00:00Greetings, viewers of the Quarter. The rate hike by the US Federal Reserve is on everyone's mind. It is a great moment to talk about recent market movements once again and remind viewers about what really drives interest rates, and what their significance is for equity investors? Rising interest rates bring a frown to the face of Finnish mortgage debtors, but as I like to remind people, a rise in interest rates is not purely a bad thing, even if it pushes up the Euribor rates a little. Another theme in the markets right now has been artificial intelligence concerns. We will discuss them a little in this quarter as well. As you might notice, there is no video footage at all in this quarter. I originally intended to film outside, but the weather does not really allow for it right now with various equipment and technologies, so this quarter comes without video this time. As is customary, I ask you to like the quarter; it boosts morale and the algorithms.

00:39The Fed indeed hiked the policy rate yesterday, as expected. Our economist Marianne Palmu comments on that more on Inderes.fi, the forum, and our service. A more comprehensive macro comment. Here are a few points from an equity investor's perspective. The equity market should withstand higher policy rates, at least initially. On the right, you can see a chart from Bloomberg provided by a research firm, showing how during the last six different rate-hike cycles, the equity market has delivered positive returns some months or years after the Fed's first rate hike. As can be seen, within a one-year horizon, the market has almost always ended up at a higher level. Following that first rate hike, it could perhaps be better phrased that a rate hike signals a somewhat more mature cycle phase, a hotter cycle phase. A pessimist might perhaps say that this is the beginning of the end, but certainly not automatically. Rate hikes by no means imply that a downturn in the equity markets needs to start immediately. Instead, rate hikes also signal economic strength, and the economy needs to be cooled down, and a strong economy is often—not always, but often—quite all right for equities as well. So in a way, the fact that equities have risen after the first rate hike is entirely logical. In the same breath, it must of course be pointed out that the data on these is still rather limited. Central bank actions matter, but I would not exaggerate their significance either.

01:53A vast amount of investor discussion on X or the Inderes forum always revolves around what the Fed will do next. But the Fed is not the dog, it is the tail. The central bank. It reacts to the economy and aims to be predictable. If inflation and the economy heat up, lo and behold, the policy rate goes up. That is actually quite clear. Equities are a long-term asset class, so they are more influenced by long-term interest rates, which in turn are driven by the economy. Not the central bank. Although naturally, in the short term, the central bank is able to influence economic conditions precisely by raising its own policy rate. So it is a bit like a car's gas and brake pedals, where you can sometimes try to brake a little and sometimes accelerate. But equities are a long-term asset class, so if you look at interest rates, I would look more closely at government long-term bond yields. More on those shortly.

02:40We cannot measure inflation precisely, as Chairman Warsh has highlighted well in his recent speeches. Let alone the economy. GDP figures are revised for years after their initial release, so is a 25-basis-point change in the policy rate even a dramatic matter? In other words, central bank actions are certainly important, but one should not exaggerate their significance. The strength of the economy justifies a higher interest rate level in the market, in principle justifies a higher central bank policy rate that can be adjusted through policy—monetary policy, that is—decided by the central bank at least for now, although there has perhaps been some pressure recently to put the Fed back under the Treasury's thumb. But that is a different topic of discussion, which has been covered previously in other quarters.

03:20But speaking of those market interest rates, which I would rather look at in connection with equities—they are, after all, an even larger asset class than equities. And in a way, market interest rates act as a gravity that affects how much compensation investors demand for the risk taken in equities. And indeed, as I have noted in many quarters, for instance, the US 10-year yield is actually behaving quite nicely. It generally tracks the pace of economic growth and expected economic growth. At present, the situation in the US economy is that nominal GDP growth is actually accelerating. It is currently around 6%. That means the economy is growing at a tremendous pace, partly thanks to things like AI investments. And if that economic growth continues to accelerate as it has recently, then there is pressure for example. Specifically on the 10-year yield, which has hovered a lot in the news because it has reached around the 5 percent level, there is indeed pressure to move upwards rather than downwards. But at least for now, it reflects the stronger economy and is not necessarily a bad thing for equities in itself.

