The phase 2 AI trade is here

Hello and welcome to Trader Talk. I'm your host Kenny Pulkari and today we're joined by Peter Cheer of Academy Security's head of macro strategy and Adil Zaman who's Wall Street alliance group partner. Gentlemen, thank you for joining me today. I look forward to this conversation because we've got a lot to talk about and let's talk about the first thing. We'll make it broad about geopolitics um and the tensions around the world uh the shifting dynamics with China, energy security, domestic security, cyber security, all these things that are driving kind of the market action. Give us a little sense on where you think we are in here and then we'll take it from there. Perfect. I'll give that a go. It's um you know, one it fits my firm very well. So, Academy Security is a veteranowned firm. About half the staff is veterans, but we have 40 retired generals, admirals, CIA people who form our geopolitical intelligence group. So, this has kind of been near and dear to our heart. And I think >> that's some geopolitical intelligence group, but go ahead. >> It's fun to work with. You know, one of our generals uh left about a year ago, General Tada, cuz he's now under secretary of war for personnel and readiness. So, it's kind of a pretty connected group, and I think it's helped us wade through a lot of this. And I would say our overriding theme probably for six years, and it's kind of evolved over time, is really this competition with China, right? China as a strategic competitor was first mentioned in the 2018 National Security Strategy. And I think we've been more negative on the relationship than Wall Street. And in the last year or so, it's devolved or evolved, I guess, into what we've been calling prosack or production for security. It's kind of really national production for national security and resiliency. But that's more than a mouthful. But I think what it is is to think about a nation a little bit more. What do you need to function as a nation? And electricity really high on that list, right? We need electricity. We need energy. I think chips, right? The chip industry crucial to this. And to me, a lot of this really solidified in two ways. is one with the development of AI and data centers which I know we'll talk about more but all of a sudden you had this massive demand for electricity to be competitive you had people like Bill Gates go from telling us to eat bugs to like nuclear is a okay so you've had this dramatic shift I think in that side of it and then the other side was the trade negotiation with China just made it so clear that they control the processed and refined rarest and critical minerals it's one of the few times I've ever really heard the president correct himself at Davos he talked about rarest and critical minerals and said no no they're not rare the processed and refined versions of and smelting. So I think as a nation we have to think ourselves as a human being what is priority one like air, what's like water, what's like food and make sure we're doing those more on our own. And I think this is actually going global. It's not just a US phenomena and it's been going on even in the US for a while and it's going to accelerate. >> So are we doing it on our own? You know, we're making some progress. I would say Trump 1.0 there were some kind of, you know, not particularly well thoughtout efforts in and around tariffs. But I think one thing that's important is Biden kept all Trump's tariffs on and added some tariffs including to solar panels. He did the chips act, right? He saw the need to do chips act. We've seen some other things get done, bipartisan bills get passed. We're making some progress. I think one issue is not in my backyard is still a real deal in the US. So you're seeing some states embrace it. Some states say they want this revenue. >> Not in my backyard with data centers. >> Data centers, smelting, you name it. anything that was kind of, you know, dirty, requires a lot of energy intensive, you know, maple, you know, smoke. Um, and so that's I think where we're seeing this shift. Which states are ready to do it? We've been talking to some states, I love the term, you know, some governors are kind of getting pitched to by their boards of commerce. It's time either red carpet or red tape. And I think you're seeing some states say, you know what, we will bring out the red carpet. We want these businesses. Others are saying red tape. And I'm a little bit disappointed. I think President Trump, I expected a little bit more from him in terms of deregulation. and unfortunately I think he just got mired in this war u and it's taken some of the focus away. >> Yeah. So I think for us like globalization is is the is the theme that's going to be there and what we are again we we are advising clients is that make sure that you have your portfolios take advantage of that u really important like if you're investing in the S&P 500 you're hyperfocused in a lot of the tech companies make sure that you have that global exposure within globalization we like countries like Japan which have gone through a lot of uh corporate governance changes Mexico benefits It's from nearshoring. So we have we are guiding our clients to be able to have a solid exposure in the global markets. >> Are you overweighting either a sector or a country? >> So we yeah so we we typically get we we keep about 15% of our portfolios in the international markets. >> Uh we get exposure basically through ETFs a lot of it. U we would get the EXUS which would give