Now You Can See Everything

MICHAEL CEMBALEST: OK, good evening, everybody. This is Michael Cembalest with the November 2026 Eye on the Market podcast. This one's called, "Now You Can See Everything." I'm going to explain.

It's been a late night. It's about midnight, and I'm in the Nobu Hotel in Palo Alto. I have to see some clients on the West Coast this week, but I've been monitoring the election results from here. And in this Eye on the Market and in this podcast, we're going to talk about the midterms, the latest AI-related market developments.

And then I've got a section on You Can See Everything, which is the new Theranos, Elizabeth Holmes documentary, with some comments on David Boies, attorney, venture capitalist Tim Draper, and a history of corporate fraud. Fraud is poison for markets, and investors should be equally unforgiving of people who commit it, condone it, conceal it, or protect it. And it's more of that in a minute.

OK, so on the midterms, for the last couple of years, a lot of our clients and a lot of investors have wondered how voters would respond to the various unorthodoxies of this second Trump presidency. And now that the midterms are over, you can see everything, which is the name of that Holmes movie. It's a rout.

The New York Times is projecting 52 Democratic senators as of midnight, plus two Independents who caucused with the Democrats, and 253 House members, Democratic House members. And there have been four midterm elections since 1910 in which the president's party had controlled both chambers and then lost them. Now, there's five with this one.

But just to show you the magnitude of it, the first time it happened was in 1910 when the Democrats lost both chambers. Wartime inflation hit 18%. You had a Spanish flu. Wilson broke some truce he had in Congress. So there's a lot going on.

Then in 1946, the Democrats lost. There was a post-war shortage of goods, meat, and housing because you had the end of wartime price controls and subsidies. And so prices are skyrocketing. And voters didn't like that.

In 1954, in Eisenhower's first term, the Republicans lost both chambers during the midterms. And a partial reason why, apparently, was voter backlash against the Senator McCarthy Red Scare. For those of you that remember reading about that, interesting little fun fact, McCarthy's legal advisor was henchman Roy Cohn, who was a mentor and advisor for the first decade of Donald Trump's real estate career.

And then in 1994, the Democrats lost both chambers. You had the Gingrich Contract with America. And then Clinton ran into trouble. The health care bill failed. And then he passed the free trade agreement and the crime bill, and that alienated some Democratic voters.

And so now you've had what is now the fifth time in over 100 years when a sitting president loses both chambers. Why? Well, there's a lot of reasons, and we're going to get into some of them later.

I had prepared this really, really cool table because I was anticipating some litigation from the GOP in the case that they had lost a close election. And I prepared this really cool table showing the 79 lawsuits that they filed in 2020, how they only got either partial or full relief in 6 out of the 79 and lost the other 73, or voluntarily withdrew them. But I think the margins of victory for the Democrats in both chambers are so big, I'd be surprised to see material amounts of litigation. But if you're a politics constitutional law junkie, the table is there with all the cool footnotes in case you want to look at it.

More importantly, midterms themselves are rarely market-moving events. The business cycle drives markets over the medium term. And the most important components that drive markets right now are things that midterms aren't really going to affect, 10-year interest rates, commodity prices, Fed policy, corporate profits, the budget deficit, defense spending, the pace of AI investment and data center construction over the next 12 months. Get to that in a minute.

And then the borrowing needs of AI companies and the impact on credit spreads. I don't think any of those things are affected by the midterms. And those are the most important market-moving events right now.

There was one topic, though, where I think the midterms will have an impact. And interestingly, it's not in the House or the Senate. It's at the governor level. And because governors have a lot more of an impact on data center build outs. And as things stand right now, about 37 gigawatts-- and again, this is a 2028 number, because almost 75% to 80% of all of the data centers that are expected to be delivered in 2027 are already under construction. So those are going to be completed.

So when we talk about governor positions on data centers, this has to do with projects that would be permitted for 2028. And what's interesting is the way the governor's races came out, about 37 gigawatts, supposed to be delivered in 2028, may be subject to an outright pause, with another 12 gigawatts subject to various conditions.

That can be pretty onerous. Data centers have to pay their own grid costs and have tax incentives, imposition of water limits, mandated labor requirements, things like that. So that's probably the one market-moving issue that investors should be aware of, which is the impact of the incoming governors on the data center build out.

One of the things I'm working on for the 2027 outlook is a section on data centers and space. And we're still doing our research. I will note that the Head of Energy at Google, in contrast to some of the statements that have come out of SpaceX, believes that at least right now, they would be 100 times more expensive than data centers on land. So we'll see how that turns out.

So what trends influence the midterm voters? Commodity prices, tariffs's impact on inflation, corruption. The New Yorker had a great chart that was called the Trump family enrichment tracker. And it showed almost $4 billion of crypto gains, media settlements, licensing fees, free planes, PAC payment of legal bills, things like that. And based on some voter polling, Independent voters were kind of disturbed by it.

The trends in housing and home affordability and mortgage applications are some of the worst readings in 65 years. There's been minimal job growth outside the healthcare and worker home aid assistance sectors. The labor share of income keeps falling. ACA premiums in healthcare and private sector health insurance rates are continuing to rise.

