The Bond Market Pain Isn't Over | Weekly Roundup

Oracle

• DCPBearish

  Oracle's bonds are trading wide and it declared force majeure, a sign of AI-linked credit stress

  He says Oracle's bonds are upside down by at least 10bp, meaning spreads have widened. Oracle has also just declared force majeure, which he calls crazy. He treats this as a curveball for AI capex and as an early sign of stress in AI-linked debt. He also says Oracle could take down a couple of people.

  “Oracle's bonds are upside down by at least 10 bips now.”at 23:48

Meta Platforms

Across the shows: 4 speakers in other episodes, 4 bullish and 0 bearish calls, past 30 days

• DCPBullish

  Meta is likely to be one of the mainstream players that ends up winning the AI race, to an extent.

  DCP expects established mainstream players to win the AI race, naming Google and then Meta 'to an extent', with one of the AI model companies also winning. He contrasts these with newer AI model players and agent startups, which he sees as risky. His view is a judgement about incumbency and is hedged with 'to an extent', so he is less confident about Meta than Google.

  “It's gonna be Google, it's gonna be Meta to an extent,”at 55:23

Alphabet

Across the shows: 1 speaker in other episodes, 0 bullish and 1 bearish calls, past 30 days

• DCPBullish

  Google is likely one of the mainstream players that ends up winning the AI race.

  DCP says the AI race is likely to be won by established mainstream players, naming Google first and then Meta to an extent, with one of the AI model companies also likely to win. He contrasts these with the newer AI model players and agent startups, which he sees as breaking out with risky behaviour. He would rather take an aggressive short on an AI name he believes is wrong than on the laggards. The view rests on a judgement about incumbency rather than detailed evidence.

  “I'm of the opinion that it's gonna be one of the mainstreams that ends up winning this. It's gonna be Google, it's gonna be Meta to an extent”at 55:23

US rates & the Fed

• DCP

  Bonds can't turn bullish until the Fed signals hikes are done, which he doesn't expect

  He says a necessary condition for the bond market to flip to a favorable long is the Fed signaling that hikes are done. He adds 'Not gonna happen.' He also argues the Fed would need about another 50bp on fed funds for the 30-year to find its balance point, which he thinks would make the market nervous and begin killing demand.

  “You would need the Fed signaling hikes are done. Not gonna happen.”at 4:13

• DCP

  Hiking into an oil supply shock won't contain inflation or fix the oil problem

  He argues rate hikes can't address an energy supply shock. Hiking since the war began might prevent some consumer-level pass-through but won't fix the oil problem or contain inflation. He cites Dario Perkins' point that the Fed can't fix a supply shock, and says a runaway dollar or energy supply shock is beyond the Fed's reach.

  “my argument for not hiking ... why are you hiking into a supply shock? It's not going to be effective at containing inflation”at 17:45

• DCP

  Markets price too many Fed hikes; hike pricing is overextended, so he would buy SOFR near 94.87.

  DCP argues that SOFR futures are pricing in about four hikes, with a further half-hike or more beyond that being guesswork. He sees SOFR pricing as stalling at each quarter-point increment and then overextending by about 8 to 12 basis points before a move to the next level, which he calls a 50/50 chance of the next level. He would buy SOFR futures around 94.87 (pricing about one and a 12 hikes) and sees the 2027 to 2028 hike pricing as the most oversold area. He says that if something breaks, there are about 100 basis points of hike pricing to unwind, which would be 'free money'. He compares the setup to the 1996 Eurodollar market and to the 1998 cut followed by hikes into the dot-com bust, and notes the Fed could again hike into an AI meltdown. In that scenario, QE and rate cuts would return. He says Fed funds is not liquid enough to matter, so he focuses on SOFR and swaps.

  “I'd say $94.87 in step seven or DSA would be a number that I would like because that is pricing one plus point one two hikes.”at 51:20

US Treasuries & yields

• DCP

  Bond pain trade with higher yields persists until something material changes in the Fed, AI capex or jobs

  He keeps his thesis that the bond market stays a pain trade with higher yields until something materially changes. He lists what would shift sentiment: the Fed signaling hikes are done (which he says will not happen), AI capex slowing (possible, with Oracle a curveball), crack spreads rolling over, a jobs weakening that he thinks would already mean recession before unemployment spikes, and a Taco/Iran ceasefire trade. He notes SOFR shows no cut priced until December 2029, so markets are not pricing relief.

