Is the AI Bubble About To Pop? And, How a Rate Cut Will Affect Your Portfolio with Josh Brown

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3:15All right, it is time to do a vibe check on the markets. So I'm calling up one of my favorite people to talk investments with, Josh Brown, who runs Ritholtz Wealth Management. He is a reformed broker bro, one of CNBC's top pros, and an author with a new book out called You Weren't Supposed to See That, Secrets Every Investor Should Know, which you can and should check out in the show notes. We talk about how the upcoming Fed meeting is going to affect the markets, where the big opportunities are right now. And you know what? We actually talked so much that we both had to jump on other calls, but then called each other right back after to talk for a whole other hour.

3:49So TLDR, I'm going to split this episode into two parts. Tomorrow, you'll hear part two, where Josh and I go through specific stocks that are buzzy right now. And he tells me if he's bullish or bearish. He even tells me which stock he is personally invested in the most right now. But now let's check in on Wall Street.

4:08Josh Brown, welcome back to Money Rehab. I'm so excited to be back. Thank you, Nicole. I feel like I need to start making those silk robes for repeat guests, like the ones on SNL. I think the five timers get it. Okay. Am I a two timer? Is that a three timer at this point? Three timer? That's not counting the CNBC stuff. I like it. I like it. Okay. So everybody's talking about the Fed. J-Pow said the time has come, which feels like so ominous, but he's not an ominous guy. He's like a very, as all Fed daddies are, like very chill guy. But he says the time has come for a rate cut. Do you think it's going to be 25 basis points, 50 basis points?

4:48What camp are you in? I think he can do a 25 basis point rate hike unless there's some sort of catastrophic jobs number coming in September, the August jobs number, but I highly doubt it. So I think it's pretty clear we will continue to get tame inflation data. I think it's pretty clear we will continue to get solid reports on the labor market, but somewhat slowing. And that's exactly the kind of environment that we've been waiting 18 months to find ourselves in. So we're finally here. We did it without a recession, at least so far. And I don't think there'd be any reason for the Fed to do a 50 basis point, because if they do, Nicole, you know exactly what that means.

5:30everyone will say, oh, so he's admitting he screwed up and he should have done one in July. So there's no need for anyone to get crazy here. We'll have a 25 basis point rate cut, maybe another in the following Fed meeting. And I think at this point, there's nothing auguring for anything more than that. Yeah, you highlighted in your newsletter, the consequences of a cut really depend on why that rate cut happens. So talk to me a little more about whether it's a move to try and curb an impending recession. So if people are freaking out or it's because things are going well. So I appreciate you bringing that up.

6:06The site is downtown Josh Brown and my firm's chief strategist, Callie Cox, has been really going out of her way to make this point with clients. And I'll share this with you. There are two types of rate cut cycles. The obvious type is the emergency, like, oh, no, we better cut rates. And usually that's in response to a rapidly deteriorating economic situation, which is not the current situation. The other type of cut is what Callie is referring to as celebratory. And she has basically documented 18 rate cutting cycles going back to 1960. So we have a chart. We took the S &P 500, which the inception is 1957.

6:51We took a look. We wanted to see what happens in the 12 months following the first interest rate cut, which is what we think is about to happen in September, just to give clients a baseline. Like, okay, here is what normally happens if we average out all of these 18 cycles. Here is worst case scenario. Here's best case scenario. It turns out, Nicole, you really do have to distinguish between whether or not the easing cycle that we're about to have is an emergency or desperation cycle or a celebratory cycle. This one, again, is celebratory. Of the 18 instances that Cali documented and that I wrote about, seven were exactly like this.

7:34And the average drawdown for the S &P 500 over the next 12 months from the date of the first cut was only minus 4%, which effectively is just a normal market. So it can get worse, can have a recession. I can't predict the future. But as far as baselines are concerned, putting this information in front of investors, who, as you know, are hearing all kinds of other nonsense, I think is really constructive. And we work really hard to illustrate these things and show people, here's the data, here are the charts. This is the actual information, not the hysterics and not the opinion, but here's the data.

8:17And I think when you do that, it helps make people better investors. Yeah, charts don't lie. Are you sure this is celebratory though? So far. Again, this is the first cut and it could turn out that three months from now, the unemployment rate is ballooning and layoffs are happening more rapidly than the Fed anticipated. And they might say, you know what? But actually, this is getting worse faster than we thought. Let's start with the 50 basis point rate cuts. It's possible. I wouldn't rule it out. Right now, there's no evidence of it. So all we're doing when we think about things like that is basically predicting worst case scenarios.

