

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Intro

You're seeing a [music] tectonic shift in productivity coming from AI. It all hit psychologically at one point when the Claude stuff came out. If we're going from like a step change of productivity growth from like horse and carriage to cars, you have to start thinking about what that means [music] out in the future. If AI really is that productive, >> there's just these huge rotations and dispersions going on right now. And it just it feels very violent even though the top level indices like S&P, you know, down a couple percent from all-time highs, but underneath it's just like [ __ ] is going down.

Yes, in a few years this big bet on AI data centers could turn into the next big free cash flow machine, but that's a 5-year bet. In the interim, what's happening is that we're removing buybacks at a time when everybody is long those stocks. Before we get started, a quick reminder that Blockwork Works's premier institutional conference, the Digital Asset Summit, is returning to New York City this March 24th to 26. This year represents more than $4.2 trillion in assets under management with 150 speakers and 750 institutions attending. Speakers include SEC Chair Paul Atkins, CFTC Chair Michael Celig, Fed Governor Steven Moran, and Tether CEO Paulo Ardonio alongside countless other executives,

asset managers, regulators, and the core crypto infrastructure builders shaping the industry. If you want serious institutional grade view of digital assets in 2026, Digital Asset Summit is where it happens. Use code forward 2000 for $200 off and head to blockworks.co/events for more details. This episode is brought to you by Gayscale, your trusted gateway to more than 30 different crypto investment products. You'll hear more about them later in the episode. Nothing said on Ford Guidance is a recommendation to buy or sell any investments or products. This podcast is forformational purposes only, and the views expressed by anyone on the show are solely their opinions, not financial advice or necessarily the views of Blockworks. Our hosts, guests, and the

Blockworks team may hold positions in the company's funds or projects discussed. As always, investments in blockchain technology involve risk terms and conditions apply. Do your own research. All right, everybody. Welcome back to another round of edition of Ford Guidance. And what a week it's been. Holy smokes. like our last week's roundup. I've never seen one become stale so quickly because literally the morning after we got the we got the Kevin Worsh nomination, we got the the medals implosion. Um and now we're just having the full degrossing and deleveraging across everything. Like >> what a week. What's up, guys? It is

De-Leveraging and Market Stress

crazy. >> Just another inning in the World Series of Macro, boys. >> Here we are again. These these periods are so crazy because you you can have a view like even like the short big tech view that's been sort of like working for months if you like funded it funded other longs with that short it's worked great. But even that trade it's like we kind of just chopped for nowhere for two three months and every time you would think the move's coming it's not and it bounces hard and just went nowhere. So, it's it's it's a tough market and you need to be like there's some times where you just shouldn't touch any buttons for months on end and then there's times

where you kind of have to be touching buttons >> every day. >> I think Quinn, we got we got to give you a little bit of a shout out here for the last few weeks because you kind of nailed that whole dispersion and just like this this online like check out check out the factor rotations today. Um just a total wipeout of anything momentum related. um value's been up and yeah, you know, you've been banging the drum on like the the long metals, short mags, and obviously the long metals one had to be had to be uh you know, taken care of pretty carefully over the last week and I know you've been in and out, but like this has just been a total blow up of you know, we we've been we've been talking about a few of the charts over the last few weeks of just how how

offside positioning was. Literally everybody who wanted to be long was long. All of retail was long. cash positions on the fund manager surveys were at like just like 10 year lows. Like everybody was all in and now we're sort of starting to see the impact of of what happens when everybody's too far in one side of the boat. >> Yeah. It's uh it's you know us macro people are usually early. So like you can say something that's like two months old but prices didn't go anywhere and then you're vindicated if you if you hold a position. So it's yeah lot going on. It's it's it's fascinating. I actually think we're kind of hitting a local bottom here if I were to if I were to guess probably tomorrow. Uh but we'll see short term.

>> Yeah, short term bounce for a couple weeks. >> I think CPI comes in late next week. I think cuts get pulled forward a bit. >> Yeah. Um okay, while we're on the topic of price action and getting it out of the way, I we're recording today and we're It feels like the biggest implosion has been crypto. I think, you know, bit Bitcoin hit like almost 62,000. What did it get down to? Yeah, 62,300. Um, Ethereum in the 1800s. Just a a total wash out. And Tyler, I actually want to you put out a tweet and we've been talking about this all week about just this framing of what is the role of stores of value during a productivity boom. And this is something I've been thinking about a lot

AI CapEx vs Buybacks and Mag7

since you brought it to my mind. And it's interesting to contrast that with the price action we're seeing. So yeah, just like I'm going to give you the floor. Walk through this thesis because I think it's quite interesting. >> So my old boss and mentor Mark Hart, uh he was one of the few guys to short the subprime crisis, buy credit default swaps in Europe in 2010 before that all went fluky. One of the first, you know, macro investors into Bitcoin. He he he came up with this framework of you know when to essentially own assets in different types of them. So if you have a $100 basket of goods and inflation is 3% at the end of the year that basket of goods will go from 100 to

$103. If you have a $100 basket of goods and you have say 2% productivity growth at the end of the year, that basket of goods should have been $98 since you have you've increased the productivity by 2%. So the delta between the inflation and the productivity is essentially the tax you pay by holding cash. So if you if you invest in equities, generally you're getting that 2% productivity by investing in equities, right? And so, but if you hold cash, you're essentially getting eaten up by the 2% productivity on not owning equities and the 3% uh inflation rate. So, you you're

basically losing 5% by just holding cash, right? Relative. And so what's happening I think using that framework is you're seeing a a tectonic shift in productivity coming from AI meaning uh and Leopold Ashbrer talks about this we've talked about this over the last year uh if we are in a massive AI productivity boom it all hit psychologically at one point when the claude stuff came out and if we're going from like a step change of productivity growth from like I said horse and carriage to cars, right? You can do 500x the output in productivity when you

