00:29:26 · Alex Altmann
[00:29:26] S1: And it makes perfect sense, right? Because if you, especially in a higher interest rate environment, high interest rate environment is perfect if you're running a long short strategy, because I deploy money on my gross long side and on my growth short side. And actually I'm not really deploying. I'm deploying units of risk, but the actual capital being deployed is really only what I'm actually posting as margin on my long and my short member. I can leverage that too, through the prime prime businesses. So actually what I'm doing is I'm taking a large chunk of capital and I can put that into say a high interest bearing, a high interest instrument. Mm-hmm clip a very nice coupon. And then I try and generate alpha on that gross capital deployed. That's the business model. And it's for the most part, a very good business model, right? The problem is, is that you've effectively tripled more than tripled the AUM plus obviously leverage. And the number of securities you can trade has stayed roughly the same or actually shrunk over time. So that creates crowding out. So how do I how do I organize or how do I mitigate that crowding out effect? Well, I've got all kinds of cool risk parameters. So, you know, Barra, I'm sure you've heard, or Axioma, just, you know, all these different style factors, quality, value, size, growth, you know, all these different things. You would have heard us talk about them quite a lot. They've become ubiquitous and obviously funds spend an inordinate amount of time and computing power trying to neutralize those factors. So that's cool. And you try and isolate the idiosyncratic risk of whatever you're trying to get. Now, The problem is, is that at the end of the day, everyone's still doing this, which means all you're creating is different kinds of crowding. And so that's why the volatility isn't showing up so much at an index level, right? Because ultimately a lot of this AUM is kind of index agnostic, so to speak. And you're seeing the violent factor rotations happening because ultimately you've got a huge amount of crowding sitting there. The one thing that leads me into sort of the technical aspect, which is the one thing that I think a lot of funds have not yet been able to solve is the AI factor, right?
00:31:33 · Joe Weisenthal, Tracy Alloway, Alex Altmann
[00:31:33] S2: Because you could be. [00:31:34] S0: Everything either is or isn't AI now. [00:31:36] S2: Right, exactly. [00:31:37] S1: And this is a problem, right? It's dawned on me recently because I've been asked a series of questions by investors specifically along the lines of, have you managed to map the AI factor? And the answer is no. Because the AI factor is changing all of the time. The betas are changing all of the time. Remember the beginning of the year, you had a lot of people that wanted to be short software. Now software is trading close to 12 month highs. And so the idea of being short software, it was part of the AI factor. And now is it so much? Well, not necessarily unclear. So because the narrative is shifting, the factor of AI is shifting too. And that in turn complicates the ability to funds to actually try and hedge that. And the bottom line is, is you're either long AI or you're short AI, right? And let's face it, the past three years, being short AI probably hasn't been a particularly lucrative trade. [00:32:27] S2: By the way, Tracy, in the time that Alex was giving us, that Alty was giving us this great answer. [00:32:33] S0: You sorted out your entire weekend schedule using ChatGPT.
00:32:33 · Tracy Alloway, Joe Weisenthal, Alex Altmann
[00:32:33] S0: You sorted out your entire weekend schedule using ChatGPT. [00:32:36] S2: No, in that time, we just got earnings from Alphabet and Microsoft. And it's very interesting. Alphabet down 7.9%, revenue X-TAC misses estimates. Microsoft jumped 6.4% after Q1 cloud revenue tops estimate. So you get two gigantic stocks. They both have very violent reactions. But if you're the indexed investor on net, looks like it all kind of washes out. [00:32:59] S0: Yeah, it does indeed. [00:33:00] S2: But man, some of these, like these numbers are incredible. Microsoft Q1 Azure Revenue X, Azure. This is their cloud platform. Azure. What's your guess? You're not looking at a terminal the way I am. What do you think it got? This is fun. [00:33:15] S1: The bokeh was, I think, 47% growth. [00:33:20] S2: Yeah, man, you're really good at your job. So the official estimate that we had collated at Bloomberg was 44.8%. They hit 48%. 48% growth for these gigantic companies. That's a good number. [00:33:29] S1: That's unbelievable. [00:33:35] S2: Cloud revenue at Google was $ 30 billion. I'm not seeing what the growth number was. [00:33:41] S0: But these are unreal.
