Why Stocks Are Still CHEAP (Even Near All-Time Highs)

0:00Hello, everyone. Today, we've got a special treat. I've got Phil Rosen. He is the co-founder of Opening Bell Media. And in this conversation, we sit down and go through a bunch of data and charts to understand the US economy. Phil brings the heat. This is data you're not going to find elsewhere. And he's got some great explanations of what the takeaways are to impact your personal portfolio. Here's my conversation with Phil Rosen. We're live today from the desk of Anthony Pompliano.

0:35Before we get into today's episode, please remember to subscribe on YouTube. My goal is to get to 1 million subscribers, and with your help, we'll get there. Hit the button, and let's get into this conversation with Phil. All right, Phil, I thought of a great place to start the conversation. There's this viral chart of ChatGPT launching and jobs just falling off a cliff. Everyone's freaking out about this. What's going on here? So this is only a very small part of the story, I think, to the general labor market deterioration. And yeah, ChatGBT launched in November 2022. And since then, job openings have collapsed compared to that time.

1:09But we have a few other factors playing into this. So you also had the Fed raising rates at around the same time, I think that was March of that year. And then you also had essentially a retrenchment from the pandemic hiring boom, because everyone had all this money, they had all this stimulus, they started hiring like crazy, everyone could get a job. And for employees, It was super easy to jump around in jobs, get hired. And there wasn't really much discernment from employers as far as talent, because I think they were pretty much just trying to grow as fast as possible. But then when all that started pulling back, it happened around the same time GPT launched, Fed started hiking.

1:47And now we're at this point where you have this viral chart going around saying, look, ChatGPT is causing the labor market deterioration. But really, it's one of, I think, three major things happening. And that's not to say the AI productivity increases aren't legitimate or real. I feel it in my own day-to-day life. I'm definitely a more productive person than I was two, three years ago. But we have more broad structural changes at play too. Well, there's a big thing of like during these economic boom times, it's very expansive. Everything's about growth, growth, growth, growth, right? You saw that in 2020, 2021, cheap capital fuels that.

2:20But what you're basically saying is then all of a sudden interest rates start going up. Companies realize, hey, the good times aren't going to roll forever. and then they go from just pure growth to now they're looking at efficiency. We still want to grow. We want to do it efficiently. And that means that we're going to have to try to grow revenue and profits and do it with the same amount or less employees, which obviously AI is a big part of, but it's not the full story, which makes sense. Yeah. And I think the point that people miss is that we are normalizing to pre-pandemic hiring levels. So it looks like job growth is decelerating so much and it is slowing down, but we're kind of floating around 2018, 2019 levels.

2:54But then when you add AI into that, it gets pretty scary because a lot of companies are saying, okay, we have these potential productivity increases coming in the next couple of years. So we're going to slow down because of that, as well as this retrenchment going on. All right. So you got this other graph here that says Google search trends for market bubble versus tech stock returns. Everything's up and to the right. It's, look, this is a great time to be an investor, but it's also a great time if you are a doomer or a headline writer or a reporter, because you can talk about bubble fears. And something I've seen people say online is that there's a bubble in bubble fear talk.

3:32So right now we're at peak bubble talk, I think. And that's probably why the market has pulled back a little bit, because some of that fear and jitters are making their way into asset prices. But also, it's enthusiasm and anxiety are pretty much peaking right now. And I think we're going to go higher still through the end of the year. But the search trends always like tying them to asset prices because it gives me a gauge of sentiment when I'm looking at, okay, is the market frothy? Is it undervalued, overvalued? Let's see what people are looking up. And yeah, right now, we haven't seen this level since the pandemic.

4:10The pandemic was maybe all-time froth. You had GameStop, you had meme stocks. And we're inching close to that level right now as far as what people are looking up online. You know, what's funny is Alex Karp was on CNBC earlier this week and he was going hard at the short sellers. And he was like, they're shorting all the companies that are making all the money. And I thought that was pretty funny of like, people look at these valuation levels and they're like, oh my God, it's so overvalued. But then if you look at the fundamentals, they're profitable companies that are growing very quickly. And so, well, some companies get overvalued, of course, but it is very hard to point to like bad companies that have really high valuations, right?

4:46It's mostly the good companies that people are saying, oh, they're good companies, but they're just overvalued. And that seems like a much harder argument to make. Of course. And if you compare the search trends to now 2020 and the internet bubble, right now, we're on the way to those levels. But even so, the companies we're talking about are so radically different. But if you're a casual market observer, or if you're not in the weeds of markets and investing every day, it's going to look like a bubble because there's money falling from the sky. So I get it. But also when you're in it, it looks much different.

5:20So speaking of radically different, you have the NASDAQ to Dow ratio has now surpassed dot com era levels. This actually isn't concerning to me, but are you concerned about this or do you think there's any big issues here? I don't think it's concerning because to me, this chart, it's not so much a story of valuations. I see it more as, okay, investors in the market have a bias for growth and technology right now. And I don't think that's actually an issue if you look at how big of an impact technology has on the market, but also our day-to-day lives, the real economy. And if you look at the Dow, these sort of blue chip old economy stocks, people don't talk about them as much because they're not as relevant to our day to day lives.