you the broad exposure but then we have the Japan ETF for specific exposure because we like Japan and then we have the Mexico ETF for that exposure. >> Do you have Chinese exposure as well? >> Yes, we get the Chinese ETF as well. We think we think it's a it's a for us we do think that it's a key component of the global world and we do want to have some exposure there as well. You know what I think is interesting for a lot of people because I have this conversation. A lot of people think China is in the developed market world and it's an emerging market, right? And so people are always laugh because but it's so big. I know but it's still an it's considered an emerging market. It is not you know when you think about the developed markets in Asia, it's not Japan, it's not Australia, it's not right. But to your point, emerging markets are actually performing very well this year. >> Emerging markets are performing great. And you know I think that if you look at it from a historical perspective as well the outperformance between the US and international markets tends to go in cycles and now we're coming out of a long period of time where the US markets have outperformed and now international markets starting from last year have started to outperform >> after the tech bubble burst similar outperformance. I think we're going to get into a similar type of a cycle now. >> I'd be happy to add too. I think this, you know, I believe like really strongly both in the energy trade and the international trade. I think, you know, you look at Canada, right? Canada's actually taking the opportunity. I think Trump kind of kicks the hornets's nest, but they're starting to look at some, you know, deregulating. Canada 15 years ago could have been good at LG and decided to effectively regulate itself out of business and let the US kind of dominate North America. They're changing some of that. And I think in Europe, you're finally starting to see, I think BP, Totel, Shell, they're going to be allowed to, you know, explore and do more. I think everyone in Europe, you know, it takes them longer to figure something out. I think, you know, they had to get kicked in the teeth five or six times before Draghy said whatever it takes. Um, but they're getting closer to that moment. I think we're >> European markets are performing very well this year >> and they're starting >> Spain, Italy, they're performing very well this year. I think they're up better than 20%. And I think they'll continue because what you're seeing again is I think each country is going through this kind of vertically integrated nation kind of philosophy a little bit. And I think when Trump kind of kicked that hornets's nest on global trade, he expected well everyone will go and trade with the US. And I think so much has gone on. People like yeah you know what we have to do more. We have to be more independent with our allies but let's figure out who those people are and let's try and do more. You've seen names like Nokia Ericson as part of a you know attempt to build up their own AI industry. So I think this is great and I love Central South America as well part of your thesis. Um, and again we'll come back. I hate to you bring up national security strategy. They did one in uh November 2025. It's a really quick read. You can find it. It's like 32 pages double space. But what I think it tells you really clear is Central and South America is going to be a focus because we have a much cheaper time protecting sea range, you know, sea lanes there versus China. And I think what we've seen a little bit is you've seen the stick approach, I guess, if you think about Cuba, Venezuela, and Colombia, the carrot approach with Argentina. But I think over the next 5 to 10 years, we're really going to rebuild that North, Central, South America pipeline, which Mexico will be a huge beneficiary and Canada as well, I think. >> Yeah. And you you spoke about the energy space. I think the energy trade has is also the the biggest way to derisk the portfolio with the geopolitical tensions because, you know, energy prices have shot up. The earnings I mean S&P has spectacular earnings growth, but if you look at the energy space, that has really dominated, >> right? So having the geopolitical tensions and we were talking about this before the show is something that we have to deal with going forward. What is the best way for clients to be able our clients to be able to hedge against that is to have energy exposure in the portfolio. So companies like Chevron, companies like Exxon or you have a Spider XLE ETF which gives you that broad exposure, that's a really good way to add a d-risking element to the geopolitical tensions. >> So what do we think about the geopolitical tensions? Because h do we think we're closer to the end? Do we think we're nowhere near the end? You know that two weeks ago they would told us, "Oh, we had a deal any day, any day." This morning we're not anywhere near a deal. Especially over the weekend, they come out with the list of six or seven demands that are really non-starters. When you talk about when you talk about kind of where it is. So where do you think we are in that whole geopolitical fight? I I think I think the market has sort of figured out like initially you know when the war happened the market came down but I think the market has sort of figured out that we can live with this >> right >> we can live with the status quo we can live with some uncertainty >> as long as other aspects of the economy are doing well with >> which