AI Bubble Watch: Has the Hype Gone Too Far? — ft. Josh Brown

29:05Tons of revenue, tons of earnings, tons of growth. So it's not a great analog. Back then there were 200 million internet users. There are 7 billion internet users right now. It's a completely different world. So I don't love the comparison for that reason. And it's almost too easy of a comparison. Everyone's trying their best to figure out how do we make the analogy. And that's kind of when you know, okay. It's too easy. It's too easy. Yeah. We'll be right back after the break. And if you're enjoying the show so far, be sure to give Prof G Markets a follow wherever you get your podcasts.

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32:19We're back with Profity Markets. Trump has signed an executive order that could reshape how Americans invest for retirement. The order tells regulators to update the rules for 401ks so that they can include alternative assets like crypto, private equity, and real estate. supporters say the move could unlock fresh capital for the private markets while also opening the door for Americans to gain exposure to investments that they are typically locked out of. So this executive order actually happened a couple of weeks ago. I've been on vacation, so that's why we haven't really covered it. But it is important.

32:55It essentially means that your 401k manager, so for us, it's a manager called Empower. So that's a 401k administrator. So you have the plan sponsor, which is the company that you work for. Yes, please. And then you've got the administrator, which is effectively like the platform that you log into to make your investments. Yes. And those platforms can now offer alternative investments. So private equity, private credit, even digital assets like crypto. And there are$9 trillion in retirement accounts in America today, and 90 million Americans have some form of retirement account. So this is a big deal for private market investment.

33:40It's basically opening it up to$9 trillion in capital. And so I think this is relevant for a lot of reasons, one of which is we've been talking a lot on this show about this idea that retail investors are increasingly locked out of investment opportunities that are reserved for private investors, institutional investors, accredited investors. We've talked about that as well. And, you know, I've talked about the idea that you've got open AI, which is being valued at half a trillion dollars, most valuable private company in history. And yet, if you're a regular investor, if you're a retail investor, you can't get in.

34:20So that's kind of another talk track, but it's certainly related. It's also relevant because you wrote an article about this new executive order on your blog page, Downtown Josh Brown. So, Josh, give us your reactions to the executive order. A lot of people are saying this is going to open up the opportunities for retail investors. Now they can get into alternative assets. And there are other people saying, no, this is going to sort of expose retail investors to all of the risk and the craziness that exists in the private investment world. Plus, Trump was being lobbied by all of these private investment groups.

35:00Yeah. All right. I think it's a really big deal for the private equity and private credit industry. I think it's a nothing burger for investors. I actually, there's no danger here. The danger is like lagging returns because you're going to take a portion of your 401k. You're going to allocate it into some high fee private equity fund. You're going to lock up that portion of your money, which is already locked up anyway. You're sitting with a 401k for decades anyway. So that's not a big deal. So you're giving up liquidity, but who cares because it's not liquid for you anyway. All right. So I could see that people saying that's a negative.

35:38I don't really view it that way. I think the longer you hold investments, the better personally. So I don't know that that's definitely a negative in a 401k. So put that hysteria aside. The other thing people will say is like, oh, you're exposing people to new, you're at risk anyway. When you cite NVIDIA is 8 % of the S &P 500, what do you think America owns in a 401k? They're already at great risk. They already are overloaded in gigantic technology stocks in the midst of a CapEx bubble. So it's not like, oh, now all of a sudden they're at risk. Stocks are risky. They're inherently risky. Here's a fun fact.

36:17I don't mean to name drop. I was talking with legendary investor Peter Lynch, considered to be the GOAT. Wow. Literally. Literally. Name drop. Love it. Fine. Whatever. I'm owning it. You own it. Exactly. You own it. I'm dropping that name. I'm picking it back up. I'll drop it again. Peter Lynch asked me a question. He stumped me. He said, do you know what the average range of a New York Stock Exchange stock is over the course of a year? And I was like, the average range, like how much from the high to the low? And I said like 30%. He goes, okay, 90 % of people say 30%. it's a hundred he said he said josh it's a hundred percent what and and i i said what do you mean he said well just think about it a stock starts the year at 20 drops to 14 rallies to 28 that's a hundred percent uh range yeah it's not linear it doesn't like go in the direct you know it doesn't go all in one direction it doesn't the average stock doesn't double or get cut in half yeah so like the he's like people don't even understand the basic the basics of how volatile the stock market is so i bring that up to you so i could drop a name no i bring that up to you ed because the what does that have to do with anything public stocks are volatile yes so private equity which is just privately owned companies that volatility is not like this new dimension of risk okay so the hysteria around this is is is not necessarily founded um the last thing is is actually really important yeah um for for the people listening to this everyone pay attention to me uh i hope you already have it this is really important you're not forced to do anything you no one's gonna like shove private equity down your throat they might include it as a sleeve in a target date or a life cycle fund, but it's going to be tiny.

