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Kushkin.

Everyone is being far too cheerful.

Knock it off.

If you tune in regularly to this here show, you will know that financial markets, stocks, bonds, currencies, all that jazz, are remarkably calm right now, given the huge range of apparent dangers.

Central bankers are under attack, geopolitics are in the bin, all sorts of policy, particularly in the US, is just all over the place.

Can't imagine why.

Now, in markets, here's a little secret.

Everyone knows the cool kids are bearish.

They're the clever sods who are always saying this will all end in doom and damnation.

Moderate optimism is for squares.

So today on the show, we're going to lay out for you how to be a massive misery guts about markets.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

I'm Katie Martin, a markets columnist at FT Towers in London, and I have to say, a bit of a misery guts in general.

I'm joined down the line, refreshed from his holidays in the sunshine, by that guy off of the Unhedged newsletter in New York City, Robert Armstrong Esquire.

Rob, welcome back.

I'm tanned, I'm rested, I'm ready.

Did you miss me?

I really did.

I had a nice vacation.

I went to the beach.

I went to a friend's wedding.

I'm feeling good.

So it's going against my mood to provide listeners with a litany of reasons for pessimism.

Yes.

But just really quickly, I'm going to see you in real life this weekend.

Am I not?

You are.

At the FT Weekend Festival in London.

Yes.

It's going to be great.

We're going to do a recording.

We're going to hope it's not a disaster because if it is, then we're a bit stuffed for next week.

But buy tickets and watch us humiliate ourselves.

And there's loads of other stars from the FT and elsewhere there.

It's just a great event.

There are still tickets available.

And you should go.

I'd love to meet listeners in person.

Come, we'll shake hands and we'll talk about the good old days.

Yeah, you will see.

Rob has a great face for radio.

So it's the FT Weekend Festival at Ken Woodhouse.

There's a few spaces available.

Use the promo code FT Podcasts with an S on the end for money off.

All of this stuff is in our show notes.

Now then, bears, pessimists, they have predicted 15 of the last three recessions, but I'm being serious here.

I think there are reasons to worry.

Let me tell you a little anecdote, Rob.

Back in 08, I was very pregnant, so I missed most of the crisis, but

you must have been.

So it was teenage pregnancy, because I know you were like 17 at the time.

Yeah, exactly.

Let's just gloss over that bit.

My point is, there I was, very pregnant, teenage bride, and staff in markets was like starting to go wrong.

And I interviewed an academic, and I wish I could remember his name, but I can't.

And he was saying, mark my words, there's going to be a huge crash coming.

It's all going to be terrible.

And I wrote up what he said, and my editor took a look at the story and said, What is this scaremongering nonsense you've got over here?

This isn't true at all.

I was not at the FT at the time, I must say.

And he spiked the story.

And I kind of argued the point, but I was like too pregnant to care.

And I soon after went on maternity leave.

My point in raising the story is that it's just not true that nobody saw the 08 crisis coming.

And the people who claim to be the one person who, you know, saw the signs, no, no, no.

Lots of people saw the signs, but nobody wanted to listen.

But your joke about predicting 15 of the last one crises is, of course, exactly the point.

The problem is not that nobody predicts the bad stuff.

It's that lots of people are predicting the bad stuff when it doesn't go on to happen.

Yes.

Right?

Yes.

And indeed, this is a professional risk for people like us, Katie, in that you write a lot of stuff and you write this downbeat stuff and everybody just forgets it.

People kind of like reading downbeat stuff anyway.

Everybody forgets it.

But the one time you get it right,

you can look back at one of the 15 columns you write and say, gosh, I really nailed it to this.

And then the next thing that happens is you get a book contract.

And, you know, it's great.

So I think it's important.

I think we're trying to get book contracts here.

But I think we have to, you know, I agree, this is a spooky moment, but I think we also have to go forward with a bit of humbleness about it.

We do, we do, but humble schmumble.

My point is, I guess, if there was a massive crash tomorrow, three months' time, six months' time, a year's time, we all know roughly one of the reasons why that will have happened.

We can all see the imbalances that are building up in markets and in the economy.

And I wouldn't be surprised to see any of them cause some sort of horrible correction over the next few months.

I hope they won't.

And I have no reason to think any of these things is likely to crystallize imminently.

But let's just talk about some of the things that are on our watch list.

On our horror list.

On our list of horrors.

First of all, valuations.

So there's a lot, well, actually, there's not that many, but there's a handful of stocks in the States that are

incredibly expensive by sort of normal standards.

I refer you to the words of our colleague Stuart Kirk, who wrote in mid-August that US stock markets in particular, and I quote, looks like a bubble, smells like a bubble, is a bubble.

US shares in particular are large, round, and shiny with a window reflected on the surface.

Look, I mean, what I would say, what I would say about this is it's not like it was,

say, in 2001, where there are particular stocks that are like trading at a gazillion tillion times their earnings.

It's not that anything is wildly expensive so much as it is that everything is quite expensive.

Right.

There's no,

where are the cheap stocks?

There just are none, it feels like.

There's a handful of stocks, particularly in like big tech and connect and connected to AI that are trading at enormous multiples of their earnings.

