Why Wall Street is dead wrong about the AI tech panic

Welcome back. This is Trader Talk, and I am Kenny Pulcari, your host. And today, we've got Alex Giuliano, who is the chief investment officer at Resolute Wealth Partners. And again, a returning guest, Jay Pulloski from TPW Advisory. He is the founder. Gentlemen, thank you for joining me today. It's a pleasure. We've got lots to talk about, so let's just get right into it. We've got this Fed hike reality check, right? So last week or a couple of weeks ago,A month ago, we saw that they hiked, uh, they hiked rates to fight inflation. Um, I'm not necessarily sure that I thought they should have, but they did anyway. So let's talk about that now sends yields above, you know, well above 5%. We saw that, well, the tenure was at 5.25%. I think now it's above 510%. But that is going to cause some people, I would imagine people at the bottom end of the boom, boomer generation, which would include me, uh,To consider taking a portion of the money out and putting it in fixed income. You know, 5 and 510, 515, if people can, can guarantee that and put it in a treasury that's gonna allow them to sleep at night. Talk about, is that a good thing? Is it a bad thing? Is it a cashtrap.

From an investment perspective, one of the great questions I always ask investors who are especially in the retirement zone or about to retire, is what happens if the market falls 20, 30%? What's your plan around that, right?And you have an opportunity now where especially if you're looking at the Treasury yields and even in the sweet spot I find is a two-year period where you're getting over 4.5%, investors can find themselves getting paid. We were getting closer to 5%. We were, you know, a week and a half ago we'd have had a better opportunity. But even still with that little a bit of a give back, if you will, in the last week and a half, we're still at about 4.6, 4.7%, right? And so you have an opportunity to lock in at that level for two years if you're quote unquote wrong and rates keep.Going up, you, you, you, you're in for less than 2 years and you could sell early. If we get the rates to fall, you can sell for a gain early. And so it's a great opportunity to reassess, hey, do I really want to be positioned and ride in the momentum names I've had, or is that a place to, uh, well, you know,

if people take x amount, you know, if they take 2 years' worth of their needs, if that's what they want to do, and put it in the treasures and know that they could just sleep at night, that way, if the, this way if the market does get a little volatile, they're not so impacted that it's gonna.Worry about their immediate needs, I think, right?

Yeah, no, we, uh, I would agree, and, uh, we noted a couple of weeks ago that the market was pricing in 4 rate hikes over the next year. All right, and the Fed had said 1 in its start pot, and I'm in the camp of somewhere between like 1 and 2. So we actually made our first investment in our global multi-asset model, our first treasury investment in over 4 years, uh, and did by.Exactly what you suggested SHY, which is the 2 to 3 year, uh, ETF, uh, for, for the treasury market. And, you know, I, I think we've normalized considerably rates, right? And now you're at the point where those long end rates are actually doing the central bank's jobs for it, right? And you've had, uh, across the G7, so the developed economies, you've had roughly 200 basis points of anticipated.Central bank hikes taken out of the market over the last two weeks because the long end has, has backed up so much.

So you know, we came into this year thinking we were gonna get 3 rate cuts, and in fact it looks like we're gonna get 3 rate hikes, right? Uh, I don't think they do anything in October. Next week I don't think anything happens. I would agree. So, but I do think, or at least the Fed fund futures is suggesting a 94% chance of a December hike. And, and while I, I.I, I understand that that's what the market thinks. I'm not necessarily sure that a 25 base point hike in December really does anythinganyway.