moved from horse and carriage cars. If AI might even be bigger than that, theoretically speaking, now this is obviously getting discounted way in the future. It's not here yet, but you have to start thinking about what that means out in the future if AI really is that productive. So take that equation and you're now saying okay productivity is at 20%. Rather than you know 2%. That means if you're not investing in the AI supply chain in the end you know end parts of it what Quinn was saying last week was you have to invest where the capex is going. All the hardware companies they're massively

outperforming. they're barely even selling off here because that's the the lynch pin for the next unlock of productivity. And then all the software companies that had these insane PE multiples in they're all getting waxed because it's like okay we we have to rotate back into hardware. So it's like >> you're watching a bunch of different cycles happen here which is the movement from software. So you built all the infrastructure out in the 90s for for hardware and then you built all the internet software components. It's like you built this this building, right, of hardware with all the silicon chips and then the the software kind of filled the building with all the, you know, was the

interior designer, right, of of the last, you know, 15 years. And now you realize, oh my god, we have this whole new type of building we can build that we need to furnish it differently down the line, but we're building the building now, right? That's the AI. and and that productivity if you're not invested in it everything else gets smoked. And what I think happened this week specifically is when expectations of productivity growth go up a step change. So like say 2% to 10% or 20% or whatever the hell it is inflationary pressures start hitting. So we saw the break evens roll over. We saw the two-year yield roll over. And and the hard part is if AI infrastructure eats everyone else's pie and there's massive

unemployment and this Kevin Worsh like lowering rates into a productivity boom. It's it's kind of mind-blowing to think about, but you could get mass unemployment because it's that productive. >> So I think all these things kind of hit all at once. Um this week specifically it's probably overdone. you know, what we saw was like, >> you know, a 10 standard deviation move in a lot of the a lot of these things and, you know, everyone was overinvested. I think Felix, you've got a bunch of great charts on, you know, where the sentiment was previously and now it's completely adjusted. Um, >> yeah. Yeah. I might just uh run through a few charts just to contextualize while we're on the topic of of what you just mentioned there is just to your point

like yeah, we're in the liquidation phase. whatever we need to price in in terms of this thematic shift is is probably a little overdone at this at this stage right now. But that doesn't really change the secular story of what's going to happen over the next five years. And we're starting to see early trends of this. So this is um a chart from from A16Z that Gavin Baker posted out who's just quickly become one of my favorite speakers on AI and AI commentary especially from a a capital allocation lens. and he he really emphasizes how intuitively most of the productivity gains are going to come from those early hungry companies um as opposed to like the large incumbent established companies. So when you just look at here, it says revenue per

employee up 75% for the top decel of AI/Software companies in 2025. Probably doesn't slow down in 2026 given the December revolution AI coding agents. Nothing to see here. Move along. No evidence of AI productivity anywhere. So this just like really shows. So when you when you really hone in and isolate on like where those changes are most likely to start happening, we're starting to see it happen. Um, this tweet I thought was just a really interesting framing of just what the market is trying to price in and digest right now, which is that AI is to digital goods what China coming into the World Trade Organization was for goods and certain industrials and materials.

And it feels like this is what the market's trying to figure out right now is like what is the marginal cost and therefore revenue that I could earn and and what does that mode even look like in this age where suddenly you know if you can think about the mode with software engineers if there isn't that mode anymore what is the what is the valuation that's appropriate for that now when we just flood the market with endless software AI agents who knows what um and so we saw that happen in the software business they just all absolutely smoked over the last week. Um, and and on top of that is this whole capex buyback narrative that I've been talking about for the last couple weeks.

And just a few minutes ago, managed to uh get some of the Amazon numbers that just came out about like half an hour ago. And again, just showing how absurd Claude and all these agents are is that like literally at, you know, we've been recording for like 10 minutes. Earnings came out half an hour ago. I didn't I wouldn't have had time to personally go find this chart and build it out and get the data. But instead, I just went into cloud and XL and I was like, "Hey, Amazon earnings just came out five minutes ago. Build me the chart. Here it is within five minutes." It's just it's just absurd. So, you can see $200 billion in buy in a capex is coming.

That's like I think the market expectation was like 146 billion or something like that. Then you have Google this week as well. Um huge beat on capex coming versus street ex consensus of just over hundred billion dollars. They're they're looking at more like $180 billion. What does that do to buybacks? Buybacks are going away for Google. Um, you put that all together and I I wish I had time to actually also include Amazon in here, but they don't really do buybacks anyway recently. So, but overall, you can just see that that there's some really big things changing in markets right now. And it's just so interesting like when you look at just top level indices like S&P, you know, down a couple percent from all-time highs, but

you go a couple ratchets beneath the surface and there's just these huge rotations and dispersions going on right now and it just it feels very violent. Even though the top level it's kind of like a duck, you know, swimming and on the surface they look very calm, but underneath it's just like [ __ ] is going down. So on the buyback thing, I do want to state this because, you know, I I'm on the front lines of trading, right? And >> you know, I I've said this throughout the years, but I don't think people have really added it up.

Crypto Bloodbath and Risk Assets

>> And 20 years ago when I started, you could be like 30% of the trading volume. And if I wanted to buy a 100,000 shares of stock, I would find usually like the opposite counterparty was like a human on the other side and we'd be crossing stock against each other. Right now, all the stock trading, I'd say like 70% of it is fake. Like it's just HFTTS going back and forth. So it if you're say three to five percent of the trading volume throughout the day, you can move a stock with a lot less capital. And I think buybacks, if you talk about a trillion dollars plus of buybacks per year from the fangs, they're the largest weights

in in the indices. And they were buying back that that much stock. And they didn't have to buy that much to just keep a bid in the market relative to all the HFT volume. So they were and so you had the inflows from from ETFs along with their buybacks that kind of stult divide volatility for about 10 years. I mean this is a real micro structure of you know the larger market structure and if that's going away you have increased debt right less cash flow maybe even increased supply of equity you know look at Oracle now now raising equity along with their debt so the lot of the market dynamics you go from sucking you know sucking liquidity out of your floats

your share floats from the large caps to almost now the bidder goes the way the incremental bidder goes away from all the cash flow and I mean we could be looking at like a massive you got a concentration of 15 20 years in these names every 41k is forced into it and now the micro structure is changing a little bit so it actually for the first time ever shorting these things might make sense um just because previously like they would just keep that little bid and when the buyback blackout period you know subsided and they could buy back their stock, you'd see that you'd see the VIX fall. You'd see volatility.

