Stocks Are Rising Because Earnings Are Exploding! This Rally Has Room To Run

0:00Hello, everyone. Stocks continue to go higher. The bears are screeching that everything's overvalued, but I've got data that proves the stock market's actually getting cheaper. And then we're going to talk about credit cards and why credit card interest rates are way too high. And there's a solution in the market now that is way, way better for you, the consumer. All that and much more today. We are live from the desk of Anthony Pompliano.

0:30Before we get into today's episode, I need your help. Hit the subscribe button right now and let's get into it. All right, ladies and gentlemen, the stock market has been on an absolute tear the last few weeks. If you go read the headlines, every single one of them keeps talking about stocks are going up and everyone's scared. Carson Group's Ryan Dietrich shows that the 17 % gain that we just experienced in the last eight weeks, it's the second best eight week rally in history, in all time history, the second best ever. Now, that type of return in just two months is absolutely bonkers. Some may say bing bong like the New York Knicks.

1:03But the better part is Ryan points out that stocks have never been lower a year later after an eight-week win streak that gained at least 12%. So we're in safe territory right there. But the average return after those eight-week win streaks is 12 months later, we see a 17 % return. It's not bad, right? Now, the story is similar in the NASDAQ as well. Blue Kurdic writes the NASDAQ 100 is up over 16 % in the first 98 trading days. Why is that important? Well, when the NASDAQ gained 15 % or more in the first 100 days, it's positive for the full year 100 % of the time. Now, when it gains 15 % or more in the first 100 days, 12 of the 14 times for the rest of the year, it's also positive.

1:43The median gain, 19%. In the last 13 cases, the market never peaked before Q4. So this data is very compelling, but it doesn't calm the nerves of the perma bears, though. These people have lost their minds. They're still screeching about an AI bubble, historical valuations, and potential financial destruction on the horizon. They're going to promise you that the stock market is only performing well because they say that a small handful of stocks are driving the market higher. And they'll claim that everything else is suffering in the market. It just isn't true, though. Ryan Dietrich silences the haters because he wrote that the S &P 500 equal weight just closed at a new high last week.

2:22That's a clue he says that things are just fine under the surface. Everyone calm down. Put your guns back in the holster. Take a deep breath and relax. The story for the perma bulls gets even better. Ed Yardini recently said that the S &P 500 is up 9 % this year, but the price to earnings multiple has actually contracted 4.6%. The entire rally that we are seeing, he claims, has been driven by earnings rising 14%. The stocks are getting cheaper because earnings keep accelerating. That's the healthy signal that you want to see if you believe this bull market is going to continue for months and years to come.

2:59Now, why is that important? Well, Phil McIntosh shows that equity prices and earnings move together in the long run. Think about it for a second. The higher earnings go, the higher stock prices go. It's pretty simple. and all of this earnings growth and stock market performance, it is coming while the United States is still technically at war with Iran. Now, it's not every day that we're dropping bombs. They're not shooting drones out every day either. So it is a war, but it's just kind of a weird one. Now, if the war officially ends, you should expect asset prices to take off higher amid the newfound certainty in markets.

3:33We know this because as Shinali Baskin points out, yields are starting to drop as the Iran deal becomes more hopeful and Brent prices are dropping firmly below$100 per barrel as well. Both of those are welcome developments for investors. Now, this enthusiasm does not come without risk though. In my personal opinion, the largest risk for US stocks at the moment is that the upcoming unlock of a significant amount of supply from new IPO issuance. Think about it. We've seen SpaceX, Anthropic, OpenAI. These are huge companies and they're all supposedly coming public here soon. Kevin G wrote a great analysis recently.

4:10He asked one simple question. Can the market absorb three separate$1 trillion or larger IPOs in the same window? Now, we simply don't have the answer to that question. We have never lived through this type of scenario. One argument would be that the mega IPOs are a top signal because the private markets are trying to grab exit liquidity before the market rolls over. The other argument would be there's insatiable demand for space and AI companies. so we actually need many more companies to go public than just these three. Whatever you believe, that is ultimately the question everyone's trying to figure out.