38:19You won't even know it's there. And you can opt out of it if you don't want it. You could say, well, I'm not buying that life cycle fund because it has private equity. And I read something about the high fees of private equity funds, and I don't believe in it. And I'm opting out. Yeah, but those are the listeners of this show. Those are the people who kind of know what they're doing. I mean, it's certainly going to be a lot of people who don't really know what any of this means, but the administrator is going to say, oh, you got to get into this. This is the greatest thing since sliced bread. You won't.

38:49All right. So you, yeah, you won't hear that from an administrator because none of them want to get sued. And that's one of the interesting things I wrote about. I agree with you, Ed. That's not a good thing. If plan sponsors start pounding the table to their employees why they should allocate private equity, that's problematic, but there's no incentive for them to do that. So it's not, I don't think it's a real danger. Um, what's, what's actually going to happen is you, these will be, these will be very large providers like Blackstone and Vanguard and huge private equity firms, and they'll create specific vehicles meant precisely for this 401k use case.

39:30So you are not going to be investing alongside people that traditionally invest in private equity. They're going to create like a kiddie pool for you. I'm not saying it's going to be bad. I'm just saying, don't think you're investing with Mark Cuban. You will 100 % or not. Those people are getting into the top, top, top, top funds. That is not going to be available through Vanguard and Fidelity. It's just, you can't, why would they? If you're an amazing private equity investor, Why would you be looking to take in retail flows? It makes no sense. Nobody would do it. So I don't think this is that big of a deal.

40:08And I don't think that many people are going to be into it. The crypto stuff will probably attract an audience faster. Young workers who see an option to put 10 % of their 401k into a Bitcoin fund, they're going to do it. 100 % they're going to do it. The venture thing is really where we get silly. So you kind of interchangeably were talking about open AI and private equity. To be very clear, like venture capital opportunities do not belong in a 401k. Just it's it's like the ultimate asset class mismatch. There is absolutely no reason for there to be shares of privately held experimental companies with no earnings and revenue.

40:54The odds of that working at scale are zero. The nature of venture capital is like one out of 50 companies turns into something and one out of 100 can outperform regular stock market. It's like very, very difficult odds. It's a very specialized market where the practitioners know what they're doing. You can't export that into a mutual fund wrapper and throw it into an insurance company's 401k. So I don't like that at all. I don't think it's necessary. So in summation, you will see private credit be substituted for some public bonds. You will see private equity be substituted for some of the equity portion.

41:41It'll be minor. Very few people will actually be interested. I don't think anyone's going to be massively hurt by it. venture capital in a 401k is fucking stupid and um bitcoin is probably gonna attain some real uh fun flows just given how much young people are attracted to being invested in crypto i find it interesting that venture capital is sort of off the table it's too silly in your view but bitcoin you don't seem to have or crypto you don't seem to have the same view i'm not endorsing people do this, but I think it's, uh, I think it's just an easier, it's an easier rollout into a product at a 401k than venture capital would be.

42:23How does, uh, so you could have an existing mutual fund and some of the large asset managers do this where they have a sleeve in their portfolio for pre-public, Pre-IPO Venture back startup I'm okay with that But like you can't invest into Andreessen Horowitz in a 401k Because they're not going to give you The access to be able to do so So like just you're not going to get The best of the best and in venture capital You have to be In the best funds You can't be the fourth best fund There's just no way So I think that's like a very winner Take all type of investing thing. Bitcoin is a commodity.

43:06One Bitcoin is as good as another Bitcoin and a Bitcoin fund doesn't need a manager. So that's where I would draw that distinction. Okay. Well, I'll lay down my views on this. So I think this has been sort of portrayed as, oh, we are democratizing access to alternative investments. That's been the pitch. That really has been the pitch. And And that's the part that I really find a little annoying. And I think it's especially annoying to me because I've been talking a lot about this, about how the private markets have been getting so big and there's so much money now that they are essentially acting as if they are the public markets.