You know, this open also opens up what happened. You know, Mike Green's thesis of every incremental buyback dollar created this convex price movement because every incremental dollar into the stock was like 7x what it should have been because of the float dynamics and the passive dynamics and the buyback dynamics. Now, these things are all switching here, right? And I'm watching this specifically because if you get a reversal, you know, like if people start picking this up and then you get the demographic shift of like, oh, boomers might actually have to sell assets here, that concentration that's built up is really scary. Like really scary. And the

one thing that's holding it back is we haven't seen bond volatility and and FX volatility pick up. So number one, you haven't seen bond volatility, meaning bond is still low. Even though you're seeing rotations in the equity market, that's that's just in the equity market. There's nothing really. I mean, credit's starting to tighten a little bit. If that credit really shuts off this that's got like crash, there's crash crash risk there. >> Check check this chart just for what you're talking about of looking at the 10-year yield versus gross surprises and inflation surprises. like it the 10 year should be higher.

>> Yeah. And so, but I mean like >> there's lots of funky things and I think what's going to happen here is credit's going to shut off. >> The Fed's going to be forced to just lower, you know, and and Pomp actually said this last week and I didn't see what he was seeing until a day later, but he said, you know, they should do an emergency to give him credit, emergency 50 bips rate cut. uh he said it a little bit early but I think it's actually playing out where you're getting the break evens rolling over you know the future growth might get actually dinged here a little bit besides certain sectors you know if you look at certain sectors they're doing great right like it's it's all rotating to different look at consumer

staples breaking out um so I I don't know but what the main thing to watch here for you know the fangs is does credit shut off and uh do we get like some sort of, you know, bonv cuz that could really cause some some funky things in in the indices. >> If you're thinking about buying crypto but don't want the headache of setting up wallets or new accounts, Gayscale makes it simple. For over 10 years, Gayscale has helped investors gain secure, regulated exposure to crypto without the hassle of self-custody or opening new wallets. With over 30 investment products from Bitcoin and Ethereum to diversified and thematic crypto baskets, Gayscale makes it easy to build a crypto allocation that fits

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your portfolio. Whether you're using a regular brokerage account or investing through an IRA, many of Grayscale's products are available right where you already invest. Investing involves risk, including possible loss of principle. For more information and important disclosures, visit gayscale.com. Everyone's [snorts] ballparking their analysis to the previous PTE multiples of and valuation comps for these companies and they're fundamentally changing their business models. So, not only is it this one-time flows hit to to buybacks and and you know selling securities to raise financing, but it's also a long run valuation because the the arms race for compute, energy, and power isn't isn't going to slow down. Like I saw someone

saying, "Oh, I'm investing in Mag 7 because they're now moving into energy and that's where things are headed." I was like, "You don't want to look at energy companies multiples, dude." Like that's like when that's like that's like when people said, "Oh, I'm I'm long Coinbase because they're going to be they're going to become a bank and take over." I was like, you don't want to compare your 30x price to revenue co company to a bank. Like that's a horrible setup. So, I I think there's a little bit of a rude awakening for people there, too. It's not just the one time. Yeah. You know, the earning stuff.

>> I have a couple other charts I just want to show in terms of how you can see the market trying to digest that. Like, I think you're right, Tyler, that something happened in the last week where suddenly everybody started to digest all of this. And you can see like tax underperformance relative to the broader market over the past five days was the most severe since 2009. Um and then this is just looking at different factor rotations and you can see this complete change happening right now. And this is why the topline indices are still holding up somewhat okay is because the value factor is actually ripping right now. Just the growth factor is falling apart. And this is getting back to that point of market structure and just this air pocket that's happening with tech is that yes in a few years this big bet on AI data

centers could turn into the next big free cash flow machine. But that's a long those stocks. Um, and you have to underwrite that with a credit risk, too, right? Like not all of that AI capex is coming from free cash flow. They've tapped that out. They max it out. And now, you know, each of these MAG7s each are doing about, you know, 40 to$45 billion a year in corporate bond issuance. So, they're going to lever up. Um, they need to see a payoff profile. It's it's not as cleancut as before. And Felix on the maybe I think what does just dovtales into the macro setup why also MAG7 is is um is is unattractive.

Credit Risk, Factors, and Fed Path

If you just want to touch on the labor data we got this week um well some of it because of the partial shutdown but um this chart here the the point you made Tyler of Fed of rate cuts which I agree with you is going to be the reaction function. Um there's clearly a shift which everyone's kind of up in arms about wars but the duration reduction of the balance sheet already began last quarter under Powell. This is what we were pounding the table on in November October November after the October Fed meeting saying this is a hawkish policy shift and some people called it QT 2.0 I know it's duration tightening Barry Nap calls it like and

the impact on the market of of the duration reduction is was more in October Fed meeting more negative than the benefit of ending QT alto together and then obviously we got the Q you know QE light with the bills purchases in December. But this is super powerful because when they do go to cut rates on the front end to support growth and support the economy without supporting the back end and in fact putting additional duration pressure on the back end. That's a massive steepener, which is the exact opposite of what policy has been since the bottom in 2022 when they purposely flattened the curve and kept the long end suppressed which kept

