Episode Transcript
The Finance Ghost: Welcome to episode 289 of Magic Markets. I'm your co-host, The Finance Ghost and this week, Mohammed Nalla is going to unpack why Jackson Hole matters for rates, why the Fed sounded less relaxed than markets hoped, and what that means for bonds, equities, and investors.
After that, I'm going to take a closer look at the recent earnings from CrowdStrike, a company that is making a lot of money, Moe, but before we do that, you're going to do Jackson Hole. So, take us across the pond to America.
Mohammed Nalla: Yeah, Ghost, let's jump right in. Jackson Hole was the big news last week. Everyone was focusing on that. I guess it's a nice precursor because, at the end of this week, we're going to be seeing updated US jobs numbers, so all of these little pieces start to come together.
Now, the key takeaway from last week was that Jackson Hole reminded the world – reminded markets – that the Fed is not yet ready to declare victory on inflation. This has some pretty serious ramifications. The market was looking for confirmation that the softer CPI and PPI prints were enough to keep rates on hold, but new Fed chair Kevin Warsh did not give them that comfort.
His message was basically that inflation is still too high, the economy is resilient enough to actually carry through some of these higher rates and that the softer prints we've seen in the labour market don't suggest that it's broken, just that there are some underlying momentum challenges.
Now, what was also quite key is that he stressed that the Fed needs confidence that inflation is moving back to 2%, clearly and fast enough. Jackson Hole last week didn't give the markets that pivot that they were looking for, to say, “Hey, guess what? Everything's fine.” It actually sent a warning shot.
Now, if we delve into what Warsh actually said, he really pushed back against this idea that one or two softer inflation prints are enough. He said that the recent CPI and PCE readings (that's personal consumption expenditure inflation – that's the Fed's preferred measure) were better than expected, but not enough to show that underlying inflation trends have meaningfully improved.
Now, why is this important?
Because recently, the market actually started leaning into this narrative that “the Fed can wait” and “maybe there'll be cuts later on”. Warsh actually indicated quite directly, if you look at the data, that the 12-month average PCE inflation was running at 3.7% (now, benchmark this against a 2% target from the Fed). Six months, actually a lot hotter than that, around 4.1%, and more than half of the PCE basket is still rising faster than 3% over the last year.
So, when you look at the data on that level of granularity, you can actually see that yes, inflation is definitely down from the 2022 peak – remember, it got as high as around 9% in the US – but he's saying “down” is not the same as “done”, and that the Fed is targeting 2% inflation. Pay attention here. He was quite loud and clear on that.
Moving on to the labour market, I mentioned that yes, it is a little bit softer, but it's not weak enough to dominate the Fed's thinking. This is where the nuance is very important, because recent payroll data (we've discussed this on the show) has actually given the markets this narrative of, “Yes, the Fed can stay on hold.”
But Warsh framed the labour market quite differently.
He said that he viewed it as broadly stable, unemployment in the US is around 4.1%, jobless claims are at very low levels, and that people who want to work are generally still finding or holding jobs. So, the Fed's view is that they're not seeing a labour market collapse. They are seeing slower job growth in an economy where labour supply is also quite constrained, so it makes it harder for the Fed to justify turning dovish just because we're seeing a slowdown in payrolls.
What was the market's reaction?
Well, quite correctly so, the market took the speech as hawkish, but that's because they went into Jackson Hole with a very dovish narrative. They were quite optimistic, so it's actually recalibrated expectations around a September hike. In fact, going into the meeting, they were priced at around 35% probability. After the meeting, they came out at around 60%. That's showing you a sharp recalibration. The market is taking Kevin Warsh quite seriously.
Most of the impact was at the shorter end of the yield curve. Remember, we discussed the long end of the yield curve last week. That's more driven by inflation expectations, yes, but then fiscal supply concerns, oil, the term premium – all of that comes into the long end, so most of the impact was seen in the shorter end of the yield curve.
Now, I want to bring that back into what this means for the rates outlook for equities as well, because the September hike is now a possibility, but not guaranteed. He didn't want to say, “Yes, we're definitely hiking in September.” He wants to avoid this forward guidance that the market's gotten really used to.