8:59And there's nothing wrong with being prepared for that scenario. But I think to have that as your base case, that's the probability that you think is most likely that the Fed has already lost control and it's too late. from my perspective, it's unwarranted. So one of the things, so people say, all right, so now you gave me this information. What do I do with it? Great question. I'm asking myself rhetorically just so I can answer it. What you do with it is you build a durable portfolio that will not let you down under any circumstance within reason. What you do with it is with a huge tablespoon of humility, you swallow it down and you say, okay, now that I understand the probabilities and now that I am not fearful of a worst case scenario, but I accept that there have been plenty of examples of rate cuts that have been a precursor to recession, how do I allocate my assets in such a way where the boat won't capsize no matter what ends up being the likely probability.

10:07But then the other side of that is how do I make sure I don't miss the upside in case the most hysterical people are wrong? Which by the way, over the last 15 years, that's been a pretty good bet. So that's what financial advisors are put on earth to do. Here are the scenarios. Here are the ones that we think are likely. Here is the right asset allocation that we think will answer each of these potential pitfalls and opportunities. and as things go, we will make adjustments based on both the economy, the market, but also what you're telling us is going on in your life. Are you getting married?

10:43Are you getting divorced? Are you selling a business? Are you switching careers? Are you pregnant? Do you think you might become pregnant? Do you have a child graduating? Do they need an apartment? What are we funding? What do we have to pay for? So I like to just like set the table and give people that understanding, the marriage between the portfolio advice, but also what's happening in people's lives. No, you have to get real friendly with your financial advisor. You need to tell them that stuff. It's KYC, baby. Know your customer. Anything people should not be doing right now. If you're not really giving advice.

11:20Anything people should not be doing, posts about the fall and pumpkin shit, it's four weeks too early. We don't do that until after the Jewish high holidays. We're not accepting anything apple or pumpkin at this time of year. That's the number one thing nobody should be doing. I don't want to see stories about my favorite sweater coming out of the closet. I don't want to see foliage. We got to hold that back for at least four weeks or until after the first interest rate cut. Okay, deal. I was more talking about taking on big debt, jumping into tech. Yes, always take on big debt. It's always a great time to do that.

12:00Yeah, that's a good question. Should people be jumping into technology stocks because they are one of the better sectors over the last few years? Obviously, you already know my answer is no. Had I said yes three years ago, you would have done very well. So a lot of times we say things that are the right advice. They don't end up necessarily being the right advice right this second. It's really hard to do sector timing in the markets. For example, this year, the best performing sector is utilities, the S &P 500. Go ask 100 people on the street what they think is the best performing sector this year.

12:37They don't know that. I promise you they don't know that. The second best performing sector is financials. In January of this year, you would have found very few people saying you should overweight utilities and banks. It just was not what the prevailing advice was. No. So this idea that like, oh, somebody knows like what are going to be the best three sectors for the second half of the year or for 2025. You and I both know this, but it's worth repeating. When you look at the quilt, the performance quilt, you take all 11 S &P 500 sectors. So you take tech, take communications, which is basically Netflix and Meta and Alphabet.

13:20Take tech, which is Apple and Microsoft. But then you look at materials, energy, real estate, which has its own sector now. You look at utilities, you look at financials, healthcare. There is zero rhyme or reason to which sector ends up on top and which ends up on the bottom in any given year. We can go back 20 years, and even if you use Google and search for headlines, it would be very hard for you to come up with the story for why, for example, in one particular year, this sector did better than that sector. I never recommend that people thematically over or underweight a portfolio, especially if they're doing so because it feels good.

14:05If something has just gone up a lot over the last three years, it can often feel like the obvious thing that you should buy. And just at that moment, it ends up being the obvious thing that you should not be buying. So when you build a diversified portfolio, you don't necessarily always win in terms of what your weightings are. but you're never going to lose. And this is really important for the majority of your listeners. I mean, you were really, really hot and bothered about NVIDIA. Was it three years ago when it was at a hundred? And I love the story of somebody jumping in when you said it on CNBC and making like seven figures or something like that.

14:45Yeah. So NVIDIA is a stock that I've been involved with since 2015. And, you know, it's one of these things where too many high tech people were talking about it and too few Wall Street people were talking about it. And whenever I hear a disconnect like that, I get really interested. So I'm like riding my bike, listening to Mark Andreessen's podcast and all of these people talking about AI and machine learning and AR, which nobody talks about anymore, augmented reality. But all of these next gen technologies. And the more you pay attention to that stuff, the more you hear things about GPUs and NVIDIA.