Yeah, I mean, for me it's really a question of like two economies, right? We've got one economy which is kind of the AI buildout economy running quite hot. 25 basis points not gonna really impact that either at all. OK. Then you've got the other, uh, economy, the traditional consumer economy, which has been struggling, right? And you see that with the banks. I just noted the other day.That KBW, the bank index, has had 6 down weeks in a row. It's the worst since the great financial crisis. And so there's an argument to be made that if you're raising rates at the short end, you're actually negatively impacting the segment of the economy that doesn't need more negative impact. It needs some positive impact. And so I think that is probably going to weigh on the Fed in terms of like how many hikes do we want to make because they understand as well.That if you're, if you're in the AI business, you're not gonna be worried about 25 basis points and the rest of the economy, housing, etc. is very sensitive with, with mortgage rates over 7%. Well,

what mortgage rates are closer to 7.4%, which was interesting to me because, you know, I thought they were closer to 7%, and suddenly I realized they were closer to 7.4%. Now I'm not in the mortgage market, so I'm not right, but when I looked at it, I went, oh my God, when did that happen? I'mSurprised we haven't seen more of a pullback in house prices.

Ithink one of the things, Kenny, as somebody who was in the housing market, bought a house two years ago, but spent 3 years looking, right, is riding this wave over the last 5 years. I think the biggest thing, you know, when you're looking at the sellers is very market dependent, right? You know, in the New York City area, you've gotten the ability where, where things have held up versus other parts of the country. Well,

if people going in and paying all cash, OK, then that, then that carrying cost isn't gonna be $13,000. But if you're someone that's gonna take out an 80% mortgage.That plus the HOAs you're gonna be paying $13,000 to $14,000 a month. I'm sitting there scratching back going, who has thesejobs,

right? And that's why that, you know, in terms of the, if you're looking nationally, those price declines you've seen versus areas where you're seeing more of those old cash offers, you're seeing that dispersion in the real estate market. I,

I, I still think in New York it's foreigners that are coming here to buy, to buy places that's keeping prices elevated. Yeah,

you have that luxury end of the market that's definitely staying, staying true. But if you even look at thePlace like the Upper East Side, for example, you've seen some stagnation there for years and years and years, but the

prices are still high. They're not coming

down. It's a supply constrained market though, unlike a lot of other places, right? You don't really have the supply coming onthat do to have elsewhere.

I mean, I guess, I, I, you know, I, I'm just, I just continue to be shocked when I look at it. New York City, babe. Come on. Well, you know, that's what they say. I'm the only one. I mean, I listen, I.I guess, you're right because the prices are up there and, and they're not coming down. So, all right, so let's talk about oil because certainly, WTI closed over $100 on last week. Uh, so that's way up there again. We're coming into the midterms. I think, I think, I don't think it's gonna be a positive for the midterms at all. Um, so if the midterms in fact sweep, if the Democrats sweep both houses, what do you think is the market reaction?

Uh, oil market or in general? Well,

start with the oil market and then go with the general market. Yeah,

I mean, I think one of the things we're, uh, focused on at TPW is kind of the normalization process we're seeing because the way we think about the last, you know, 6 months since we invade, since we attacked Iran, you have oil driving rates and rates driving stocks. And so, you know, where we are in the normalization process is really important. And when we look at oil, we kind of feel.Like we're in that, uh, uh, trading range, right? Because oil peaked. If you look at Brent, it peaked at 100, around $120 in late April. And you know, today it's at $109. Uh, and we've had all this action. We've had attacks on the Saudi pipelines, etc. etc. and oil still is in that $100 range. And so we kind of feel like it's normalized, and that's one of the things that's helping, uh, rates normalize and then hopefully someday stocks. But in essence,You know, in terms of the oil market, I don't think the midterms are necessarily gonna have much of an impact because people talk about maybe Trump attacking Iran more aggressively. It's hard to imagine more aggressively, uh, and therefore rates probably, or oil probably doesn't do a whole lot. And if the Democrats sweep, I don't really think they have a huge amount of impact on, on energy prices.

