00:00 Speaker A
As seen in the stock decline caused by Broadcom after a huge spike in AI trading. And we move into the summer season, and I’m trying to think, okay, is this a pause? Is this the beginning of another recession? What do you think about that?
00:23 kelly
I think this is a healthy break. A closer look at Broadcom’s results shows that it was not about fundamental changes to long-term AI theory or anything alarming in the grand scheme of things. It was more about very high expectations. That’s because every company has reported it since then. For example, Dell saw a 50% upward revision. And we, you know, we’re just getting used to these parabolas a little bit, and this probably hasn’t been the rate of change that we were expecting.
00:59 kelly
Well, the market is calming down a little bit and we think the market is healthy. We believe the overall long-term long-term trend still exists and we should continue to invest.
01:07 Speaker A
Well, keep investing, especially in the AI industry. Do we need more catalysts there, or can we build on the momentum and continue?
01:21 kelly
Well, this is interesting. Because if you think about the current AI trade, it’s kind of a narrow group of spenders and a narrow group of receivers, and you want some exposure there, but you don’t want to put all your eggs in those baskets. It is expected that the range will continue to expand. So while you certainly need some exposure to this trade, diversification is certainly important.
01:46 Speaker A
One of the really interesting things about this meeting, one of the characteristics of it, is that the Fed doesn’t seem to be part of the discussion right now, um, because there’s a recognition that it’s not necessarily going to move this year. Well, my colleague Jennifer Shamburger actually spoke with John Williams from the New York Fed yesterday. Well, I’d like to play his words. Because he talked about what situation we’re in right now and what he thinks about it.
02:23 John Williams
But I feel like we’re in a really good place right now. But if circumstances change, whether it’s in terms of inflation or the employment side of the mandate, we need to react. Of course, we need to stay focused as always.
02:45 Speaker A
So, is this exactly what it is this year, with no production cuts or rate hikes? What do you think about it?
02:56 kelly
It’s certainly possible that the Fed will cause some ripples. At the moment, we are talking about profits, and I think that capital investment, which is the background to solid profits, is important. And if you look at what’s priced in, one rate hike is already priced in. So the market is digesting it. The market will probably accept it. And I think he’s right that if you look at the numbers right now, they’re in an okay place. I don’t see any wage pressures. Let’s see what the payroll numbers are tomorrow. Um, but we do see some volatility risk because we expect inflation to be 4%. If we become hawkish, that could pose a challenge to the market, but we think:
03:52 kelly
There is still a chance that interest rates will rise and the market will rise. It happened. It happened in ’23 and it happened in ’24. So we are now on a background of higher nominal growth.
04:02 Speaker A
In that regard, demand for I bonds is coming back, right? I mean, a few years ago, the government, you know, put out a retail product that people were obsessed with. And now they seem to be getting back to it. Is that a good place for people to look within the fixed income range?
04:26 kelly
I think so. If you’re worried about inflation and inflation, if you look at inflation expectations, we’re not really out of the range that we’ve been in for the past few years, and we’re certainly below where we’ve been in the past few months, probably over a 10-year or even longer term. So if things get worse, we might start to get a reading on inflation and the Fed might start to move toward lower rates before the market thinks the Fed should move or the market thinks it’s appropriate. One risk we see is that long-term inflation expectations rise, putting further upward pressure on yields.
05:14 Speaker A
And that’s one of the risks of stocks. So when yields started going up, that was one of the only things that actually caused some problems for stocks. Is that a significant risk that you’re looking at?
05:28 kelly
I think so too, but when you think about rising interest rates, there are two factors. There’s the real interest rate, and then there’s the inflation component. There is a risk in the inflation part. And then the actual interest rate part, there are a few things that could drive this. As you know, as I said earlier, one rate hike is priced in. If the Fed starts thinking about raising rates at some point, they probably happen to raise rates one or two times, and that’s when we see real interest rates rise. Well, deficits and debt are also growing. That will put pressure on long-term yields. So if you think about what could lead to lower yields, slowing growth, slowing inflation, which we don’t know right now, but if you think about the triggers for higher rates, you’re definitely leaning further.
06:17 Speaker A
And finally, it’s kind of amazing that I stopped asking people in your position about Iran. It’s about oil to some extent, right? Because no one seems to care. Well, even though the war isn’t over, we know that, but it’s unclear how this will end. But are there any scenarios or market perceptions that would change that at this point?
06:49 kelly
I’m with you. I sometimes think to myself that maybe I’m being a bit complacent, but when I look at the revenue numbers and the economic data, there’s some proof of that. Well, I wonder where we are in terms of getting closer to some kind of agreement, but every time markets get disrupted or interest rates go up, what happens? A headline said they had a deal. So I feel like the market is there and they are challenging the regime by intervening. We have midterm elections ahead of us. I think that will also be a motivator for winning the contract. What we’re worried about is that you get an agreement and maybe you’re in a worse position than you were before the war started, right? And the oil infrastructure was destroyed. Well, that keeps oil prices at a higher level. So, um, to your question, I think it’s kind of a tail risk, but the market just doesn’t seem to want to get caught up, getting on the wrong side when we get a trade, and that’s what we might see.
08:18 Speaker A
Well, the kind of FOMO market we’re thinking of.
08:23 kelly
It worked, right? Look at Emancipation Day. It worked.
08:27 Speaker A
Yes, it worked very well. Kelly, nice to meet you. Thank you very much for coming.
