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Hello and welcome to another episode of the au Thoughts podcast. I'm Tracy Alloway.
And I'm Joe.
Why isn't thal Joe?
Our live show in London recorded May seventh at Wilton's Music Hall. A lot has happened since then. Him Markets, it's hard to have a markets conversation that you know isn't out of date within like a minute or two. Yeah, but I think this one, this one carries on. I think this one is still relevant.
Well, you know, I have to say I always feel a little anxious about recording Markets episodes because of this very phenomenon. But this is true for our live and our recorded shows that by the time it comes out, who knows how much hole have changed.
This is why you should go to the list, is why.
That's exactly where I was going to go.
It's actually good to record markets episodes of the live show because that's like, all right, create an inducement to get people to buy a ticket. But again, you know, with a lot of these things, like how traders are digesting this particular moment in time. Sure, the headlines and the prices on the screen change, but there are certain like principles and frameworks for understanding what's going on that will be sort of useful regardless of what's happened in the meantime.
You mentioned frameworks, and that is the perfect framing for this discussion. So we indeed had the perfect guests. We spoke to someone who's been on quite a few times before, one of our favorites for letting us know what the big money is actually thinking about and trading. We spoke with Ozan Tarman. He is, of course vice chair of Global Macro over at Deutsche Bank. We also spoke to his colleague, someone who hasn't been on the show before, but who has quite a reputation, one of Deutsche Bank's
star bond traders, A ditcha single. He is the head of em trading across rates, FX and Credit at Deutsche Bank. So take a listen. Okay, let's start with the obvious question. Lines on the chart keep going up despite what would seem to be some challenges to the global economy. To put it mildly, why.
First of all, even when I walked in, I was checking for you guys. It wasn't like that fifteen minutes ago.
When we're now recording this at seven three twenty seconds.
When one agency claimed that Operation Freedom was back on, that President Trump could try to open the hormones by force, SMP and oil SMP didn't like that at all. Oil was surging higher than al Jeza denied. So we're all calmer again. But bottom line is why we keep going higher despite everything that how we are in orkin steeds because buses are empty. When I say buses are empty, I don't only talk to my portular managers, but men on the streets, to my college classmates. One of them
was like, what do you mean busses are empty? That means investors.
Don't have it.
The analogy is a bit like closer to April second April nine off last year, when we had the big tariff shock billboard up. We thought that it would be the end of the year and of the markets. Then President Trump stepped back and Marcus never looked back.
A bit similar coincidence or not.
March thirty first is the first time he claimed through Walls the Journal that he would separate State or Foremost and Operation, that the two could go separately.
None of that happened, but that.
Was the first big brief market took and on April nine, exactly on the same day the big first postponement came and said you're not going to do anything for two weeks, and since then markets never looked back the historic led by tech Nazak and SMP rally. And you know, I talked to a lot of people at you know, Key ladies, guys. Honestly, maybe three four five people really believed in this rally
since April first, April nine. That's one big part of it, but it can be all positioning also fundamentals right, earnings.
Again, head of sales. One of my.
Legend the researchers, Jim Read just today he was on Bloomberg as well, talking about earnings in Q four of last year, just thirteen percent growth. Q one records biggest in five years late by take twenty four percent. And that engine keeps us, keeps us going.
Yeah, the earnings are what they are, So I'm here's some they're curious. So Ozon came in and he gave us the latest headlines. Thank you, because I haven't I hadn't been looking at my job.
Yeah, exactly, look at his phone for fifteen minutes.
Which it might be a record, a record how do traders deal with the market in which they're just the sheer.
Number of headlines?
How would you?
And how do they know what to take seriously? And like what's real? What's not real?
Like how are they interesting news?
So from a trading perspective, right, mostly almost everybody that the fundamentally five asset classes, right, so you have a thematic view and raised effects credit equities and commodities, and a lot of people are fixated or are mandated or asset class per se, right, so they have no choice
but to stick within that kind of region. And then of course are you if you're a real many investor, a hedge fund, or if you are a sell side trader, just depending on how you are positioned, right, it's not really it's difficult to get in and out right, So thematically you have to take a structure long term, you see what every asset class is pricing on that particular view and define an upside downside kind of scenario and based on the liability profile you have, and that how
you define that is the function of the money you have or what kind of drawdowns are acceptable. You take a particular position and you let it play out. So in this kind of environment, it's difficult. So what is the upcoming kind of positive news that you can rely onto the market right today? If you were to sit here today, you say, okay. So the fact that not much action has happened in the last three to four weeks within the straight means that at some point or
the other the resolution will come. Pakistan is mediating as we can see, there's been enough talks happening, so you assume that a resolution and should come.