And I think one of the biggest things, you know, from the market perspective, there's always gonna be an initial reaction, especially with a big political event, right? And the initial reaction tends to be immediately rebounded typically within the first week or two after that takes place. I think the more important driver for the equity markets is really looking at three things is earnings growth slowing, right? And that's held up very nicely. And so that's one of the concerns for the market. So persistent inflation, right, if that's gonna keep going with the oil.Markets, which you talked about, and then you have the dynamic of potentially rising rates. All those three things happening, it's gonna spell, you know, a little bit of a heat check, right, in terms of what the market's concerned. I think the bigger thing that people are underappreciating is perhaps the disinflation with the continuing stabilization or even growing earnings that could take place. And so if you do get some moderation in oil, that's really the sweet spot in terms of the labor market holding. Do you

think if they sweep.Then Iran comes to the table because they'll, because if they sweep and he loses control, he, meaning Trump loses control of the, of Congress because now it's all Democrats, that then Iran comes to the table and says to him, basically, you're neutered now, so you might as well make a deal with us. Like you're gonna stop being a bully.

I wouldn'tsay that's necessarily my.In this case, I think the bigger thing at that point is optionality in terms of what the administration can do. Maybe be a bit hampered, but that also would just lend credence to them continuing in the same path they're already on. And playing that long game seems to be the move that they're making in the absence of having more optionality. And so that's my expectation is to continue the path they're already on at that point.

Yeah, I don't really have a whole lot to add there. I don't think, as I say, my view is that oil is kind of normalized and the, the likelihood of significantly higher oil prices is pretty limited unless we put boots on the ground, which I think even Trump would, is not going to do. So to me it's more about, OK, does oil have room to come in significantly, and it does, it does, right, butThe other thing in terms of normalization is that if you look out on the, on the gasoline, so not oil, but gasoline here in the US, the forward curve is pricing on a wholesale basis, $3 or more a gallon out through next June, July. So the market's kind of given up on the idea that there's going to be a drop in price. So if you do have something happen.And it is, uh, beneficial to lower oil prices. You could have a big move and then that would hit rates. Rates would come down sharply, and then stocks would really rip, and, you know, that's kind of the thing that

inflation, but, but wait,

let's talk about rates for one minute because are you worried about the massive amount of issuance that Besson has to bring to the market coupled with the massive amount of corporate debt, you know, these AI names are gonna.to bring the market that rates are not going to come in that much.

Well, one of the things in terms of the AI side, I'm not a big believer that AI is crowding out, uh, any, anything else really. I note, for example, that AI issuance peaked back in the summer at about $140 billion of issuance in June. In September it was $20 billion. So it's, it's really declined significantly.Uh, in, in other, in, in the rest of it, I, I think rates are for the most part, again, normalized and therefore highly unlikely to kind of have a big move up or down. And as I said earlier, the fact that the bond vigilantes have stepped in here and central bank rate hikes are being taken out of the market is bullish. And we're at a point now where we've priced in the bad news. As I said, the bank index is down.Six weeks in a row. It's worst run since the great financialcrisis

is that, is that index regional super regional? No, it's,

it's the, uh, the main, yeah, the main, main money center banks. So it really to me it's, uh, it, it, the issuance issue is more about who now buys treasuries, OK, because the buyer base has shifted considerably. It used to be pensions, central banks, reserve managers, and I just read over the weekend.And that now those guys make up about 10% of Treasury owners and buyers and the hedge fund industry makes up about 35 to 40%. So when you see this rapid action in the treasuries, which historically is a very stable, you know, risk-free asset, it's in large part because the buyer base has changed and we now do have as the marginal buyer, the hedge fund community, which is leveraged.Therefore, I do think one has to be a little bit concerned as we, but we've seen it on both ways, shot up and then shot down. OK,

so let's move on because we're gonna run out of time here. Let's move on to tech. Certainly anthropic is expected to come in before Christmas or right around Christmas. Uh, they'll go to the NASDAQ. I'm not sure they're gonna hit 2 trillion. I don't know what you think about that. I think if they're in, you know, probably 1.5 probably sounds right, but even then I think people are gonna be cautious about it, um.Uh, but that being said, tech is certainly the talk. Everyone wants to be in it. You should be in it. I get it. But there has to be opportunity away from tech.Right, that we're looking at. So talk to me about,

