The Convexity Maven

Recorded at 5.30pm EST on Wednesday 11th November.For Episode 103, we are joined by fixed income legend Harley Bassman, creator of the MOVE index and the man behind The Convexity Maven. Harley explains why this rate cycle is about fiscal malfeasance rather than inflation, why TIPS at 3% real are the wrong number, why re-IPOing Fannie and Freddie is a moral hazard disaster, and why things get “very jangly” if Treasury yields approach 6% again. Benny & The Squirrel is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.Show NotesHow to Read The MOVE (index)* Harley created the MOVE index (the “VIX for bonds”); first published in 1994, with internal data extending back to 1988/89* Historical MOVE range was 80 to 120; more recently 60 to 100, or 70 to 110* The MOVE is a real number, not a rebased index: a reading of 100 implies a one standard deviation (68%) chance rates are plus or minus 100bp a year from now* Divide by sixteen (technically by 15.9, the square root of 252 trading days) to get the daily implied move: a MOVE of 100 means roughly 6bp per day; a VIX of 16 implies a 1% daily S&P move* “All of vol trading is ninth grade statistics dressed up with Greek letters to justify higher fees”Why convexity is hard (Minute 4)* Volatility confuses most participants because it is non-linear and path dependent; a bond that travels 100 to 110 to 90 and ends at 101 made one point, but an option’s outcome depends on how you get there* Humans think in two dimensions; convexity is a three dimensional problem, and most people are neither paid nor trained to think that way* Leveraged ETFs paying 2x or 3x the daily move are a massive short convexity position few holders realize: up 10% then down 10% leaves you at 99, and repeated round trips grind the asset toward zero* This year has been a live lesson in path dependency, with rates walked up and down repeatedlyWhat is really driving rates (Minute 7)* Harley argues the rate rise is not about inflation: ten year breakevens have sat near 2.35% for three years straight* The real driver is the fiscal situation: a roughly 6% deficit with 4.1% unemployment and solid GDP, which historically only happens in war or recession; a real recession could push the deficit toward 10%* The Treasury will borrow about two trillion dollars net this year; AI capex adds another 700 to 800 billion, meaning a handful of tech companies will borrow roughly a third of the federal deficit* That supply dynamic explains rising rates across the West, the US in particular* On Michael Green’s passive thesis: Harley is agnostic, noting active bond managers still beat the index, though he concedes supply one day equals demand* As a University of Chicago-trained monetarist, he holds the old rule that ten year yields should sit near nominal GDP: with nominal growth around 6%, a ten year at 5% is not crazy and 3% was the wrong number* He is a self-described inflationist: expects inflation near 3% for a long time, driven partly by millennial household formation, an echo (smaller in percentage terms) of the boomer “pig in the python”Fiscal politics and the inflation exit (Minute 14)* On the three variable problem (rates, currency, fiscal): you can only control two; Japan controlled rates and the yen went from 80 to 160; the US faces the same arithmetic* MMT was theoretically right (borrow until inflation appears, then tighten) but politically impossible: politicians are paid to get reelected on two year cycles, not to cut spending or raise taxes* The silent default will be inflation, a stealth tax on the middle class; run nominal growth above the debt rate and debt to GDP burns down, as after World War IIThe mean vs median economy (Minute 17)* Stocks are fine as long as unemployment stays below 5%, because millennial 401k money recycles into passive indices regardless of price* His advice to his own kids: “max the 401k, take the match, 70 to 80% in an S&P index fund, the rest in a five year IG fund, reinvest, call him in thirty years”* The post pandemic “jaws” between the S&P and consumer sentiment is simple mean versus median: in a village of ten where one person earns 500k and nine earn 10k, the average is 50k and the median is 10k; nationally the economy looks great, individually it feels terribleThe Fed cycle and rate levels (Minute 22)* The Fed will keep hiking as a reults of hubris; Powell and Kevin Warsh both want to be Volcker, not Burns, so they will keep tightening until inflation is resolved. Harley thinks the Fed has a couple more hikes in it.* His levels: hard to see two year notes above 5%; ten year fair value is 4.35%, but he has no problem with tens trading up through 5% before falling back* At some point a government guaranteed yield beats stocks at a giant PE; a 30 year TIP at 3% real makes him ask why a pension or insurer owns equities at all* A 20% equity drawdown would scare people but not change the economy, since the top 10% own most of the market and their spending barely moves; hosts counter that RSU driven layoffs and upper quintile consumption are real transmission channels, which he partly concedesMortgages and MBS (Minute 32)* He likes mortgage bonds now: think of a Fannie, Freddie, or Ginnie bond as akin to being long a ten year bond at 100 and short a three year call struck at 105* Current pickup is an additional 100 to 110bp of spread versus roughly 50bp for Investment Grade credit* The bigger driver of MBS spreads is the yield curve, not rate or vol level: the flat, inverted curve (two year up far more than ten year over recent months) explains spreads near 110 over versus a 75 long run averageGSE re-IPO and moral hazard (Minute 35)* He is firmly against re-IPO-ing Fannie and Freddie: privatizing gains for shareholders while socializing losses is classic moral hazard* Housing is 16 to 17% of the US economy; the government will always backstop the GSEs* He hints the investor base in GSE common stock explains the political push (“you kind of know what is going on here”)* What killed the GSEs pre GFC was running as government sponsored hedge funds, buying their own MBS, hedging with futures, swaps, and options to earn a spread, with management cashing options before the blowup. To recreate those incentives would be “nuts”* Why mortgage spreads move with the MOVE: MBS is short a call option, and option prices rise with implied vol; if the short call goes from four points to five, the bond drops from 96 to 95* The MOVE is an imperfect hedge vector for MBS: it measures one month vol while mortgages price off three to four year expiry options* Treasury vol no longer trades; swaption vol is the market since the early 2000s (Fannie and Freddie drove the shift): global liquidity, no repo or borrow costs, effectively infinite issue sizeThe Treasury basis trade and CTD risk (Minute 44)* The basis trade (long cash bonds, short futures) is now carrying water for the US government, absorbing supply; pension funds are the natural futures buyers, wanting thirty year duration off balance sheet while earning credit spread from five year corporates* The fragility: in volatile markets, cash and futures decouple, mark to market losses force risk manager stop outs, as seen when Treasury injected liquidity a few years back* CTD (cheapest to deliver) risk: each futures contract has a basket of deliverable bonds with conversion factors, like grades of wheat in Chicago; a rate shift can flip the deliverable from an eleven year to a nineteen year bond within weeks* If rates approach 6% again, “it will get very jangly” as futures holders stop knowing what they own; no defaults, just more volatility* Basis trade capacity is vol governed: risk models cut the trade exactly when the market needs absorption most; last cycle the funds actually won because the future extended duration faster than the cash bond* On persistently negative swap spreads since the GFC: Bassman says they reflect balance sheet costs and accounting constraints, not stupidity, and pushes back on th… This is a public episode. 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Recorded at 6.10pm EST on Sunday 8th November.The dust is still settling after Thursday’s washout. NVIDIA has sliced through its 200-day moving average and is getting marked down in the perps market going into the weekend. The Anthropic IPO price talk is drifting toward our number (sort of). Chinese stocks have ripped 12% against the S&P in seven days on no news, right as the earnings revision streak finally rolls over. So what now?Benny & The Squirrel is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.Show NotesNVIDIA, The Highlander, has a tough week ahead* NVIDIA is being marked down roughly 2.5 percent in the perps market (Hyperliquid) on weekend China Honeypot spy scandal news.* The stock sliced through its 200-day moving average at the end of the prior week and barely recovered on Friday, setting up a potentially tough week for the market leader.* Core question: can the broader market rally properly if NVDA is not participating?“What Now” After the Puke (Minute 3)* The 🐿️ took his hedges off into Thursday’s washout and is now thinking about what conditions warrant putting them back on.