4:43It's gonna be fascinating to watch this play out. Well, I hear the pessimists and their arguments. I'm sympathetic to them. I understand that they're nervous. I just fundamentally disagree that the market's in a bad spot. Earnings are growing faster than the stock market and stocks are getting cheaper. Every investor should be excited because that means that the sky is the limit at this point. So what you do with your portfolio is ultimately your decision. But what I see, the data I'm watching means that the stock market bull run, it ain't going to be over anytime soon. All right, folks, we've got a very special treat today.

5:18We've got Sadi Khan. He's the founder of Avon. And in this conversation, he's going to explain what's going on in the credit card market for the American consumer. Now, this is important because they have invented a brand new way for you to get a much lower interest rate on your credit card. Everyone's heard that the U.S. government wants to cap interest rates at 10 % or that interest rate on credit cards has been sky high and it's crushing the American consumer. But Saadi and his team set out to figure out why is that happening? What can we do about it? And how can we build a better product? And I think what they're doing is very interesting.

5:48And so here's my conversation with Saadi Khan. All right, Saadi, I thought that it's very interesting to see all of the credit card damage that's happening to the American consumer. Right now we have delinquencies that are going up. We have interest on credit cards exploding higher. We've seen people in Washington talk about capping interest rates on these credit cards, but really it just seems like the American consumer has financial pain and they're turning to credit to try to cover the hole. What are you all seeing and how healthy is the American consumer right now? It's a great question. We're seeing enormous amounts of credit card debt, higher than ever before.

6:18There's over a trillion dollars of credit card debt in the United States. The average US consumer with credit card debt pays over 20 % interest rate on that. So the consumers in America today are paying$200 billion in interest per year. That's not the principle going down. That's not it being paid down. That's just the interest payments on top of it. I'm not even including another$50 to$100 billion in fees every year that the U.S. consumer is paying. Imagine with products that Avon bills, we can reduce that interest rate by 50 % or more. Our average credit card interest rates are under 10%, which means that you're able to reduce your cost of capital as an American consumer by 50 % or more.

6:55This is really important because Americans also own, actually, an enormous amount of assets. The U.S. consumers own over, homeowners in the United States alone own over$34 trillion of home equity. 50 million homeowners today are carrying over$400 billion of unsecured debt in which they're paying over 20%. These are not subprime, deep subprime consumers. These are prime and superprime consumers who are not paying down the debt using the assets that they already have. AVEN's mission is to give credit to people for what they already own. And that mission is fulfilled when we take consumers who have home equity, who have Bitcoin, who have other assets, and they're able to use these assets intelligently to reduce their cost of capital to be 50 % or lower than what it was before.

7:41So what I really find interesting is if I have$100 of debt at the end of the month on my credit card, I just pay it off. I don't get hit with the interest rate itself, right? So I don't kind of don't care what the interest rate is. But what you're saying is that there's actually people out there who they're not paying off the credit card at the end of each month, yet they have, whether it's illiquid or liquid assets to their name. And so why do you think these people aren't paying off the credit card at the end of the month if they have assets or some degree of wealth? That's a great question.

8:07In fact, 70 % of Americans don't pay off their credit card debt every month. 70 % of Americans revolve on their credit card debt. It's very easy for us to imagine a world where only these deep subprime and subprime consumers are revolving on their credit card debt. It's actually most U.S. consumers. In fact, most American homeowners are revolving on their credit card debt, and they're revolving between$5 ,000 to$10 ,000 a year, actually. That's a fair amount of money, almost$1 ,000 to$2 ,000 a year, that's just being burned off on paying interest rate on credit card debt. Why aren't consumers taking advantage of assets that they own, whether it be home equity or Bitcoin or other digital assets that they may own?

8:43It's because it's hard. It's inconvenient. It takes a month to get access to your home equity. At Avon, we're able to bring that down to 15 minutes. We're able to launch the best-in-class Bitcoin-backed credit card, where you are able to borrow at rates as low as 7.99 on really long-term durations, up to 10 years on a Bitcoin-backed credit card, and reduce your cost of capital in both of these circumstances by over 50%. So talk me through, let's do the home equity first, right? So I have a credit card. I can go and I can buy stuff at the store. Or where does the home equity come in? Or how does this work on the back end?