04:19One theme that has also been much discussed is that investors no longer want to lend to the United States. I also said in some quarter that investors are a bit more reluctant, and I think that is actually a slightly better expression, because reluctant does not mean that they are not lending anyway. Because if you look at the auctions where these are traded, investor demand for the US is still sufficient. And here is a slightly more theoretical chart. I will explain this very superficially, but we can in principle separate out the portion of interest rates that is pure risk premium using various methods. For example, put very colloquially, let us imagine in theory that an investor could invest in, say, three-month US Treasury Bills, and then simply roll them over. Investing that money into a new three-month Bill for the next 10 years. What sort of difference in interest rates or risk premium is there compared to simply putting money into a 10-year yield? Because if you lend money to someone for 10 years, that is naturally riskier than lending money to someone for three months repeatedly every three months. Well, from these we can roughly gauge what the risk premium is. It might be, hovering around the one percent mark currently. It has indeed risen from zero to that level in a few years. A baffling increase in itself, but if you look at this longer-term 35-year history, this current risk premium level of one percent, or term premium level as it is nicely called, is not even close to the level it was, say, in the early 2000s or back in the nineties. So investors are perhaps a bit more nervous. That would perhaps be a more accurate phrasing, but the rise in interest rates is by no means driven by investors being excessively worried about US indebtedness just yet. Of course, no one knows the point where real concern sets in, but for now, we are perhaps only heading towards that point, and we are certainly not there yet.

05:57It is also good to remind ourselves that financial conditions are very loose, meaning that even though interest rates are rising, interest rates are not the only thing that affects people's appetite for borrowing. Here is a financial conditions estimate in the US by Bloomberg. That index, whenever it is above zero, financial conditions are loose rather than tight. And actually, right now they are near historically loose levels. There are various types of financial condition indices. They typically combine data from the stock market, credit spreads, the bond market, and so on. And they describe how easily financing is available to companies. Currently, for instance, AI. There is plenty of money available for investments from banks and investors for borrowing, so money is very loose even if the interest rate level is higher. As you might consider, from the perspective of an absolutely slightly higher interest rate level and intuitively thinking from a Finnish perspective perhaps through Euribor rates, that high Euribor rates kill the appetite for borrowing, but one must remember that there is currently around 350,000 billion dollars of debt in the world. And if we assume that the average duration or maturity of that debt is five years, that would mean every year, regardless of the interest rate level, 70,000 dollars—meaning 70 trillion dollars' worth of those loans—must be refinanced. Regardless of the interest rate level. So in this sense, the world may no longer be as sensitive to interest rates as before, because we are more in an economy where old debt is constantly being refinanced rather than taking out entirely new loans for investments and future growth. Thus, the absolute interest rate level itself does not necessarily tell us anything about tightness yet; rather, that is indicated by these other measures. Indicators measuring liquidity and financial conditions, and those are indeed loose right now. So if one wants tightening force in the economy from interest rates, they certainly have room to rise, both through the market and through the Fed's policy rate.

07:32A few more words about these recent AI concerns. Some friction has been visible in the markets, among other places in semiconductor stocks, because these major leading laboratories—frontier labs like OpenAI and Anthropic—have demanded more regulation for the industry. The fear is that AI development could spiral out of human control through self-improving models. As was seen, for example, in a hacking incident involving agents during the summer. I find it difficult to comment on that any further as we cannot see what those labs see and what goes on inside them, so just a few general comments on this. First, if such a slowdown were to hit AI development, given that we are talking about trillion-dollar investments, slowing them down would certainly be quite a bump. For instance, for semiconductor stocks, particularly Nvidia, which unsurprisingly opposes such regulation because they already have an assumption baked in of an investment boom lasting years, perhaps even longer, which should rather gather more speed, absolutely not take any pause. At the same time, it is worth remembering that regulation particularly benefits companies that are already at the forefront of development.

