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00:00With us now, we've got Jonathan Golub. He's Managing Director and Chief Equity Strategist at Seaport Research Partners.
00:06All right, we were talking before we came on. This is, you said the Fed's going to do its job.
00:11You think that the markets are correct. Well, it's about 50-50 right now.
00:14Markets are betting whether or not they're going to hike, but you're foreseeing a hike after this jobs report.
00:18And first of all, I think the jobs report was even better than we're stating just with the payroll numbers.
00:23I mean, you brought in a whole bunch of new workers. You adjusted up the prior period numbers.
00:30I mean, this was a gangbuster report, and it reaffirmed what we already know is that the economy is really
00:37quite robust.
00:40And so the market is correctly assuming that the Fed is going to raise rates.
00:45Walsh told us that if things look strong, that he's inclined to raise rates.
00:50And I think that that's what the market's expecting.
00:54And so you ask, what would the market do if that comes to fruition?
00:59Nothing, because it only responds when it's surprised, and it won't be surprised.
01:04So the president feels very strongly about this issue, right?
01:08And he made the case yesterday that this was basically a sign of a strong economy.
01:13And a strong social, yeah.
01:14Exactly, and he's true social, as he normally does, and made a case for why the Fed should actually cut
01:21interest rates.
01:22And the vice president did the same thing the day before.
01:24And he has obviously put in Walsh as the new Fed chair, but the pressure is on.
01:29Will that have any impact, do you think?
01:31Well, you know, when you study markets, it's a lot about incentives.
01:36So does the president have an incentive for lower interest rates as we move into the midterms?
01:43Sure.
01:44Does Walsh have an incentive to be sensitive to rising economic demands?
01:50That was going to be my question. Does Walsh have an incentive?
01:50Also, yes.
01:51And so, yeah, so I understand why the president is pushing back.
01:56And it's not irrational, and it's not unexpected.
01:58And therefore, it'll keep you guys busy with news headlines and conversation, but we can save the time.
02:06They're likely to move, and the president will yell, and it won't matter.
02:09The other thing I found interesting about this job report was the revision from last month.
02:12It basically erased the loss from next month and revised it to, from last month, excuse me, and revised it
02:17to a gain.
02:18Is that, I've covered these quite a bit.
02:20I don't remember seeing one of those recently.
02:22Does that concern you at all, that the numbers were that off last month?
02:25Or is it just, I know August is kind of a hard month in general for these numbers.
02:28Well, yeah, I mean, first of all, there's all kinds of wacky seasonality things.
02:31Right.
02:32With, you know, with people getting jobs over the summer.
02:35Also, World Cup by a spike in hospitality sector.
02:39And teachers go, you know, in and out, and there's all kinds of things like that.
02:43But, no, these numbers get revised.
02:45Probably the best way to look at them is, you know, look at them like on a three-month rolling
02:50average.
02:50If you look on your Bloomberg terminal on what these numbers look like, they look quite jumpy.
02:55But if you smooth them out, you do see a trend.
02:57And the trend is, I mean, the most important thing is, we're not creating an enormous number of jobs over
03:02that, you know, last three months.
03:04That's because there's not a lot of new people entering the labor force.
03:07And we're probably absorbing everybody who wants a job.
03:10Is there anything concerning in the report to you or to economists?
03:15You know, there are things that I'm concerned about.
03:18I mean, first of all, I'm pretty optimistic.
03:20But there are things that I, you know, I'm always concerned about.
03:22And this jobs report wasn't one of them.
03:24Fair enough.
03:25We're also, and nearing the end of earnings season, you said you had a lot to say about that.
03:31It was a gangbusters earnings season, but maybe not so much.
03:34Talk us through what you're saying.
03:36Well, so first of all, earnings grew year over year by about 55%.
03:43Just to put it in perspective, a typical earnings season grows year over year by about 9%.
03:47So this was the only time we've ever seen anything like this, as far back as we have data, is
03:53when you're leaving a recession and you're comparing this V-shaped bounce when the economy is improving against a really
03:59lousy quarter a year ago because you're in the middle of a recession.
04:01So do we know what accounted for that this time around?
04:03Well, so a number of things.
04:05It was an accounting change, which basically forces these big tech companies to realize the gains on their passive positions
04:13in Anthropic or, you know, or some of these other companies.
04:19And as a result, first, that alone was 50, that 55% goes into the low 30s.
04:25So that was like two and a half earnings seasons worth of earnings just on this.
04:30And by the way, it's not like, you know, it wasn't the profitability of these companies.
04:34It was just the mark-to-market.
04:36Right.
04:37Okay.
04:37That was one.
04:38We have tariff refunds.
04:40And, you know, it's really hard to know exactly how much that plays through.
04:46But I'm guessing 3% of the number.
04:49Now, 3% of 55 doesn't sound like a lot.
04:52But if a typical earnings season is 9%, that's like a third of an earnings season you're getting from tariff
04:57-free funds.
04:57This is another issue.
04:59Let's say that, Jeff, you're NVIDIA and, Christina, you're Meta, and you sell Christina a chip.
05:06You realize the revenue on that immediately.
05:09But Christina doesn't quite realize the expense because she has to wait until her data center is built, and then
05:14they depreciate it over five years.
05:15So there's this revenue recognition against expense recognition that normally is kind of a shoulder shrug.
05:23But right now is a huge big deal.
05:25And then there's more.
05:26Did I get the better deal on that?
05:27Well, temporarily.