That's what the market is pricing. Theoretically.
You also have a situation with Russia which is developing right Russia Ukraine war, which could keep positive worse. And then you have the visit, the US visit to China, which also is the positive. Now, of course there's a lot of it is at the price per se, But fundamentally speaking, as a trader, you position yourself and then you just choose, you know, at some point to close it to the time but get out.
But just like just and that all makes sense to me, But like are traders sitting there with a truth social window open, like the literal like ingestion of news?
How do you do it?
And how just getting the messages from me?
Yeah?
Right?
Just kidding.
Well, someone needs to make like a motivational poster that says, Lord, give me the confidence of an equity investor trading on an Axios headline. Yeah, like I feel like that would that would?
So yes, we have one open.
Yeah, genuinely we we we have no choice. But fundamentally it's like this, right, so you make up you see what's so? We had a if you would look at the rates market for example, this is an example, right, there was a six IgA event that happened within it. At some point the pricing gets to a level where it doesn't make any irrational sense. So you start to look at that on a most structural basis and you start to ignore the noise in the middle, and whether we like it or not, we have to operate with
that kind of philosophy. So you take one side or the other. It's very difficult to trade the headline because it's impossible because as of now you had two conflicting headlines and you can get caught out. So most people have come to that understanding. So you've taken a perspective review. Either this is going to get resolved, or if you believe it's not going to get resolved, there's a way of expressing it within the five asset classes where you
might get the most convexity. Similarly, if it gets resolved, there is certain things that actually might work which haven't yet worked. So you take those sides and you just certain wait.
Mentioned irrationality just then, which means we should talk about AI, right, because all of the stock market rally at this point essentially seems to be a bet on AI. What are you hearing from your clients on how comfortable they feel with us?
Well, just two days before the Iran war began, we were in West bam Beach and Miami with Aditya as well, visiting clients, and then the whole talk of at least that town but us in general was that famous Strenny piece, the other fifteen million stampiece. Something big is about to happen. How in twelve to eighteen months, fifty percent of white color jobs could be wiped out. What that could mean
for rates? That in itself is very very telling, right, And because of that, and one Solstal claims numbers if you remember us ten years that Friday before the bumps came in closed that three ninety three, and one of my more famous Frans Clients sends me a message on that Friday Night bond is the new gold three Night three top tic clothes. Then eraon war happens. Not that's surprising, but of course the how it played out is very
very surprising. War inflation hikes getting priced in for people completely pushed aside the slow down job growth, labor part of it, and then started completely focusing on the equity, the growth the AI engine. Again, if you just go back to January February, we were quote unquote happy because
the thing was broadening out. It was a rally, but it was a rally late by Russell as well, would it be Magnicude four, Magnicum three, Magnificent seven was forgotten and lord behold, some of us, thank god, have three month memories. Now now we're complaining about oh, it's all about seven stocks. The brief is to we're just fighting ways to try to fight and wrestle away the rally. But so back to your question at the moment, Yeah, the kool aid is to believe that this AI run
may have another one to two years to go. Pull to the Jones public one of definitely my more famous transplants today claimed that that's the case and made the nineteen ninety nine analogy. So either you swim with that or try to fade it.
You know, this is the other thing, all right, So we talk about these very worrisome scenarios the price surgeon oil, but very worrisome scenarios about deep shortages in various commodities. So that's one reason to be worried. But then there's this other thing that basically, you know, the disinflation is stalled out if arguably it's going in the other direction. Rates around the world and you know, we're I think, you know, there's some sort of what was UK thirty.
Year high since nineteen ninety eight.
Yeah, So again, just intuitively, you would say, do these things compound each other?
It should really take the wind out of the sales of risk appetite. And yet so.