5:59And that's not to say they're irrelevant. But when you compare them to these AI growth names, and the magnificent seven, they don't even come close. But I think this chart also, it's swinging towards the Nasdaq, especially because the the biggest stock in the Nasdaq is Nvidia is a 14 % weight, but Nvidia only has a 2 % weight in the Dow. So I think that explains a lot of this bias in the chart. Well, there's this big shift and we are going more towards the digital economy. I think there's a lot of people are saying, wait, the real economy, the American manufacturing, industrial, like we need to make reinvestment there.

6:32And so you probably will get some normalization over time. But by nature, a digital business is more scalable. A digital business can grow faster. A digital business can drive more profits at a faster pace. And so they should become a bigger portion of these indexes compared to maybe the traditional economy, because you don't have to go build a manufacturing facility. You don't have to go and produce physical products. You are writing code for the most part. And that is what's fueling so much of this, right? Yeah, I think that's right. And something that I'll be watching is the Mag7 and other AI big tech companies, they're moving into these data centers and sort of physical asset businesses.

7:09So we might start to see that shift reflected in this chart, but also other valuations and also future stock returns might be lower for these tech companies if they start becoming more sort of physical asset companies. You've got here the S &P 500 PE ratio. This is one of my favorite things to show people is right now the S &P 500 PE ratio is essentially where it was in like the early to mid 90s. Yeah. Not a problem. We should be fine if you look at this chart. And again, I'm not one to draw my conclusions from a single metric or a single point of analysis. But I do think this chart is helpful because it shows that we're still a third lower in valuation terms from what we were in the dot-com bubble.

7:50And as we just said, the dot-com companies weren't profitable. They didn't have these fortress balance sheets. And today, we can't keep up with how big the demand is for these AI products. And I don't see that changing anytime soon. All right. So we've talked about tech stocks and kind of stocks in general. Bitcoin is another asset that everyone's all worked up about. Some people are very bullish. Some people are very bearish and lots of people in between. You've got Bitcoin's volatility is a feature, not a bug. This is 2018 to 2025 averages across Bitcoin, gold, US large cap stocks and bonds.

8:22Bitcoin looks pretty good here. Bitcoin has been the hurdle rate for a long time. And I think the risk or the hesitation people have of buying Bitcoin, they point to the chart and say, look, I don't want that volatility. They say it's way too risky of an asset. I'm going to go to something like stocks or bonds or even gold. But then the, yes, the downside is lower, but then the upside is no comparison. And I think that shifting over time, I think retail investors are understanding that more and more, especially younger retail investors, but it's still going to take a lot of time and a lot of education to convince people volatility is not necessarily a bad thing as an investor.

9:01Now, what I noticed in this chart is you get 33 % average annual return between 2018 and 2025 for Bitcoin. And you get the average 51 % intra-year drawdown. And what I find interesting is you can just see there's lots of volatility. And then these other assets have much more muted volatility. And so in a way, if you want the return, you got to be able to stomach the uncertainty. You got to be able to stomach the volatility. And it reminds me always of the saying, you get paid for the risk you take. And that is the essence of Bitcoin. Yeah, you need a diamond hands to hold through these huge drawdowns.

9:34And Bitcoin has been the, that's the story of Bitcoin. Now, speaking of somebody who has diamond hands, but also is not really the most popular person in the Bitcoin community, Warren Buffett, we've got here Berkshire Hathaway's lag, the S &P 500 since Buffett announced his retirement. How much of that do you think is like Buffett stepping down versus just the types of businesses that he owns that are a little bit more real world economy versus tech? Just generally that sector is underperforming. You know, I think it's a combination of both. So I was there in Omaha earlier this year and I saw him announce it.

10:07One of the coolest moments I've ever seen. But the chatter in the stadium and around the conference was that people were going to stop coming to the conference in the years ahead. I talked to people that have been there for 10 years. Every year they go back to Omaha to see Buffett speak. So I think there is generally people are going to be less enthused about Berkshire Hathaway without Warren Buffett. So we're seeing that in the stock price, I think. But then, as you said, he's not a tech guy. So he's not buying into this, you know, the Nasdaq to Dow ratio. he doesn't play into that at all because he's more okay i'm going to buy companies i know but the dude is 100 years old so like he's not going to be as tapped into like nvidia let's say he's not buying into this ai boom um and look i i think the buffett premium like that is going to go away increasingly over time but i also am not one to let's say bet against berkshire hathaway i think they're going to be fine i think they have really smart people in place and they're so big and they have so much cash, they're not going to collapse without Buffett.

11:08Maybe they might not see the outperformance that they've enjoyed over the last decades, but I'm not discounting Berkshire by any means. They've been beating for the last decade, the S &P 500. That feels like a thing that the value investors always constantly point to. That was not true two years ago, right, or so. So there's these moments where they're outperforming and underperforming. One takeaway that I always say is like, I actually think that the public persona of him in particular is very skewed. He's like the greatest branding person in the world. The aw shucks, you know, grandpa from Omaha who eats McDonald's, you know, in the morning, whatever.