* Revisiting the CoreWeave CDS blowout (”the snap of the jaws”) as the tell that blew out the “situational awareness” fund manager for a second time in a year.* Looking back to the late May and June period when CoreWeave CDS was at the tights and the Nasdaq at the highs; the “echo boom” gave a false sense of confidence before everything caught down.Anthropic IPO Repricing (Minute 5)* The market needs to be stronger for the Anthropic IPO to get done convincingly; hedges likely go back on once Anthropic’s pricing is in the rearview mirror.* Price talk has moved toward his estimate, but a 30 to 40 percent range signals the underwriters have no real idea where it prices, and they have had pushback.* Precedent-setting moment: a pre-IPO trillion dollar repricing is unprecedented; his constant view was it was always going out at a trillion (even at the June peak of AI euphoria).* Valuation caveat: fundamental valuation work is deeply out of vogue, so all of this is guesswork.Does the Index Level Matter? (Minute 6)* Debate over Mike Green’s view that index price has no macro value and is “the dumbest macro product on earth.”* Counterpoint: in a hyper-financialized economy, consumption is a derivative of where the Nasdaq and S&P trade, so the index is a valid macro indicator via the wealth effect.* The index level drives human behavior and matters for macro, but day-to-day index readings contain little information; the violence beneath the surface is the true harbinger. Historical markers cited: late January 2018, September 2018, February 18 2020, late 2021, and right before Liberation Day (February 18 to 19).Positioning: GS Prime Slides (Minute 9)* Gross leverage is still high (around 310%) while net exposure is down; the net decline is not genuine deleveraging.* Thursday was clearly a machine selling day, with many humans already out of the way.* CTA equity positioning remains elevated; by no means has all that systematic selling happened yet.Earnings Season Reality Check (Minute 10)* The bull narrative of relentlessly rising forward earnings has been “shot in the head”: consensus S&P EPS missed at the index level, while numerous stocks with good prints fell 5 to 15 percent.* Aggregate year-over-year growth (roughly 30 percent) hides a weak median participant; the average company is effectively in a recession and a bear market.* The market is repricing how it discounts 2028 to 2030 AI economics while 2027 capex probably remains safe.* Rate-sensitive orphaned assets have rallied since early October, but that does not make put them in a bull market; the only way forward if the AI trade fails is much lower rates.China: Confucian Confusion (Minute 15)* New piece published over weekend covering whether another bull leg in Chinese equities is possible.* FXI vs SPY has snapped back roughly 12 percent in seven days on no news* China proxy pairs (for example Li Ning as “China’s Nike”) have outperformed their US equivalents* Critically, this happened against aggressive negative earnings revisions: the streak of upward CSI 300 revisions running since summer 2024 has now turned down abruptly.* The summer 2024 positive inflection in earnings was the original entry signal.* Core framework: stocks rise where governments are spending and earnings are being revised upward. * US angle: fiscal support is effectively underwritten by the AI capex schedule; a slowing rate of change in that capex is as impactful as a government cutting fiscal spend.* Sector-level revision breakdown for CSI 300 and MSCI China: analysts are fading the consumption recovery hard and pushing it out, yet the market is fading those cuts in price.* Tech hardware and materials show the inverse: stocks getting drilled while analysts still raise numbers, a massive multiple compression dynamic.* Credit impulse has turned up again and looks like a buy.China Positioning and FXI Shorts (Minute 21)* FXI (4 billion AUM, roughly 800 million daily volume) is the standard tool allocators use to hedge China within broader EM mandates without selling the underlying.* Historically, peaks in FXI short interest have preceded rallies in Chinese stocks; shorts look crowded.* China remains a stock pickers market, not a place to grab beta indiscriminately, and not until actual stimulative policy arrives.Benny & The Squirrel is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.If you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

For Episode 101 of ⁨the show, we were joined by Daniel Peris, head of the Income and Value group at Federated Hermes. Dan explains why cash in hand beats contingent gains, why total return is a broken measurement, how the S&P 500 stopped measuring the market and started driving it, and what a historian and former Sovietologist sees in the long decline of Russia.Benny & The Squirrel is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.Show SummaryDan’s dividend philosophy and its origins* He came to dividend investing through a historian’s critique of total return as the dominant, quasi-statutory measurement framework.* Transitioned from academia (Sovietology , later modern Russian history) into financial research in the early 1990s, then migrated toward dividend-oriented portfolio management.* His core lens is agency costs: as a minority shareholder with no control over CEOs or boards, the dividend is the tangible manifestation of business ownership.* Focus on cash flows from large companies he does not control is an almost natural historical framing, given recurring human behavioral patterns in markets.Historical basis: dividends as the norm (Minute 4)* Until the 1980s, serious issuers came to market with a cash flow attached; stocks without dividends were considered speculative or defective.* The capitalization ladder was bonds (fixed coupon), preferreds (fixed coupon with priority), and common equity (riskiest, but with a growing dividend). There was effectively no “no dividend” option for credible companies.* Nineteenth-century railroad stocks are the archetype: entire capital structures were built around the commitment to pay. The business ownership relationship is thousands of years old, and stock-market dividends roughly 200 to 400 years old.* Dividend investing has fallen out of fashion in the U.S. over about forty years for reasons he acknowledges, but he keeps a plain vanilla business-ownership approach for conservative, often business-owning clients.Buybacks versus dividends (Minute 7)* Peris reframes the Kenneth French quip: buybacks divide people who understand finance from people who understand business ownership through the stock market.* A buyback is a liquidity event for share sellers; a dividend is a business outcome for shareholders. Fundamentally different phenomena that have been “smushed together” for convenience.* He objects to companies presenting “dividends plus buybacks” as a combined cash return (the “buyback yield” or “shareholder yield” framing).* Dan cites analysis showing announced buybacks are often far less effective than claimed: investment bank frictions, poor execution prices, and share counts that shrink much less than advertised.* Exceptions exist: large dividend payers like big energy and phone companies that genuinely and persistently reduce share count, allowing per-share dividend growth without runaway aggregate payouts.Tax treatment debate (Minute 12)* The elephant in the room: dividends create taxable leakage versus buybacks. Peris pleads “guilty as charged” but refuses to subordinate investment policy to tax minimization.* Taxes are a sign of success; the current regime is historically benign since qualified dividends and long-term capital gains have had equalized rates for about two decades, whereas parts of the twentieth century saw dividends taxed far more heavily.* Some investors organize their entire financial lives around tax avoidance out of anger; that is a business model for some advisers, but not his approach. June 2026 selloff days like this one show that capital-gains-only exposures carry their own risk.Critique of total return as a measurement (Minute 14)* His method: ask where the rules came from, whether they were fit for purpose then, and whether they still are. Much of modern investment practice (MPT, the S&P 500, total return) is a product of the 1950s to 1970s.* History of total return: academic research in 1924, referenced by Ben Graham (1934), T. Rowe Price and Babson’s, Lorie and Fisher (1964), became standard on brokerage materials in the 1960s through 1980s, and was only permitted on documents by the SEC in 1988. It is roughly fifty years old, not a timeless principle.* Total return is fundamentally a product of daily pricing technology. Without daily prices, the concept would not exist; in the nineteenth century, income streams were the only realistic information investors had.* The S&P 500’s introduction in 1957 as a daily index was a genuine technological marvel, and combining daily price change with dividend yield was an innovative, useful shortcut at the time.