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Feels like the world in the last month or so has turned upside down. We have a Republican administration that is in theory business friendly, but the stock markets go in the wrong direction. Growth expectations are falling and markets, finance, corporations, everything is helter skelter, opposite day and inverted.
Today on the show, we're going to start swimming so we don't sink like a stone because the times, they are changing. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from beautiful Unhedged World Headquarters in the capital of the universe, New York City. I am joined today by world-famous head of the Financial Times Lex column, John Foley.
to discuss how strange things are and whether they can get even stranger. Hi, John. Hi, Rob. Well, where to begin? There's a lot of strange things out there. Here's one for you. You've written about this a bit. I've written about it a bit. It used to be the tech led the stock market. Tech sort of stinks now. Since the middle of February, not one of the Magnificent Seven is up. This morning, we have two big tech companies...
reported results and are down 15, 20%. What is going on? What happened to tech, John? I think there are a few things going on. One thing is that people have met people. Investors have made a ton of money on tech. Mega ton. A ton. On the Magnificent Seven, Nvidia, $3 trillion. Palantir, not in the Magnificent Seven, probably the Magnificent Eight to Nine. Yes. It makes sense that when expectations change a little bit that people decide to
take some profit. And expectations certainly are changing maybe more than a little bit, actually. Yeah. Sort of general expectations, not just expectations for those companies, but for kind of the world, it feels like. So when you think about it, all these companies that are based on this artificial intelligence boom...
At some point in the future, the idea is that people are paying for something. Yes. That someone is buying a service that they believe has some value to them. Yes. Otherwise, what's the point of all of this? Right. And I think generalized worries about the economy and growth and how much money there will be sloshing around to buy stuff ultimately have to feed through into these long-term growth projections. And the thing about stocks is that
Most of the value comes from future cash flows, right? So think about Nvidia Palantir, probably like 80% of their value comes from stuff that happens after 2030. Yes. So you're really like drawing lines out into the distant future. And if you change the trajectory of the line a little bit, you've wiped or added lots of value. One thing, yeah, is when you have a lot of your value in the future, you're very sensitive to expectations as a stock, the price of your stock is.
And the other thing is when an investor is looking at their portfolio and they've made so much money in a small group of stocks or a single sector of the stock market,
They're overweight, that sector of the stock market. Right. That starts to take over the whole portfolio. Then some spooky stuff happens. You're like, well, I got to sell something. Let's take a look down here at the stuff I could possibly sell. Your eye is going to fall on the thing where you've made a load of money.
And which you are overweight, which makes it look risky not to sell it. Absolutely. There's another thing going on here as well, which is what I often think of as the curse of being good at stuff. Like if you're good at stuff, people just expect you to do it, whether or not you like it. Right. Maybe I'm talking about myself. Yes. I'm making this too personal. But like with these tech stocks, people have got used to them exceeding expectations. Yes. So now if they don't exceed expectations,
our already elevated expectations, we become horribly disappointed. And you mentioned the two tech stocks today that are falling. Yes. One is Marvel, which is a chip maker. The other one is MongoDB, which is a company that essentially just does an unintelligible thing involving databases. Like...
everything in the tech sector today. But these companies haven't actually done anything bad to be down 20%. They just have not exceeded expectations by as much as people thought that they should. Yes. Yeah. Eventually, everything conceivable good ends up in the price. Yes. And there's literally nowhere else to go. Yes. Okay. You wrote about another area of stress in tech, which is a tech IPO, CoreWeave.
Now, am I to understand this is another company that does an unintelligible thing with a database? No. So I loved writing about CoreWeave because it does things with objects that I understand, which is always nice and rare. I mean, it kind of does. These things are relative. So CoreWeave runs data centers. Yes. What it is effectively is an enormous pile of NVIDIA chips. Hmm.
in servers which customers can rent out in order to do AI stuff. It's kind of a cloud services for AI something. Yeah, we often call this Neo Cloud because the big cloud companies are like Google, Alphabet, Amazon, but Neo Clouds are kind of independent companies that just run data centers like guns for hire. You can come in, you can use their servers to do some complex calculations, then off you go. Corweave wants to list
list its shares, the valuation could be anything up to 40 billion would be reasonably sensible, believe it or not. The whisper number out there is more like 35 billion. Yes. Because this is tech, it comes with quirks that would in a normal world be extremely off-putting. Go ahead. In this case, might not be. So CoreWeave is like, as I said, it has data centers and it rents them out, but it rents them out mostly to one company, which is Microsoft. Ah.