and, and, so Jay mentioned the decline in the bank name specifically over the last few weeks, which provides an opportunity. Yeah, great opportunity there, you know, you actually get to play both the AI story, right, in terms of like big bureaucratic organizations, a lot of people, a lot of systems that necessarily can't be disrupted, um, and so having the opportunity to have AI go through the ecosystem and the banks gives them an opportunity to increase their profitability on that side.You have the ability, the consumer continuing to show resilience out there, right? And so riding the wave of the economy continuing to go on the path that it's

consumerdiscretionary is now negative on the year.

Consumer discretionary is, but if you look at the actual resilience in terms of the credit card, uh, rates and exposure, the, like all those numbers have come in either stable or declining, right? And so that, that the, the bank earnings lend credence to the consumer continuing to be resilient across the board, even with everything that we've faced, right, from that perspective. And so you have the consumer resilience story, you have the AI plus.In terms of like the, the AA benefits really trickling down through the financials and you have the dynamic like we talked about where rate hikes don't actually happen and the opportunities, but that potentially with, with the oil numbers coming down that inflation goes down that there may be a possibility that rates fall that the market's underappreciating. So with those three things you have opportunity with banks being flat on the ear to, uh,

well, banks, I think healthcare, look what happened out Cua stables has been really an outperformed the last couple of weeks because I did a lot of nervousness in the market, right? People still want to be in the market, but they don't want to be, they're moving out of.The move out of the, the sexy growth and we saw that big time last week between, uh, you know, the core weave, I think the core weave conversation lit the fire and then it becomes like a contagion, right? But I think what's interesting, and we talked about this, I think it was on, uh,I was talking to Varney, I think. Um.Is that you look at a place like Taiwan semi, they came out and crushed it last week.Blew every metric, yet they sold the stock because they're caught up in that core weave whole bond issue and can they support the debt and all that. Taiwan semi's got $110 billion of cash on their books. The bond market is not, I mean, their bond holdings is not an issue, but yet they get caught up in that selloff, which then creates the opportunity, right, for a savvy investor. Say, whoa, whoa, whoa, they're throwing the baby out with the bathwater. Makes no sense.

Yeah, well, I'm, uh, definitely in that camp and in terms of owning that stuff.Feeling the pain and thinking that, that the market just has it wrong. I wrote, uh, uh, uh, a, a piece on Friday called The Black Cat Market arguing that the, the buyers, investors are superstitious, right? They don't believe the sustainability of the earnings story. And so you have the semi-chip makers and the memory stocks in particular trading at ridiculous forward PEs. The, the, the.South Korean memory stock. South Korea itself is trading at an all-time low on a forward PE basis. It's trading at like 5 times forward earnings. So to me, the opportunity is right now in the tech space. Uh, these things, uh, the market short-term, the rental for, uh, GPUs is showing that short-term demand is very strong. And then long term, you have, as you say, TSMC, ASML.

ASML came out last week said they can't keep up with demand through 2028, but

this is my point. They are telling you that they are sold out for the next two years, and the market doesn't buy that either. So at some point it's gonna be like, OK, you know, we're wrong, and, and we're gonna own this stuff. And so you have an opportunity where the PE in the, in the semi-space and in the tech space in general is at 3 to 5-year lows. Nvidia is selling it at 10.Year low on a forward PE basis. Then you have the banks, as Alex said, completely agree there. And then you also have small caps because small caps have also had one of the worst runs in years over the last six weeks.

Well, because, because rates had ticked higher, right? So much more sense. But look, I still think we're in the very, very early stages of this AI. I don't even think we're started the game yet. I think we're still in the batting cages, right, in terms of where we are in, in this

AI story. But I think the big thing is we're facing.The evolution period now we're like, OK, you know, like Jay mentioned, like people aren't trusting the earnings and the potential growth that's there, and you think you're gonna start seeing that dispersion where people are gonna start trusting and leaning into the ones that they trust, and the ones that aren't are gonna face much more challenges proving what that's, well,

and that's always right, but we're gonna see now as we move through the earnings season because like I said, we already had NSL. We had Taiwan semi. Tomorrow you're gonna get SpaceX. Tomorrow night after the battle. I'm really curious what they, you know, what happens with SpaceX, um.