* The problem: the shortcut conjoins two unrelated phenomena, a market phenomenon (daily price change) and a business phenomenon (a company distributing a share of profits).Cash returns versus contingent returns (Minute 18)* Dividends and realized gains are real cash returns; unrealized gains are contingent returns you cannot consume, pay rent with, or reliably borrow much against.* Economics holds that the ultimate point of investment growth is funding consumption, and only realized cash can do that.* Acknowledges harvested capital gains count as “real” once sold; the issue is mixing unrealized price moves with actual cash in a single number, which was defensible in the dividend-rich 1960s and 1970s but has become less helpful.* Brokerage statements routinely show unrealized gains and losses prominently while hiding aggregate income behind toggles, and yield reporting varies.* He cites the 2022 paper “Reconsidering Returns” by Hartzmark (University of Chicago) and Solomon (Boston College), which found brokerage statements handle this badly and that few even attempt to show total return properly.* True portfolio total return is genuinely hard to compute because of unrelated cash flows (401(k) contributions, withdrawals, fees, taxes) and the arithmetic versus geometric linking problem; he jokes the word “geometric” kills podcast audiences.* His reform proposal: statements should distinguish cash returns from contingent returns for the current period and over time.Siegel’s Stocks for the Long Run (Minute 24)* A cottage industry of high-end academic debunking of Siegel’s long-run return data now exists (Peris notes Edward McQuarrie at Santa Cruz and financial historians reworking nineteenth-century data), and Siegel has responded responsibly.* Key challenge: the roughly 10 percent historical equity return implicitly assumes free, frictionless dividend reinvestment, which drives about 90 percent of actual account returns, yet reinvestment was historically hard and expensive, so realized returns were likely lower.* Modern improvements (no broker charges, near-instant reinvestment, fractional shares) changed this. Any reinvestment delay creates drag, so frequency matters.The Global Context (Minute 27)* Large, mature, highly profitable companies paying no or de minimis dividends is a uniquely U.S. phenomenon; European and emerging markets, and historically dominant markets like pre-1917 Russia and pre-1940s Germany, were “all about the coupon.”* The current U.S. dividend-free culture of the last thirty to forty years is anomalous both against U.S. history and against other developed markets. He concedes the era’s productivity success is real, but his research zigs where the market zags.* On dual-class and non-voting share structures: his fund avoids them; agency costs become too high given passive investors elect boards and “imperial CEOs.” Missing Tesla, Broadcom, or similar names is an acceptable cost; there are other fish in the sea.Then versus now: the 1960s profit pool (Minute 31)* In the early 1960s, despite being an industrial, high-capex economy, companies reliably shared profits with minority shareholders via dividends.* Today capex as a share of sales is lower yet profitability is far higher, and there is minimal inclination to pay dividends; the money goes to buybacks and acquisitions. Two very different market worlds, and few divi… This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

Episode 100! Benny & The Squirrel hit the century mark!! Markets into the midterms, the Anthropic IPO, why Google and Amazon got hammered while Oracle ripped, and the one trade that has held the book together since June.Benny & The Squirrel is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.The LLM MonitorShow SummaryAnthropic IPO Note* The podcast kicked off with a 5-minute run through of the 🐿️’s weekend note on the Anthropic IPO. Find it (no paywall) by clicking on the image below.Midterm Elections (Minute 5)* Brazil last week was a salutary lesson against treating political outcomes as foregone conclusions.* Pollsters have had a terrible decade; Democrats reportedly ahead in the Kansas Senate race, GOP more or less stopped funding North Carolina.* Structural wrinkle: Democrats need one extra seat because J.D. Vance holds the tie breaking vote as VP, and even then a one seat majority is fragile (the “Fetterman effect,” swing senators needing to be whipped or bought).* Polls cannot capture the sheer money in specific races: hundreds of millions from Musk on the Paxton versus Talarico Texas Senate Race; Musk’s total cycle spend is around half a billion dollars, making him the largest political donor in history, ahead of Soros.Market Internals: Hidden Bear Market (Minute 7)* Recap of the structural bear market call: roughly 60% of individual stocks were already in bear markets (down 20% from highs).* Two distinct drawdowns: September hammered out of favour, rate sensitive and GDP sensitive names; October broadened the selling.* September weakness partly mechanical: many mutual funds and the government have a fiscal year end on 30 September, so tax loss selling of losers is traditional, with those names then resold into October.* Triple C spreads show the biggest divergence “of the century” versus BB (the best of junk) and the high yield index average, though triple Cs are only a small sliver of the index, so no panic yet.* Is the credit story simply the continued selling of the most toxic remnants?* Ties into Mike Green’s passive dynamics: money comes in, spreads tighten, issuers keep hitting the bid; high yield still has capacity on a normalized basis.* IG is where hyperscaler TMT issuance has blown out spreads since last September; sector risk limits then force mechanical reallocation into other, sometimes terrible, credits at their best ever spreads relative to fundamentals.Machines vs Humans (Minute 10)* The S&P index is only about 3% off its high, but the trading underneath has been violent: rate sensitives smoked in September then rebounded; tech held in then dumped.* Nasdaq futures sit near the 200 day moving average for the first time in a while.* COT data (large and small spec length) shows the October drawdown barely dented positioning: the humans sold, the machines did not.* Sell side says CTAs have sold heavily, but the 🐿️, with 15% of NAV in trend strategies, sees no major equity index reduction in his own CTA holdings; vol target funds also remain very long because realized vol has remained depressed.* Thesis of Benny’s upcoming “casual barbell” essay: fewer humans matter at the margin than ever, so discretionary deleveraging is largely done and the systematic, mechanical players are the latent bag holders; if realized vol picks up, those are trapdoor sellers with no discretion.Primary Supply (Minute 13)* Anyone under 41 on the Street has never seen a genuine multi year bear market (2022 probably does not count).* New and untested dynamic: the net supply of primary equity paper. Giant caps doing $90 billion equity raises and straight to the top of the index IPOs were flagged in May and June when they turned bearish on the AI trade.* The question to ask: why are the richest companies and executives in the world taking your savings, and why move down the capital stack to equity this early? Implication: the IG market was tapped out unless capital ratios improved first.Hyperscaler Capex Reckoning (Minute 16)* The narrative has shifted to free cash flow, which we flagged (way too early) back in April and May.* Oracle, “the dog of the hyperscalers,” rallied massively when Ellison merely hinted at spending a little less; Google and Amazon got hammered on their prints.* Cloud growth is no longer the driver; investors now watch capex and cash burn; relief rallies now come from spending restraint, and the revenue side of the AI equation remains unanswered.Google: Search Erosion Arrives (18:30 to 22:10)* The “AI chatbots kill search” narrative from mid 2024 finally showed up in the numbers last quarter; those who bought that panic low did incredibly well.* Search erosion is coming home to roost alongside unyielding capex.* Both hosts pay for Gemini Pro and rate it highly (Nano Banana image generation is best in class), yet Google now front runs its own search links with AI summaries.* Framing from the NYC dinner with Mike and Hari: “search” is retrieval, “ask” is intelligence, and “ask” is coming for the search business.* Defence of Google: to stay in the retail LLM game it had no choice but to put its advertising cash cow at risk; unlike Kodak or newspapers, it is at least being proactive, but the fundamentals of its old utopia have changed.Politics Returns (Minute 22)* Blue wave and blue tsunami talk is everywhere; remember Brazil and wait for all the dice to roll before pre positioning for a Democratic sweep.* The September setup (long GDP sensitives, housing, bonds) to front run a sweep already worked; the October bond rally has made the trade much more coin flip like now.* The AI trade is such a large share of the market that political flow can dominate price action regardless of AI headlines.* Data centres are the sleeper political issue: Democrat opposition to manufacturing tax breaks traces to data centre backlash; many projects are being overrun and it has become bipartisanly unpopular remarkably fast.* Driver is the visible wealth divide: trillionaires, $20 to $25 cocktails, offensive New York rents; if you are not a winner in Menlo Park or Manhattan, why support what is creating this.The Equal Weight Trade and Correlation (Minute 25)* Anchor for the 🐿️’s BUSHY™ core beta book since early June: long equal weight S&P (RSP) versus the Nasdaq 100 (QQQ); ripped initially, pulled back hard in September, then almost made new highs and has held the book together.* One month implied correlation (black) and realized correlation (red) collapsing S&P High Beta / Low Vol mirrors RSP/QQQ; it is the same trade as pod shops grind correlation down.* Mechanism: whatever works keeps getting bid, defensives and orphans get no bid, then reprice violently; since bonds bottomed around 8 October, high beta versus low vol repriced hard* Caveat: this is not a new bull market in mediocre mid curve businesses; many were simply funding shorts being unwound, driven by market mechanics.Benny & The Squirrel is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.If you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