43:48There's basically no incentive to IPO if you're an open AI or if you're a Stripe or if you're a Databricks at this point. If you're a big venture-backed company, and as you say, with massive profits, massive revenues, you're well on your way, it used to be that you go public to get some liquidity. You don't really need to do that anymore. The liquidity is there in the private markets. And what it essentially means is that if you want to get in on AI, you only have your NVIDIAs and your big tech stocks to choose from in the public markets. You can't invest in OpenAI and Anthropic and all of these other AI startups that, honestly, that's where the action's kind of happening, at least on the consumer side.

44:31The 401k, though, is not the answer to that problem. Well, so fair enough. And this is part of my issue here. So the way that this has been presented is that now you have access through your 401k. And by the way, I agree the 401k is not where you should be putting that money. But I also think there should be a distinction here. There's a huge difference between investing in a private fund versus investing in a private company. If you want to go invest in a private company with some leftover money that you have, I think that would be great. And the big difference between those two things is, you know, one is autonomy.

45:13I mean, you're kind of just letting these money managers decide what they're going to invest in. And as you say, these venture funds that are going to go in these 401ks are probably going to be ridiculous. And two, the other big thing is the fees. I mean, you're going to be paying stupid fees for these funds that, as you've pointed out in the past, don't even perform well. I mean, I think one thing that you brought up in your article is that actually the stock returns on the top private equity companies. I love this. The stock has outperformed their own funds. People hated this. People hated this so much.

45:48Let's take Blackstone as an example. This is one of the best performing stocks in the S &P financial services sector. It actually, when it came public, it wasn't a corporation. It was a partnership. And they changed the structure because a lot of funds couldn't own it as a partnership structure. They have to invest in corporations. So all of these companies, KKR, Blackstone, they did these conversions. And now they're all in the S &P 500. I think Blackstone's up 1 ,800 % since it came public in 2007. And that's including the stock probably losing like 60 % of its value during the 2008 crash. So this has been a runaway winner.

46:31I can promise you Blackstone doesn't have a single fund, private credit or equity that has done as well as its stock price has. At least I'd be shocked. I really don't think so. I know the average fund is not. So what we did, my research partner, Sean and I, is we took the universe of the top 10 publicly traded private equity and private credit funds. And you know all the names. It's Aries. It's Apollo. It's Carlisle. These are amazing companies, by the way. But we took the top 10. We market cap weighted it. And then we equal weighted it just to make sure that we weren't being unfair. We compared it to Bloomberg has a PE index benchmark.

47:14And I'm sure people will complain about what's in it, but effectively it's the best way we know of to track the returns of private equity funds. So basically we raced the sponsors themselves, like the companies that launched the funds, their publicly traded stock prices versus the products they sell. And the results are hilarious. So if you had invested in the market cap weighted basket of the top 10 private equity companies invested in their stocks,$100 turned into$264 going back to 2022. If you had put the money into the Bloomberg PE index benchmark, let's just assume that's like an approximate of the average of all their funds,$100 were to turn into$113.

48:00dollars. So it's like not even like you almost can't even. To put it in percentage terms, the funds returned 4 % per year. The stocks returned 38%. Yes. Now, is it fair? I'm just using the last three years. No. And I don't know what the next three years will be. Maybe it'll be the opposite. But it struck me, why be a player in the casino when you can own a piece of the casino and let other people try to pick private equity funds to invest in. So I just thought that was an interesting way to think about it. Yeah. And I think it's indicative of the point, which is, I think, unanimously understood at this point, which is that these funds, net of fees, are not very good.

48:43I mean, you compare them to the S &P. The S &P consistently, I don't know if there's really been a 10-year span in the history of the stock market where the S &P has underpressed perform these PE funds, maybe in the early days of private equity. In the early days, like if Mitt Romney was your private equity manager at Bain Capital in 1993. You got it on the Bisco. Yeah. Their returns are amazing. Like I read Steve Schwartzman's biography last year. It's incredible what these people have done. I'm friendly with Harvey Schwartz at Carlisle. I interviewed him for my podcast. Boom. Well, I'm saying like I revere these people.

49:25I think they're amazing, but that doesn't mean that an individual investor needs to own a product necessarily in a 401k. Like if the goal is long-term compounding equity returns, I think the stock market's good enough. That would be my comment. We'll be right back. If you're enjoying the show so far, hit follow and leave us a review on ProfG Markets.