is exactly what happened with Russia Ukraine remember when that first started creat all kinds of panic now weeks can go by you don't even talk about it >> exactly and that's where you know from again from our point of view we always have those conversations where we remind people that remember about those Russia Ukraine crisis same thing happened it's the same playbook I think now the market has accepted that the the this is here to stay and that is why you don't see much movement in the market based on the geopolitical tensions our base case is that even if this gets resolved there could be something else so we should be prepared for an environment where geopolitical tensions are going to be there >> remains elevated >> remains elevated remains relevant. But let me ask you a question. Do we think that the that the this current geopolitical situation with uh with Tyran, Iran, and the US is going to also be driven by midterm elections because they know that we're, you know, 11 weeks away or 8 weeks away from our midterm elections. And that, you know, if they keep if they don't make this deal and they don't let Trump look like he won, that's a negative for Trump, right? That the country will get exhausted. American just says, "I'm done with this. They'll vote Democrat and then they'll completely neuter them. >> And I think that was the idea with the Trump administration like this is another thing that we were telling clients some months back is that they're going to try and resolve this because they want positive >> outcome in the midterm elections. But the counter side is >> that Iran also knows that, right? So they are playing that card as well. And now it's game on, right? And it's it's this back and forth which is one day there's a deal, the other day it's not. It's it's it it seems to be very frivolous >> and I think we're you know with every day that passes by now we're getting that much closer to the election and people are just going to throw their hands up and say you know I'm frustrated I'm angry and they're going to vote that's how they're going to vote. >> That's how they're going to vote because you know their affordability is a key factor. They're feeling the pain at the pump and you know that that is now we've started seeing prices creep up as well >> again and people are getting hurt by this right and at some point they're going to say that this wasn't well thought out and they're going to react to it and potentially >> well remember it was supposed to be a six week conflict now turned into a sevenmon conflict with no real end in sight >> right >> and you're starting to see that right you can hear it in even even on the Republican side there's starting to be more frustration >> I think one thing kind of much more hurtful this time around is we were able to dampen both in the US and globally the impact because everyone had petroleum a strategic petroleum reserve to release and we're now at levels some people think you have difficulty releasing much more without affecting the structural integrity of these facilities. So I think that's something that's really weighing and you can I think you get a sense when Besson's trying to argue about this that we have lost one of our big levers to supply this keep supply going. So, I think there's a lot of pressure to kind of just close our eyes and pretend it's okay and revisit this six months down the road. >> I I thought we were refilling the SPR. We We haven't done any of it. >> No, not really. So, when they were releasing the strategic petroleum reserve and those they had contracts with the people who bought it, but they didn't have to refill it until January or February. So, they had a pretty long lead time. So, no, it's down to the lowest it's been. So, we barely refilled anything. We certainly never got to pre-B Biden levels even under Trump administration in terms of refilling. Maybe we got back, you know, if it went from there to to 300, went back to maybe 400 and we're back to 300 or sub 300 right now. And so that to me is a danger. Asia has the same problem. They have to release a lot of theirs. China wasn't on the world market the first time around because they had a billion dollars or billion barrels in stockpile. So I think it's changed a little bit. There's a little bit more urgency. And when we talk to people, I think further down the supply chain, you know, it's really about LNG, diesel, those are the things that are starting to scare people. You're starting to look at some of the airlines especially maybe not so much in the US but jet fuel prices are rising from 30% of cost to 60%. It's becoming untenable. So I think the world needs some relief on this. >> And even if they even if tomorrow we get a resolution to the war it's going to take time to rebuild all that infrastructure to get the supply chains going again. >> Yes. But the price of oil will drop fairly quickly. Right. If if there's a deal that would be a benefit, right? >> Yes. So it should come down quickly. And I would just want to say I think when we're talking about the you know geopolitical tensions you know I still think Russia Ukraine's tactical even what's going on Iran's tactical the strategic overriding is still China and I think it's China's attempt to sell their products globally like they shifted from being comfortable with made in China to made by China 10 years ago. BYD Automobile I probably hadn't heard of it until 2020 and now it was just in Germany it's everywhere and I went check out one of their showrooms. They're