In Episode 99, Benny & The Squirrel are joined by Brandon Carl. Is AI headed for its shale boom moment? Brandon is a rare operator - with a decade on Wall Street in fixed income derivatives followed by a decade building in AI. He is now the founder of Soundcast, and he argues that the loudest voices on BOTH sides of the AI trade are wrong.We really enjoyed this conversation - it’s a banger!The SlidesThe Finance/AI Divide* Playing both sides of finance and AI reveals two smart camps that completely miss each other:* Finance people understand compounding but not compounding innovation.* AI people understand Jevons-style efficiency but not macro constraints like savings rates and financing equations.* Mispricings emerge where the two frameworks fail to meet.* Tech guys assume funding is “always there” after a 17-year bull market, while finance guys ride AI narratives without understanding the underlying mechanics.Token Deflation and the Supply Glut Case (Minute 3)* Brandon frames the bull/bear split:* Bears: Michael Burry applying a 2008 playbook to “circular financing,” with the thesis resting heavily on how fast GPUs depreciate; Brandon argues GPUs last longer than bears assume, especially in a supply-constrained market.* Bulls: Jevons paradox means demand grows forever (Bill Ackman’s “infinity ROI” line); Brandon rejects this too.* Brandon’s base case: a traditional commodity-like cycle of shortage then glut, which is actually an optimistic view, not pessimistic. Analogy: British railways were overbuilt, capital holders got smoked, but society benefited for a century.* The key puzzle addressed: how token prices can fall while GPU rental rates rise.* Game-theory: if recursive self-improvement (RSI) is winner-take-all, you buy compute to deny rivals and slash prices to block new entrants; but this alone cannot explain Anthropic’s observed gross margins.* The fundamental answer is token yield: Algorithmic improvements (i.e., DeepSeek’s inference-serving updates) deliver 2 to 3 times more tokens from the same GPU and data center. Prices fell slower than yield rose, creating an arbitrage that justifies buying more hardware, and the end result of that is a supply glut.* The parallel the shale boom, horizontal drilling unlocking inaccessible reserves; same capital-heavy dynamics, same glut outcome.* The headline numbers:* A fixed unit of machine intelligence (”one unit of 100 IQ”) is deflating roughly 13x per year; nothing in history has deflated at that rate.* Extrapolating 13x annual efficiency gains, 25% annual data-center capacity growth, and a 25% shift of training to inference implies roughly 8,000x today’s token supply in three years.* Demand must still be financed out of roughly $115T of global GDP; AI takes share rather than conjuring new income.* Labor risk: challenges the lump-of-labor fallacy. Past technologies created new jobs because people learned faster than machines; this is the first time machines learn faster. Cannibalizing part of a roughly $40T global white-collar wage bill in 3 to 5 years guts the households with the highest propensity to consume, breaking the circular flow that funds Meta, Google, and Amazon free cash flow.RSI vs AGI, Model Tiers (Minute 17)* RSI is not a walk-back from AGI; they are different axes: AGI is the level of intelligence, RSI is the rate of change.* Karpathy’s “jagged intelligence” idea: models are superhuman in some domains, subhuman in others, so AGI has become partly a marketing term.* Chollet and others argue LLMs are only quasi-symbolic reasoners; true symbolic reasoning could unlock up to six more orders of magnitude of efficiency, which dwarfs today’s price declines.* Enterprise behavior: the “token maxing” era is over; big banks and firms like Uber now issue token budgets. ChatGPT’s default “auto” mode is the answer to wasteful model selection, though routing is genuinely hard.* The “Jev” model launch: a deliberately non-general model, trained on reinforcement learning optimized for task completion rather than human-pleasing behavior, can be about 100x cheaper and faster. Extends the toolkit beyond the “nuclear sledgehammer” to screwdrivers and saws.* The profitability paradox: as efficiency compounds while prices lag, inference economics become wildly profitable; DeepSeek’s paper implied roughly $38 per hour per NVIDIA rack. The market is inflecting from supply-constrained to demand-testing, hence the scramble for new use cases (3D modeling, cyber, robotics) to fill an 8,000x supply curve.Personal Agents & Data Security (Minute 33)* Personal-agent reality check: Sora/Muse-style products show weak retention (about 22% after two weeks) because agents require habit change, not entertainment. Brandon’s end state: personal agents end up largely free, bundled to sell devices or intercept shopping.* Data security and $AAPL * Enterprise buyers prioritize data security over price (JP Morgan containerization example); open-source models on personal machines have likely leaked 10x more data than any prior year.* Apple at 39x forward earnings is partly a privacy and on-device AI bet; notable as the rare mega-cap tech not spending down free cash flow on CapEx, even as Intel reports awful consumer PC results.* The “third leg” framework: alongside the real economy and the financial economy sits a new AI economy. Whether or not LLMs are a good business, a massive AI labor force gets built anyway, with major implications for labor’s wage-bargaining power. Mike Green’s framing: the Roman Empire ran on slaves; AI labor has no leisure, rights, or illness, a fundamentally different economic model.* Macro arithmetic: even the bullish 15 to 20% AI-driven GDP growth forecasts require a matching surge in money supply or velocity; velocity is the wrong candidate since US money velocity peaked in 1999 and has fallen since, like Japan.Soundcast and the Reckoning Ahead (Minute 43)* Podcasts are the most information-dense medium (where Huang, Musk, Nadella actually share their thinking), yet there is no real search engine for them. Brandon applies his old “Palantir for sensitive data” playbook (he previously processed bank surveillance data for market-misconduct detection) to structure, attribute, and search podcast content.* Working with roughly 100 sub-agents daily Brandon’s usage ladder runs from level 0 (do it yourself) to level 4 (multiple concurrent projects); his stack is automated research, development and hardening, plus Cloudflare’s serverless platform to skip heavy engineering.* Vibe coding versus commercial software: roughly a 40:1 time ratio; two hours to prototype, two weeks to properly engineer, and the ratio is hard to compress further.* Coding craft shift: the industry is moving from artisan to industrialized phase, but AI is weak precisely at the foundational layers (architecture and database decisions). “Radioactive weeds”: about 10% of AI-generated code is quietly wrong, and models replicate those errors from your codebase over time. Printer-press analogy: what becomes scarce is editorial judgment, not output.* The labor cycle: first-order panic layoffs, second-order hiring of engineers to build automation, then 6 to 18 months of governance and RIF structure before labor data actually weakens, which is what we are now seeing. * $XPO XPO Logistics example: an 18-month internal build, now generating large returns; ROI is real but slow, like any capital project.* The market timing question: when does the hated, puked-out 2002-style entry point arrive?* Goldman’s May forecast of 120 quadrillion tokens per month by 2030 was already outmatched: with current DeepSeek-class serving efficiency, roughly 10,000 quadrillion tokens per month is producible today.* Lab CEOs (Dario) must commit to compute purchases 24-plus months out while model efficiency compounds and demand is unknowable; odds of nailing supply are under 10%.* Because this buildout is debt-financed, overbuilding is not a soft equity loss but “balance sheet Russian roulette.” Even if CapEx stopped today, algorithmic gains would keep compounding o… This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

