"Yellow Alert" for Credit: Peter Tchir on Risks in Rates, Riots & China's "Cheap Compute"

SPEAKER_1 (0:00)

And let's talk about some of this. And the macro joining us now around the desk is Peter Tchir, Head of Macro Strategy at Academy Securities. A lot going on, Pete. Good morning.

Peter Tchir (0:08)

Good morning. No shortage of things going on at all.

SPEAKER_1 (0:10)

Yeah, exactly. Let's start with the credit market, because obviously this is one of your wheelhouses. Obviously, it does tend to sniff out risk first. I'm just wondering if these widening spreads we're seeing, particularly with the CCCs, is a concern for IG, but also for equities.

Peter Tchir (0:27)

Yeah, and I think right now, it's kind of a yellow alert. So what scares me a little bit is, you saw how quickly treasuries widened this summer when they decided to widen, they widened 75 bips in a period of month. What was really concerning is how quickly France, Spain and Italy widened 50 to 70 bips versus German buns. It was in the course of two days, right? None of those stories were really new. They've been floating around there. So what tends to happen in credit, they can handle small moves, but if you get a flood, it really widen spreads very quickly. I think we're at that precipice, so we're looking for a little bit of a bounce today. We're seeing some of that. Hopefully, it stays and holds, but if not, I think the next thing is a bigger move in credit spreads, and I think that will hit equities far harder because that challenges the AI growth story. It challenges earnings ability for other companies if their credit spreads go wide. So I'm on the cusp of it. I'm watching LQD, HYG, JNK, all ETFs, also VCSH, four credit ETFs very closely. And what I want to watch is are they trading at a discount to NAV or not? Because if they start trading at a discount to NAV, that indicates disorderly markets. Right now, we're not seeing that. We're seeing down but orderly. I think we're on that precipice. So the next move down could create disorderly. So that's what scares me. I'm not running panicking, but I'm watching that very closely.

SPEAKER_1 (1:40)

It's interesting because Corweave kind of became the poster child for a lot of this concern last week, particularly when it comes to the cost of capital, given the amount of debt it's had to take on. I'm just wondering now with the number of people sort of coming to Corweave's defense, Michael Intrader, obviously the CEO itself, we've also had Jensen Huang now, Goldman Sachs is saying it's upgrading this to a buy from neutral. I mean, given the fact that it had such an impact on semis last week, do you think the fears were overblown, was an overreaction or is it justified in a healthy pullback that we're seeing?

Peter Tchir (2:14)

When I'm looking at the compute story, one is I'm looking at these credit spreads and will they be able to grow at the pace they've been growing, right? So I think that's a question, right? I think the credit markets have said you know what, we are comfortable financing this and we're going to have to finance a trillion this next year and then a trillion year after. Now, I think they're saying, well, if we're going to finance this much, we want to get paid more. So I think that's part of the story. The other part of the story, I think, is still the question, is AI truly delivering what we want, right? Are we spending the right amounts on AI? Are we getting what we pay for? Then I think the third part that's less prevalent, but I think also will today's leaders ultimately be the big winners? Or is there some new technology lurking in the background?

I think you mentioned it in the start to this segment, but I've been really concerned about cheap Chinese compute. Their ability to flood this market where they are delivering stuff, it's not as good quality as ours, but it's at one-twentieth the price in some cases, right? And I see parallels to what happened in the manufacturing sectors early 2000s, a little bit what happened in rarest and critical minerals. And I'm really nervous about China's ability to dump cheap compute on the market. And though I would probably be a bit sketchy, I would not use it. I think people will look at the price differential. So those are all risks. So I don't think any of that's really been addressed yet.

SPEAKER_1 (3:25)

Yeah, that's a really interesting perspective. And you wonder what could happen say 10, 20, even 30 years down the line given what we have seen with some of the on-shoring and obviously political moves against China.