  “I'll stick with my thesis that until I see something materially change, it's still the pain trade with higher yields.”at 19:54

• DCP

  Yield curve needs to steepen further, and he expects a bear steepener

  He says the curve, which has flattened a lot, needs to steepen more, and the steepening will come from the long end selling off, a bear steepener. He notes there is no 20-year chart that shows how to price ZB at a given level, so pricing has to be benchmarked to historical averages going back to the 1970s.

  “Think it needs to steepen more, and I think it's gonna be a bear steepener.”at 26:44

• DCP

  Economy can handle 10-year near 5.75-6% and 30-year above 6.25%, but some borrowers will get crushed

  He thinks the economy could easily absorb 5.75-6% on the 10-year and 6.25% or higher on the 30-year. That would still crush some people, especially those refinancing, which brings in commercial real estate and regional bank stress. He treats these as levels the economy can tolerate, not as a forecast.

  “I think this economy could easily handle six and a quarter, five and three quarters to 6% on the ten year, six and a quarter and higher on the thirty year. It's going to crush some people.”at 41:27

US deficit & government debt

• DCP

  Treasury lacks the firepower for bond buybacks to change the market, and issuance will swamp them

  He says every uptick in rates eats up issuance, so a $10 billion buyback gets offset by $500 billion of issuance. He thinks Treasury lacks the gunpowder to change the market and that it would take full intervention to change the outcome, which he doesn't expect.

  “I don't think [Treasury Secretary Bessent] has the gunpowder to do it, to be perfectly honest with you.”at 11:50

• DCP

  Deficit heads to about $50 trillion by year-end, possibly higher

  He says the deficit will be at about $50,000,000,000,000 by the end of the year and is pretty much a given, possibly a trillion dollars higher. The figure as spoken looks implausibly large and may be a transcription error. He uses the deficit to argue that issuance keeps rising with each uptick in rates.

  “we're gonna be at a $50,000,000,000,000 deficit by the end of the year.”at 12:00

US consumer

• DCP

  Lower-income consumers will be squeezed hard over the next six to nine months from diesel pass-through

  He says the lower half of the K is struggling while the upper half is fine, and that they will be squeezed hard in the next six to nine months because the pass-through from diesel to everything takes time. He ties this to gas, diesel, fertilizer and beef costs that are all rising, and expects the little guys to get hit hard.

  “the lower half of the K are going to get squeezed hard in the next six to nine months because this, the lag on the pass through from diesel hitting everything is gonna take time.”at 9:07

Agriculture & food commodities

• DCP

  Cattle market won't improve soon, so beef prices will go through the roof

  He expects the cattle market to stay weak, pushing beef prices sharply higher. As evidence, his school catering business pays double for beef compared with three years ago. He also says farmers are paying high prices now for next year's fertilizer delivery, which points to higher food costs ahead.

  “The cattle market's not gonna improve anytime soon. So your beef prices are gonna be through the roof.”at 9:41

Oil & fuels

• DCP

  Diesel's price spike is feeding through to everything on wheels, from food service to Amazon

  He cites diesel at $9 a gallon in Galley and $7 in Chicago. He says diesel will feed through to food service, retail and Amazon, and to anything that's on wheels. Combined with gas and fertilizer, it is a broad cost shock that feeds into inflation and hits smaller businesses.

  “anything that's on wheels, diesel's gonna get in there. I was just in Galley, diesel was $9 a gallon.”at 10:11

US inflation

• DCP

  PCE inflation will print hot over the next two months

  He expects PCE to come in hot for the next two months. He thinks the Fed got in front of it and that this is good, though the Fed is still somewhat behind. The hot-PCE expectation sits alongside the broader inflation pressures he describes from diesel, fertilizer and beef costs.

  “And PCE is going to come in hot the next two months.”at 21:36

AI infrastructure & data centers

• DCP

  AI capex is a driver of inflation and could be the first trigger that reverses yields

  He cites David Cervantes describing AI capex as an inflationary expansion of all assets. The balance point is where interest rates offset AI capex spending and inflation from diesel and pass-through. Cash is increasingly concentrated into AI, so AI is what he expects to break first and trigger a reversal in yields. Hyperscaler debt issuance is pushing spreads up, and he links the risk to Oracle and private credit financing the build-out.

  “of all the things that I expect to break first, AI is probably the thing that I think triggers a reversal in yields.”at 23:14

Private credit

• DCP

  Private credit is the likely place where the stress shows up first

  He expects a break somewhere in the private credit zone, including BlackRock-type groups and their peers, and private equity getting involved in financing. He links this to the AI build-out and the spreads needed to keep financing AI capex, and calls it one of the things most likely to break first. The view rests on the financing structure and is not backed by hard data.