05:29I feel like this is like girl mouth.
05:30You got the money.
05:31You got the money.
05:33You're just not seeing the other side of it.
05:35But there's other things.
05:36You normally think that higher oil prices are going to be a bad thing.
05:40But the U.S. is an oil exporter, and the energy sector, I think, are earnings at like 140%.
05:47And they're like – they may only be 4-ish percent of the S&P, but 140% is such
05:53a big number.
05:54That adds.
05:55And then there's even more.
05:57The bank – no, I mean like everything couldn't go better.
06:00The banks are doing this enormous amount of lending and IPOs and all this stuff, and they're making gobs of
06:07money.
06:08And for some reason, the estimates were that that wasn't going to happen.
06:12Like it wasn't in the numbers.
06:13And I couldn't understand why the estimates weren't higher, and then they put up great numbers.
06:17So everything worked in favor of these numbers.
06:19Okay, but doesn't any of that worry you?
06:22Like are we – it just seems like a lot of numbers – we say in Washington a lot if
06:26you torture the numbers enough, they will confess.
06:29Oh, you don't have to torture these.
06:30I mean –
06:31No.
06:31But we're talking about circular credit.
06:33We're talking about private credit crunches.
06:35We're talking about, you know, these valuations and how real they are and whether they can really put up profitability
06:40to justify what they're going at as an IPO.
06:43You don't worry that this is coming for a crashdown or a letdown next season or in the future.
06:49So I just – I want to take on two of the things you said, one which I think you're
06:53underestimating one way and the other you're underestimating the other.
06:59The valuations are really low, and you can't go – I mean if a stock goes up from 10 to
07:0520, its valuation doesn't go up if its price went up.
07:08If the earnings went up fourfold, the valuation went down.
07:13The valuation on tech companies is below the long-term average now.
07:18If there's anything expensive, it's non-tech stuff because the earnings aren't coming through.
07:24There is an issue, and you kind of hit upon it.
07:29We have to raise an enormous amount of capital to feed the beast.
07:34And it would be one thing if we were just raising capital for data centers and AI companies and all
07:41this type of stuff.
07:41But we're – on one hand, record level of capital raises.
07:46And some of that is direct bank financing and revolving lines of credit.
07:49There's a million different buckets, but it's all financing this stuff.
07:52But then we're also seeing the largest increase in government sector borrowing because we have deficit problems, and they're competing
08:00with each other.
08:01You have to add those together, and it really does mean that there's – we're likely to see higher 10
08:08-year bond yields because of this competition for capital.
08:12So you asked me, am I concerned about the Fed, 25 basis points on overnight paper, which – that doesn't
08:19matter.
08:20But the fact that you could see the long end of the curve move up meaningfully, that I think is
08:27something to really be concerned on.
08:28One of the things that's obviously driving earnings for a lot of companies is AI.
08:32This week, NVIDIA acquired the AI startup Hugging Face for nearly $13 billion.
08:38What does a move of this size signal about the AI trade going forward?
08:43So the first thing is – I think they paid 80 times revenues, or I don't even – I don't
08:47– so I'm not –
08:48Seems like a lot.
08:49Right, so – but I think you have to strip it back, and as a strategist, I'm less focused on
08:56what does this specifically mean for the IPO of the company or something else.
09:00But what's the big story here?
09:03Number one is these companies are generating gobs of cash flow, and they have to put it to use.
09:11Now, they could return it to shareholders, or they can make investments in other things that support their role in
09:17the ecosystem.
09:18So this is Jensen Huang trying to find a smart place to park some of this money.
09:21What would you do?
09:22I mean, by the way –
09:23This is not a problem I have had is where to park gobs of money.
09:27This is not a concern that generally plagues me on a daily basis.
09:30It's one month of NVIDIA's cash flow.
09:33One month.
09:34One month of NVIDIA cash flow.
09:36Imagine that.
09:36So it doesn't – and there's benefits to their role in the ecosystem, the information they get from it.
09:43So I'm not evaluating whether this was a good or bad transaction, but I think you have to put it
09:49in the broader context.
09:51And by the way, if you listen to all of the other players in the space, they're all investing in
09:56a variety of these things,
09:57and they're viewing it as an ecosystem and a basket that they want to expose themselves to.
10:02We should note that that deal includes $1 billion as a retention plan to keep employees at Hugging Face.
10:08We should not know that.
10:09I don't need to know that.
10:10I mean, I felt better before I knew that too.
10:13All right.
10:14We've got about 30 seconds.
10:15Anthropic is upping its credit line to $15 billion.
10:18Bloomberg is reporting.
10:19And we're now hearing that that IPO may not happen until October.
10:22Is that a sign of anything, or is that just timing?
10:25I'm not sure.
10:26First of all, it's not crazy that you see investment bankers as they're posturing for an IPO to provide lines
10:33of credit.
10:34But I think it's a sign of the exact story that we're talking about, which is there's a lot of
10:38financing need in all of this CapEx activity.
10:42And this is just part of it.
10:44And some of it is on balance sheet, or some of it is through lines of credit or obligations or
10:49other things like that.
10:50All right.
10:51Well, if anyone you know needs to park a couple million, I'm happy to hold on to that.
10:55Four billion if it's just a month's worth of cash flow.
10:56Really, I'm here for any of the zeros.
10:58All right.
10:59Jonathan Gobb, Senior Seaport Research Managing Director and Chief Equity Strategist.
11:03Thank you so much for making us a little smarter on all of those things.
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