50:05We'll be right back. Jimmy Fallon, series premiere Tuesday on NBC.

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51:32We're back with ProfG Markets. The final thing that I've been thinking a lot here about is this distinction between the private markets and the public markets, which in my view, the distinction is becoming increasingly blurry. I don't know if you agree with that. Yeah, it's true. No, it's true. I mean, the private markets are functioning pretty much like the public markets. And, you know, I just think it's, I think it's a shame that this is happening because I think it's a shame that we're not having more companies, more strong growthy AI companies that are, that have really proven themselves.

52:11They're not going public and I'll just put it flat out. I want to invest in open AI. I want to invest in all the AI stuff. Or they are coming public, but once all of the money has already been made. exactly coming public at a full valuation and that's a shame and and i and my issue is i think a lot of people saw this headline they said well this solves the problem you can get in it's like no no i can get in in some bullshit basket and and pay one to two percent in fees per year and then pay the 20 the 20 in the carry i was gonna say if there's a venture capital fund that's like actively courting uh people in their 20s and 30s that are not like uh centimillionaires you you probably don't really want to invest there the best way to get in early on on a hot venture backed private uh private company that then goes public is to work there and be paid in part with rsus or isos some sort of stock stock option that's the best way the second best way um is to be like the college roommate of the guy that founds Uber.

53:19Like, that's a really great way. And I'm saying this like half facetiously, but like at the end of the day, life is not fair. Don't you think everybody wishes that they had the ability to invest in Facebook in 2006? Like, obviously everybody, it's just, it's not going to be democratized because the wealth of the world is not democratized. It sucks. Get mad about it. start a band, put on a eyeliner. What, you know what I mean? Like, what do you, what do you want me to tell you? Like, it's, it's not going to be fair. It's never going to be fair. So, um, it's become increasingly unfair is what I would say.

53:54It's gotten, it's gotten a little out of control. One thing that's true. One thing that's true, Ed. And one, one reason that's true. People, people talk about the small cap premium in the stock market, which has vanished, but there used to be this concept that small caps offered better performance than large caps over time. And there were all these reasons for it, like growing earnings off of a smaller base and the multiple increasing as companies become more well-known. That's vanished. And people don't understand why it vanished. The reason is the best young growth companies no longer come public as small caps.

54:31They come public with$20 billion valuations. They go right into the S &P. This is my point. $500 billion valuations. OpenAI is 19th most valuable company in the world. It's a private company. And 10 people benefited. Exactly. And my point to you, Josh, is that's new. That's new. And I do believe it is unfair. And fair point, you know, I'm complaining. Go start a band. Go work for OpenAI if you really want to. Maybe I fucking will. Maybe I'll be there podcasting. But my point is, we, the young people, the retail investors can't get in. And I just want to say this because it happened while I was on break.

55:13There was a Business Insider article that came out about this at this point that I've been making, specifically about how all the best companies are staying private and kind of the shitty companies, sans maybe Figma, going public. And so we're frozen out. I disagree with that. I disagree with that premise. I don't think it's all shitty companies going public, but okay, continue. Okay. Less impressive companies. Maybe I'm being too harsh. Well, remains to be seen who's impressive. You need a little bit more seasoning. You need a little bit more time for these companies to see which are the good and which are the bad.

55:48We'll table this one, and then you and I will get into an argument about this later because we do need to go through this. I just want to cover this one point. Joe Weisenthal, podcaster, Bloomberg journalist. Shout out to Joe. That's my boy. I like the guy. He came at me on Twitter. He posted this article. He said, the way people talk about wanting to get access to hot private companies drives me crazy, riddled with hindsight bias and other biases. I just want to say, Joe, you got to at me next time. He screenshotted the article, Ed Elson, Ed Elson, Ed Elson, and I hear people talking about this.

56:26It's clearly, it's me talking about it. So he's got to at me next time. That's a vicious subtweet. It's vicious. Where he screen grabs your quotes in an article he doesn't like. That's like, that's a very aggressive. I don't know why he's coming at me. You and Joe, you and Joe, if you guys, if you guys spend time together, you guys actually would probably be friends. Joe is awesome. I totally agree. But we're going to have to get over this boot. I'm going to connect you guys behind the scenes after this. I'll do it. I got it. Okay, thanks, Josh. Let's take a look at the week ahead. We'll see fresh inflation data from the Personal Consumption Expenditures Index for July.