11:51But I don't think the investing style of buying things for less than they're worth, having cash flow, like that stuff's never going to go out of style. And so it is easy to forget that in a world where everyone is so focused on tech. Yeah. And I think one of his best investments in the last 10 years was Apple, but he's been rotating out of Apple in the last couple of years. And I think that's his legacy is that he didn't take these big swings on tech, but the Apple investment, which wasn't even his call ultimately, that's driven a lot of the returns in the last decade. So yeah, the world is changing.

12:25technology is driving the market more than ever. And if the new leadership at Berkshire doesn't embrace that, they're not going to be beating the S &P for the next 50 years probably. Yeah. One of the things I found interesting is they recently suspended their share buybacks and people are reading into that. There's a big crash coming. They really want to conserve their cash. I think they now have over$380 billion in cash, which is just taking it on the chin for all the currency debasement. But it does feel like they also have a problem of how much capital can they deploy into any one deal, right?

12:58So if you have$380 billion, you can't buy a$1 billion company that doesn't really move the needle for you. So maybe you've got to buy something that is a minimum of 10%. So now you're very quickly kind of constraining the addressable market that you can evaluate in terms of what is actually going to be a big enough deal. And so I just think that uh they're almost um you know uh increasing the challenges based on their success which you know hey no one feels bad for them at all yeah and every quarter when they come out okay record cash pile record cash pile and that's been happening for several years now um a lot of people point to that as a recession indicator i don't think that's the case i think it's more what you're saying it's like they just don't have that many options of what to do with that capital like they're not going to go take a one billion dollar stake in a company because them it doesn't move the needle at all they should have just put in the s p 500 he always says that you know that's uh that's the thing everyone else should do if you're sitting on you know it was 200 billion 250 300 350 now it's 380 uh if he had done that two three years ago he would have a lot more cash it's true he uh the other side of that is that he just thinks the entire market's too expensive so it doesn't want anything to do with it yeah well um broken clocks right twice uh twice a day um all right so you've got Best Ideas Club.

14:14I mean, you're killing it. You're killing it with this thing. Describe what Best Ideas Club is first, and then we'll talk about Vertiv. So every week I interview a very smart investor who's been doing things for a long time in the financial world. And I ask them, what's your highest conviction stock pick for the next 12 months? And usually they don't want to be pinned down on a single stock. So then I flip it and I say, all right, if you could only buy one stock with your entire portfolio this year, what would it be? And then they give me a name. And this stock I want to highlight is called Vertiv.

14:46And a year ago, it was fairly under the radar. And right now it's been making more and more waves. We published it in May. And since then, it's gained 87 % since we published this stock to our members. And it's pretty much a, it's a AI sort of picks and shovels stock. And they create liquid cooling systems for data centers. So everyone talks about the data centers and we're not going to have the infrastructure or the demand or the energy, not the demand, but the energy to build these out because the demand is so great. However, they can't move forward without Vertiv. And the reason is because these data centers without these cooling technologies pretty much can't operate.

15:26So this is a real mission critical technology that this company is building, which is why the stock has done so well. I mean, it's pretty interesting, right? The stock was down 10 % or so in May year to date. And so somewhat out of favor with investors. It had gone down more than 40, 50 % in the year. So it was kind of on its way back. And I don't know, who's the super genius who came up with this idea? So this investor, I've known him for a long time, Thomas Martin at Global. And he's very smart. He's given me a couple ideas this year, but this one has been his outperformer. And it's certainly one of our biggest performers in the portfolio right now.

16:01Yeah, so up 87%. All right. So if people subscribe to Best Ideas Club, then every Sunday you publish one idea, not your idea, but somebody, you interview somebody and basically ask them, what's the single best idea you got right now? They give it and then you publish it to the subscribers. Correct. And over the last 39 weeks, our portfolio of stock picks, if you put them all in an equal weight portfolio, we're almost doubling the S &P 500. Oh, that's pretty good. Not bad, right? All right. Where can people go to find out Best Ideas Club? You can subscribe to Opening Bell Daily, which is the newsletter I publish every morning.

16:30And our membership to that, the paid membership is Best Ideas Club. Got it. All right. Well, thank you very much. Where can people follow you on Twitter? Well, it's just Phil Rosen with two N's at the end. Someone took the one N username a long time ago. You doubled up on the N at the end? I know. You got to come up with a better story then. You got to say Phil Rosen and then, you know, no mercy. Yeah. But one thing exciting, we just launched a new show called Full Signal. So people can also check that out as well. All right. That's on Twitter? Yep. All right. Amazing. Thank you so much for doing this.

17:02We'll do it again in the future. Thank you. Now, I always enjoy talking to Phil, so I hope you enjoyed that conversation. Phil brings great data, and I just enjoy his takes on what is actually behind the data. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube, and I'll see you guys live on Monday from the desk of Anthony Pompliano.