15:25And that's 10 ,000 % ago. So it's definitely the best investment I've ever made. And having talked about it on TV all this time has obviously been pretty gratifying. I don't give people directly like buy this stock. I don't give them that sort of advice. I just talk about what I'm doing. And I'm still an NVIDIA shareholder. So do you think the AI bubble, where are we in the pop cycle like is it is it bubbly is it popping yeah it's too it's too much so you're not but you're an nvidia shareholder but you're not buying more no no no no no i i had been trimming the stock over the last couple of years every time i sold it was wrong it kept going higher but right now the position that i have that's it for me come what may my average cost is absurdly low because i've been in all these years what is it it's absurdly low it's split multiple times.

16:15Lower than 100? No, no, no. Way lower. This is 2015. The stock is 100 bagger or more since then. I'm not looking to buy it. I do think though, to answer your question just more generally away from NVIDIA, I think a lot of the AI, quote unquote, the AI plays in the stock market have already blown up. One of the big stories this week is in a company called Super Micro, which sounds like a fake company. It turns out it's a real company, but a short seller has been alleging that they are engaged in some fake business practices and some accounting irregularities. I wouldn't know anything more than what they're reporting in the press, but this stock is in a more than 50 % drawdown from a tie.

16:58And this was another AI darling. And a lot of people looked at NVIDIA and said, well, I missed that. I'll buy this. And that happens in every wave of tech bubble that we've ever seen. A lot of times there are some really big winners and then some new companies come along and people say, that's the next blank. So there are a bunch of those stocks. And I think it's really important not to get suckered into them and not to chase things and convince yourself that it's the next NVIDIA. In my experience, it's never the next NVIDIA. And so there are a bunch of examples of that right now, which gets back to the point I was making before, there are stocks hitting 52-week highs right now and all-time highs right now that have nothing to do with AI.

17:46Go buy some utilities. Go get an electricity. Staples. Take a look at the chart of Coke. There are pharmaceutical companies. You don't need to live or die based on how many GPUs Microsoft is ordering this quarter. Like there are a lot of other things you could be investing in and there are a lot of other themes right now. And it's really important not to like fall head over heels in love with any one particular story. Yeah, but outside even the sector discussion is generally what's going on this time of year. So we have rate cuts. People are on their toes. What's going to happen there? But also in October, historically, that's been a really volatile month, as you know, because all this mutual fund mishigas.

18:33So you say that that's not so much a thing to stress about, though, this year. Why? No, I think so. There used to be this this there used to be this idea that like all the bodies were buried in the month of October and October had this reputation as having been the most volatile month. And it's it was well earned. So the crash of 1929 happened in October. Crash of 1987 happened in October. The TARP vote, when it looked like the financial system was effectively about to crash to zero. The vote in Congress, whether or not to, I think they gave$700 billion to Wall Street. That vote, failed vote, and then the re-vote took place in October.

19:17So October definitely has had its share of like wild and woolly financial events. The other thing to keep in mind is there was a time when the activity of mutual fund managers was really influential on Wall Street. And they closed their fiscal year out in October. So if they are locking in capital gains and losses for the funds, they would not be doing that in December. They'd be doing that in October. So that excess activity around the closing of the mutual funds fiscal year also was wedged into that volatility data about October. So yes, it's a little bit more volatile than usual. And yes, there have been some massive historical blowups during the course of that month.

20:07But the impact of that actively managed mutual fund activity has become somewhat muted in recent years. We just haven't seen that level of October vow. And I think the reason is so many people have gone toward index or passive strategies and algorithms have become a larger part of market trading. And those things tend to have a dampening effect on what used to cause this kind of wild activity. So maybe we're in for a volatile October, but maybe not. I think the key thing though, is when you're going through one of those periods, remind yourself that you have a choice you don't have to participate in the madness you could tune it out if you don't work on wall street professionally you can decide i'm not going to log in every day all right i get it october is volatile i'll just wait till november like one of the most powerful things that retail or individual investors have on their side is that they always have the opportunity to opt out.

21:11They're not forced to play the games that professionals are sometimes forced to play. And I think they should look at that as one of the few edges or advantages of the retail investor. There aren't many, but the ability to say no thank you, that's one of them. Pick your heels up, get a pumpkin spice latte, just don't post about it. No, we're not doing pumpkin, Nicole. No, no, we are doing it. We're just not posting about it. That was the deal. fine deal hold on to your wallets money rehab will be right back and now for some more money rehab

21:55then we're not too far away from december of course so even though we're putting our blinders on historically as you know december has produced market highs for the year roughly 50 percent of the time over the past 100 years. Do you think that's going to be the case again? Well, if you were a betting woman, that's certainly what you would bet. Doesn't mean it'll happen. But yeah, this is research that my friend Jessica Rabe at DataTrack has been citing. She's taken a look at seasonality. She's taken a look at the tendency for the S &P 500 to top for the year in the course of any particular month.