And then you have the big hyperscalers and then you have meta on Wednesday and, and the big hyperscale was next week and I think, you know, people are gonna have to kind of come to grips with the reality of a very solid near-term and medium-term, you know, demand outlook right as you say, we have just beginning the agentic, uh, AI economy, and we haven't even started the physical AI economy. And so all of it, I mean, to me it seems quite clear that demand.It's gonna be robust for the next several years and we want to participate in that. You're getting a chance, in my view, pretty much unique chance to buy the best earnings bath in modern history at the cheapest forward multiple. I mean,

right. I look, when I look at names like ASML, we own it. The firm owns it. Taiwan sent me the firm owns it. I think those are great opportunities when they sell them, when, when the market sells them off after they come out with those numbers and you understand what the demand is, and you understand what the, you, everywhere you.Look, the demand is immense. Um, and so I think it's, I think to your point, it's right. I think, you know, there's certainly opportunity, but I think there's also opportunities, you know, you always have this conversation about other parts of the market where can people put money and you saw that last week. Like I said, energy did well last week. Consumer stables did well. Healthcare did well, right? You, and tech are crushed, right? Um, and you look at some of those, like the memory names are down, down 7 or 8%, right? You look at some of the quantum names just on Friday alone were down 8%.Um, and I think that's another area actually quantum that's gonna, that's gonna sneak up on people, right? Like it's, it's volatile right now. I think,

I think one of the things, Kenny, you know, people are looking to figure out where they could put money, right, but also taking much more of a barbell approach. I'm getting paid on this, on the, on the short end, right, not taking too much risk on the charging market. Yeah, the mini rotation next week in terms of names that are both yielding, have pricing power, and if we do get a pullback in rates or or a lack of inflation.You have the opportunity to the

treasury market presented an opportunity last week when, when the tech was already getting crushed. People wanted to go into safety, but the, but the bond market trigger had gotten so oversold it, it was almost a value play as well, right? It was both the value play as well as the flight to safety, um, and I think, you know, as, as we get a little bit more volatile.And I think we're gonna continue. I think the volatility is gonna continue for a while, at least I think until we go through midterms, which is what, 3 weeks away, 2, 2.5weeks away.

And let's not forget the rest of the world too, right? We have a whole another, you know, we have all, all the other markets out there which are, uh, I think opportunities in various and sundry places. You think about Japan.Uh, we think about Latin America. We think about emerging markets like Poland or South Korea with the memory, uh, stocks. So I think there's also

a lot of stocks inthose, in those markets

in South Korea. Yeah, South Korea, South Korea, Poland is more domestic, uh, demand and European growth play and also a real play on any kind of, uh, uh, ceasefire in Ukraine. Uh, there's an ETF.There are for so many things, right? EPOL is the, uh, symbol for the Polish ETF, and it's done great. It's up over 20% year to date. It's doubled the S&P return. That's an example. EPLO. I have to look it up, and ILF is the Latam, uh, ETF we own, which Brazil has a big election coming up, right? And, and if, uh, I think either way, but certainly if the more.Conservative, uh, candidate wins, the potential for rate cuts. We're talking about rate hikes here. The potential for rate cuts in places like Brazil are absolutely because

rates are, ratesare extraordinarily high,

very high, yeah. In Brazil you have real rates, real, not nominal, real rates of 8%, so they can come down dramatically. Yeah.

Tell me what you think about fossil versus renewable ener uh, energy sources.