markets floating and allowed them to keep the federal funds rate too high. So that's the whole argument here that Warsh and Bessant have been saying is this imbalanced transmission of monetary policy that's benefited the large caps and hurts. And the where it gets funky is the solution of rate cuts is actually not really a solution for the mag seven part of the market. It is a solution for the main street part. And so this chart uh Felix you had up. Sorry, I was rambling, but to the the preamble was this chart shows you so since 2024 basically small businesses uh which is the gray box have have largely like been in a recession in terms of um job job

creation. Uh small business has been in manufacturing for example has been negative since August 2024. Um but just now we're seeing the green box, the green here is the large business sector and that just turned negative uh in this month's ADP reading. So the funny thing is is it's all fun and games for the policy makers who can tout AI productivity and you know the booming economy for the 1% and and you know Paul would always kind of ask us oh except for main street you know there's some parts of the economy that aren't doing well but now that the white collar jobs the large business jobs are now joining in the the job loss don't be surprised if they change their

tune in terms of coming to the rescue of the labor market which is just classic why another reason why um you know they they want the admin wants change at the Fed because it's it's been it hasn't been a a fair and objective policy uh strategy for for many years now. >> Yeah. And you know what what's interesting is you're seeing the capital rotations like check out regional banks. They've they've actually they're actually breaking out to almost new highs here. Like IWM perfect retest to the 50-day. like there's that rotation's happening like 2000201 out of tech into smaller caps >> and then [clears throat] like like old

school businesses have you checked out like um I don't know Delta Airlines and uh cruise lines stuff like that it's actually doing quite well so this rotation is happening under the surface part of it is there's just so much capital moving out of tech and it's compiled there doesn't take much to move other parts of the the sectors of the economy so >> I I think the the regional bank one is is really interesting to me because that that actually perfectly represents what I think is the playbook of nominating Worsh and his actions of what he wants to do of okay AI productivity boom we just talked about that all of that the reaction function is is lower Fed funds rate but at the same time they're they're not going to be as forgiving on the long end um what does that do

steepens the curve like we we just saw the two stance curves break out it's the highest level since I think 2018 I think that's going to continue. And what does that do for banks? It makes them a lot more profitable. That allows them to, if you do that, if you steepen the curve and you deregulate things like SLR and and risk based ratios like that and allow them to actually create loans, you get the Fed out of the game of marginal liquidity creation. You pass it on to the banks. You get them to start to get moving things. You know, what's better for Main Street than if than if regional banks are doing well? Like that's where the loans come for small businesses is from regional banks. So I think we're starting to see the playbook and the playbook is yeah like if I want to

describe it easily it's like long regional bank short max 7. >> I would say yes except though there's one gorilla in the room which is like when when that yield curve kind of steepens fast you get credit tightening. And you're seeing high yield credit spreads widen a little bit here which makes me a little nervous. You're seeing a lot of like the private equity guys are rolling over. They have a lot of debt. There could be a there could be some zombies in here before like I don't >> I wouldn't just say it's going to be game on because there's a lot of funky bad credits in the economy that might float to the surface.

>> So that that's my one caveat there is I'm watching credit real close. And there was there was also a buyer of 700 I think it's 75,000 HY tail puts which makes me like really I'm like what you know low delta cover your ass you know type of type of position that's out in the market and I'm like what are they you know what are they worried about type of thing. So I don't there's there's stuff that that's happening there that's a little bit um kind of funky. I mean, when you say that, I kind of there's a case to be made where you have like Pal who's sort of like not wanting to play ball and and and like,

you know, playing this hold out game on on easing the front end and, you know, maybe for he optically he doesn't want to do any anything before his his term is up. So, he could walk away and say he didn't, you know, give into the the Trump pressure. And so maybe there's this purgatory area and then you know you have Bessin and you know he wants to kind of rebalance things like there is a there could be a pocket here where like the Fed isn't working so closely with the Treasury to manage it and it gets a little out of hand cuz because what where do they step in right it's like uh I don't know because the the Yelanomics policy was would have been to tweak the QR this week and and reduce duration on the long end and support the market and

just the same old And and now I'm not I'm not it's it's scary. >> Yeah. And actually, can I hit me with these couple charts, too? >> Yeah. Your charts. >> Yeah. Go to 35. So, this is um this is a kind of interesting one from Goldman who does really great great work on you know, V market structure. So this is um the S&P average stock volatility verse index stock volatility and and essentially what I think that this is saying it's in this was last week it was in the 99th percentile um another way say another way average S&P stock is swimming 7x the index. So I

think what you know largely if you go on to the next chart this is retail is just getting absolutely rinsed. This is why you know during periods of like >> these imbalances build up in retail options volume you can see >> this is from Monday from Citadel. Uh Monday marks a historic inflection point for single stock options. For the first time, new Monday and Wednesday listings on the Mag 7, Avago and IBIT will trade as zero uh days till X-ray options. So, the market structure is changing on option side. They're opening up new options for for retail to play. And then if you go to the next chart that you can see the the software ETF volume

um call option volume. I think this is a reckoning of uh I think that's slide 37. IGV call volume. You can see a 10-year look back on on how many people are playing, you know, from a retail perspective. You know, V was so low, but now it's so stretched on a single stock basis. And it's why the index isn't really moving, but you know, all the single stocks underneath are moving 7x normal is because the market structure is largely driven by retail. Now we're watching Robin Hood roll over, Coinbase roll over, crypto roll over, and I think people are going to stop trading as much on the retail side because they're just

getting absolutely worked. Um, and and that's that's partly like it's really hard to manage money fundamentally when you have it's essentially gambling. It's the same thing that happened Kalshi and I think what's happened is part of what's ruined crypto is you created just essentially gambling markets across everything you had and and that that whole financial nihilism thing it works when the government is behind it but then there's this moment when it gets pushed to an extreme where it it goes in reverse and I I think that's largely what we're seeing here is just a complete wash out like if Think about it psychologically. Oh, I'm long call

options of XYZ high beta stock and then when the delta the strike gets away from the delta and the delta keeps going down, the dealers have to sell deltas to hedge out their short call position s call position. So, they're selling deltas on the way down and then retails got to sell their calls and it just keeps it's this self-fulfilling, you know, suck of liquidity on on calls. And um you know it's the hard part about the whole thing is it's really structural because the government has incentivized this by making it just bailing out capital owners. And so retail finally caught on.

