Related content

Patrick 00:00

Welcome back to the Barclays Brief podcast. We're in New York today, and sitting opposite me is Brian Kuritzky MD in our rates sales team. Brian, thanks a lot for being here today. 

Brian 00:10

Thanks for having me, Patrick. I've been listening for a long time and it's great to finally be in here with you. It's also helping me get over my World Cup withdrawal and helping me forget even more the last USA game.

Patrick 00:18

Yeah, well, if you think that's bad, imagine being me flying over thinking that I was going to be able to watch the World Cup final in New York until the last few minutes of the Argentina-England game.

Brian 00:29

At least we're here today. I guess you wouldn't be otherwise. 

Patrick 00:32

That is true. And we're joined by our producer, Ane, who is Spanish.

And I have to say, looking very, very happy, if a little tired today. So, Brian, the reason I wanted to get you in is, you know, we speak a lot. I read all of your emails that go to clients. And the thing that stands out for me is whenever we talk, you're always challenging the market consensus. You're constantly seemingly looking across markets and connecting the dots.

Patrick 00:55

So what I think our listeners would want to hear from you today is what's catching your eye at the moment. 

Brian 01:00

Thank you. And let me first say, I've had the good fortune of covering a wide range of clients, from the variety of hedge funds, equity, credit rates, macro to Canadian pensions, Nordic pensions, domestic money managers, bank portfolios. And when I hear what the hedge funds are saying is repeated by the money managers and the Canadian pensions, or vice versa.

Brian 01:22

It really starts to raise my antenna. And then when the positioning and then assets really seem extreme as well, then red flags start going up. So I like to think I have a way of triangulating some of these pain trades. 

Patrick 01:36

Okay, so what red flags are flying at the moment other than the Spanish one?

Brian 01:40

The Spanish one is flying high right now.

Three things I'll say. And this is what I would call the macro consensus macro positioning. Most people think that the fed is not hiking. And if they are hiking, it's a hike or two maximum, and probably not until after the midterms. Two, the chance of a very aggressive cut cycle is much higher than the chance of a very aggressive hike cycle. 

Three, when you read that through to the dollar there's still this residual de-dollarization, you know, how do I rotate away from dollars US political risks. But what seems most interesting to me right now is I'll also say three things. The first one is the nature of the conflict has changed from this rolling 60 to a MoU to a rolling kinetic conflict, which brings upside risks to energy prices, gasoline and inflation expectations.

Brian 02:27 

This notion of this great wealth transfer. And we always want to look at what the labor market is doing and what consumption is doing on a traditional economic data sense. But when you think about the amount of wealth being passed from generation to generation, Boomers to generation Millennials or Alpha or Z, it's massive. And it might help explain some of this economic resilience.

Brian 02:50 

And then the third thing I'll say is on the AI CapEx story; the market seems to be linearly or maybe even exponentially extrapolating the pace of AI CapEx, which is needed to keep the growth impact the same. And right now, even though we've taken a little bit off the AI trade from maybe some Chinese competition, I think the market is missing the domestic political risks. 

Let me give you a better example. We're taping this in New York, the center of capitalism. Yet New York State has been the first state in the entire country which has banned data center building above a certain capacity for a whole year. All I'm saying is that the market is not thoroughly questioning the impact on some of these political tides that are turning, whether or not the house goes blue, whether or not, you know, democratic Socialists of America really succeed in elections. 

Patrick 03:39 

What about your clients, though? Are they talking to you about this?

Brian 03:42

Not really. If a client is mentioning the midterms or political risk, they'll say, oh, sure, the House will turn blue. And I think it's much more than that. It will be a central issue in the 2028 election. I know that's too far outside the market's horizon. But when you think about, you know, this is raising my energy costs.

Brian 03:56

This is taking my water pressure away, raising my water bill as well, which you guys talked about in the last podcast. This is potentially going to take my job. Like why on earth wouldn't every politician want to, you know bash against this? You know, what are the implications on that for this AI CapEx projections that the market wants to extrapolate into the future?

Patrick 04:14

Yeah. Okay. But can I push back on that? Because the other way of thinking about it is the market is all over this. So, since the June highs, the SOX has dropped 20% or so, despite Q2 earnings growing, I think kind of 130% or so. So, it would seem to me that the market is de-rating the sector into this event going into the midterms.

Patrick 04:34

Or is what you're saying that no one's connecting the dots between the political agenda on a state by state basis and that broader AI story where it's just a broader kind of AI jitters being back? 

Brian 04:49

Yeah, I think you'd have to go back to why have we rallied so much in the beginning in some of these AI related names?

And if you look at how some of these, you know, you talked about it with Kaan in the in focus on the Asia complex, you know, some of these names have doubled, maybe even tripled. There are certain idiosyncrasies with single name levered ETFs that I think you talked about with Alty and in a recent podcast as well. So you know, where we've been, we're far away from, you know, in short time higher.