In fact, he argues that he wants to actually position the Fed as a lot quieter out there, less pre-commitment. This means that the market's going to be a lot more data dependent, and that is why I reference the jobs data that's going to come out later this week.
Why is this important to investors?
I've mentioned the yield curve, but if you're looking at equities, if we actually see the Fed stay hawkish, it means that equity valuations could face pressure. Long-duration stocks also become more sensitive. Bond proxies like utilities, real estate – they also stay vulnerable.
The dollar? That remains supported under a hawkish Fed.
That filters through quite directly into international markets, because what does that mean? A hawkish Fed means a stronger dollar, and that filters through into maybe some pressure on the rand, which has done quite well. It filters through into pressure on commodities.
So, all of a sudden, we've gone from a world where everything looks fine – maybe the Fed's going to actually keep rates on hold and cut – now, we've actually pivoted from that into a world where the market is calibrating towards the fact that yes, rates can stay higher for longer.
That gives us a pretty tricky backdrop.
Jackson Hole was definitely a reality check last week. Yes, inflation's improved. It's not enough for the Fed to stand down. Until the data clearly breaks lower, we should pay attention to the fact that the Fed's mandate says 2% inflation, not just slowing inflation.
The Finance Ghost: Yeah, super interesting, Moe. Speaking of holes (Jackson or otherwise), that's where South African industrials have been. And maybe if this trajectory on the rand starts to change and the rand actually weakens a bit, that'll certainly help a lot of local companies who have positioned themselves for exports.
So, what I'm hearing from you is some relief, perhaps, for SA industrials? Maybe this dollar weakness is brought in line by what happens at the Fed? I mean, it's impossible to know these things for sure, but as you say, suddenly a big percentage increase in the possibility of a hike.
Mohammed Nalla: Yeah, I think it's very nuanced in South Africa's terms because yes, you need a weaker rand to help your exporters, but at the end of the day a weaker rand also translates into higher inflation for South Africa. And so, unfortunately, a more hawkish Fed and a stronger dollar probably means that the SARB's going to stay hawkish for a while, so any benefit that you're getting, maybe from a weaker rand on the export side, I think you lose some of that benefit on the import side, and that filters through to inflation.
Now, Ghost, against this backdrop of a hawkish Fed, if you look at certain sectors of the market, you're not seeing that pressure materialise that much. I know you're covering CrowdStrike this week. That's a stock that just seems to print a lot of money. Why don't you take us through what you saw at CrowdStrike last week?
The Finance Ghost: Absolutely, Moe. It is quite a thing. You were saying that down is not the same as done. Well, one thing that is not down is CrowdStrike. That share price has doubled over the past year. It's quite a story.
And it’s amazing how quickly markets move on. You might remember when one of their software updates basically broke the Internet. Lots of questions at the time around customer trust, customer retention – what would happen and would competitors take advantage?
Well, fast-forward to today and CrowdStrike is basically sitting at the top of the pile when it comes to cybersecurity. They're having a great time. Their last earnings call (i.e. the one before this one), was in the aftermath of that Mythos moment at Anthropic, which really put cybersecurity in the spotlight, and now we have some numbers to back that up because the Q2 numbers which just came out… It's the best second quarter in the company's history.
Lots of emotive language coming through in the transcript – AI “expanding the attack surface”. Don't you love that? “Agents going rogue.” “Swarms of attacks.” I'm not making this up. This is from the transcript. Basically, what's happening is adoption of AI is increasing cybersecurity risks, which in turn boosts the CrowdStrike offering.
And they love the emotive language. I remember when we covered CrowdStrike in Premium, this was something that we highlighted. So, storytelling is alive and well in US markets.
This AI adoption is a great tailwind for them, because IT systems are going to get more complex, not less. Agents are being built all over the place. Even if you take out the emotive language, you're still left with a decent bull case and a growing total addressable market (TAM).
Now, one of their products to take advantage of this is called Falcon Flex. This means the customer basically says, “I have a pool of money to spend with you, CrowdStrike, across your various products as needed.”