  “I think it's probably private credit.”at 23:27

Credit markets

• DCP

  Smaller company bankruptcies will start rising soon as borrowing costs hit small businesses

  He checked SBA 7(a) working capital loans at 12-13%, versus roughly prime-plus rates on his brewery loan at the earlier highs, and says the little guys in the middle are getting crushed. He points to $1-20M corporate restructurings and expects smaller bankruptcies to start kicking in soon, which is why he says to watch them.

  “So I'd keep an eye on bankruptcies, especially smaller bankruptcies.”at 26:14

Middle East & Iran

• DCP

  Iran won't negotiate with the US until Trump leaves office; Iran is backed by Russia and China

  He says Iran is getting munitions, equipment, drones, imagery and intel from Russia and China, and that Xi, Putin and Iran are working together to make life hard for Trump without going too far. He thinks Iran can keep the US hostage through the threat to the Strait of Hormuz, and that Iran would hold out for a new president. He admits the US doesn't know what's happening inside Iran.

  “If I were Iran, I would not negotiate with The United States ... I would be holding out for a new president to negotiate with.”at 35:40

Commercial real estate

• DCP

  Commercial real estate refinancing at higher rates will be ugly

  He says that higher long-end yields near 6% will crush some people, and that refinancing of CRE debt will be ugly. He raises CRE as one of the stress points alongside regional banks and private credit, though he gives no data on CRE loan maturities here.

  “If you've got a refi out of some stuff, it's going to be ugly.”at 41:46

Banks

• DCP

  Regional bank lending will show the stress, with KRE sitting on its 200-day average

  He says Warsh specifically called out regional lending, so the stressors will manifest there, whether in CRE, private credit or the spread needed to finance AI capex. KRE sits right on its 200-day line on the daily chart and probably broke through it that day, which he says matters because regional banks are where the stress shows.

  “So the stressors that you're going to see are going to manifest in regional lending.”at 42:35

US growth & recession risk

• DCP

  US economy is still a boom despite the pain, though it feels more uncomfortable

  He says the US economy still looks good and is defying logic, while bears are in turmoil. He sees no stress yet in the repo or swap markets, and says Conks is still shitposting and not stressed. He thinks the pain is exposed, but the economy hasn't cracked.

  “it's still a boom economy. It just feels a little more uncomfortable than it did before.”at 43:29

Consumer & retail

• DCP

  Beaten-down consumer and food-service stocks trade at multiyear lows despite being relatively good companies.

  DCP points to a list of stocks down sharply from their highs, including Nike, McDonald's, Pepsi, Disney, Wendy's, Campbell's, Kraft and Lululemon. He notes that none of them are AI names, as most relate to food service or consumer themes, and suggests they may be recipients of a K-shaped economy. He calls these multiyear lows for relatively good companies and says this is where some money will be made. He does not want to short these laggards, and prefers to avoid taking a position on them.

  “Those are multiyear lows, and they're relatively good companies.”at 45:30

US stock market outlook

• DCP

  He is not forecasting a crash and would look to buy if a correction breaks the March lows.

  DCP says he is not forecasting a crash because he does not see one. He argues that even a 20% correction would not bring the S&P 500 back to the March lows, given how far the index has run since COVID. He points to passive flows as a dominant force in the market, with much of the money in systematic passive strategies, and says a secular rally 'works until it doesn't'. Tactically, he plans to watch for an opportunity to get long if the market breaks, with the March lows in the ES as the level he will watch.

  “So I'm not forecasting a crash. I don't think it's there.”at 49:42

AI bubble & tech valuations

• DCP

  AI resembles the 2008 subprime and dot-com bubbles, driven by leverage and greed, and is unprofitable.

  DCP views AI as the same kind of speculative excess as the 2008 mortgage crisis and the dot-com bubble, all examples of leverage and greed reaching ridiculous levels. He argues AI is not yet at the bubble's peak because the industry has not turned a profit, and says the AI companies expect no profit for at least three years. He contrasts this with past bubbles, where many participants made money, and says the only money being made in AI now is from buying the leader and hoping to exit before it ends. He sees room for a policy mistake, with the Fed hiking into an AI meltdown.

  “Because I view AI in the very same vein that I viewed 2008 in the mortgage subprime crisis and the .com market. They are all examples of leverage and greed manifesting to ridiculous levels.”at 56:27