UGO13: How Much Longer Can AI Carry the Market ft. Christian Mueller-Glissmann

Cem Karsan (0:03)

Welcome back to You Got Options from the CBO floor, brought to you by Top Traders Unplugged and Kaiwell. Today, we get to talk to Christian Mueller-Glissmann from Goldman Sachs. Incredible wide-ranging conversation, dealing with everything from are we in a bubble? Are the earnings real and sustainable in the market? Do valuations on a bond basis make sense at this point? What's the role of volatility in a portfolio, and are we likely at this point to need to look at the ball a little bit more than we had been in previous periods? Lastly, where are we going with the bond market and the speed limit of 60-40? Is this a time to be watchful and prepared for debasement? I think you're going to really enjoy this one.

Welcome to another episode of You Got Options here at the CBO floor. Today, I get Christian Mueller-Glissmann from Goldman Sachs. He's the head of asset allocation research there.

We have talked once before, quite a while ago, incredible conversation last time. Can't wait to chat again today. Welcome, Christian.

Christian Mueller-Glissmann (1:33)

Thanks for having me, Cem. Looking forward as well.

Cem Karsan (1:36)

So I want to start out today with a couple concepts you have very recently kind of been talking about, which is how the bond market has really been kind of is becoming the speed limit of the equity market and this concept of broadly kind of innovation versus inflation. There's really this tension between the bond market and the stock market and what's happening. If you wouldn't mind, maybe take us through a little bit of kind of how you're thinking about this moment we're in, in terms of growth versus inflation, etc. And I'd love to hear a little bit kind of about how you see asset allocation at this time in this year.

Christian Mueller-Glissmann (2:13)

Yeah, sure. I mean, listen, I think this macro regime that we have since the beginning of the year is very different to what most people expected coming into the year. Like at the beginning of the year, like you had unemployment rates that were low, profit margins were high, equity valuations were elevated, policy rates were somewhat high. And the best people were hoping for was some type of Goldilocks market where you get a bit of inflation relief coupled with maybe some regulatory and fiscal kind of help from policy makers. But instead you got this enormous AI capex boom that really pushed the business cycle to some extent back into a mid cycle acceleration.

Like you create this enormous re-leveraging and you have to consider that the only thing that didn't look very late cycle at the end of last year was private sector leverage. Like the private sector didn't look particularly leveraged. And now you get a major re-leveraging here with the AI capex boom.

And this AI capex boom has created this nominal growth acceleration. And that already feeds into the bond market. Because if you get like nominal growth accelerate, that usually is good for equities, it's bad for bonds. And equities are usually supported by better earnings growth. And we've seen some of that for sure, even though it's been very narrowly driven. But we've had significant upward revisions to earnings growth. And then obviously on the bond side, you have the issue that often such an acceleration can drive inflation. And I think this time around, a lot of the inflation has actually maybe not even been driven by the AI CapEx boom, some of it.

But I think the bigger drive off inflation has been the Middle East War. So the Middle East War pushing up energy prices has then boosted inflation. And now the bond market essentially has to adjust to this new macro regime. Because equities have already kind of to some extent reaped some of the benefits because you had the earnings growth really boosting equities. But I think the bond market is still trying to find its new equilibrium. And as you were saying, the risk you're facing is a bit, as the earnings tailwinds for equities are kind of moderating a bit, because they've been really enormous for the first half of the year, the rates headwinds are starting to bite a bit and they're starting to play on equities a bit, especially certain parts of equities. And I guess that's the speed limit that you're talking about. The speed of the bond sell-off coupled with the fact that the earnings tailwinds have been moderating has meant that equities have started to consolidate a bit.

Cem Karsan (4:51)

So I wanted to unpack this, two parts of this and kind of separate them. Well, first I want to talk about the innovation part. And then I want to get to the bond, kind of the speed limit part.