22:33And what she found is going back about 100 years. So, I mean, it's not 1 ,000 years worth of data. It's not necessarily science, but it's as close as we can get. About 50 % of the time, the S &P 500 makes its high for the year at the end of the year in the month of December. That's really interesting information to be armed with. Now, it's August. I can't tell you if this will be in the good 50 % or the bad 50 % of distribution. I can't tell you that. But when we're talking about investing, we're talking about probabilities and likelihoods and base cases. We're never talking about certainty. We're never talking about precision.

23:17So if you know you've got a 50-50 chance of the market ending on a high, and we could talk about why that happens if you want to go deeper, it's a good way to orient your way of thinking. The other thing that Jessica has found is that volatility tends to peak in August. Well, this August would be another checkmark. We had a 65 VIX, I think, three Mondays ago at this point. Which is the volatility indicator. So the VIX is basically a measurement of how many people are buying bearish bets on the market, usually as a means of protecting themselves. That number typically this year has been sitting somewhere between 12 and 14.

23:59It went up to 60. It fell back down almost immediately afterward, but we had this incredibly volatile couple of days in the market. And so if I tell you that that's usually when volatility peaks in August, we could talk about why if you want. And I tell you the market usually goes out on top at the end of the year. Again, it's no guarantees, but it's a really important background to have in the back of your head, just as an understanding of how things usually work. Yeah. So you're not freaking the F out when everybody else is. I mean, the crazy Monday, that's what you're referring to that happened in the markets a few weeks back.

24:36That was this one day media frenzy talking about potential recessions, doom and gloom. When did you realize that people were overreacting? Immediately. I went on TV that day and I said, this is the dumbest thing I've ever seen. And at a 60 VIX, I don't care what you think is happening. You buy stocks. That's the history. Anytime you've ever seen a VIX spike of that magnitude, of half that magnitude, VIX 30, you should be like in the couch cushions. VIX 60, you should be calling people when you've run out of money to buy. I need to buy stocks, but I put all my money in. I need to borrow some money from you.

25:17VIX60. You had people on TV acting like the missiles were in the air from Russia, like this is it. Really, what had happened was we had a minor disappointment on a jobs number on Friday. And then over the weekend, there was some chatter about some hedge funds dealing in Japanese yen who had a margin call because Japanese currency appreciated relative to the US dollar and they had to come up with some more funds or sell stocks. That was it. So the Japanese had a stock market crash. They sort of had their own mini 1987. Some of their blue chips fell 15, 20%. It was definitely traumatic if you were an investor in Tokyo.

26:03We didn't have that here. We had this insane VIX spike. We had like 1 ,000 points down in the Dow. By the close, we had gained back half that. And three days later, it was as though it never happened. So part of my job, I gave myself this job. Nobody's directly paying me to do this. Part of what I view myself as a market commentator, as you know, Nicole, is I like to go out in those moments. I don't hide. I don't say I'm too busy talking to clients. I go out, put my face out there and I say, this is bullshit. Don't listen to the last three people you just heard hysterical nonsense from. Go about your day and buy stocks.

26:46And so far that has not been bad advice. So what did you buy? What were you digging in your couch for? We buy every day. We're an RIA. So we are constantly buying and we never sell anything in reaction to market volatility. So on any given day, we could be onboarding a million dollar account. We could be onboarding$5 million accounts. We could be onboarding $100 million account. But we will never call a client and say, hey, that money you sent, we were about to allocate it. But like some shit is going on with the Japanese yen. Let's wait till tomorrow. That's not how we manage money. And one of the things we try to do is is train our clients to laugh along with us.

27:30It's not that we're laughing at the prospect that markets could go down. We're betting that they'll go down. This is why it's asset allocation. That's the nature of the markets. We expect it and our investment strategy won't work if it doesn't happen. So when you're building an asset allocation model and you're adding risk off assets like short-term T-bills and you're adding non-correlated assets from real estate to municipal bonds. The reason why that works is because there becomes a time to opportunistically rebalance. There comes a time where you say, okay, the dry powder has held up. Let's move out of that dry powder and let's add some more risk now that whatever your strategy is, valuations are lower.