actually pretty decent looking cars. So, you know, they are doing that and lately >> in a million years why buy a Chinese car in a million years. >> There we go. I'm Well, I will never use Chinese comput if I can avoid it. But yet, all of a sudden, now we're being fluttered with cheap Chinese comput. >> I told my kids not to buy Chinese toys because they always Well, >> but the problem is everything's made in China, right? That's the problem. >> I went on T-Mo once. I felt dirty. Like I'm like I know they already have my information, but it's like >> I just want to say one thing about the whole oil thing and about the airlines and all that stuff is that you know the story that story that uh that was running around last week about how the airlines are now using AI to monitor you. When you go on JetBlue's website or Delta's website, American Airlines, >> they're monitoring your your uh your address. They're seeing where you live, what zip code you live in. They're monitoring things you buy and then they're adjusting the price that you see on the on the site. So, you might get one price, I might get a different price for the same exact flight if we go at the same exact time because your your zip code is, you know, maybe a higher end than my zip code or you're buying, you know, you just went out and bought yourself a Mercedes and I bought, you know, a Ford. Is that they're going to look at you and say, "Well, this guy can pay more, so we should charge him more." Right? That's an issue with AI for sure in the airlines. is going to be an issue with a lot of things because if you have that kind of demand pricing, it's going to happen everywhere, right? That's a whole another conversation about AI. And so since I went there, let's just talk about where we are in the AI trade very much in early stages. Where do you think we're at? >> So I think I think as far as AI is concerned, the first stage was where all these hyperscalers did extremely well, >> right? >> And I think we are now in phase two and phase three. And phase two is essentially this 800 billion that is getting spent. Who's going to receive it? Right. >> You saw Caterpillars earning, they did extremely well >> now. This >> has been amazing. >> It's been amazing. And >> because it's one of those adjacent stocks, right? It's not AI, but it is AI. >> Exactly. And you know, another interesting company, John Deere. >> Yeah. >> You know what they do? They they basically their tractors, they've implemented cameras in there, which enable them to spray parts of the field that are infected by weed as opposed to the whole field. >> Right. So only spraying where it's infected, not the whole thing. >> Exactly. driving cost savings for the farmers, productivity increases for the company. So now we are starting to see these type of things. We are seeing bene AI enablers which are the infrastructure company. We are seeing AI beneficiaries which are companies like John Deere that are implementing AI into their businesses and seeing productivity gains. So I think we are at that phase right now where this the phase one max 7 underperforming the market significantly this year >> phase two and phase three where the money is going that is where we feel is is is the next stage >> right but while even while the mag 7 may be underperforming I for me that's no reason necessarily to blow out of all my mag seven stocks of which I don't own all seven but I'm not selling my Amazon and my Apple because it might be underperforming one year I'm just not I'm taking advantage in other places. >> But Kenny, the problem is that a lot a lot of people what they were doing was they were listening to the news >> and then they were just going extremely heavy in those sectors >> and now those seven stocks are more than 30% of the S&P 500. So even if you're an indexer, >> you're concentrated right and even within the max 7 now there's differentiation which one of those are monetizing AI and which one of them are not. >> That's right. >> You saw that. We saw that in earnings >> and we saw that in earnings. Meta was punished. Microsoft was rewarded. So I think the key is that even within technology, you have to be we're not saying blow out of the Mac 7, but we are saying be more have exposure to other areas of tech. >> That's right. And you can't be formalized, right? You can't be fear of missing out like like you know you're not missing out. If you're invested and you and you've got your you know your your foot in the water, then you're participating. You just have to be a little bit more methodical in how you allocate it. This is a market where patience is being rewarded right where like if you look at the cyber security stocks right they did extremely poorly in the beginning of the year past 3 months parabolic moves in crowd strike palto >> patience is being rewarded so if you wait and you could do the same thing with semiconductors fact of the matter is the semiconductors have shot up so quickly that a lot of people missed out on that completely right and it became such a large proportion of the S&P 500 in a very short period of time, but you continuously keep getting pullbacks in that sector. You got it last year, you got you're getting it this year. That's when you dip your toes. >> That's right. >> And you get involved. >> Agreed. You're not chasing it when they're at their highs. You got to take advantage. You have to be ready to take advantage when you see that pullback happen because the pullback can happen fairly quickly, right? Because with the technology