57:03We'll also see Consumer Confidence for August, and NVIDIA is reporting earnings on Wednesday night. Now, we're recording this just before the Jackson Hole Summit, where Jay Powell will be speaking, but a lot of stuff going on in Fed land, specifically Trump asking one of the Fed governors to resign. We're seeing more pressure on the Federal Reserve. Any thoughts on what's happening with the Fed right now, Josh, and perhaps any predictions maybe on interest rates or what's going to happen in terms of the Fed governorship? What's going on here with the Fed? All right. On Wall Street, this is being characterized as Powell's last stand, meaning this is conceivably his last Jackson Hole address.

57:50If you believe the president's rhetoric on Twitter, this guy's out of here when his term ends in May, if not sooner. So this is really his chance, I think, to cement his legacy rhetorically at the podium. There's a lot of people who think he's going to use this as an opportunity to reassert the need for there to be an independent Fed and to do something that's somewhat politically charged, I actually am predicting I would go the other way. I think this is going to be more of like, I don't want to say victory lap, but like I think he's going to signal that September we're getting a rate cut because the Fed has given it so long and has done what it had to do.

58:36The big debate in the Fed minutes that came out this week, some of the some of the committee believe that the risk is to the upside meaning higher inflation, stickier inflation and then some believe the risk is actually to the downside because the labor market by some metrics is weakening so there's not agreement in the committee, it's not like they all think one thing and you had two dissenters on the Fed's last FOMC where they chose not to cut rates, you had two dissenters who thought they should have So, and that's, you know, it's not that rare But it's rare enough that it's worth mentioning So I think the Fed is not going to give a politically I think Powell is not going to give a politically charged speech I think he's going to give us a dovish hint And then in September he'll follow through with Maybe 25 basis point rate cut And I actually think he's aiming to cool down the temperature Not, you know, stick his chin up and say Come fuck with me Cool down the temperature politically.

59:40I mean, that is what is interesting is I agree. I think he does not want to get involved in a political spat. By the way, Scott takes the other side of this. He thinks, oh, Powell's, he says Powell's not going to cut rates because he wants to sort of give the finger. My view is this guy doesn't have an ego like that. Yeah, I don't think so. I don't think so. But what you're saying is he does want to turn down the temperature politically because it has become politicized. The more independently he tries to act as Fed chair, the more he's endangering. He doesn't have a choice. But the more he's endangering the independence of the Fed.

1:00:14This is not the first president in history to have an opinion on where interest rates should be. This is not the first president in history to try to intimidate the chairman of the Federal Reserve into acting on the administration's best interest. It's just not. He has a style all his own. It's the first president to do this on Twitter. Important detail. Yeah, I get it. But I just I don't think that Powell thinks what's what's in the best interest of the institution is to give the middle finger to Donald Trump. And I also don't think a rate cut would be so crazy. Rates are too tight for a one to two percent GDP growth environment.

1:00:56If you're basing your opinion on whether or not rates should be cut on the stock market, then you don't even understand how the Fed works. The Fed is not supposed to be paying attention to the stock market as its own variable. It's employment versus costs. I don't think we're in an inflationary emergency. And I think rates are too high given economic growth. The labor market is not as strong as it was last year. And they did a rate cut last year. So I don't think it's that hard for Powell to get to the place where he says, all right, here's your fucking 25 basis points. Enough already. And that's what I think.

1:01:33Well, that's my prediction. I don't know anything more than anyone else. That's what I think. I like that prediction. Okay. Josh Brown is the co-founder and CEO of Ritholtz Wealth Management, a New York City-based investment advisory firm managing $6.5 billion in assets for individuals, corporate retirement plans, and foundations. He also is a podcaster. You should check out his podcast, The Compound and Friends. Am I missing anything, Josh? No, it's enough. It's enough already with me. It's enough. Okay. We really appreciate you standing in for Scott this week, and we hope to have you on again very soon.

1:02:09Love you guys. Thank you so much for having me. Really appreciate it. Thank you for joining us. This was great. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Miel Saverio is our research lead. Our research associates are Isabella Kinsel and Dan Chalon. Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Tune in tomorrow for a fresh take on markets.

1:03:03And the dog flies In love

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