Fed policy rates have gone up. Long-term interest rates have gone up. The budget deficit keeps going up, even though we're in an expansion. And that's the first time that's happened since 1970. Et cetera, et cetera, et cetera.

And so we have a section in here with 18 charts on things that may have been affecting the midterm voters. I just want to show, for those of you that watch this podcast visually, I just want to show you some of the charts in there. This one is on commodity price increases from the start of the Iran war. Some of these numbers are still extremely large.

Naphtha, jet fuel, shipping fuel, retail, diesel, all these things are up 50%, 60%, 70%. And what's really kind of amazing is despite the fact that the United States is a net exporter of coal, gas, and oil, the increase in US Commodity prices since the start of the Iran war isn't that different than the global ex-US commodity price increases, with the exception of natural gas.

So natural gas is different. Kind of flattish in the US and up a ton elsewhere. But the rest of all the refined product prices, the price increases have been similar inside and outside the US. And I think that hurt the administration a lot.

Here's a chart that just is really jolting to see. It's the percentage of Americans expecting their financial situation to be worse in one year, almost 40%, and the highest level since 1960, before I was born. So that's not a good sign.

And as we talked about after several years of 3%, or 4%, or 5% premium increases, the last two years of ACA premium increases, 26% and 14%. So the administration hasn't really done much with healthcare.

And here's a chart showing payroll changes since the president took office. Construction, manufacturing, rest of the economy kind of flat to down. And only healthcare and social assistance jobs are up. So that's not the kind of economic mix that I think the administration was shooting for.

For people that were really focused on America First and defense, it's going to take years for the US to return to pre-war munitions levels. And so I'm using a chart on the number of years it will take to restock the surface-to-air missiles, the Tomahawk missiles, the Patriots missiles [INAUDIBLE] systems as a proxy for concerns about America First.

And then here's that chart I mentioned from The New Yorker and from David Kirkpatrick. I find The New Yorker definitely has a political agenda, that's for sure. But unlike other left-of-center news outlets, their research is generally impeccable and extremely thorough, which is why I felt comfortable, after talking to David, reproducing some of his work.

And this looks at crypto gains, management fees, legal bills, planes, real estate, media settlements, things like that. And the numbers are somewhere between 3 and 1/2 and 4 billion. And as I mentioned earlier, voters weren't too happy about this, or at least the Independent voters. OK, so that's enough about the midterms.

Let's get back to the markets. I'm sorry. I'm drinking a Pelligrino. It's very hot in here. I'm in the Nobu Hotel, and it has one of those strange bathrooms with the interactive toilet, which I haven't figured out, so.

OK, so what's going on in the markets? A lot of position profit taking by hedge funds, for sure. Gross long-short hedge fund exposure has fallen by about 8% from its recent peak. May not sound like much, but it's the largest long-short hedge fund gross exposure decline in about a decade.

So some profit-taking and repositioning by hedge funds is certainly part of the story here. And then the other big part of the story is over time, there's been more and more of an appreciation for the fact that about $4 trillion of leases and purchase commitments and other debt obligations of the big AI companies are still off-balance sheet, which is about 80% of all the obligations are still off-balance sheet.

We have a chart here showing from Microsoft, Google, Meta, Amazon, Oracle, NVIDIA, and Anthropic. I mean, the Anthropic S-1 was another example of a company that has a small amount of on-balance sheet debt and a ton of off-balance sheet debt. And as the markets are kind of grappling with the eventual need for where this is going to come from in a zero sum world, credit spreads for all these same companies are really starting to move.

Spreads have practically doubled on SpaceX, just in a matter of weeks. Same is true for Broadcom. And even Meta, which until recently was stable. Those spreads are starting to widen. Now these companies probably will be price inelastic, meaning they'll be willing to issue plenty of debt at these higher spreads, but there will be a limit.

And then the last thing on the markets I want to point out is, after the recent decline in some of these large tech companies, the markets are pretty pessimistic if you look at pricing relative to expected earnings growth. And so I think what you're seeing here is the market's really discounting what the company projections for earnings are. Because when you take the PE ratio and you divide by the earnings growth, you get this PEG ratio, which is one of the ways historically that we've always looked at this stuff.

And if you look at the PEG ratios for Oracle, NVIDIA, Amazon, Meta, Google, Microsoft, they're kind of in line with the rest of the market and even lower than what you'd see in financials, staples, and some of the other sectors. So there's a lot of distrust of the AI earnings boom right now priced into the markets. I think that's something to pay attention to.

OK. So now you can see everything. I want to talk a little bit about this Elizabeth Holmes documentary or docu-film, or whatever you want to call it, from Nathan Fielder. I enjoyed it like everybody else did. But first, I want to say I'm writing this section from the perspective of somebody who spent, of my 38 years at JP Morgan, I've spent 30 of them overseeing and investing client assets.

And I was unpopular in certain parts of the firm about 20 years ago because I was in favor of Sarbanes-Oxley. I couldn't think of anything better than Sarbanes-Oxley to finally put some of the fraud issues behind us. Fraud is poison for investor confidence and for multiples and for market stability. And from an investor's perspective, the people who condone fraud, excuse it, conceal it, and intimidate people surfacing it, in my opinion, are just as culpable as the people who commit the fraud in the first place. So that's a preamble to what I'm about to talk about.