Episode 98 and another unmissable Sunday Show! The AI trade is getting flushed. But is this the big one, or just another crowded-position unwind? We unpack the widening cracks in AI financing, why booming compute demand does not automatically mean booming revenue, and whether the S&P equal weight’s comeback signals a genuine market rotation.LLM WatchPod SummaryThe AI Unwind in Numbers* The week’s equity weakness = a sharp reduction in crowded positioning, particularly around AI, rather than clear evidence of a broader market collapse.* This is probably not “the big one”.* Net leverage has been aggressively reduced, with positioning measures reaching the bottom percentiles* Similar to the deleveraging seen from late June into late July.* The damage within AI-related trades has been much more severe than the headline indices suggest* The central distinction is between a modest-looking index drawdown and a substantial collapse in individual speculative trades.AI financing: competition for capital becomes the constraint* Only a small number of players can compete effectively for credit-market funding.* Is access to financing is straightforward even for the largest companies?* Borrowers are having to pay more.* Beyond a certain point, a higher interest rate may not solve the problem because lenders hit capacity limits.* This creates a potential dividing line within AI: the ability to fund infrastructure may matter as much as the ability to generate demand for it.AI capex: compute demand is not external revenue (Minute 4)* Is the bullish argument that extraordinary demand for compute, including strong Hopper rental rates, is sufficient to justify AI investment.* Compute demand is not equivalent to revenue.* The relevant question is how much revenue must ultimately come from customers outside the AI industry to support the infrastructure spending.* Discussion of Paul Kedrosky’s AI capex revenue hurdle calculator* It translates AI capital expenditure into a required level of external revenue.* It then expresses that requirement relative to GDP, global software revenue and US white-collar salaries.* The purpose is to test whether the economic assumptions behind the investment cycle are plausible.* “Unlimited demand for compute” becomes less useful as an investment proposition unless it translates into real customer spending outside the sector.* Are credit markets are beginning to confront precisely this issue?AI usage versus spending (Minute 7)* Rapidly rising usage need not produce equally rapid growth in expenditure.* Better routing, system design and optimization can allow usage to grow geometrically while spending flattens or declines.* The key issue is whether customer spending will grow enough to justify the capital already committed.* The strategic motive for continued infrastructure investment.* Large operators may be trying to become indispensable, establish a toll-road position or price competitors out of the market.* In that scenario, the infrastructure owners could retain value even if the model developers face difficult economics.* Own the compute rather than be Anthropic or OpenAI but compute ownership only works if the owner can continue accessing capital markets. That narrows the investable universe substantially.* The hosts compare the possible outcome with a utility-like market in which a small number of dominant providers control access and capture the profits.What happened to Anthropic’s S-1?* Anthropic’s expected S-1 filing did not appear on Friday.* Delayed disclosure may help preserve the AI narrative.* Once detailed financial information becomes public, investors must assess the actual economics rather than an open-ended story.* Differentiation in private debt markets between OpenAI-backed and Anthropic-backed data-centre projects.* Some OpenAI-linked deals are reportedly not getting done.* Where financing is available, he has heard of differences of approximately 200 to 300 basis points.* He explicitly qualifies these observations as individual data points, not a comprehensive market survey.The sell-off spreads beyond direct AI beneficiaries (Minute 10)* The latest week’s weakness has extended further down the AI-related supply chain.* Copper miners fell nearly 10%. Iron ore miners were also coming under pressure.* The damage is moving from direct AI winners into second- and third-order beneficiaries.* Even traditional value investors are beginning to feel the effects.* He also sees increasing concern about slowing growth and a more stagflationary backdrop.* But do these apparently macro-driven moves simply just instead reflect the mechanics of crowded-position unwinds.Equal weight S&P versus Nasdaq (Minute 12)* The ratio has staged a striking rebound over past five weeks.* For it to extend, the semiconductors probably need to break down - but the weekly chart still in primary uptrend:* Betting against semiconductors means betting against currently booked revenue and earnings, not just a speculative narrative.* The hosts agree that “cheap” and “expensive” are difficult labels for highly cyclical businesses.* A bullish memory-stock thesis requires a clear view on:* The timing and scale of additional Chinese supply.* How that supply affects pricing.* Whether strong earnings can persist for another year or longer.* Very low multiples could produce attractive returns if current profitability lasts.* However, the thesis ultimately requires confidence in earnings further out, including 2028 and 2029.* The broader point is that the durability of earnings matters more than the apparent cheapness of a single year’s multiple.Industrials ‘20-for-20’ (Minute 18)* The traditional portfolio role for industrials is challenged in current pricing environment.* Industrials should ideally provide a steady base of compounding businesses.* Many now carry substantial premiums associated with AI infrastructure, electricity constraints or defence spending.* He revisits a hypothetical portfolio built from a 2006 starting point.* A portfolio extrapolating then-current narratives might have owned auto companies, handset manufacturers and GE.* A more successful hindsight portfolio could have included FANUC, Caterpillar and Schneider Electric.* The lesson is not simply to identify good businesses, but to distinguish business quality from the price paid.* Caterpillar is a classic case study - an “accidental bottleneck stock”.* He sees a similar pattern across industrial businesses connected with physical power constraints or the broader AI theme.* Defense stocks present a related problem.* Their thematic narratives are powerful.* That does not automatically make their starting valuations attractive for a portfolio assembled in 2026.Gold miner cash generation (Minute 23)* Popular narrative is that gold miners are “printing money” at $4,000 gold.* Some companies may be generating substantial cash.* That does not justify assuming the same economics across the sector or buying GDX indiscriminately.* Discussion of Respeculator research on ASX-listed gold miners.* The spread between gold prices and reported all-in sustaining costs can suggest margins of approximately $2,000 per ounce.* Yet those apparent margins are not consistently appearing as incremental cash on company balance sheets.* A major reason is spending classified as “growth capex”.* Some growth spending, including mine extensions needed to keep mills supplied, is economically necessary rather than genuinely optional.* He draws a direct comparison with AI accounting.* Ignoring model-training costs (‘EBTIT’) flatters the economics of AI labs.* Ignoring recurring mine-development requirements can similarly flatter the economics of gold producers.* The analytical requirement is to identify which companies actually convert high gold prices into cash after all necessary spending.If you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not re… This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