And its supplier is mostly one company, which is Nvidia. Right. So if you think about this as like, it's a company that does a thing that seems good, definitely.
data center rental, but it has basically one dominant supplier, one dominant customer. That's a lot of risk. Avoid. Both Microsoft and video also, as you say, great companies, high expectations. If you have to be between two huge companies. Yeah. Those are good ones to be between, but you're also, you're not just between the two companies. If you invest in this, you're also between the,
founders who have super voting shares that give you no power. There is a staggered board where you can't eject all the directors in one go. It's all the greatest hits. But it's just not only you investing in the AI boom, you're investing in a basically three-way tug of war between dominance suppliers, dominant customers, dominant shareholders that just layers on an extra kind of risk. And already the FT, our colleagues at the FT have reported today that Microsoft may be
reassessing some of its relationships with core weave. Moving on from tech uncertainty to economic uncertainty, we've seen bond yields fall, dollars fall, worries about tariffs, small caps selling off. So on top of this shift in what we might call the internal dynamics or leadership of the stock market,
We have a macroeconomic shift layered on top of that. It's almost hard to distinguish the two between what is going on with what would be changing in the stock market anyway, and what is changing because the economics are changing.
I mean, are things like tariffs and growth expectations showing up in your world, in the companies that you're covering? The whole tariff situation is crazy. They're on, they're off. Yes. They're imposed, they're unimposed, they're re-imposed, they're unimposed again. Right. This throws companies into a state of grave discombobulation. And I think what we know about companies is that they like some kind of predictability. And when I've been talking to company executives
The story is always the same. It's like they just want to know what they're doing. They just want to know where to put their assets. Yes. And that uncertainty is the most damaging thing for companies. It's not bad for everyone. You know, traders in Wall Street banks love volatility. But the companies themselves are finding it very hard to know what to do. What they are doing is making noises about building stuff in the US. Hmm.
opening car plants, building data centers, whatever it may be. So the economic story then becomes even more complicated, right? Because in the short term, you've got tariffs, which are presumably highly inflationary. Eggs cost whatever, $12 a dozen. That may not be tariffs, that's bird flu. But still, we have an inflationary backdrop.
And we also have eggs that come in from Canada, don't forget, into some of the northern states. But yes, bird flu. But then in the longer term, we're being told, but this is going to result in a huge renaissance in manufacturing in the United States. And it's definitely true that companies are talking about building more production capacity here. And that was the idea of these tariffs, is to get manufacturing capacity moved to the United States. And that might, at least in theory, companies are edging that way. Yeah.
We wrote about an interesting sector yesterday in this respect, which is boxes. You know, you never know where these policy changes are going to affect, but the companies that make cardboard boxes and packaging material, International Paper and Smurfett are two stocks that got really whacked yesterday.
Because if you're going to take anything across the Mexico-U.S. border and a lot of stuff goes across that border, it's in a cardboard box. So those companies said, this is bad news for us.
And if you're going to make a cardboard box, you're going to make it out of a tree. And that tree comes from? Not the United States. Canada. Yeah. We have a lot of timber in the United States, but we also get a lot of timber and wood material from Canada.
And Trump wants to get more timber from the United States, right? He said this. Yeah, I'm sure. And the timber company that is actually very heavily overweight the United States rather than Canada is a company called Weyerhaeuser. That stock is up because now it's competing in its timber sales against expensive Canadian logs. You never think about the cardboard box supply chain until somebody starts fiddling around with it.
