In Episode 95, our pal Tom Roderick (Trium Capital) is back with us on CPI day as a hotter print cracks a tape that already felt fragile. Recorded at Noon EST on Wednesday 14th October.
We get into why the short end rates trade has been a slog, why Tom prefers steepeners to outright receivers, and how France, bank carry pain and hyperscaler supply are all feeding the same problem: a rising cost of capital.
From there it is CoreWeave spreads; negative hyperscaler free cash flow; the China AI and oil collar; South African 9.5% bonds; Brazil ahead of the second round; A-shares versus Hong Kong tech; Europe drifting right - a potential Le Pen versus Melenchon runoff; and why gold keeps struggling when real rates rise.
The Extras
Tom’s bearish energy note:
CPI Day and the Rates Selloff
US CPI came in warmer, but Tom argues risk assets were on edge and looking for an excuse to sell: bond market worries on both sides of the Atlantic plus fragile tech positioning; bond yields spiked and stocks got hit, but he would not extrapolate a new trend from one print
The painful short-end rates trade acknowledged: US 2yr at roughly 4.85% versus about 3.75 to 3.80% back in February; Tom is not outright receiving rates, preferring steepeners instead
Rationale for steepeners: heavy long-end issuance including hyperscaler supply, and a Treasury already issuing at the shortest duration in the world with heavy bill reliance; outright receivers are too tough here
Banks, AI Capex and Credit Stress (Minute 5)
Bank earnings: fixed income trading revenues fell sharply; Benny suggests Q2 risk manager “disciplinary chats” showed up in weak Q3 FICC P&Ls; Tom notes crowded carry trades hurt both the sell side and buy side when funding spreads blew out
CoreWeave spreads around 1000, neoclouds back at lows, “outrageous” token deflation; Tom sees a credit squeeze on CoreWeave analogous to the squeeze in France, but the market refuses to judge the whole sector, with Meta near all-time highs; two tails playing out and neither winning
Hyperscalers - even Oracle - will be fine operationally, but the credit market cannot absorb the paper (compounded by Basel hedging feedback); better to be a token consumer than provider; data center buildout faces transformer backlogs, interconnection delays and local political pushback, so Wall Street extrapolation is heading for a moment of truth
The “free cash flow countdown”: aggregate hyperscalers plus Nebius and CoreWeave are now negative FCF.
A rising cost of capital environment means revenue expectations must rise in lockstep or stocks fall; expect differentiation rather than all boats rising; sovereigns are competing for the same capital, with off-balance-sheet liabilities (retirement costs) seeping onto national P&Ls and structural deficits keeping everyone in “the price discovery zone”
Emerging Markets and China (Minute 17)
EM local currency bonds: EM rates have matched DM sell-offs in size this year rather than underperforming, which is abnormal and reflects credible high real rates; risk of contagion from rolling stop-outs remains, but policy quality is doing the work
South Africa: Tom is still a ZAR bull; around 9% FX carry has made the trade comfortable despite Trump and Musk “throwing stones”; 20yr bonds with a 9.5% coupon, a central bank that cut its inflation target midpoint from 4.5% to 3% and is credibly set up to hit it, fiscal consolidation attempts, and an electricity surplus now being marketed to data centers
Brazil politics: Bolsonaro Jr’s decisive first-round win points to fiscal consolidation and inflation control; yields around 11% give a thick margin of safety built on creditworthiness rather than pure rates
Prediction markets on Brazil are distorted by uninformed offshore money and the race is closer than priced; with Bolsonaro’s high rejection rate and family scandals, there is a real tail; advice to EWZ call buyers is to wait for 25 October
The structural Brazil trade: local pension funds sit at about 5% equity allocation because belly-of-curve real rates beat their actuarial waterline; if fiscal dilution compresses those real returns, they must rotate into a tiny equity free float, a two to three year gift that keeps on giving
China: no current positions; the yuan should keep appreciating gradually while Beijing hopes for a broader trade deal, but long yuan is poor reward against a Taiwan or trade-war risk-off event; prefers onshore A-shares (ASHR, CSI 300) over Hong Kong listings because giants like Alibaba and Tencent get politically squeezed, while smaller A-share names are “too small to be interfered with”
China champions debate: BYD, CATL and Tencent are superb businesses but function as policy tools, subject to meddling from Beijing, Washington and Brussels, which blocks investors from extracting the returns the fundamentals would justify; they only flourish if a different, rules-compliant China emerges
Europe, FX and Politics (Minute 34)
FX board check: DXY at 103 yet the RMB is grinding higher and the yen is holding up better than expected; Europe is taking the brunt of dollar strength, and euro-yen has been a good short
Europe structurally challenged: Spain’s snap election expected to shift right, with callers of snap elections increasingly losing them; the pro-EU lobby has narrowed to a shrinking center while the center-right turns more Eurosceptic
France scenario: center is fragmented so a Le Pen versus Mélenchon second round is plausible, and Eurosceptic Le Pen would win it; critically she is no fiscal hawk despite all of the “debt brake” talk - a case of the “dog that caught the car” finally having a crack at the title?
Energy, Gold and Wrap (Minute 41)
Tom’s thesis (full note above): “the end of the age of oil”: global energy surplus, the US is now an exporter, China has spent a decade insulating itself, and the world absorbed the biggest oil shock since the 1970s without punishingly high real prices; UAE leaving OPEC and the Iran war look like the last gasp of the era, accelerating its end rather than reversing it
Squirrel’s “China collar” thesis: China, run by engineers, has built strategic storage making it a monopsony price setter, stopping buying near $115 Brent and stepping back in near $80; that caps triple-digit extreme risk and reframes how to value global E&P, midstream, offshore and services
Tom’s twist: oil abundance incentivizes bad geopolitical decisions (Trump on Iran) because surplus makes risk-taking politically palatable, which can keep eroding that surplus; shipping has become a real constraint, with transport costs of roughly $25 to 30 per barrel versus a historical $1 to 2, plus tanker losses in the Strait; refiner margins are distorted and EM demand destruction (three-hour scooter queues in Bali) is beginning
Gold and silver: Gold always struggles when real rates rise, so recent performance is no surprise, but the long-term case is intact because China - running a big current account surplus and unwilling to buy Western financial assets - must keep buying gold
If you act on anything provided in this newsletter, you agree to the terms in this disclaimer. Everything in this newsletter is for educational and entertainment purposes only and NOT investment advice. Nothing in this newsletter is an offer to sell or to buy any security. The author is not responsible for any financial loss you may incur by acting on any information provided in this newsletter. Before making any investment decisions, talk to a financial advisor.