In Episode 97, Benny & The Squirrel are joined by Nick Nemeth, author of Mispriced Assets. Nick has spent fifteen months buried in 10,000 page statutory insurance filings, and what he found should worry anyone with an annuity, a life policy, or exposure to credit markets. The US life insurance industry runs a balance sheet the size of the entire American banking system, at roughly 16 to 17 times leverage, with capital that Nick describes as “completely fake”. A mere 5 percent write down on assets would wipe out the margin of error for most of the industry. And there no federal regulator with full sight of the system, and no obvious bailout big enough if it goes.Show NotesInsurance and the data problem* Why insurance? Nick calls it the most boring world - but the more you look, the more interesting it gets, for scary reasons.* Filings are enormous. About 680 insurers, and a single annual statutory filing can be nearly 10,000 pages. Mapping holdings across entities requires reading them or using LLMs.* The paywall problem. There is no EDGAR equivalent for insurance disclosures; the NAIC, the body meant to set guidelines, charges per filing (around 20 dollars each). SEC filings give you “really nothing”: you cannot see capital hardness or exposures.* Bad actors are pushing the risk spectrum. The highest yielding asset is private credit, so anyone pushing ROEs piles into it, and competitive pressure drags everyone else in.The $10 trillion balance sheet (Minute 3)* Scale. Asset side is about $10 trillion, liabilities of $9.6 trillion, once discounted. Functionally a balance sheet the size of the entire US banking system. True in force policies are way above $9.6 trillion.* Discount rate mechanics. Liabilities are PV’d back and the residual is equity. Contrary to what most assume, there is no standard risk free discount rate. Offshore reinsurance creates “toggles” to change the discount rate and flatter returns. Operators openly call it regulatory arbitrage.* The black Box. Aggregate in force policies and liabilities are visible, but average duration and granular data are not. Whatever sits in Bermuda, the Caymans or Barbados is legally beyond the reach of US regulators; the fact that Nick cannot answer basic questions after 15 months of reading NAIC filings is itself one of the problems.* Regulatory structure. No single federal regulator. Fifty one jurisdictions set their own rules, the NAIC is a quasi private standard setter “like the Federal Reserve except no law made it”, and individual state commissioners can grant “permitted practices”, essentially permission slips to break NAIC guidelines. * Nick’s view: the system is intelligently designed to have no oversight. Fed involvement is limited to SIFIs like AIG, MetLife, Prudential.Leverage, marks and capital quality (Minute 8)* Industry leverage is about 16 to 17 times. Huge dispersion: mutuals are generally better, listed companies worse, and private equity backed insurers worse again, with exceptions both ways. * Athene (Apollo’s life vehicle) has only 8 percent Level 1 assets (cash and treasuries). The rest is Level 2 and Level 3. Level 3 is an internal Excel model, but Nick has concerns about Level 2 as well: observed marks do not match market prices, and top of book liquidity is not the same as clearing prices.* Most insurers are in significant trouble if assets fall 5 percent, before even considering liabilities and hedging.* Mental model: an insurer is like a bank. Assets are mostly loans (plus equity repackaged as credit, including the newer “equity ABS”); liabilities are premiums instead of deposits. It is a spread business.* Leverage is simply assets over equity, defined the same way as for Lehman. The capital and surplus buffer between solvency and insolvency is “super soft, as in completely fake”, inflated via permitted practices and questionable or phony reinsurance. Insurers do go under, failures seem to be picking up, and when they fail there is always less capital than expected.* State guaranty funds cap protection at roughly 250k (300k in New York; California covers 80 percent up to 250k), on the total policy value, unlike FDIC deposit cover. A 1 million dollar annuity becomes a three quarters write down.* Runoff evidence. Insurers report surrenders running far above expectations as rates rose, despite policyholder inertia. The reputational run dynamic (the SVB, “60 Minutes asks if your insurer is safe” scenario) is unmodeled and could spike extraordinarily. With a 5 percent margin of error, a 15 percent write down on private credit puts some carriers close to the edge.What ‘Civilians’ Can Watch (Minute 25)* Equities will not tell you (passive flows distort prices). Watch the credit instead, for example Global Atlantic and similar insurer bonds, and subordinated issues. Practical advice: buy the 20 dollar statutory filing for your own insurer, run it through an AI, and check private credit exposure, leverage, and affiliated reinsurance out of Bermuda.* History says it can happen. Annuities existed in the city states of the 1500s and 1600s; insurers failed in the Depression, at the turn of the century, Executive Life failed in the 1990s high yield unwind, and failures are occurring now. What has never happened in our lifetime is a critical mass failure, and Nick predicts it will pick up a lot.* Complexity exceeds banking. Athene’s derivative book alone is a 3,000 page exhibit. Filings are only snapshots, and books can be dressed up for each reporting date. Regulators and commissioners do not have the answers either. Opacity has opened a window for extreme risk taking and, in some cases, fraud.* Tails hide in the shadows. Actuaries are smart, but almost nobody can jointly model asset correlations in a tail event and liability behavior under stress. People are predictable in normal times, not in crises: in 2008, policyholders surrendered even as the Fed cut rates, because they were broke.* Correlation is where it dies. Models assume stationary correlation, then in a tail everything goes to one while you need liquidity. That was the basis error behind CDOs, and it repeats in private credit and broadly syndicated loan CLOs, which are less diversified than believed (around 35 percent software exposure, heavy housing, real cyclicality). Outliers get excluded from the stats, which is exactly how things blow up.The endgame ( Minute 35)* The bailout question. Government could plug the hole, but Nick’s worry is that mispriced, consumer linked credit is everywhere, including the housing market, so a rescue could spiral beyond the sort of control seen in COVID. * The required number would exceed COVID (which exceeded World War II and dwarfed 2008), insurers are roughly 150 percent of the Fed’s balance sheet, and a credible response could mean 10 to 15 trillion dollars, expanding M2 by 25 to 33 percent in a year, with the bond market potentially revolting.* This is global. SocGen, BNP Paribas and Allianz carry similar private credit exposure, as does Asia. * Authorities always refuse the medicine, which takes gold toward $10,000/Oz. Gold works in both deflation and devaluation; deleveraging crashes are the time to buy it, as in late 2008 before the GFC structurally ended that November. Practical implication: shorting insurers caps you at 100 percent; the bigger money is on the other side of the trade.The New Subprime Crowd Wears Patagonia Vests (Minute 42)* Growth cannot bail the system out of a 6 percent deficit, leaving two paths: deleveraging through defaults or inflation. Private equity professionals are borrowing against carry and even their homes to meet capital calls and GP commitments of 2 to 5 percent per fund, with nothing returning, while funding Connecticut lifestyles on million dollar salaries. Asset rich on paper, cash poor.* The K shaped economy risk. If the top of the K stops feeling wealthy and stops spending, you get a recession that is extremely hard to fix. And this time the bailout politics are different: in 2008 people were in shock and Occupy came later;… This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

For Episode 96 the show brings ‘Black Monday’ (we think not!) chatter, neocloud CDS blow outs, and Brent 2027 going vertical. We break down the first real pain at index level this year, why the AI unwind is a positioning flush and not the big one, the sovereign backstop question hanging over Anthropic / OpenAI and the data center complex, and where the smart money is actually hiding. All that, plus the Squirrel’s latest work on the ‘Twenty for Twenty’ portfolio (Global Industrials) and why BYD might be the world’s most impressive industrial company but a less impressive stock.Latest LLM / Token Chart PacksShow NotesThe week that was, and the AI unwind* Key dynamics: a continued bid to bonds and growing concern about the AI narrative unwinding, centered primarily on neocloud balance sheets, a theme running since the Amish episode in March.* The hosts turned bearish in early June, calling the blow-off top in AI CapEx recipients.* SpaceX segment: the biggest unlock is coming; the market is being warmed up for a possible Tesla-SpaceX merger; SpaceX supply was talked about all summer but nobody is positioned. Shares went from around 210 down to near 100; the company has raised roughly $65bn in credit since listing (including a new $40bn package of $30bn IG plus $10bn term loan) plus around $110bn in equity. Elon has taken roughly $86bn in cash out of the market.Last week’s price action and positioning (Minute 5)* First real pain at index level after months of poor breadth: defensives caught a bid, staples up over 5 percent and utilities rallied.* We doubt this is the flush moment: it looks like an overcrowded trade unwinding on positioning and liquidity, with vol and implied correlation too low, a pattern seen repeatedly over the past fifteen years.* Midterm history suggests risk trades well afterwards; a Democrat result probably would not be great for stocks.* Growth-scare data points: Anthropic numbers came in “miss-ish,” average token price hit an all-time low, and rumors that the IPO timetable could slip again. A slipped $100bn Anthropic IPO at a $2tn pre-money valuation could paradoxically be bullish for year-end liquidity.