And the story is kind of repeated all over the place.
changes and you have no global trade flows anymore, what do you do with all the cardboard boxes you don't need anymore that you're making with American timber in America? It's tricky. There's a reason why trade flows work and it's because you can send stuff to where it's needed for the best price. Yeah. So we have a weird piece of growth slash tariff anxiety in the background with
intended and unintended consequences. But one company you wrote about, I was interested to see that has made a little bit of hay off this weird situation globally. The strange Trump world situation is BlackRock, which got a deal done in Panama, which I guess is going to be the United States soon, but it isn't quite yet, at least according to the president, to kind of walk us through that deal that they did. Well, so the Panama Canal,
As most listeners will know, President Trump has talked a lot about his concerns about the Panama Canal being a sort of American creation that is now being influenced, used, whatever it is, by...
powers that he's not so keen on China being the obvious one so he wants to kind of take back control of that so what's happened is that's resulted in the owner of some of these Panama Canal ports CK Hutchison which is Li Ka Shing Li Ka Shing's conglomerate in Hong Kong selling these ports for like 23 billion dollars or its stake in those ports to BlackRock in
In a deal that seems to have been brokered through handshakes and bilateral conversations, Larry Fink, the CEO of BlackRock, talking to Trump and briefing him, sort of arranging this deal. Other bidders don't seem to have had much of a look in. The number of advisors on the deal was very, it was a very elite group of bank advisors.
How did Lex assess the price on that deal? Cheap? Expensive? Is it impossible to say? So it's difficult to say because we don't know what the exact numbers are on these ports. Like C.K. Hutchison reports, they come into a section called other in its reports along with some other stuff. So we can't exactly see. Some analysts have had a stab at it. Citigroup said in a kind of first take on it,
Their analyst said that they thought that this asset, which was changing hands for about 23 billion, was CK's stake in it, they thought was worth about 12 and a half billion. CK had like 80% of it. So clearly there's a gap there. The other telling thing is that CK Hutchinson's stock was up by the equivalent of about $4 billion after the deal was announced. And so when I looked this morning, it was still up that much. So that suggests that they've sold it for more than investors were thinking it was worth, which...
in fairness to BlackRock, may not be because BlackRock has overpaid. It may just be that investors in CK Hutcherson weren't really paying attention to the value of these ports. Yes. But it might also be that BlackRock has paid a high price for a very politically valuable asset that presumably wins BlackRock more friends in Washington. Yeah, which companies are really lining up to get. I mean, the friends in Washington thing we saw with the partial...
reprieve against tariffs for Canada and Mexico after a visit to the White House of various car executives, Trump said, we'll give you a month where automotives and auto parts are not part of the tariff package. And the stock market liked that, at least as of yesterday afternoon, the stock market liked that. But it raises the question about the value of in a highly regulated trade economy,
Political capital is worth more now. Something like that? That is definitely true. Relationships matter more than rules in some senses. I don't want to use the word crony, but I think the word for what we're talking about is crony. But it also is the interesting question, and it's one that I know you've tackled on Hedged.
is how much the Trump administration cares about equity prices in the index, right? Because in the first administration, it was widely assumed when I would talk to folks in DC or in the markets that Trump cared a lot about where the S&P or the Dow was going. And that was, he managed
to that because he saw it as a sign of success for him. It's not clear yet how much that matters in the second administration. Every time you see a reprieve on these tariffs, you think, oh, maybe it does matter. Maybe this is a response to the kind of mini meltdown we've had in the last few days. But I think the thing that the market is asking is like, does he still care about that? Because if it becomes clear that he doesn't or that he feels that even a large correction is worth it
for this long-term gain of rebuilding America, then I think there's going to be, hang onto your hats. I think that's true. Scott Besant, and I'm never quite sure if I'm putting Besant, just on the right syllable there. Anyway, he said on TV, he was pressed on this point, gosh, stock market's going down, market doesn't like tariffs. He had this very important comment the other day,
coming from the treasury secretary, he said, Wall Street has done well. We're worried about Main Street. And that is a hell of a statement coming from a Wall Street guy who's running the treasury department. You can be sure Wall Street is listening to that. But that thesis, in my view, has not really been put to the test yet. The all-time high for the S&P 500 was just a month ago, and it's only like 5% or 6% ago.
I mean, we haven't had any real pain yet. We'll see who cares about Wall Street when Wall Street's off 20%. Right. If it is, I mean, it may go up for, you know, I'm not making a prediction. All I'm saying is-
The principle has not been put to a proper test yet. Also, Wall Street in the US more than other countries is Main Street to the extent that people have their retirement invested in it. They certainly do. So yeah, so people will feel... If you get a real stock market correction, you haven't had anything like a correction yet. You've had a lot of volatility, a lot of the changes in leadership and internal puts and takes that we've discussed earlier in the show, but you haven't had a real correction.