9:14Totally. So think about it this way. It's just a home equity line of credit. What we're able to do is originate a home equity line of credit in as fast as 15 minutes. We invented a bunch of technology to be able to do it that quickly. All the way from electronic signatures and robot arms to help you do notarizations and deeds of trust to being able to verify your income automatically and instantaneously. and we're able to close this entire home equity line of credit transaction in as fast as 15 minutes. Then what we do is we let you access that using a credit card. It's a Visa preferred credit card where you're able to go and make large purchases that you're able to get 2 % unlimited cash back on this credit card.

9:54The line sizes go up to$400 ,000 or higher, 2 % unlimited cash back on the entirety of that line. We think it's the best credit card that you can get as a homeowner. And by the way, the same things apply that you mentioned earlier. which is if you're able to take this card and pay off the bill every single month, you pay$0 an interest rate. Now, what about Bitcoin? Same thing as you're basically just taking a loan against the Bitcoin, and then now you're just creating a card that allows you to spend that loan? That's exactly right. Same exact infrastructure, same exact pieces of technology. It's 10-year fixed rates that you're able to get as low as 7.99.

10:29So you're able to, the Bitcoin-backed card that we built was designed to help kind of span the spectrum of use cases that a consumer may have, whether it be smaller purchases that you want to get rewarded for on a monthly basis. But really what we saw in the industry was a gap in being able to do large purchases that you wanted to amortize over a longer duration and time while locking in an interest rate. That hasn't really been done in the crypto community yet, where you have a lot of one-year duration I.O. type loans, where, yes, they're great if you're trying to do kind of leveraged margin buys, But they're really difficult to actually buy a home with or buy a car with where you want like a five-year, seven-year, or 10-year term where you want to be able – and you want extremely low interest rates to be able to purchase a large item.

11:13And we think those large items are actually often good investments for consumers to purchase. And able to access that capital at a much lower cost makes it way more effective than any other option that they have. Now, what I find interesting about this is you guys are looking to try to get the lowest cost of capital for any sort of consumer. And so homes, Bitcoin, I'm assuming there's other things over time that you're going to be able to do. And you see it in the data, right? Like you guys have a chart on your website that I was looking at, and it's like the APR on a regular credit card is over 20%.

11:41And you guys are somewhere in the like 7%, 8 % range it looked like. And it just feels like as you expand to other assets that potentially could back the credit of these cards, then you should be able to find lower and lower cost of capital. That's right. But to be fair, we think the Bitcoin-backed card will eventually, actually, and digital currencies in general, will eventually be the lowest cost of capital in the world. If you think, if you step back for a second, yeah, it's a great question. If you think about what is the cost of capital, we think the cost of capital is the cost of the risk-free rate plus the cost of the risk plus the cost of the transaction.

12:17When you think about what we can change and what we cannot change, the cost of the risk-free rate is something that you and I don't get to touch. Jay Powell gets to move that around. And now our friend Kevin Warsh hopefully will make it as healthy as possible for the U.S. consumer. The cost of the risk is an information theory problem, right? None of us gets to change it. We get to observe it and understand that for this given person at this point in time, this is the cost of their risk. So the real thing we're all working on, especially at Avon with our mission of reducing the cost of capital, we're working on reducing the cost of the transaction.

12:48So if we can reduce that cost of the transaction, we can pass on that savings to the consumer in the form of a lower interest rate. Why do we think the BTC and the digital currencies backed cards are going to be the lowest cost of capital? It's because the cost of those transactions are already the lowest. The cost of acquiring a lien on a home and the cost of attaching and doing all that kind of verification and attachment to a home asset is just strictly more expensive, even with all the technology that we've built, than a digital asset. where that cost is just strictly going to be the most efficient.

13:18Cryptocurrency is run on 24-7 exchange, so we're also taking less risk exposure on that asset than a home asset for that matter. So all these variables come together, and we think in the long term, even though today our Bitcoin-backed credit card headline rate is a little bit higher than our home equity-backed credit card's headline rate, we think in the long term that is just going to come down over time. These markets around capital markets around Bitcoin and digital assets just haven't matured yet. And I think that world is just coming. And these waves are coming over the next 5, 10, 15 years.