Brian 05:13

Second, there is this notion of increased competition, which is forcing the market to call into question, what are the future cash flows going to look like? What are the future multiples going to look like? Future profits? I think that's the right conversation to have all the while. "Oh wow! Yes. As our equity analysts have portrayed in recent pieces, this could be the most transformational technology since the Industrial revolution."

Brian 05:34

So you have to respect that. But now, I'm introducing another potential headwind, which again, very few people will mention. I'll give you another example. Down in Virginia, Blackstone was meant to build this gargantuan data center complex, and there was local pushback. It went to the courts and they recently pulled their application. So, you know, there hasn't been a change in the elected officials there.

Brian 05:56

But there's certainly been a change in sentiment. And I don't think enough people in the market are thinking through what the implications are to risk assets and, and various other assets across markets. 

Patrick 06:05

And earlier, Brian, you talked about the great wealth transfer that, you know, is something that economists talk about a lot, but you're sensing that market participants and your clients aren't talking about it perhaps as much as they should do.

Patrick 06:16

Can you explain to our listeners what it means and why it matters to the US economy?

Brian 06:23

This idea that the baby boomer generation is aging into retirement and they are passing their assets down, their equity assets, their real estate assets. And if you were to ask six different economists, how are we meant to measure and pinpoint exactly when and where or how this is going to happen?

Brian 06:35

They'll all say different things, but they'll say, hey, this is going to be in the trillions of not tens of trillions of dollars. And then if you compare that to other transfers, you know, Covid, there was fiscal transfers. Those were also in the trillions of dollars. So this great wealth transfer could rival and again, maybe not in as condensed of a time frame, but could rival the massive amount of stimulus that was transferred from the government to private citizens during Covid.

Brian 06:58

Again, I just want to raise this as a question for listeners to consider. What does this do? Well, it probably raises the bar for the U.S. economy to enter a recession. It raises the bar for consumption to really fall off a cliff. It probably makes it easier for the Fed to hike and harder for the Fed to cut.

Brian 07:13

And those types of read troughs, we're just kind of spit balling here, but I think that the markets should really, seriously consider, well, in a world where consumption doesn't drop below 2%. Like, how could the fed ever cut? In a world where we didn't even talk about the government fiscal deficit, where the fiscal deficit is 7% and this great wealth transfer, nominal GDP hasn't been below fed funds since Covid, why are we thinking that we're at all restrictive in policy stance right now?

Patrick 07:36

So if you were now having to think about a trade to play these themes, right. So we talked about AI, CapEx and maybe that political domestic agenda not being fully appreciated by the market and this great wealth transfer that's propping up the US economy, possibly more than the markets appreciating. How would you trade that in terms of the Fed right now?

Brian 07:55

There are two ways of thinking about this. From a more thematic structural stance. I would say that anytime the ten-year yield drops or the two-year yield drops 25 basis points, I want to be there, ready to pay into it, because I know that the structural bones of this economy is well supported. We didn't talk about the mortgage rate and how half the mortgage is outstanding are lower than 4%.

Brian 08:16

That's as of realtor.com from last year. There are things that we may not fully appreciate that are helping support this economy and consumption that really make it hard for rates to fall. So much so when they do fall so much. And this year has been a good example of this "being greedy when others are fearful and fearful when others are greedy", when everybody is saying it's recession, recession, recession.

Brian 08:36

You have been paid each of the last few years to fade those recession fears. So that would be point number one when the market is concerned about maybe it is an AI CapEx wobble and equities fall 10%, rates will certainly go down. You want to have some powder ready to pay into that. 

The second way of thinking about that is, as I said in the beginning, very few people are talking about the fed embarking on a hike cycle of any real magnitude.

Brian 09:00

And those options to me seem quite cheap. And I think the market is giving you that opportunity from evolve perspective. Even cross asset, you look at where VIX is, you look at where files are, you know vol despite all these uncertainties, despite the fact that we don't know what the midterms will bring. We don't know in 2028 if it's going to be a DSA candidate.

Brian 09:18

There's massive uncertainty and I don't think vol markets are properly reflecting that uncertainty.

Patrick 09:23

Well we could talk about this forever and I'm sure we will as we leave the studio. But thanks for being here. I hope this has helped you get over the World Cup. 

Brian 09:30

It helps, but not solved it completely, Patrick. 

Patrick 09:33

I have to say it's similar for me, but thanks for being here.

Brian 09:35

Thank you very much. Thanks for having me.

Patrick 09:37

So it's been great to have been joined by Brian in the studio today, and it's a fantastic reminder about the importance of challenging the dominant market, consensus views, and thinking about what the market isn't pricing in. I hope you enjoyed the conversation. 

Please do hit subscribe and we'll see you again next week.