And although bond yields have fallen as growth expectations have come in, and in theory that's bad, remember that bond yields down is at least the direction that this administration says that they want. So even though they've gone down for the wrong reason, they're going the right way. So they can be happy. So I would argue that the administration's stomach for bad market news has not really been tested yet.
And we will see. But speaking of government, I want to talk about one other note your team wrote, which was about consultants in Washington. Mm-hmm.
What did you write about there? So, Doge, Department of Government, the so-called department, because we don't know if it really is a Department of Government Efficiency, Elon Musk's outfit, which Elon Musk maybe runs or maybe doesn't, wants to cut costs. He wants to cut the budget deficit. Consultants are a source of enormous spending by the government. There's a number out there saying $500 billion of consulting fees in the last couple of years. Yes. So, the question is, who do you cut first and what gets cut? Now, what's interesting about this to me is that if you're supplying the government with
paper clips or servers or whatever it is you know what you're delivering you know what the value is they can decide whether or not they need that yes consultants is something a bit different right the whole point of consultants which you could unkindly describe what they sell as snake oil is that they tell you how to do stuff and they charge you a fee for it and maybe the fee is worth it maybe it isn't you kind of just have to hope for the best and it's an issue of trust but these consultants are now going to have to show that they add value
to the government, which is not an easy thing to do. It's not a terrible thing for them to have to do it either. Yes. I will say that there is high value and low value consulting. And I think that people in the industry would tell you that. And a lot of the so-called lower value consulting is referred to within that industry as butts in seats. So it's like literally there is periodically in the US government a push to...
privatize bits of the US government. This is not something new. It's been going on for years. And one of the ways you do that is you take someone sitting in a seat who is a government employee and you wave your paperwork wand and they become a PwC employee or a Deloitte employee. They're still doing the same government work they were doing before, but the government is in scare quotes smaller now.
So it will be interesting what happens to those people because I'm sure they'll be the butts in seats consultants, what will happen to them as opposed to...
The federal workforce is probably more unionized, more dug in. That makes sense. I mean, the point of consultants should be that they create a return on the investment that you make into them, right? Yes. So if consultants are actually helping the government save money, it would be foolish to get rid of that high-value consulting business. And you know who is at best position to figure out who provides the most high-value consultant. Yes. Yes.
Exactly. I'm going to be bidding on that contract. I think there's nothing bad about doing this. Consulting, consulting. It's just doing it chaotically seems bad. Speaking of chaos, we will be back with more chaos after a short break.
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Listeners, welcome back. This is Long and Short, which is the part of the show where we go long things that we like and short things we don't like. John, do you have a long or a short for us today? So I do have a long, but I'm going to stick my neck out because I could look really stupid. Awesome. Tesla. I think long Tesla. The reason for this is
is that everyone is really down on Tesla for reasons that seem very good. Stock's been crushed. It's off like a third. It's like 7% above where it was before the election. So, the whole Trump bump has basically almost gone. Everyone is talking about falling sales in Europe, people vandalizing power charging stations, Musk's time is too thinly spread, blah, blah, blah. All of these are very reasonable. But I just think that Tesla has always been trading on
stupid valuations based on things like humanoid robots, robo-taxis, things that don't exist. I just think that those things are no more or less likely now than they were before the election. So there is no reason for me to think that Tesla is worth less than it was before Musk entered the White House. That is a bold call. I'm glad we have this on tape so we can replay it at your retirement ceremony. I am long...
Potash. Do you know what potash is? I do know what potash is. Potash is a fertilizer, as you know. It is in the ground. Do you know where it's in the ground mostly? I do. That's why I'm longing. Tell us, John, where is it? Canada. It's in Canada. And it's something that American farmers really need. It's a very, very hard thing to substitute.
another kind of fertilizer for. So Canada's got it. America needs it. And here is Ontario Premier Doug Ford speaking on Tuesday. We need to make sure America feels the pain, Ford said. Without potash down there, the U.S. doesn't have a farming system. So if you happen to have some potash sitting around the house, you're in a good spot right now.
So I'm long potash. Listeners, we'll be back in your feed next week. And until then, stay sharp out there.
Unhedged is produced by Jake Harper and edited by Bryant Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global 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 Rob Armstrong. Thanks for listening.