allow you s one day, suddenly you turn around and and it's all up 10%. Like how'd that happen? >> Exactly. And you saw you saw that with SpaceX, >> right? SpaceX shot up. >> Yeah. >> Meta playbook shot down. >> If you wanted to nibble at it, you might as well do it at 120. I was waiting for it to go to below 100. >> I was waiting. Still might get there. >> Limit orders. >> Yeah. All right. Listen, let's talk about uh the bond market just real quick because we're going to run out of time here. Is that the bond market and Kevin Walsh, good job, bad job so far? I know it's only been what's he been two months or three months he's been in that position. Give me your sense. I I like Kevin Walsh. Give me your sense of what you think. >> Yeah, I like him too. I think I think it's decent. I think reality is we will as far as rates are concerned, I think we'll probably remain unchanged for the rest rest of the year. >> Um I think it's interesting that money markets now after you take out taxes, the net return is not beating inflation. Right. So I think that for that reason investors are well served in trying to lock in high yields by going for bonds. So I think I think overall it's a decent job. Fed will probably stay put for the rest of the year. >> Is now the time to fall in love with bonds? >> I don't know if fall in love with them right now partly because I think globally there is this spending going on as people do defense spending, energy spending, the hyperscalers. So I I think there's a overall pressure on yield. So I think it's going to be difficult to see the long day bonds come screaming tighter. On the other hand, I think you're getting paid for some of that. I think you're getting paid for some of the spread risk you're taking in those. I actually like uh GPZ, which is or GPZ, I guess, um which is a um ETF that has a bunch of the alternative asset managers on the equity side. It got hammered pretty badly when everyone was scared about private credit. I think that could come back. And having said all this, I think the single most important thing worse has done so far is create this data task force. And so I'll even challenge the one thing that you said is when you said it's not beating inflation. Depends what metric of inflation you're looking at. If you look at true inflation, it's doing better than true. So I I think we are stuck looking at CPI. I think CPI has all sorts of issues with how it's done, how it's calculated. Owner's equivalent rent might be the dumbest thing ever because at one point, yes, people rented single-handedly homes, but we pull onetenth of them and we guess what someone would rent my home for. That seems no way when you got Zillow real time. I think they're going to find alternative sources and what they will show almost everything that I look at that I trust >> 2020 and 2021 the official CPI and BLS data heavily understated inflation and now it's overstating as it's catching up so I think we have an affordability problem more than inflation and a big part of that is our data did not work well we're making bad decisions based on bad data I think worse is going to get people to start thinking about inflation differently looking at real-time rents is looking at these things and guess what the story is nowhere near as scary and that actually matches my personal experience 2020 you know when we were saying we were 6% everything was going up 20%. Now they're saying it's up 3%. I don't see that. So I think we're mismeasuring and making decisions based on that and worse is going to change that. I think I think sorry I think I think one thing that which I agree with is on is that AI productivity is going to bring prices down right that is going to be deflationary and we spoke about John Deere right so these are the things that we'll probably see which will actually be helpful and it takes a little bit of time for those things to play out right it's it's it's the second and the third phase >> and that'll be interesting to see how that plays out >> and inflation was coming down coming into the start of the war started coming back down the second we had theou in place. I think it starts coming down again. It's the economyy's away from the AI spend, it's just not that robust and I think we're priced in the AI spend. So I I think there's this ability to see some deflation. >> Well, far less inflation. >> Yes. But if energy if this geopolitical situation in the Middle East continues and energy shoots higher from here, then that's going to be kind of, you know, that's going to be the black swan, right? That's going to be the one that gets in the way of that argument, >> right? That's the one that gets in the way of everything, I think. >> Right. it gets annoying and I and I'm you know a couple of weeks ago I was so excited to think oil was going to trade back in the low 60s and now here are again at 80 you know and if and you know they just come out with this list of demands over the weekend which are non-starters for I think they're non-starters for the US um it's only going to push it's got the potential to push oil higher not lower and you know tomorrow Wednesday Thursday we're going to get CPI PPI this week certainly it's expected a little bit better but that could be temporary if if oil stays up here again right we could see that now start to turn Anyway, gentlemen, listen. We've run out of time. I've appreciated this conversation. Maybe we'll circle back in three or four months to see how this all panned out. Until the next time, take good care.