How is it the like even like you know, what we see going on and selling of how does the selling in sovereign bonds mix into this market in review?
So let me take this to actually give you a thematic kind of how to think about things, right, Okay, just to give a perspective, right, So ultimately there is only one thematic view that matters for the next few years. Right, And that is if you were to assume you have China and China aligned countries and you have the West. Right, if you were to take China and China aligned countries right and they were in space, what does West need
theoretically in both manufacturing and services? And if you were to the reverse the rules, and if the West person space, put is China and China aligned countries needs both in manufacturing and services. And the reason I'm bringing to this point is because I want to give a perspective. So what happened right in the last many years. So this microphone for example, right, this most of the material and here comes from China or China A lined countries almost
ninety percent. Right, manufacturing capacity the world is fifty five percent China or China link, but some places almost ninety to ninety five percent. An example of cobalt, cobalt refining all in China. Now, in the past, what happened was they would give you this microphone and you would give them dollars or pounds or euros or whatever it is.
So they hold that.
So China holds that, what is the most rational thing for them to do? The most rational thing for them to do was to buy your land with that money, but you said no.
Then they said I'll buy your equities. You said no to that too.
Then they said, what, you know what, I'm going to buy the commodities that you might need in the future. You said, fine, do it, which is what China did for years. Then here's the interesting thing. You said in return, let me sell you my services. So let me sell you fine wine, let me send you the gucci you know, more phenomenal bags, top education, education, and a lot of other things. And then also services services, whether it's a
Microsoft Excel or whatever it is. Right, But now what's happening is you have that side of the world which is also building their own services. Tax durdism is now on shore. They started building their own cars up the chain value chain. So you're getting to a stage where if you expand this thematic que you in the West have to literally build all of it from ground up.
So if you assume China was a space, they can still disrupt the services sector, but they can't disrupt the manufacturing sector theretary anymore, because you can you will have to build it all up. So if you want cobalt, and if they say no, you have to refine it, mine it, refine it. You need to have companies that refine it. You need to have the engineers do that work. And fundamentally, that's what the fundamental paradigm of the world is.
So when you talk about sovereign debt or any holding of or any equity holding, ultimately the creditor is China and China alligned countries. They are the creditor to the West and we are the debtor. And this is only increasing. So if you believe the wizard, what does the ultimate objective agenda of the Wizard of the US China is to balance the current account to some extent, that's one agenda,
and this, of course there's certain other spectual it. But fundamentally that's what defines the kind of makeshift of the next kind of year two three years, and whether we like it or not, we have to build this.
I want to come back to China versus the US on AI in just a second, but I definitely want to also ask this question, because we are in London, how big a deal are the UK elections from your respective purchase, the local elections that are happening tonight.
It is important because basically UK and broad there is for the past two years at least a big fight between fiscal dominance beliefs ten years, thirty years, more importantly thirty years around the world. Will they get more out of control since we are in London, have the dear
least trust two moments? Or will financial repression mean meaning emerging market style, Treasury and central banks working more close together, especially on issues issuing less on the long end, more on the short end, taking a risk, but making sure that ten and thirty years are under the leash.
In fact, a very key investor.
Last summer, as in a smaller round table, what happens if all four of them this was probably August is before back to school September races began a US, Frans, Japan and UK if all of them had their transponments and then September came in. I remember us talking about this. Yes it happened, but only four hours in the guilt market and that was it.
I remember that little many moment.
So now there's an excitement again because UK has a different risk premium, a net international investment portfolio i e. Has a budget deficit and the current counterfeicit. Has to be nice to the foreigners because they will buy your our debts. Question Marks on what this local election may mean for the government. Will there be a change there or in the chancellor, will somebody more to the left come in? All these are under question mark famous last word.
My feel is for the moment still, this financial repression will win. We won't have the trust moment two, but obviously they will need a little bit of luck for the Rand situation to continue to calm down, because unlike the trust moment Trust moment one. Now all of this is happening for reasons much beyond the UK.
Joe, I am impressed that we always managed to schedule these macro conversations for maximum event risk between when we record and what it publishes. So we have the UK elections, everything happening with Iran, and we have non farm payrolls tomorrow.