And to be clear, their earnings are fantastic, but they're nonetheless trading on large multiples of those earnings.

Yeah, but it's 40 times, not 100 times to the point.

In 2001, it was stuff at like 200 times.

Yeah, I will

absolutely like, take your point.

These are not dot-com valuations, but they are pretty toppy.

The thing to really worry about on that, I guess, is that it's all hinged on one thing.

It's all AI.

It's all big tech.

This is not really the kind of broad swell of optimism and fantastic performance.

It's kind of like this one thing that's dragging the whole market along.

Yeah, what you'd want to see in a healthier rally is

all kinds of companies churning out quite good earnings.

And we're not seeing that.

That gives you a stronger kind of bedrock of support.

Yeah.

Less room for error.

Yeah.

I think that's the way to think about this.

Yeah.

Markets can go on and economies can go on in quite tenuous situations for quite a long time until the wretched thing happens.

Yes.

And what we're talking talking about is the probability that the wretched thing happens, which is always low, but it grows higher and lower at different moments.

Speaking of wretched things, another thing that you can point at to say, look, there are signs of excessive exuberance here.

You know what I'm going to say, don't you?

I'm not going to say it for you.

You have to say it yourself.

It's bloody crypto.

My God,

this thing.

There's, you know crypto is doing great all the companies that do absolutely nothing apart from buying crypto are doing great this whole thing feels a bit kind of woo woo woo off to the races and it's like I just think we you and I have lost the argument here this this is a runaway train it's making people a lot of money it doesn't make it right morning anecdote incoming i was at the uh i was at this wedding last week and somebody pulled me aside on the dance floor to tell me that I was wrong about crypto.

It literally happens to me all the time.

And so, and it does not happen to me all the time.

So people I hardly know want to want to talk to me about crypto.

So I don't know.

I don't think that's a good sign, but listeners can take it however they want.

Reasonable and indeed unreasonable people can disagree.

Similarly, like meme stocks are back.

You know, there's a lot of very kind of frantic rah-rah trading going on on in stocks that are just popular or

TikTok or whatever for some stupid reason.

So there are clear signs of exuberance there.

But just like circling back to like AI stocks, I think we've touched on this in a previous pod, but it's not just in the public stock market where there's a lot of concentration on the AI trade.

If you look at the venture capital industry, which is like really early stage financing, if you look at the private equity industry, if you look at the private debt market a lot of that is crowded into the AI infrastructure trade right so it's building data centers and cooling towers and God even knows what now how much does this dominate the private debt market for example the answer is we don't know but we will find out if it all goes belly up all at once which is just not to me a super reassuring space to be you know so UBS recently was talking about how the AI infrastructure phenomenon is a critical engine behind the private debt market and that there are overheating risks here.

There are upside risks, but there are overheating risks.

You know, it's that kind of age-old saying, I think it's Warren Buffett's, right?

You only see who's swimming naked when the tide goes out.

But this is absolutely a case of that, to my mind.

Yeah, we've talked about this before, and indeed, the construction of AI data centers

was a significant contributor to overall GDP growth in the last two quarters.

So if that slows down, it means a noticeable slowdown in economic growth.

And

you're right, there is probably a lot of private equity and private credit exposure to the mad rush to build those data centers.

There's no question about it.

And I'm glad you mentioned private assets because

it's not just AI that should make us worry about that space.

I think there's a lot to be said about the private equity and the private credit business models.

However,

just the mad rush of assets into private credit in particular in the last couple of years makes me wonder whether returns won't be a little bit weaker than everyone is hoping for from that space, and there might be a minor or major stampede out of the space just the way there was a stampede in.

So that could go on your list of wretched things.

The excitement about private credit starts going the other direction.

So look,

we're a little bit worried about valuations and exuberance.

We're a little bit worried about AI concentration in markets.

We're a little bit worried about private markets for a number of reasons.

Yes.

Then there's institutions.

In particular, there's the U.S.

Federal Reserve, which we all affectionately call the Fed.

Now, I don't intend to get deep in the weeds on what is going on there, but it's very clear, because we've talked about it in previous podcasts, please do look them up and listen to them.

But the point is only that the attacks on this supposedly independent central bank are intensifying, and that really opens the door pretty wide to some quite crazy policy moves out in future, right?

I would say not only have these attacks intensified from the administration, that they have changed in kind.

That going through the dirty laundry of an official at a supposedly independent institution in order to find some little hook you can use to drag them down, which is what they have done to Fed Governor Lisa Cook, it doesn't matter whether she did something naughty.

on her mortgage application.

I mean, of course it does matter, but the point is they went looking for a hook and they're trying to pull her down with it.

And that is different from calling Jay Powell, the chair of the Fed, a big dummy.

It's the difference between rhetoric and a frontal attack.

And so something there has changed in the last couple of weeks in kind, not just in degree.

For the U.S., which is kind of the biggest, baddest market, which kind of matters the most, it is really not helpful to be undermining institutions that investors normally trust to give them safe, reliable, true information in the middle of all that.

Amidst all our worrying, we have to note that markets don't look all that worried.