00:33:41 · Tracy Alloway, Alex Altmann, Joe Weisenthal
[00:33:41] S0: But these are unreal. [00:33:42] S1: Yeah. I mean, they are. And this goes back to the point about kind of AI winners and losers. If you've got a fantastic legacy business and you're a cash volcano from your legacy operating business, then if you want to go and embark upon the largest CapEx experiment really in the history of America, total non sequitur, by the way, I was trying to work out because we're spending, if you believe the CapEx numbers and the terms of the forward, and I'm sure that they're going to change from what the consensus looks like now, but on face value, it's about 12% of. [00:34:16] S2: GDP, right? [00:34:18] S1: It's like two Netherlands, right? Um, and I was thinking you have not in modern history, like the Louisiana purchase, the railroads, it's blown all that out of the water. What have we done as a human society where we've spent that much money? Certainly in a short period of time. And I had to start getting really creative. I'm sure, Joe, you'll be awake at night thinking about this and trying to find some historical work on it. Pyramids, maybe? But they took hundreds of years, if not thousands. Great Wall of China, maybe? I can't think of a period where we've spent. [00:34:52] S2: All right, wait here. What do you think? How fast do you think Google Cloud revenue grew? Again, I'm turning my laptop away from me. I actually don't even... I can't even believe this number is real. I'm giving you a hint. 30-something percent? I don't really understand. I don't, I, I almost. [00:35:09] S0: Yeah.
00:35:09 · Tracy Alloway, Joe Weisenthal, Alex Altmann
[00:35:09] S0: Yeah. [00:35:09] S2: 103% Google cloud revenue grew 103%. It seems great. I don't know. All these numbers are insane. Anyway, that's what it says. [00:35:18] S1: I mean, these are impressive businesses and this is, this is why, you know, a lot of people say S and P undefeated. [00:35:24] S0: Right. [00:35:24] S1: I mean, by the way, funny, the concentration of the S and P it basically given Tracy, to your point, everything's kind of AI. Concentration of S & P, next year, 75% of your earnings growth in the S & P is going to come from memory, from semiconductors. [00:35:38] S2: What percent? [00:35:40] S1: Sorry, a bigger part. It's actually, it's about two-thirds from semiconductors, and then the broader AI ecosystem gets you to around about 75%. Wow. So you basically, S & P has become KOSPI. [00:35:53] S2: Oh, cospification. [00:35:57] S0: KOSPI-fication, yeah. All right, well, Alex, we're going to leave it there because we want to get this episode out pretty quickly. But thank you so much for coming back on Odd Lots. [00:36:04] S2: Really appreciate it. [00:36:05] S1: Thank you. [00:36:05] S2: See you next week. Thank you so much.
00:36:05 · Joe Weisenthal, Tracy Alloway, Alex Altmann
[00:36:05] S2: See you next week. Thank you so much. [00:36:21] S0: Joe, it was great catching up with Alex. I think he does a great job of sort of synthesizing a lot of different things going on in the market right now. But I do think the key thing that's emerging is this differentiation idea and the idea that we're moving from this sort of capital abundant environment into an area where people are perhaps a little bit more selective and what that means for the business models. [00:36:44] S2: I do think, completely agree. I also think, you know, every... The classic is different this time is, oh, interest rates don't matter anymore, right? And this is a classic thing. Oh, this is not going to be a rate-sensitive industry because the numbers are so unbelievably high. If you're growing 44% in a year, what do you care about when the rates are 5% or 5.25? It's completely irrelevant. You're just going to keep building, et cetera. But that is a lie that investors tell themselves. Rates, at least at the margin, at least at the tip of the sphere– sphere– at least for some of these leveraged companies like the Neoclouds or whatever, for one thing, it looks like a rates matter. [00:37:26] S0: Yeah. And also, I mean, just the costification idea of the market, it is really quite stunning because a lot of the earnings power of the tech companies, the hyperscalers, is predicated on the fact that, well, other companies are going to buy the services so that they can boost their own productivity and get the earnings up. [00:37:44] S1: But like.