There's so much going on and we just apologize in an advent. This is why people should buy tickets to the event, because if you have to hear this conversation on the podcast feed, who knows it could be out of date, but those who are here don't have that issue is emification of Western policy making. Is that an apt characterization of it? Sinning aside specific you know, elections here or there. You hear that term emification of end is that appt.
It depends right, So it's country to country this again paradigm you have. So let's the legalistic UK is an example. Let's elaborate further. Real rates are reasonably high. The country has gone through a difficult situation. You court see what happened with oil the pass through effect, but it's happening pretty much everywhere else in the world. You have a current account, which matters mostly in most countries, including UK.
You have an input factor of energy and you have an output factor of services effectively that you said, so depending on where you are in the world, which country, depending on who you are. If you have a situation where you an energy importer M and your exports are highly dependent on effective services which you are getting disrupted courtesy AI, if you're in trouble alongside, if you're an importer of manufacturing also or goods, again you're in trouble.
So this adjustment will happen. So you have to have allies. You have to have people who you do a quick proprove with, and that adjustment is what we're seeing effectively, and markets are finding a true balance of risk cleepia alongside.
Well, okay, so on this point, two things you've said which sound very rational on stage, having a series of allies, I don't know if those are stable. And then also you know this aspiration to balance the current account between the US and China. It sounds nice, but like do you think, like, are there actually any real prospects of moving the dialogue that kind of thing.
So again I don't want to comment here.
This is in terms of our house view, but a general will I give you a general perspective on the same example, if you were to get west in space and ask China, what does it deed from the West?
Yeah, it's not not. Yeah, I've heard apart from.
Bowing in air buspare parts if you were to just look at from that perspective. So there is a desire and maybe there is an they will oblige. I do think there is certain things, like for example, agricultural products that could benefit. There are certain aspects, but fundamentally, unless we choose within the West to build the whole manufacturer stack, it's going to be very difficult to keep this current account balanced and.
On top of it.
The biggest worry, and again I'm maybe jumping on this point, is when people took about the as attack that the West is investing in the Capex stack, that the West is investing in. The key is not what the West is doing. The key is to understand what China is doing in it. Understand what they are doing with the deep sea version for models, glm FI, the Hawaii clusters. I can go on with an optical compute, there are
quantum computing. There are many more things that they're actually investing a lot and which effectively becomes a true competition and a cost factor of reduction.
If there is a risk, that is the risk to watch out for.
Right It's not to study what we are doing here, because we will find ways to keep evolving. But you have an ecosystem there which is actually quite well worsed and also has a lot of capital behind it. And there was somebody who was quoted as most of the engineers today actually are that part of the world.
And another thing that the market miscalculated right right after Trump got elected the second time December twenty fourth January twenty five, by far, the big CONSTANTUS straight. Besides, the us NI year is going to five fifty. You know, everybody being done a long was to buy these dollars NH options like that seven to seventy five.
Everyone I knew was buying dollars C and nature.
There you go, and what happened is.
To start to start your see the other around. So that shows you even though some people are really into saying markets are never wrong, you're wrong, that can be very very wrong itself. So we're all human beings and certainly that can make markets very wrong itself. One more aging country that we need to talk about to bring it right to the market, Japan.
Right, So to your question.
Higher oil, higher rates, why doesn't this thing bring down equities? Why are these you know, why is this guy was on sending messages buses empty and nobody's buying it. It can be quite frustrating. Right last Thursday Friday, it almost
happened because you know, it just feels itchy. The other end looked like it would break one the sixty it took like US Space would contin to sell off hurlmost again, question mark there was there wasn't that hunt and then just like the rate checkof at the beginning of the year, one of my closest friends on not on our trading floor, but on the sector. I had to heard this big Irish voice. You know, you know, this is a fat New York calling on helful of Bank of Japan and like,
what's going on with this guy? And because he was shouting around, Because they want to make sure that in public information, they told those three banks that they called would let others know that they were watching. Similar this time around, FED didn't call Bank of Japan itself came and they punted for risk parity. What does that mean? They punted for lower walltalty, commer waters and stable rates.
The moment they pushed down Yan's dollar and lower yan stronger US rates, calm down, he's got a bit et.
Cetera, et cetera.