And just as a reminder, it wasn't that long ago that corporate fraud was a major accelerant in the dotcom collapse. And if you remember, the NBER debated whether or not a recession had even taken place because it was so shallow. The ultimate economic contraction was like 0.3%. And Brookings estimated at the time that corporate frauds were accountable for maybe up to a quarter of all the lost stock market wealth that had taken place.

And here's a chart on our old friends at Enron, Adelphia, Global Crossing, WorldCom, and Tyco. I like to look at this chart every few years as a reminder of how bad things can be and how bad people can be.

So I was really struck, while I enjoyed the film, I was really struck by how ambivalent this documentary was about exactly what Holmes had done. So I have a whole section. I'm not going to go through the whole thing, but there's a whole section in the Eye on the Market we have what actually happened at Theranos. They did less than 10% of the tests on their own proprietary machines. The 1 out of every 10 tests failed, and people got all sorts of faulty information about what was going on.

The lab directors and the chemists that worked directly for Holmes said, testified that they made her aware repeatedly of the error rates, failing quality controls, inconsistent results. And what did they do? They marginalized, fired, or threatened employees that questioned the validity of the blood testing technology, or anybody that raised any kind of ethical concerns. So what they do instead?

For 90% to 95% of the tests, they secretly used commercial off-the-shelf blood testing machines to run the patient samples instead. They had to eventually avoid about one million blood test results after regulators figured out what was going on. Holmes told investors that the technology had been validated by 10 of the largest 15 pharmaceutical companies. And yet prosecutors showed the jury a document that Holmes and her team had forged with the Pfizer logo on it as evidence that Pfizer had been supporting them.

And I could go on and on and on and on and on. But if you walk out of that film in any way ambivalent about whether or not Holmes committed fraud, I would suggest that you read this section in the Eye on the Market. And indirectly, the experience of seeing the film and reliving everything resurfaced some other issues that come to mind.

And another one is the role of a lawyer who's also a director and who's also a shareholder. And so lawyer David Boies began representing Theranos in 2011. He took half his firm's fees in stock that was valued at $7 million at the peak. And then he joined the board four years later.

So this creates a potential conflict. Because as a director, Boies owed a fiduciary duty to Theranos shareholders at the same time that he was representing the interests of the companies and its management as legal counsel. This kind of conflict is not expressly forbidden by the American Bar Association, but they don't like it. They say that it should be discouraged in most cases. And most law firms prohibit partners from joining boards for this reason.

And when the Theranos thing unraveled, Boies's law firm sent threatening letters to former Theranos employees. They sent threatening letters to the widow of the former chief scientist. Boies sent a 23-page letter to The Wall Street Journal about John Carreyrou's investigative work.

And this is not the first time that Boies engaged in this kind of intimidation. He was fired by The New York Times for hiring private investigators to collect information on the women that had accused Harvey Weinstein of sexual misconduct. And there's a quote from The New York Times that I have it here on their opinion of what Boies and the firm did. And they talk about how this is intolerable conduct, a grave betrayal of trust, and a breach of the basic professional standards that all lawyers are required to observe. And we never contemplated that they would contract with an intelligence firm to conduct a secret spying operation aimed at our reporting and our reporters.

Why am I going over this? I just want to reiterate, investors should consider the people that intimidate, harass, and contribute to concealment of corporate fraud to be cut from the same cloth as the people who commit the fraud in the first place.

Then the other thing that you find on the Theranos ledger is venture capitalist Tim Draper, who's very well known, has had a spectacular career, is a huge Holmes supporter, and has followers in the venture capital industry. And he's written that Holmes is heroic, she's innocent. She had good intentions. She's honest.

Jailing entrepreneurs kills innovation. And from what must be some distant, upside-down planet, Draper has compared the Holmes prosecution to the Salem witch trials. I can't even say it with a straight face.

So as a fiduciary of client capital, I hate this kind of thing. Startups fail all the time. Harvard Law School has estimates of startup failure rates of 75% or so. But there's a big difference between startup failure and the kind of deliberately orchestrated and brazen fraud that's described here.

And so, we have more information on this. And I just wanted to close, if this film ignites a renewed debate on corporate governance and venture capital, that's a good thing, because there was recently a paper that looked at the question of venture fraud. 614 cases of venture fraud in US VC-backed startup since the year 2000.

And founder-controlled boards were 88% more likely to be involved or in detected or alleged fraud. And fraudulent VC founders were able to launch new startups and raise funds almost completely unharmed. And VC-backed firms were more likely to face litigation related to non-dismissed securities class actions within two years of an IPO than comparable non-VC IPOs.

So there's still some work that has to be done, even after all this time and all these examples, to clean up sloppiness and deliberate deceit in the venture community. And as long-term investors, we're in favor of that 100%.

So that is it for today. I am working on a piece on sports betting and prediction markets that will come out shortly after Thanksgiving. Thank you for listening. And we will talk to you soon. So long.