13:47And you will see kind of mature securitization markets and mature capital markets occurring on this infrastructure. And that's when you're going to start seeing that cost of capital really get grinded down. You mentioned Kevin Warsh. He is the now new Federal Reserve Chairman. He also is on your guys' advisory board, I saw. And so - He was. Yeah. Okay. So explain if he cuts rates, which he has clearly stated he would like to, if the market will allow him to, what does that do for a business like you guys? Well, so in general, when rates get cut, two things happen. One is the demand for capital increases, as you can imagine.

14:23So kind of like basic supply and demand, when the cost of the supply decreases, demand may increase. So in this case, we think there'll be more demand for people to borrow more overall in general. I think what's interesting is it really matters on how much rates are cut by. So if the rates are cut by a lot, then there's a possibility for consumers to have more options. So they may be able to do a cash-out refinance and or get a HELOC. If rates are cut by a little but not by a lot, as in the amount that the rate is cut by is not larger than the current mortgage that they are already paying for, then what you'll see is you'll see an increased demand on just HELOCs and not as much demand in cash-out refinances.

15:01And these kinds of products kind of obviously help balance the different types of debt that consumers can get access to based on their home equity. We actually at AVEN provide both. So from our standpoint, we think if you're taking a large amount of capital out of your home, then a cash out refinance might be the right option. Whereas if you're taking something a little bit smaller, then a HELOC is often the right option, especially if you've locked in one of those historically low mortgage rates that was possible in the last decade or so. Now, as you guys are doing this, you guys have this machine banking backend, and you were hinting a little bit like robotic arms.

15:32I don't think anyone's expecting you guys to have that. There's some other automation technology. Just walk us through what's happening on the back end or what is the thing that is making the cost of the transaction go down? Yes, this is a great question. When you think about what is a bank and what services it provides, we kind of ask the question of how much of it can we automate in a way that remains compliant, correct, deterministic, observable, and all the kind of elements that we think are good in terms of both regulatory infrastructure as well as technical infrastructure. So a lot of what we do is we build technology in the back end to automate as much of this as possible.

16:07So there are very few humans involved in this operation. And that's one of the main ways we're able to reduce that cost of transaction. The way to think about it is how many human beings are involved in you getting your mortgage or you getting your HELOC? If you're going to think about it, HELOC is kind of a mini mortgage, right, in some ways. And so if you can remove every single piece of atom that needs to move around and instead move bits around in the back end, you're then able to kind of reduce that cost of capital by reducing the cost of energy required to originate a mortgage, originate a HELOC, originate a credit card.

16:39And that's what we do a lot of. And so, for example, we built an enormous amount of compliance infrastructure, actually, to help us remain compliant in all 50 states that we operate in across every single state boundary in every single county. That's actually extremely expensive from a human labor cost across every single country. And so a lot of our infrastructure is designed to help us do that. We automate credit underwriting. We're able to automate the valuation of this property. We're able to automate closing with robot arms and digital signatures and online notarization. And all these little pieces compound together to help reduce the cost of that transaction and pass those savings on to that consumer.

17:15And more importantly, what we're able to do is we were able to invent new products that were not possible before. Capital One actually tried to build this credit card 20, 25 years ago, in fact. And they failed. Why? because they couldn't get this transactional cost low enough 20, 25 years ago. We were fortunate enough to try it again and build on the shoulders of giants, if you will, of technology that has been built. And then we had to stand on top of those shoulders and build new technology ourselves to be able to make these products possible. And so this is also an era in technology where we're able to bring more automation to the table using AI, using machine learning, whether it be in credit, whether it be in origination, whether it be even in things like mechanical engineering and robotic arms, all these technologies are possible today that were simply not possible more than decades ago.

