Why Capital Spending Matters More Than Interest Rates Right Now

Me now is Kyle Reedhead.

He is the co-owner and head of research at Milk Road.

Kyle, nice to see you today.

Let's talk the cool stuff, interest rate cuts and the Fed.

CME FedWatch tool says the Fed's next move is an interest rate hike, not for July, but for the month of September.

Why do you think the next move may actually be a cut?

Yeah, I, I think that a lot of people's reactions are thinking that we're going to be in sticky or high inflation.

Uh, you know, we, we all, not me, but the market thought that we were going to have inflation very high, uh, last week, and it turned out to be one of the biggest downsides in inflation versus expectations in I don't know, I think it was like 5 years or something like that, so it's been a while.

And, um, and so I think inflation is, is under control.

Obviously, we just had a, a spike in, in oil over the last week due to the, due to the war kind of re-escalating, um, but I think that will be shaken off once again.

And so, I think inflation is ultimately under control, the economy is strong but not too strong, unemployment is fine, uh, and so everything just seems OK.

And inflation doesn't seem to be uh out of control in any way, and I think it's actually going the opposite way now.

And so I just think there really isn't a reason to cut rates, and so I think that they'll pause coming up next week, uh, and I think they'll just continue to do that through this year.

We might even see a rate cut at some point, but I don't know.

The market doesn't see that today, so I think that's part of the upside.

Uh, but, uh, yeah, I, I, I really don't see them, them cutting here.

Kyle, macro indicators are important, but Capex itself tells a fundamentally different story.

What does that story tell you right now?

I mean, CapEx tells us we're going much higher.

Uh, you know, we've got Google who's gonna have their earnings tomorrow, so we'll, we'll see if this is going to continue, but so far, every earnings cycle, the hyper scales continue to raise their capex and their guidance.

Um, and so we'll see if that happens again, starting with Google tomorrow.

My guess is they will raise, uh, and will continue to raise, you know, into next year and even probably the year beyond that.

Uh, and so I think this is really where the money's going.

This is what's moving the market, not so much what's happening in the macro world.

It really is Capex because this is one of the biggest spends that we've seen in a very, very long time.

And so if you're looking at what's moving the market, it's semis, it's the neo clouds, it's, you know, anything around the AI infrastructure buildout, and that all comes from the largest companies in the world who make some of the most earnings in the world, deciding if they're going to spend more or less on the AI infrastructure buildout.

And right now it seems every quarter, they want to spend more.

You have a triple-headed bull case.

I call this the read head indicator.

Cap backs up, inflation down, rates potentially being cut.

What more, what more should we know and what more are you seeing as part of your thesis?

Well, again, I think the, the market really is controlled by what's happening with AI and so the question is, is there still demand?

Uh, and I think we're seeing so much of it.

We had Kimmy K3 come out last week.

Everyone thought this would kill the market because it's one of the cheap open source models.

And instead, I think what we're realizing is there's so much demand.

48 hours after they launched, they said their GPUs, they don't have enough of them.

They can't actually provide the service to everyone.

Signing up and so I think there's just so much demand for AI and as long as that demand continues and we see ROI from the companies that are using it, then I think we're just gonna continue to see that demand further.

So, I think this earnings, that's actually a big thing I want to see from companies is, are they using AI and is it bringing ROI for them?

And I think the answer is gonna be consistently more and more, yes.

And if that continues, then the demand is just infinite for intelligence at this point.

AI and ROI.

I like it, we'll keep an eye on it.

Kyle Reedhead, co-owner, head of research at Milk Road.

Kyle, thanks, we'll do it again soon.

Thank you.