Sanger also sees AI as a major development, but said the disruption from AI agents could create instability across sectors as investors struggle to assess where the technology is headed. With inflation, economic, political and geopolitical risks also at play, he expects markets to remain volatile and described the current environment as a “sell the rallies” market.
This is an edited transcript of the interview.
Q: How do you see the global cues and this surge in yields, with the massive one-day move? Crude is one factor, but stronger economic data also appears to have unsettled markets. What is the bond market telling you, and can US markets continue to deliver when yields are rising at this rate?
A: The pace of the increase in interest rates is really the problem. Markets somehow keep hoping that there’s a deal coming. Every time there’s no deal, the market takes a bit of a conniption. Now you’ve got the Fed on an interest-rate-raising cycle, you have inflation that is going to keep hardening because of higher oil prices, and today you had a sale of five-year Treasuries which came in a little disappointing.
So, you have clearly stresses building up, where bond buyers are unwilling to fund the ever-expanding US deficit, with all the other macro indicators suggesting (a) the economy is too hot, and (b) inflation is too hot.
So, we’ve got these competing forces, and I don’t think equity markets can ignore the fact that rising bond yields make the discount rate in the denominator of calculating the present value of future earnings go up. If that discount rate is going up, then the present value of earnings is less, which means the market has to go down.
So, this is a problem for the US, but unfortunately, when the US market sneezes, the rest of the world is going to catch a cold too. So, it’s not a US-only problem, but clearly the US market can’t ignore it.
Q: Counteracting some of this, if bonds run away, that’s another point. Chris Wood of Jefferies told me earlier last week that at some point between 5% and 6%, the US would essentially freeze yields. He said he was surprised it hadn’t happened yet given the huge pressure upwards. On the other side, you’ve got this entire artificial intelligence (AI) revolution, and Meta’s Muse has once again lit the fire under these names. How significant is it? Is this the start of agents and everybody having one in terms of large models? Is this a big moment?
A: I think it’s a big deal. I’ve been using the Grok agents for the last week or two, and I’m going to be trying the Muse agents soon. But the reality is that these agents really are getting better and better.
For us consumers, it was fun to use ChatGPT or whatever to ask questions which you would in the past ask Google, and that’s fine. But with these agents, you can actually do a lot more.
A lot of the internet is built on human advertising and human interaction, and you’ve countered that if your agents are doing the work, how do you advertise to agents? So, there’s a lot of turmoil on that front. That’s causing some sell-offs.
So that’s a whole new thing that is causing angst in certain parts of the market. The problem with AI is we don’t know. Last year, or earlier this year, it was about the SaaS companies. Now it is about travel companies and online companies, and a lot of other areas. Even banks, people are talking about.
So, I’m not sure that I completely subscribe to everything is going to fall apart because of AI, but the disruptions are going to be somewhat destabilising for markets because we don’t know where the puck is going in terms of what that might mean.
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In the meantime, obviously we’ve got these more fundamental problems on inflation and the economy being too hot. Then you’ve got an election where it looks like the Democrats are going to sweep, and that creates the risks of: are they going to be anti-AI, what is that going to do, and what is that going to do to Trump?
In the meantime, we have a war that is not working. So, the risks are so many, and the optimism is just based on all the spending that is driving AI, that is driving the boom.
So, it’s kind of two competing forces, and my sense is it’s a little bit of a sell-the-rallies market till things fell down.
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