The Best of Times, The Worst of Times

From Benny & The Squirrel · 40:03

Show by Benny & The Squirrel

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…

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