Oh, the government's backing, you know, capital owners. And at the exact same moment, you know, they're pulling the plug from capital owners. And I think all these and and rotating back to actually labor in in a weird way. So all all these things, it's such a macro, you know, irony, they they come and collide at the same time. And, you know, I have to bring this up because it's it's not a coincidence, but the Epstein stuff is is correlated to you're watching large power structures fall. That's what's going on. And it's it all these things collide into like a a social soup where that causes change when they all all these incentives just collide. And we're

Epstein Fallout

seeing it from a market structure standpoint. We're seeing it from a social standpoint. It's making me really scared. You know, we're seeing gold signaling something's off. you know, the fact that we're we actually got to see what's in the Epstein, some of some of what's in the Epstein stuff and it's deplorable and it's everything we ever we always thought, but like now it's there and we know it and everyone's been complicit at it and >> every now we're all like now what? [laughter] >> Well, you know what pisses me off the most about it? I'm just going to get on a a soap box here is, you know, everyone makes these companies and these leaders, corporate leaders, they make all these comments when it's just some, you know, some trivial social issue. They'll get

on a soap box. But when it comes to like child trafficking and sexual abuse, they're [ __ ] radio silent. And it's just like [clears throat] it actually gets me really angry because you should, this is the most sacred thing on the [ __ ] planet. and everyone's quiet about it. It's it's it's absolutely mind-blowing. I mean, I I it's and it's I just have to say my piece on that and I'm getting red and sweaty and I want to fight somebody, but like this that's really like it's it's so and all the it's all generational too. Like we we let our system get co-opted by these [ __ ] creeps and then and it's all it's crashing down all at the same time

as the market structure is too centralized, right? like this stuff is not it it happens because because of all the politics and the weird it sent it. So I'm not trying to like you know it's not a conspiracy theory. It's all how it's built. It's it's built this way. So, >> I mean, yeah, that should be the realization is that like it's like here we are and it's and it's it's bipartisan like you can, you know, we've been we've been fighting blue versus red like >> yeah, >> you know, one nation versus another and whatever other like identity politics or or conflict when in reality like those we should all be coming together right now and being like, "Hey, like this is this is what's actually happening."

>> Yeah. Get all the bozo politicians gone. like [laughter] get them get them out, you know. >> Well, there's a reason that no one speaks up, Tyler, because um the the few people who are actually releasing these files, they're they're probably might lose their seats because they're getting hundreds of millions of campaign dollar campaigns against them from rich donors who want them to shut up. So, it's it's just >> it highlights >> it's like it's like Marjorie Green, you know, was one of the biggest Trump supporters and now she resigned. And like if you're thinking about buying crypto but don't want the headache of setting up wallets or new accounts, Grayscale makes it simple. For over 10 years, Grayscale has helped investors gain secure, regulated exposure to crypto without the hassle of

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Market Structure, Bond Market

It's really it's a bizarre thing that like everyone's just kind of going on like it's normal and it's but you the the market structure is also weird because like if you think about these power structures that were set up and it's slowly chipping away and the trust is chipping away you're going to sell like you're going to probably repatriate capital a little bit because you know the trust in the systems kind of if you're an international and oh this is a great these are great charts to show. So check this out. Um this is slide 48. So you can see the capital leaving. This is um >> so this is Latin American carry trade index measures the the cumulative total

of buy and hold carry trade position that is long six Latin American currencies and is fully funded by short dollar positions. So like money is seeping out of American assets. it hasn't done it like you'll see it when the bond gets crazy but it's it's leaving and if you go to here's another one uh slide 47 this is the topics Japanese bank index from a you know seven-year time horizon to you know to back to the last 30 years and this is the debt bubble bursting in in Japan but the banks are have to lend now because they need the the inflation's you know

keeping up, right? So, that's how you you stay ahead of the inflation. You you you invest in in the banks over there. Now, so and then here here's the last chart I'll show is like slide 46. And this is probably good fodder to talk about to get off the social side, but what happens when trust breaks down is gold. Everyone goes, you know, to gold. I mean, we thought it was going to be Bitcoin. There's clearly some flaw there that, you know, it's piled in with software. But um yeah, gold as a percentage of world reserves is now you know 25% and the fall you know the fall of the USD as the share world currency is dropping too. So we're seeing you know this is really the trust issue

right like there was no trust issue for a couple decades and now now it's coming back. So that's uh >> I think I think one of the by the way like very well said that was awesome. Um, I think one of the nice segways here is looking at this gold dynamic and something that I saw, Scott Besson was was under testimony today and he mentioned something about how there's rumors that China is looking to have a digital back yan that's backed by something else potentially gold is what he said. Um, and I think that just frames up like what we've been seeing in terms of the price action over the last six months or so when you compare gold to Bitcoin is that gold has been surging and Bitcoin has just been doing nothing

slash bleeding. And it makes sense that if if you if you're China and you see that suddenly Bitcoin and crypto has been co-opted as this American coin or enterprise or or industry, it's the last thing that you're going to want to back your your digital yuan with. You're actually probably going to look at it negatively. instead you're going to go over to gold and back your Chinese digital yan with gold instead. Um, and in the meantime, you know, it's not like there's a US dollar that's going to be backed by Bitcoin anytime soon. Like that is just the furthest thing ever. We have the most friendly administration ever for crypto, quote unquote, and it's just not panning out. So, it just gets lost in the middle. [laughter] >> Why why is there radio silence? You know, like that's that's the other thing

is you think China's sitting there and they're like, "Oh, wow. Everyone's a cumulion gold and you know there's radio silence from anybody in our administration. Maybe maybe that's a long-term play so they can stack some sats. I don't know. But there's a lot of lot of fishy stuff out there. Man, there's a there's a chart on 31 Felix. It also shows a similar thing about the it's Bloomberg from Bloomberg Intelligence USD share of global foreign currency reserves in percentage terms and and how it's really fallen off a cliff. And the next one, yeah, in 25.