So it's always a tug of war on one side resparraty camp mostly central banks trying to keep things calm, and on the other sides, sometimes my dear fast money friends looking for more twenty twenty two years Christmas come early every Friday, another fifty base points sell off on ty US ten years higher volatilty, et cetera, et cetera, and US stay in the middle and try to decide which one is right.
Can't you just tell your fast money friends to calm down for a little bit. To Aditya, I want to go back to what you were saying about US versus Chinese AI models, because if we think about how much the stock market rally is actually dependent on AI at the moment, and how much of the AI story is dependent on this idea that like, well, the West has these amazing more sophisticated, albeit more expensive models for which
the you know, tam is basically the entire world. And you're arguing that actually that's not the case, and China's models are perfectly suited for its own needs. Elaborate on that. How are you, as a sort of trader evaluating these models? How much of your day basically is now just trying to figure out AI.
It's a very very good question, and the key here is is to understand what are you so currently? There's a whole There is a very very strong narrative. Yes, also a very strong use case. Now, the valuation stack versus a forward earnings kind of multiple, right, if you were to look at it right, says that there is going to be a huge CAPEX investment within the Western stack for the next three or four years, and that's what's created this valuy within various companies and the second
order effect companies. China is doing something similar. It's very clearly said in the West that they're effectively using in video chips and video is just to companies, just to give an example, but just their chips to train the models. In reality, now they have Hawaii chips which are pretty
much parallel or comparable to h one hundred processors. The big problem, and that the West is not appreciating is is that the reason West is investing so much in CAPEX is because they want to effectively get to superhuman intelligence very quickly. So almost everybody's saying, okay, you have a model that has seven trillion parameters. Now we go to fifteen, maybe at twenty five fifty, and it becomes
self learning and it's reinforcement. But the reality is you have things like distributed AI, you have things which is actually being worked out in the West. You have also things which are very different, which is something has simple as quantum computing or I would say optical GPUs. Right, it's another concept, please read about it. So you have currently, there was a narrative in the West where you had GPUs of Nvidia and you had a copper connector between them.
Now you have optical computer firms or optical firms effectively that have done very well in the last many kind of months.
So this narrative will remain right.
Having said that, if you keep an eye on what's going on the other side of the world. Also use case in terms of actual optic of usage, because it's not like I'm going to run five different AI models together. I'm going to probably converge to one at some point will eventually cause some kind of a problem in the future. The second thing that you have to keep an ion
is also robotics. That's the other aspect which is going to be the second narrative that is actually going to start within the Western stack, which is the Elon Musk revolution of Optimus. And again something to keep keep an eye on what's happening in China within it versus what's happening in West, and how deficient is West.
You talk about, Okay, this microphone that we're talking to almost certainly the majority of it or all of it prime made in China. How much do you see clients or people that you talk to purchasing Chinese financial assets, including Chinese government bonds, which more and more people are talking about not just the safe haven, but a safe haven that's done well and a diversifier. And how much is that becoming a meaningful part of portfolio construction.
It can grow.
I mean already it's happening with effects. But you know people first denial, then anger than accomplishments, right, they realized that the effects train has moved to your question government bond Chinese As said just two three years ago, even when I went to Singapore and Hong Kongs of the world, people were either fearing claiming being very confident that.
China was uninvestible.
Yeah, and deep inside I was saying, if Chinese uninvestible, you know your future in Singapore and Hong Kong. I turned out to be correct, right, But it turns out its thoughts of a fixed But there's still a lot more room to go in Chinese equities and Chinese bones.
That bus is also not fool Okay.
All right, lots of empty buses around. Ozon and Adita, thank you so much for coming on all thoughts really appreciated.
Thanks for working.
That was our conversation recorded live in London on May seventh. Shall we leave it there?
Let's leave it there.
This has been another episode of the au Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway and.
I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our producers Carmen Rodriguez at Carman armand dash, Ol Bennett at Dashbot, Cale Brooks at Calebrooks and Kevin Lozano at Kevin Lloyd Lozano. And for more odd Lots content, go to Bloomberg dot com slash odd Lots. We have a daily newsletter and all of our episodes, and you can shed about all these topics twenty four to seven in our discord Discord dot gg slash lots.
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