18:03And so this allowed us to build these products. Now, as you're talking through this, one of the things that really jumps to mind is, oh, they're creating efficiency. They must be using AI. I'm sure people are thinking that, right? Where are you using kind of this new technology? And then where are you just innovating with maybe quote unquote older technology or technology that's been around for a while and it's more the way you're doing it is where value is getting created. Totally. And we're doing both, to be clear. And I think there is a lot of hype flagellation happening around AI everywhere, etc.

18:31I actually think one of the challenges with using modern LLM technology is the fact that modern LLMs are actually relatively high-recall, low-precision systems. And in a regulated industry such as ourselves, we have to operate extremely high-precision, and we are willing to sacrifice a lot of recall. So a lot of our innovations are actually not related to LLMs. A lot of our innovations for the last four or five years that we've been working on it are actually more traditional technologies and more traditional machine learning. So we're, as you know, Pom, from my background at Facebook and Microsoft, more traditional machine learning.

19:03So we build a lot of boosted trees. And I like to joke that 90 % of machine learning problems can actually be solved with logistic regression. You don't need an LLM. You don't need any magic. You just need logistic regression. It will solve 90 % of your problems. And so we use a lot of more traditional machine learning and statistical technology. LLMs are actually really interesting when you look at quality control systems, when you look at parsing human input that has a lot of variance. You know, the traditional use cases that people talk a lot about are like customer service and customer support.

19:31And yes, there we have used technology to help our customer service agents be significantly more efficient and operate at higher efficiency, higher throughput, etc. One of the interesting things that we do is we build a lot of technology to drive very high precision out of LLMs. So we operate at a 95 % precision and we're willing to sacrifice to like 20, 30, 40 % recall ranges in order to get high precision services that allow our compliance agents to be way more effective. And the reason we do this is 95 % is not an arbitrary number. It's a number we picked to be twice as efficient as a human.

20:06So human beings usually have an error rate at about 10 to 15%. If you were to take an average customer service agent and have them run through thousands of answers, they will get about 10 % of these answers incorrect. However, our goal is we only deploy machine technology when the technology is twice as good as a human. And so we operate at 95 % precision. And that has worked really well for us, but it requires us to invest a huge amount on data, in labeling, and how we build software, how we build operations, and of course, how we actually constrained the LLMs to be high precision, low recall.

20:39I call it, we invent all of this technology and I call it a giant I don't know classifier, which is like, how do you teach AI to say, I don't know? And if you look at ChatGPT or Claude or most of these LM agents, it's very easy for them to always give you an answer, even when it's wrong, even when it actually shouldn't give you the answer. And unlike humans, it's not able to stop itself from providing an answer, even when it shouldn't. And that's what we do. We built a lot of technology that's able to allow it to say, I actually don't know. And so I'm not gonna answer this question. I love it.

21:10Last thing I wanna ask is, most credit cards, there's like a war for customer acquisition, and they have all kinds of crazy perks and points and, you know, go to this tennis match or do this thing or get this lounge access. It's awesome for the consumer. How are you all working against or competing against so much competition and so much, you know, kind of perks being thrown at these consumers? So the question is like, what's the financial incentive for these banks to do this? The reality of it is most of these other credit card companies aren't able to compete on price. They're not able to actually reduce the cost of capital.

21:45And so what happens is there's a lot of cheerleading happening and noise happening all around it with perks to go play tennis and perks for travel and perks for this and perks for that. But the reality of it is all these perks, if you look at how a credit card company makes money, all of them are making money on the same thing, which is the interest that these consumers are paying. So all these perks are designed for you to spend more on the card, which then you will revolve by not paying it off. And then you'll pay 20-25 % interest rate. What we do is we want to cut through all the noise and say, our value prop is very simple.

22:21We are the lowest interest rate credit card in the market. In fact, we guarantee it. So come to us when you actually want to reduce your credit card debt. And you can use all the perks from all the other credit cards, and we actually need to pay it off, come to us because then you'll pay the lowest bill. The White House talked about capping the interest rate. Good idea, bad idea, helps you, hurts you? I think it actually helps us. We're the lowest interest rate credit card. In fact, the cap was at about 10%, if I'm not mistaken. We'll be healthily underneath that cap and we'll be very happy. However, it's not clear that it's actually that helpful for many US consumers.