>> Um, and this is this is kind of what I was trying to a point I was trying to make about this huge dollar deval uh that that clearly went on. Um, and actually, yen, USD JPY is right back to 157. So, we're right back to where where people intervened and the dollar is sort of like underside retesting its yearly open, this 98 level. Um that's pretty big. So I I actually think more dollar weakness is ahead. And where this becomes problematic is one commodity you know everybody knows the inverse relationship between dollar and commodities like metals have basically been an inverse dollar trade uh from the long side. But if you go go up back two

two slides um you mentioned uh how the move index for bond volatility has been in the gutter. there's been no signs of anything >> which I find very interesting that the move is is is gone down to sort of 21 levels while the basis trade the high you know leverage treasury basis trade is is rising significantly. So you you basically have on the surface V go is straight down and to the right and under the surface tectonic like risk of leverage is just a straight up and to the up and to the right. And and if you look at this um the bottom right chart is is just net position of 10-year

futures by asset managers yellow and by hedge funds black. And so that's saying that um hedge funds are are net short treasuries because they're levering up the short and they are uh you know buying they're they're putting the basis trade on where there's short futures long spot. But the the other interesting thing is the yellow the net position of asset managers is the most long 10-year treasuries they've been in years. So then go to the next one and you have hedge fund exposure. This is just a sentiment trader index level of of 10-year long bond exposure and it's like at the highest levels

since basically right uh September 24 which we know preceded that just absolute rip up in yield. And so I think it's um it's pretty so so imbalanced. It's it's going to be very problematic. So on the one hand I'm my message is okay Warsh and Bessant want to get out of the they want to let the long end free float here a little bit and and everyone you know is saying they can't do that they can't reduce balance sheet they and you're right like it's going to be very difficult but at the same time don't shoot the messenger they're pointing out the problem for a

healthy financial system you do need that and for capital allocation to be efficient you do need that so they're going to try it >> and they probably will get stopped by the market because of the Congress proflegate spending. But this is a problem because once you start lowering rates to fix the market uh to fix the the market's decline or weakness or economic, you know, woes that might be introduced with with the down stock market, you you run into this where everyone's levered long and there's just not a lot of appetite and we see foreigners reducing their share of treasuries and going into gold. So you have just this huge huge which it's not a topic many people cover. It's not what your pod shop guys who's long short 30 names is going to be thinking about, but

it's going to matter and it does matter. And like today I started not in size but I closed my sofa futures longs and started starting shorting the long end again because I think there's a there's a liberation day style thing about to come where eventually >> bond rallying when the market >> I'm kind of doing something similar of like long the two-year but short the 10 and the I think like they're going to try it basically. I we we don't know how it's going to pan out to Tyler's point. It's going to it's going to depend on how credit digests that, but they're going to try there. I I see the short-term trade at least.

>> Yeah. And there's still supply issues. So, until we we got word this week that they're they're not reducing coupons. So, um it does feel like there's a window here. But that's that's why I actually I think yeah the real pro like when when you see today when you see bonds rallying prices up yields down on on the risk off I'm actually like more inclined to bid that you know I'm kind of okay like you know you could get some relief here. That's why I kind of think there's a bounce.

>> Yeah. But but it's when you start to see yields like start inching up and uh risk hitting that ceiling, which I think probably happens by the end of the month. >> What do you think happens to private equity? >> Man, >> I mean, they're sitting on a lot of crazy valuations. I was it like 30 40% of, you know, software or private equity is software or something like that. >> Yeah. Yeah. Yeah. It's it it has so so so so many like linkages. Like all it is, private equity, private credit is just all the unregulated [ __ ] that they pushed out of banks into a more obscure black box than even the banks were. And now you're

Private Equity and AI CapEx

seeing the ramifications. And I Tyler, we were going back and forth on Twitter on this, but this, you know, private equity is just eating up software where they just lever these things up to the gills. people were doing six times EBIDA debt debt deals on these PE backed LBOs and and now like now they're the biggest funer of the AI capex buildout. So you're like uh well if you're nursing all these haircuts >> that is a tough spot for your balance sheet to be in right now where you're getting decimated and you're you know you're getting marked quarterly and your assets of like software are getting smoked. Um, and then you're also you're also backing these loans on AI data centers. Oh my god, I don't even know.

>> All my buddies I know like >> there's so many landmines. >> Yeah, everybody in credit I speak to everyone's just tearing their books up and it's like all right, who's AI exposed and like what do we do with this name? And >> actually I do have a chart on that Felix on slide 24 I believe. It's a weighted average bid of US leverage loans and and this is ugly. I mean it's whatever problems like these PE firms are telling you about like double them and and and this is at a time where supply is increasing. So you you have an even greater not only AI capex boom you finally have the rest of main street economy starting to catch fire. So your supply of fixed income issuance both

from the sovereign and now from from the whole economy with with the OBB uh you know depreciation of capex immediately it like your fixed income supply is just going to be massive >> to to boot go to slide 40 this is another interest I want to ask you that as this question because it's like a this is like a game theory so this is city this is city group I got to give them a shout out their basket group does great work. Um, but this is, you know, their basket for supply bottle bottlenecks for AI, which is the blue line and then the AI at risk basket, both cityroup baskets. And you can see, you know, everything in the supply

bottleneck going up. Now the game theory here is if this is actually like secular and not you know cyclical and there's like deaths of companies and you have some sort sort of credit event so the Fed has to respond to all the other companies but these companies could be functionally like like dead. I mean it's it's kind of like watching like Uber versus taxi. So like in a productivity boom there's winners and losers. How do you passively manage money first off?