So I think you've obviously seen the trend over the last few years, right, where you had major investment in the renewal space and people are wondering, you know, ultimately, can we make that transition? You mentioned the political situation we have in terms of elections and how that may play out. I think the bigger thing is continuing to have the energy independence play in the United States, especially with everything we've faced, and, and having the investments in renewal continue to build upon himself. Are you betting on nuclear? I think nuclear is a tremendous opportunity for the country. I think the only holdup to nuclear is really the political.Landscape at this point, right, and that's a long game, multiple decades, right? And if we can find a way to really position that in a way that it's palatable both from political and also from the United States population, I think there's a massive

opportunity. I think nuclear has evolved. It's not the same nuclear it was when, when we were kids, right? Um, I think it has evolved, and I think that is gonna play a, a bigger role going forward, at least in, in

energy demand. I mean, to me, the issue is the market doesn't want to pay for present earnings.So stuff that's a far, that's way out there like quantum, like Muer, I think really struggles here because higher rates mean a higher cost of financing, means more difficulty in terms of understanding what actually is going to play out. And, and you just have to understand the market. It's not willing to pay for stuff that's out there. And the issue with clean or fossil versus renewable is that fossil fuels for all the angst have massively outperformed.Y XLE is up about 50% year to date in renewables. You look at something like ICLN or lit, they're, they're flat to down. And so part of it's competition because you have, you have tremendous demand for renewables, particularly outside the United States. And yet you have a, an ecosystem that's China-centric where the competition is so stiff they're not really able to make money. And so the market is not.You know, it's not willing to pay. And then you get back into the, again, the issue of, OK, higher rates means things like thematics, like clean energy, uh, are more problematic. People have memory of last time rates backed up. These things got absolutely crushed. And so, you know, people are not really willing to hold on. I, I still think they're attractive. We own ICLN for example. We own Lit, for example, which is the lithium and EV, uh, ETF.Uh, and we own XLE, so we're kind of playing again to your, your point now. It's a little bit of a barbell, uh, but boy, I'll tell you, you know, it's, it's, uh, it's been tough in the, in the renewable space.

Yeah, yeah. What's your view in terms of the economy? I don't see us slowing down. I think the economy is strong. I think it continues to be strong. Uh, I mean, unless suddenly, suddenly they jam retire, but I don't see that happening.

I'm, I'm in the camp of the disinflation without recession expectation right in position.around that. And that comes to that barbell, right, where you have the earnings growth, especially in the tech names. I think people are gonna get a lot more selective as that, as that market tends to evolve and some of the speculation and froth names people tend to avoid and looking much more to the semis, especially in terms of a place to go. I think the biggest thing investors are looking for again is, what is growth, is growth slowing in terms of earnings? Are we having persistent inflation and are, is the oil markets continuing to rise or are they starting to have that persistent inflation wane?And the absence of having all those three things at the same time, I think provides an opportunity for the equity market to continue to go up. Yeah,

we look at the world through, uh, what we call our TPW spending super cycle, right? We've been arguing for most of this year thatEurope, Asia, and the Americas are spending on AI, defense, and climate, and that spending is unprecedented and is sustainable for years. And so we talk about a global growth long cycle that we expect to play out through 2030. So when we talk about 206 and 207, clearly that's part of that. And when we think about, so that's globally very constructive on growth.Uh, globally. When you look at the US, I mean, you know, 6% budget deficit, 8% nominal GDP growth, uh, you know, you're not gonna have a recession. When you have a budget deficit of 6% in peacetime, absolutely no way you have a recession. You may have an issue, as you said, with, you know, all the Treasury issues we have to do to pay for that, fund that. That's a different question. So US.You know, growing probably 2%, give or take, uh, real, right, and 3 or 4% inflation gets you 6, 7%, uh, nominal growth. And with that environment, much as we saw with COVID, earnings are gonna be fine, earnings will be, you know, you're not gonna have a problem with earnings when you have nominal growth of 7, 8%.

Well, gentlemen, we've run out of time. Once again. I've enjoyed this conversation. Thank you very much. Until the next time, take good care.