Not the dollar, not

stocks, not bonds, not break-even inflation rates.

All this stuff looks pretty calm, with the one exception of gold.

Yeah, yeah.

Everybody, we're building a graveyard here, Katie, and everyone is whistling by it.

Well, one thing I will say on that is, again, going back to being pregnant, right?

You can't be a little bit pregnant.

So either the AI bubble has burst or it hasn't.

Either the Fed is dead or it's not.

You know, either the private equity industry is still raking in money or something horrible has gone wrong somewhere.

And actually those adverse situations, which are quite sort of binary, none of them has really happened yet.

So it's quite difficult for markets to reflect the possibility because you can't, you know, it's either kind of, it's black or white.

And it's quite difficult to price grey when that's not a possible color that's available to you.

The analogy I used in the newsletter yesterday was a dam bursting.

Either the dam has burst or it has not burst.

But it doesn't burst slowly.

It's not like water comes trickling over.

It holds and then it cracks and then there's a flood.

And this has to do, I mean, look, for investors,

they have to own something.

Yes.

If you're a professional investor, you're not paid to just hold cash or some other safe asset and hope that things will look better in six months.

You're paid to invest, right?

And until the crisis comes, you know, or in in in Chuck Prince's famous words, while the music is playing, you got to dance.

Yes, right.

So we're seeing some of that phenomenon right now where, you know, it's a big professional risk for anyone managing money to be too pessimistic too early.

And if everybody gets slaughtered, I mean, this is a very familiar point.

Armstrong did not make this up, but if you're one of the pigs that gets slaughtered when all the pigs get slaughtered, that is professionally survivable.

What is not professionally survivable is being the guy who for two years has been saying, oh, this doesn't look good.

I'm going to be underexposed to U.S.

equities and U.S.

debt.

Oh, worry, worry.

I listened to the unhedged show and Katie said everything's so terrible.

That'll get your ass fired.

Right?

And so,

you know, what I mean.

So, look, I don't think either of us here wants to shout fire in a crowded cinema, right?

I'm not suggesting any of these things are going to go belly up tomorrow, but I would just say sometimes that little drumbeat of things that don't feel quite right is worth paying attention to.

Do you agree?

Oh, I didn't know if you were wrapping up.

I think we both remember, Katie, in 06, 07, 08, there was this weird little drumbeat of strange events that kept happening.

Hedge funds nobody had heard of going belly up, odd doings in the real estate market

and so forth.

So the question is, when and if we start to see stuff like that,

bits of the machinery starting to crack.

So let's go on the record here.

What is the bit of the machinery that we are watching most closely looking for a gasket to blow?

Good question.

I think it's something like an AI data center running out of money halfway through its construction and people pointing fingers at each other and losing money.

That is a good guess.

I am going to go with the easy answer,

which is

we have a panicky moment somewhere in the vicinity, perhaps not the core, but in the vicinity of the U.S.

Treasury market.

Government bonds.

So how about some hedge fund that's doing the basis trade

going sliding slide?

And

it's just basically taking a very leveraged position in treasuries.

We get a weird bump in the treasury market because of some incredibly asinine thing.

Someone in the administration says, this is enough to tip over this fund that has a leveraged position in treasuries.

Then people start to question the treasury market in general, and it's off to the races.

Both good bets.

Listeners, I hope you have enjoyed your class at Doom School.

We will be back.

We'll be back in just one second with Long Short.

Speaking of alternatives, PGM's monthly podcast discussing trends and strategies in alternative investing.

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Hear the full conversation on PJM's podcast, Speaking of Alternatives.

Oaked Oak, it's time for long short, that part of the show where we go long, a thing we love, or short, a thing we hate.

Rob, what you got?

I am long the month of September, and I'll tell you why.

It's traditional, at least in America, to be very down at the end of August.

Summer's over, vacation's over, boohoo.

But I think it's easy to forget that the weather in September, at least here in the New York area, is glorious.

It's a beautiful month to be alive.

And my friend Dave said to me, September is just August with football.

And

I think this is a really good point.

I think we got to focus on, instead of being bummed that summer's over and we're going back to work, September's cool, man.

Great month.

Well, it's going to happen whether you like it or not.

am.

We've been talking about crises and I am short people shouting about a huge crisis in the UK and claiming we're going to need a bailout from the IMF sometime soon.

This is just, guys, come on.

Be serious now.

This is just silly.

This is just saying silly things for attention.

I will accept that things are not great, but they're not.

IMF bailout bad.

Katie,

it's so nice to hear you say something

good about your home country because it happens so rarely.

Come on.

I will see you in my home country at the weekend.

In the meantime.

I look forward to that very much.

My mum will be there, by the way.

I'm not sure she's ever listened to this podcast, so she may or may not know who you are, but that will be fun.

Listeners, we're going to be back in Your Ears on Thursday, so be sure to listen up then.

Unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

Topha

is the FT's acting co-head of audio.

Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the Unhedged newsletter for free.

A 30-day free trial is available to everyone else.

Just go to ft.com/slash unhedged offer.

I'm Katie Martin.

Thanks for listening.