That's my first question especially when it's market cap weighted passive. And then secondly you know if it's a real if this AI boom is even like more productive than anything we've ever seen. How does the Fed respond to that where it's not just handing money out? You know it's just like those two things these all these things are just so competing. Yeah. >> Yeah. Like totally they're boxed in because now it's like what we were saying that the labor market was just the small main street businesses with no political say and then they just brushed it off and now white collar job losses.

So, they're going to be coming to the rescue most likely. And it Tyler, your your point about um I like actually made me think how we always talk about all the pensions, the insurance companies, etc. that are stuffed to the gills with with with debt and and bonds who who are basically going to have to eat the the inflation. We know they're not going to allow deflation and job losses. That that's just not going to happen. We have no political appetite for that. Um >> so big that it does, you know, but the thing is that The thing is is that the mag seven which is basically the stock market that everybody's invested the pensions 401ks >> those companies are basically they're sacrificing their share prices for

productivity in the S&P 493 and so but but that's not what everybody owns. So in the same way that the boomers and the p pensions etc are are subsidizing via their holdings of bonds they will basically be doing that over the next if you hold the index over the next 5 to 10 years your real rates will be garbage while all the other uninvested long long-term kind of brushed over parts of the market the the AI cap productivity beneficiaries the commodities where you need the resource etc >> those will be continuing to do their rotational you know, blowoff things um at the expense of just like S&P 7, you know, the mag 7 just real returns will be

really bad for multiple years. >> Yeah. You have a decade of just, you know, garbage if you although they might figure out how to use use the tools to be more effective. I don't know. But it's >> the other thing people I just want to put into people's minds and this is a really I got to shout out Jem Carson because he talked about this ages ago and and everybody needs to be reading his work that he's even put out since 2021. He c he's called the secular inflation all this stuff insanely like accurately. But one thing that always stuck out to me was him highlighting the difference between a a zeroinflation world which we were in since basically China entered the WTO in

the 2000s and you know the the runup um postGFC you know slow growth economy the slowest rec economic recovery in history basically no inflation when you are now postcoid into a secular inflation world where you have underlying inflation running 3 to 5% % you know CPI says whatever you know we all know it's higher think in real not necessarily nominal and what one of the things that means is a a 10% 15% draw down in nominal terms back then with 0% inflation is a 15% draw down right a 15% draw down today with 5% inflation is a 20% real draw down and that's why you get these stretches over time if you

etch that into your brain when you're thinking about market tactics Over time, it's not that nominally prices have to crater into a deflationary bust like we've gotten in the past, right? That the uh GFC or um you know, the Great Depression, these were deflationary busts. Going forward, it looks more inflationary, you know, poor real rate, poor real returns. And and what that means is that nominal, you know, it's it's a choppier environment. Like if you if you look at some of these some of these time periods, it it's like down 10, up 10, down 10, up 10, you know, and and and it's not these big trending. And

so when when we talk about kind of saying like this year might be a traders environment and and you have to be a lot more tactical like think in the think in real terms. So like you know S&P's down what 2% today or whatever you know that if you anal annualize that it's in in secular inflation world it's much bigger. So, that's just something to think about because you you see lower nominal draw downs typically, but real returns are are kind of worse over this multi-year period. >> You know, it's another thing that got me thinking about is economic growth within this regime of just huge AI capex build. Like, can you even I mean, we we've been talking about this throughout the last few months in

the fall. calls like can you get a recession where we're getting this much AI capex and investment and it's like if you just if you take the simple framework of okay all this money that was going towards buybacks does that get counted in GDP I don't think so maybe this is just my guess is that I feel like it doesn't maybe some way somehow a little bit of it but probably not but every dollar going into capex for an AI data center is going into in capital investment which is like one to one into into GDP So, I don't know. Like I when I just feel like we're going to have a roaring GDP this year even though at the same time the labor market is falling apart. Like that is just a crazy conundrum where you have >> we're going to step in. Yeah.

>> You're totally the the only the transmission mechanism of supporting stock prices is the wealth effect. And we know that the propensity to spend of the wealth, you know, it it doesn't flow through when you when you get into the bottom 50 60% of the economy, main street consumers, they they spend everything. they don't save. And so when you start stimulating these parts of the market, >> you're you're 100% right. And and >> that that's that's sort of, you know, for a long long time, the markets have not equal been one to one. Sometimes the markets in the economy correlate when when certain liquidity conditions are ripe, etc. But this year, it's very much a a there's not unlimited liquidity. And so that liquidity is being directed at

Main Street and not at financial assets, Wall Street. And that's you're right, Felix, cuz cuz you're seeing a, you know, stabilization at least somewhat of of of labor and and these things, but push comes to shove. They got an election to win. And like this is >> this is why in the whole >> they're toast. They're toast. >> They are. But this is why in the whole boom of AI, this is this is why the bears or the critics of it sounded crazy because you're saying like the the the bear case, the opposition was guys, your policies are so stimulative to five one to 5% of the economy, the AI, the the

rich, the wealthy, the tech. Like there's huge ramifications down the road if you keep doing this. And everyone's like, "Shut up. It's a arms race. It's blah blah blah blah blah." But now what we're seeing is you financialize things so massively that five Nvidia is sitting at $5 trillion and Felix you pointed out top of the show when that capital then because they start spending it and the capital follows where they spend it you it's like elephant through a keyhole and then that will create inflation. So while everyone's saying you know boo boo you know bears like shut up like you don't understand it's an arms race with China we need AI okay those things could be true but the ramifications are always after the fact and now we will see it

where in order to prevent utter job loss and economic destruction they will have to stimulate when the a the capex is now stimulating it already and it just so the run it this is when run it hot is real because nominal GDP will stay elevated But it will not feel good if you're holding these large cap tech assets that have been the benearies of the other policy. >> Yeah. Yeah. >> Yeah. >> Chains are going to break. Like imagine 4% real GDP growth, a a shitty labor market with layoffs and mag doing pretty badly. Like that is just a crazy combination.