So, that's a move from a subscription model to a consumption model, which is obviously what we're seeing play out in a number of tech firms at the moment. There's more risk out there, there are more scared executives – guess what? There's more consumption.
And management noted that when customers move from traditional subscriptions into Falcon Flex, the average ending annual recurring revenue (ARR) – quite a tongue twister there – increases by over 40%. So, it really does move people up the monetisation curve here. They also talk about new logos coming into Flex (that just means new customers), contributing around 34% of the net new ARR for the quarter.
Then there's another dynamic. You'll love this. It's called reFlex, where customers expand their commitments after the initial adoption phase, on average 8 months after the initial Flex conversion, with an average ARR increase of 53%.
So, what does this mean in practice? It means a higher lifetime value of a customer. How are they finding customers? Well, apart from word of mouth and brand equity and all the rest: hyperscaler marketplaces. These cloud marketplaces have become actually a very good distribution channel for them. More than $600 million through hyperscaler marketplaces during the quarter. That's up around 30%, year-on-year.
Why does this matter? Because customers want to buy through platforms where they are already spending money managing their infrastructure. CrowdStrike, only too happy to provide here. And interestingly, CrowdStrike's revenue split at the moment is 65% US, 35% international. So, they are very much hitting a global audience here.
If I dig into those second quarter numbers a bit more - revenue (total revenue that is), up 26%. Free cash flow, up 33% – has now reached 26% of revenue, so that's their free cash flow margin.
A useful reminder there that they are unlocking cash, but I will also always point out that, in US-tech land, the non-cash expenses like stock-based compensation tend to get rather abused, so always take the free cash flow margin with a pinch of salt.
Perhaps more importantly, and something the market certainly appreciated, is that management has raised their guidance again. So, they now expect the midpoint of fiscal 2027 net new ARR guidance to be around 11.5 percentage points higher than the original expectation, so they now think it will be 34%. They previously thought it would be 22.5%, so that’s just a remarkable uptick in guidance.
But, of course, the valuation knows this. The market knows this. It's not a big surprise. CrowdStrike is not going to go down as a hidden gem. The three-year average price-to-sales multiple is around 25x, but the stock is currently trading at close to 40x sales, which is enormous, obviously.
Now that's trailing sales, not forward sales, but still, that's very high.
And you almost wonder, Moe, if you need to start thinking, never mind PEG valuation multiples, is it time for REG multiples - where you basically look at the revenue multiple and compare that to revenue growth?
Because the way these tech firms are behaving, you almost wonder if we need to start thinking that way. But even if you did take that approach (which, technically, I'm not sure is right), you'd have 40x sales versus expected revenue growth of 25%. So, still looking rather expensive, actually.
And yeah, just again, a perfect example of money looking for a home in the AI era and CrowdStrike, very happy to provide that home.
Mohammed Nalla: Yeah, Ghost, you mentioned reFlex, I'm thinking reflux if you actually missed out on this massive rally at the end of the day [laughing]. In fact, I went and had a look on the website to see when we actually covered the stock – it was when they had the cyber incident. I think that was back in 2024.
Around that time the stock actually went on, it tested the 200-week moving average. And we mentioned at the time it was already expensive on a valuation basis, but the technicals said that if that support holds, it could have been a very opportunistic entry point. And boy, the stock has really gone up in a straight line from there, and it really took time from 2024 all the way through 2025 for the market to digest some of that news.
How much is narrative and how much is actually performance coming through in the stock? The stock chart tells you the entire story.
And again, if you're not a subscriber, you can go and have a look on magic-markets.com. It's only R99 a month. You get full access to the entire library. And I would suggest you go and consider subscribing if you're not a subscriber right now, because unfortunately, we are going to have to consider price increases over the course of the next month. So, now's the time to go and check that out. Certainly, a lot of value, in our view.
That's where we're going to leave it this week. We hope you've enjoyed the show. Let us know what you thought.
Hit us up on social media. It's @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X, or go find us on LinkedIn. Pop us a note on there.
Until next week, same time, same place. Thanks and cheers.
The Finance Ghost: Ciao.