* Triggers: the pulled Firmus IPO in Australia (long end of the curve bid from 5.70% to 5.40% since), plus UK neocloud Nscale having a major Microsoft contract pulled over the weekend. Amusing tweet: “if I were Jensen, I’d simply buy all my clients.”Positions, sovereign backstops and China (Minute 9)* 🐿️ is short Oracle and CoreWeave but nervous about NVIDIA acting as “the central bank of AI” and papering over the stress. * “Too big to fail” whispers about OpenAI are now circulating, an idea the show covered with Brandon Carl (guest on next week’s show) and in earlier episodes.* What sovereign intervention would actually mean: backstopping Wall Street’s data center credit at the monetary level rather than taking golden shares. OpenAI’s CFO floated a government backstop in Q4 2025 before walking it back on LinkedIn.* The circular dependency problem: OpenAI’s commitments underpin Oracle and cloud backlogs plus data center DDTLs; if OpenAI goes down, data centers, debt and collateral go down with it, a GFC-style chain. The flip side is adding huge liabilities to the sovereign just as debt refinancing costs are under scrutiny.* China keeps making tokens cheaper: the latest DeepSeek model offers near-frontier capability at roughly a 90 percent token-cost discount, so any US sovereign underwriting would be backing a disastrous forward P&L structure and would likely need to be twinned with protectionism.* Fortune 500 companies increasingly want to build their own AI on open-source models and their own hardware for data security; fraud risk is rising; large corporates are blocking agentic access to their APIs, and technically blocking agents is much harder than it sounds.Korea trigger and the IPO pipeline (Minute 21)* Korea looks like the proximate trigger, reacting to the Anthropic numbers. The SK Hynix ADR still trades at roughly a 50 percent premium to the Seoul listing, which cannot be arbitraged. Even international retail can buy locally, so there is no reason to pay the ADR premium.* OpenAI is definitely not coming public this year; Anthropic price talk is sliding from $2tn toward $1.5tn pre-money, and the view is they should just price at $1tn and get it out the door.* IPOs are momentum games: publicly talking down valuation before pricing is almost unprecedented (closest comp is Facebook’s 2012 “mobile problem”, but at a $100bn valuation, not $1.5 to $2tn). Too late to halve the target now, and the forward capital problem, roughly half a trillion to raise over four to six years, means they have to start big.Energy: the real hiding place (Minute 25)* Energy was again a good place to hide. The standout chart is December 2027 Brent: the market is reaching for long-dated contracts while large spec shorts (COT data) remain substantial.* Under the “China collar” theory, the move in long-dated crude underwrites the energy equities; the IXC global energy ETF chart looks strong.* Spike risk is higher now: Jesper Kohl’s point that Japan runs out of reserves by January; China is down an estimated 300 to 400m barrels; global reserves are being drawn. Transport costs now add $20 to 30 per barrel, yet China is still lifting cargoes, suggesting more right tail.* Demand is low volatility (COVID aside); supply is where the volatility sits. A double negative, soft demand against an even worse supply situation, could still push prices up.Rotation mechanics (Minute 30)* The AI trade is 40-plus percent of the S&P; neither host thinks it is truly rolling over yet, and if AI rolls over while the index holds via rotation, their non-AI longs benefit.* India outperformed the rest of Asia massively last week; Brazil is trading on its own election cycle with the runoff the following week. Both are read as positioning: popular funding shorts (staples, Infosys, TCS-type names) getting squeezed in a degrossing.* The “causal barbell”: implied correlation near zero with single-stock vol in the 99th percentile forces leveraged pods to degross when correlation rises, so shorts rip and longs get sold, but it does not cascade the way old crash analogies suggest.Twenty for Twenty - The Industrials (Minute 35)* Twenty for Twenty portfolio update: work began on industrials. * The key industrial question is the China scenario (the “panda in the room”)* BYD - arguably one of the most impressive industrial companies on the planet, but a great company is not necessarily a great stock. Deflationary technologies are hard to monetize compared with regulatory-capture industries and full-contact capitalist competition in Chinese industrials should never be underestimated.If you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

In Episode 95, our pal Tom Roderick (Trium Capital) is back with us on CPI day as a hotter print cracks a tape that already felt fragile. Recorded at Noon EST on Wednesday 14th October.We get into why the short end rates trade has been a slog, why Tom prefers steepeners to outright receivers, and how France, bank carry pain and hyperscaler supply are all feeding the same problem: a rising cost of capital.From there it is CoreWeave spreads; negative hyperscaler free cash flow; the China AI and oil collar; South African 9.5% bonds; Brazil ahead of the second round; A-shares versus Hong Kong tech; Europe drifting right - a potential Le Pen versus Melenchon runoff; and why gold keeps struggling when real rates rise.The ExtrasTom’s bearish energy note:CPI Day and the Rates Selloff* US CPI came in warmer, but Tom argues risk assets were on edge and looking for an excuse to sell: bond market worries on both sides of the Atlantic plus fragile tech positioning; bond yields spiked and stocks got hit, but he would not extrapolate a new trend from one print* The painful short-end rates trade acknowledged: US 2yr at roughly 4.85% versus about 3.75 to 3.80% back in February; Tom is not outright receiving rates, preferring steepeners instead* Rationale for steepeners: heavy long-end issuance including hyperscaler supply, and a Treasury already issuing at the shortest duration in the world with heavy bill reliance; outright receivers are too tough hereBanks, AI Capex and Credit Stress (Minute 5)* Bank earnings: fixed income trading revenues fell sharply; Benny suggests Q2 risk manager “disciplinary chats” showed up in weak Q3 FICC P&Ls; Tom notes crowded carry trades hurt both the sell side and buy side when funding spreads blew out* CoreWeave spreads around 1000, neoclouds back at lows, “outrageous” token deflation; Tom sees a credit squeeze on CoreWeave analogous to the squeeze in France, but the market refuses to judge the whole sector, with Meta near all-time highs; two tails playing out and neither winning* Hyperscalers - even Oracle - will be fine operationally, but the credit market cannot absorb the paper (compounded by Basel hedging feedback); better to be a token consumer than provider; data center buildout faces transformer backlogs, interconnection delays and local political pushback, so Wall Street extrapolation is heading for a moment of truth* The “free cash flow countdown”: aggregate hyperscalers plus Nebius and CoreWeave are now negative FCF.* A rising cost of capital environment means revenue expectations must rise in lockstep or stocks fall; expect differentiation rather than all boats rising; sovereigns are competing for the same capital, with off-balance-sheet liabilities (retirement costs) seeping onto national P&Ls and structural deficits keeping everyone in “the price discovery zone”Emerging Markets and China (Minute 17)* EM local currency bonds: EM rates have matched DM sell-offs in size this year rather than underperforming, which is abnormal and reflects credible high real rates; risk of contagion from rolling stop-outs remains, but policy quality is doing the work* South Africa: Tom is still a ZAR bull; around 9% FX carry has made the trade comfortable despite Trump and Musk “throwing stones”; 20yr bonds with a 9.5% coupon, a central bank that cut its inflation target midpoint from 4.5% to 3% and is credibly set up to hit it, fiscal consolidation attempts, and an electricity surplus now being marketed to data centers* Brazil politics: Bolsonaro Jr’s decisive first-round win points to fiscal consolidation and inflation control; yields around 11% give a thick margin of safety built on creditworthiness rather than pure rates* Prediction markets on Brazil are distorted by uninformed offshore money and the race is closer than priced; with Bolsonaro’s high rejection rate and family scandals, there is a real tail; advice to EWZ call buyers is to wait for 25 October* The structural Brazil trade: local pension funds sit at about 5% equity allocation because belly-of-curve real rates beat their actuarial waterline; if fiscal dilution compresses those real returns, they must rotate into a tiny equity free float, a two to three year gift that keeps on giving* China: no current positions; the yuan should keep appreciating gradually while Beijing hopes for a broader trade deal, but long yuan is poor reward against a Taiwan or trade-war risk-off event; prefers onshore A-shares (ASHR, CSI 