08:36And on the right, there is a good, perhaps slightly dark-humor meme, nevertheless. There is the legendary movie line "sell me this pen", and then Anthropic sells that pen by saying: this pen actually kills everyone. Well, that is the ultimate way to create a sense of mythology around the invincibility of one's own product. Lo and behold, Anthropic is at the same time preparing its own IPO, among other things. All regulation, such as licensing processes, slowing down model development, legions of lawyers shuffling papers and causing various headaches for everyone else. And other measures also block competition, because smaller challengers find it harder to catch up with the frontier labs' models in such a scenario. They may not be able to afford legions of lawyers to shuffle papers there, so competition would practically wither away to some extent. The ultimate goal of many companies is nevertheless eventually to achieve a monopoly position, and if they cannot always manage it with the best product, they can at least try to cement their leading position through favorable regulation. In economics, there is indeed a concept called regulatory capture. Meaning that you try to capture the regulators, so to speak; if you can influence the regulation to your own advantage, you can then cement your position. So in all these talks about putting the brakes on AI development. There may be genuine concern for the future of humanity. It can still be hard to tell from the outside, but there can also be highly selfish interests simply to block competitors from the game before too much threatening competition emerges. In addition, it is perhaps highly unlikely to ever get China or others to join such regulation. In that sense too, that sounds a bit silly.

10:13Here is another almost meme-like image. A friend's colleague tipped me off about this X post: if the leaders of top AI companies genuinely believed there was even a small chance that AI would cause some horrific catastrophe or the outright destruction of humanity, as some currently fear, they would likely focus all their energy right now on blocking that threat. They would hardly be preparing the biggest IPOs of all time right now, which always take a lot of time for executives to prepare. At least from my perspective, saving humanity would feel like a more important task than pushing forward one's own IPO. Or another. Dario, the CEO of Anthropic, was just speaking at a Salesforce event where Salesforce CEO Marc Benioff said, welcome Dario to this Dreamforce team. So indeed, Anthropic's Claude is being integrated into Salesforce's sales operations. So you would hardly integrate your super-intelligent AI language models into some sales software if at the same. At the same time, you believe that AI will disrupt everything tomorrow and cause the end of the world the day after. So while concerns must certainly be taken seriously. And as I said at the beginning, it is really hard to tell from the outside what the actual severity of the situation is. Only the people inside those labs know. At the same time, while naturally remaining a bit critical. Such people also have a pretty big incentive to create this mythical image, to create threat scenarios and regulation so that they can block competition.

11:34This is also a good reminder in general of what I have brought up in several quarters, that I know many investors are always excited by such new technological disruptions, while at the same time like us. It is not yet precisely known what the economic impact of language models on the economy will ultimately be. We know that coders are getting faster, but many other things remain a question mark. So at the same time, one risk alongside the unpredictability of technological development, especially in the early stages, is usually how regulation will evolve. And the recent regulatory nervousness is a good example of how, if harsh regulation hits and development slows down, it could mean quite a negative outcome for many companies.

12:07The market at least doesn't seem to believe in a fast AI- disruption. In recent years, there has been a fun, contrasting theme. Meaning semiconductor shares, i.e., the hardware, graphics cards, memory, and so on—things that are physical in data centers—versus the so-called intangible ones, meaning software companies. And as many know, software shares plummeted sharply at the beginning of the year because people feared that language models would disrupt the software business almost overnight, and on the other hand, all these semiconductor shares soared almost vertically upward because it was thought that the investment boom had no limits. But actually, after the summer, semiconductor shares have continued to decrease somewhat, and what has happened is that currently, for example, the IGV ETF, which invests in the world's largest software companies, among others Microsoft and Palantir, Adobe, and others, is once again approaching its all-time high. So if the market is anywhere near correct—which of course it doesn't always have to be, but investors collectively are nevertheless fairly smart—one could argue that right now there is no fear, at least, of any immediate disruption to the software sector.

13:09Generally speaking, thank you for watching the quarter. Hopefully, it gave you a few thoughts regarding these recent developments. Here is the second meme of the week. From the user handle Citizen J. Oil is 100 dollars. Say it. Iran wants to make a deal and the classroom cheers. In other words, the price of oil has also risen quite a bit. And the market naturally also affects politicians' desires to continue their funny campaigns here and there around the world. Maybe that conflict will also reach some kind of resolution at some point. Thank you for watching the quarter, read the research, and don't just look at stock picks. Also make good stock sales if a sale becomes necessary.