>> Does the dollar cave in that? because they're just I mean >> the dollar. >> Your economy just becomes way less diverse and it's Yeah. It's really a funky cocktail. >> Well, the amount of liquidity that they will end up having to supply to sort this out is is going to be dollar negative. >> Yeah. And that's I think maybe Bitcoin's front running that and then we'll see a little >> could be, >> you know, bottom when they're they're starting to change policy potentially.

But >> I thought I think it's interesting. I I was thinking about it today. I don't know if you guys noticed, but there hasn't been any like talk from the admin, right? Like I mean this is >> Yes. Like I I got a lot to say. First off, >> it's a controlled burn basically. I mean they >> I highlighted this in a tweet earlier this year. I said, "Watch this. They learned last year they went out on TV. They're saying it's Main Street's turn. We're going to let you know Wall Street can have some pain. Blah blah blah. They got screwed off that path because Wall Street went up in arms. All the rich people said, "Dude, what are you doing? You're crushing us." And so they had to pivot. And and I said earlier, I said, "Watch, they learned. They're not going to be touting Main Street. They're not

going to be doing all these things, but under the surface, all of the policy is a reversal, just like they're sort of doing. It's a little different than last year because there's cutting with Doge, etc., But the effects are sort of the same. And um but now they're quiet. I mean, we'll see. Well, there's there's a couple things they're quiet on which I found really interesting and it makes me really skeptical is number one, he hasn't made a peep about Bitcoin after what's really interesting is his ratings were completely correlated with like Bitcoin performance in a lot of senses and he's left all the demographic stuff just lost the the next generation along with JD Vance. I'm really shocked Vance

Final Thoughts

has not said anything about this Epstein stuff having previously been on the record talking about it years ago and like so they're they're I I think they just lost the entire the next 10 years of of voters >> and that to me is I don't know there's a we need a whole new new party but it's it's fascinating like you'd think you you piled a whole bunch of people into this new asset you said it was going to be in their 401ks. You said it was going to uh you know the next generation gold.

You're you're issuing Melaniacoin and like and you just go radio silent now like [laughter] >> that's Trump's pillaging. Yeah. He just >> It was him to get elected and then and then it was a pillaging and now >> now the Bitcoin price is below where it was when he was elected and it's like >> that's horrible. But like your ratings aren't coming down. >> What just happened? Yeah. And like not only that, but then you're trying to talk yourself out of this Epstein stuff and it's just like you're you just screwed I mean this is the fourth turning this clearly. >> Everyone >> I don't think I don't think the Republican party comes out of this term in a good way.

>> No, not at all. >> And and the Democrat like who know like they're already in a mess but now Republicans are going to join them >> when everybody you know they have their chance. What everybody needs to like just meditate on tonight and remind themselves is is it's February 5th. We have nine months of time before the midterms. And so you figure that the big push kind of starts coming April, May, June, you know, a couple like three, four, five months before. Like >> what kind of acronyms? What's what's they're gonna come out with? All sorts of acronyms. The Ponzi is gonna come.

They're gonna pump it. the the the mayhem and the full frontal assault on trying to vitalize the economy and buy votes. Like Biden did this in 24 and the guy slept 18 hours a day. Trump is up 18 hours a day. Imagine the like the thing no one's talking about and I I don't envy Bessant's position here is is that's this why I said a couple episodes ago on the my outlook for the year is they're going to be chasing the 10 tenure round like like a like a dog on a leash because Trump's going to just be blasting housing. We want housing stimulus. We want rates at

two. We want this. We want that. And every single one the long end just and Besson's going to be over here like dude shut the [ __ ] up. Like I like you're you're you're not helping and it's going to be wild. just keep your heads until like this fourth turning. You gota you got to survive in advance and and try to trade. You know what I'm finding is like trading sentiment is is actually way better than fundamentals these days because it's just all turned into a freaking casino. And so now the VIX is inverted. You know, everyone went from super bullish to super bearish. And you know, you you have to just you have

to be more of a trader now as a single person. Not institutionally. It's a little different strategy, but >> things are just it's really hard to stay in positions when the politics are tearing themselves apart and there's no, you know, they make up things out of thin air just to bail people out. It's it the whole thing is not capitalism. It's a perversion of capitalism with a couple entrepreneurs trying to push things in the right direction. It's it's really messed up, >> I think. Um, and maybe some alpha for those who are sticking around to the very last minute is when we get dips over the next month, people should be thinking about what you want to buy in a world where Republicans don't have both

houses. Things that might revitalize with with some Democrat influence in in the House and Senate. Um, maybe that's just [ __ ] Vicks calls because like [laughter] Trump's going to get impeached and it's going to just be mayhem. But there there is going to be a lot of continued sector dispersion to be thinking about um you know healthcare or you know places or places they collide places where you you could see Trump marijuana maybe you know where Trump is going to come to the toratic side and try and buy votes. Maybe he legalizes you know psilocybin and and things like this. But a fascinating thing for me personally is like I saw, you know, Roana and Sean Ryan talk about, you know, the Epstein stuff and so Roana is

obviously Democrat and, you know, everyone's giving heat about the the tax in California and then you have Massie and and they're all going at they're going at both these guys which makes me think it's just it's a a uni party of just like it's so so messed up. It's like that's not that should be a winning platform, you know, [laughter] when you think about it. It's like protect our kids. Vote for me and you're like no one cares. I'm sorry. I'm I'm so >> There's There's one there's one big club and we're not in it, man.

>> That's that's what you that's the message we need people to listen to is that like >> the guy the guy you disagree with on the street is more like you than against you. And and the sooner you realize that, the better off everyone is to stick together and >> play the fight the real battle. >> Yeah. We're not we're not left and right here. This is uh you know, >> this is being a good person, not being a good person. There you >> go. So, anyway, I have not to end it on. >> Good weekend, boys.