300) over Hong Kong listings because giants like Alibaba and Tencent get politically squeezed, while smaller A-share names are “too small to be interfered with”* China champions debate: BYD, CATL and Tencent are superb businesses but function as policy tools, subject to meddling from Beijing, Washington and Brussels, which blocks investors from extracting the returns the fundamentals would justify; they only flourish if a different, rules-compliant China emergesEurope, FX and Politics (Minute 34)* FX board check: DXY at 103 yet the RMB is grinding higher and the yen is holding up better than expected; Europe is taking the brunt of dollar strength, and euro-yen has been a good short* Europe structurally challenged: Spain’s snap election expected to shift right, with callers of snap elections increasingly losing them; the pro-EU lobby has narrowed to a shrinking center while the center-right turns more Eurosceptic* France scenario: center is fragmented so a Le Pen versus Mélenchon second round is plausible, and Eurosceptic Le Pen would win it; critically she is no fiscal hawk despite all of the “debt brake” talk - a case of the “dog that caught the car” finally having a crack at the title?Energy, Gold and Wrap (Minute 41)* Tom’s thesis (full note above): “the end of the age of oil”: global energy surplus, the US is now an exporter, China has spent a decade insulating itself, and the world absorbed the biggest oil shock since the 1970s without punishingly high real prices; UAE leaving OPEC and the Iran war look like the last gasp of the era, accelerating its end rather than reversing it* Squirrel’s “China collar” thesis: China, run by engineers, has built strategic storage making it a monopsony price setter, stopping buying near $115 Brent and stepping back in near $80; that caps triple-digit extreme risk and reframes how to value global E&P, midstream, offshore and services* Tom’s twist: oil abundance incentivizes bad geopolitical decisions (Trump on Iran) because surplus makes risk-taking politically palatable, which can keep eroding that surplus; shipping has become a real constraint, with transport costs of roughly $25 to 30 per barrel versus a historical $1 to 2, plus tanker losses in the Strait; refiner margins are distorted and EM demand destruction (three-hour scooter queues in Bali) is beginning* Gold and silver: Gold always struggles when real rates rise, so recent performance is no surprise, but the long-term case is intact because China - running a big current account surplus and unwilling to buy Western financial assets - must keep buying goldIf you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe

In Episode 94: The free cash flow countdown on AI capex has hit zero, and the bond market is starting to say no. Benny joins from Milwaukee ahead of Brewers vs Dodgers NLCS Game 1, the Squirrel is back in Oxfordshire after a 15-hour drive through France, and the boys go around the houses: the pulled Firmus float on the ASX, hyperscaler CDS at junk levels, why 5% on the long end is anything but “agnostic”, two rate-sensitive stocks worth your attention, Brazil’s pension fund powder keg, and why France is the G7 debt story into April.Show NotesAI capex: the pulled IPO* AI capex free cash flow countdown monitor now reads zero: the complex is no longer FCF positive as a group heading into earnings* Firmus, the Asia-Pacific CoreWeave $CRWV lookalike, pulled its ASX listing at a mooted multi-billion valuation despite NVIDIA backing, after local long-onlys refused to wear it; a NASDAQ float is now the plan, where gamma squeezes and smoke and mirrors are possibly availableHyperscaler CDS and rate transmission (Minute 5)* Hyperscaler 5-year CDS chart (black line is the 5-year UST as reference): * CoreWeave near all-time wides above +900bps, having been flagged on the show at 465-470 in late May/early June; Firmus-related paper near 200bp, which is BB/junk territory; Microsoft the only contained name* Most corporate debt and most non-US mortgages sit at five years and under; non-US mortgages are largely floating, hence the RBA’s near-instant transmission (Squirrel’s “most powerful central bank” line, qualified as best transmission mechanism)* ECB is chained to headline CPI, hence repeated policy errors (Trichet twice in the hall of fame); the Fed has far more discretionBest of times, worst of times (Minute 9)* Bond investors and rate sensitives are hurting while AI capex and SPY/QQQ holders thrive; BofA framed 5% yields as agnostic for equities, but Hendry’sNiederhoffer rule says 5% is too much* At some yield the average boomer rolls into the 10-year at 5% or TIPS at 3% real and coasts; high yields exist to attract capital (hunger games for capital), so always ask why the yield is being offered* The eight-name capex monitor (Microsoft, Meta, Google, Amazon, Oracle, Firmus, Nebius, CoreWeave) shows aggregate FCF at zero; the “funded from cash flow” cheerleader line no longer holds* Classic finance mistake: issuing paper when the narrative is bestAI valuations: infinity, zero, or negative (Minute 15)* Silicon Valley mindset: model labs are worth infinity or zero, and the average of the two is still infinity* Squirrel’s pushback: the downside may be negative, not zero (rogue agents hitting the grid, BP-scale liabilities, no liability framework or social contract for AI), so expected value must include a negative tail* Even the bull case is capped: Anthropic at half of global public market cap (roughly $120tn) is only a 30 baggerMarket structure: the causal barbell (Minute 21)* NASDAQ/S&P ratio has reflated after the Q2 leverage washout that smoked the high-beta AI trade; still below the prior line, so plenty of pent-up energy* Benny’s “causal barbell” essay lands this week: pod shops on one side (short vol, correlation zero), free unlevered beta on the other, with the active middle hollowed out* A cozy equilibrium that works until it doesn’t; owning CDS insurance has bled premium (CoreWeave the exception) while vol sellers get richSingle stocks: Home Depot and Rocket (Minute 24)* Home Depot: world-class operator, ROIC down from 38% in 2022 to sub-20; roughly $14 EPS this year versus $16-17 in 2022; at about $280 the stock is 20x troughish earnings, with a wipeout to 14-15x implying $200-220; a 3.3% dividend yield cushions versus Treasuries* Rocket Mortgage: an $11-12 stock with potential $2 of earnings; the Mr. Cooper deal (done at $22 last October) made it the second-biggest servicer, and the rate-driven selloff bought a free year for integration plus better AI tooling; a defined-use-case token consumer* For equity managers who cannot trade macro products, Rocket is the equity version of a SOFR trade; Benny frames it as a trade, not a positionEM: Brazil over Korea (Minute 29)* Brazil ripped on Flavio Bolsonaro’s unexpectedly strong first round; the 25 October runoff is seen by Brazil-watchers as a formality* Korea has been the EM bull market on memory and DRAM; Squirrel sat it out (PTSD) but notes it remains cheap, prints surpluses, and the currency looks too weak* Since the June memory-mania peak: EWZ up 29% versus EWY down 13%, a roughly 40-point pair trade in 3-4 months, with correlation near zero* Brazil thesis: a bet on the Bloomberg Commodity Index plus 8-9% real rates pulling in global money* The belly of the curve is the real story: local pension funds hold de minimis equity allocations because real rates meet their actuarial bogey; even a modest erosion of fiscal dominance under Bolsonaro sends them into a very tight free float where there is not enough stock* Squirrel’s “wait for the runoff” call was overtaken by the strength of round one (last week’s EWZ and BRF moves); the 12-18 month view is pension flows driving equitiesCapacity constraints and the bond rotation (Minute 33)* Capacity cuts both ways: shorting is capacity-constrained with pod shops dominant, and on the long side holders lift offers, so price is whatever clears the system (uranium miners, Brazil)* Open question: when does money actually rotate out of stocks and into bonds?* Benny holds bonds only as a hedge: parts of his book he does not control are short bonds, and discretionary shorts in utilities plus long oil need protection; not yet a true believer, and duration is off the tableFrance: the G7 debt epicenter (Minute 36)* Squirrel’s drive through France felt incredibly normal, yet bond markets are waking up to an emerging political crisis* The old pattern (Le Pen scares the market, centrists rally and box her out) may be breaking: the horseshoe is in full effect and an April runoff of Le Pen versus Mélenchon looks increasingly likely* Marine Le Pen is not her father’s daughter: she expelled him, talks debt brakes, and is tacking to the center on the Meloni template* Our view: give populists the ball! After 30 years as the ghost opposition, the dog that caught the car should get to drive; if it fails, the left gets to say it told you soIf you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor. This is a public episode. If you'd like to discuss this with other subscribers or get access to bonus episodes, visit www.bennysquirrel.tv/subscribe