In short
Podcast Notes: The Compound and Friends - Episode: How Does Apple Get Its Mojo Back?
Episode Overview Date: Tuesday, [Insert Date] Host: Michael Batnick Guests: Cullen Roche, Eric Balchunas, Alex Kantrowitz Sponsor: Grayscale
Key Topics Discussed
- The future of the dollar and potential replacements
- Analysis of the fiscal deficit and its implications
- Insights into the ETF market and trends
- Apple's current challenges and potential strategies for improvement
- Meta's competitive strategies in AI
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Segment Summaries
- The Dollar and Its Future
- Cullen Roche discusses the potential decline of the dollar:
- Concerns: Inflation and government spending could undermine the dollar's value.
- Contextual Understanding: History shows that simply holding cash does not translate to wealth; productive investment is crucial.
- Deficit Analysis: Roche highlights that while deficits can influence inflation, the U.S. economy's productivity has historically mitigated the negative impacts of government debt.
- The Fiscal Deficit
- Roche emphasizes that viewing increasing government debt superficially overlooks the broader economic context:
- Wealth Creation: The private sector's wealth significantly surpasses government debt.
- Long-term Viability: While current trends show increasing spending as a percentage of GDP, Roche argues that the U.S. economy remains robust enough to manage this without catastrophic inflation.
- The ETF Market
- Eric Balchunas discusses the resilience of ETF investors:
- Investor Sentiment: Retail investors have become more committed and are less reactive to market fluctuations.
- Innovations in ETFs: The shift towards thematic and niche ETFs, including yield-focused products, reflects changing investor preferences.
- Market Dynamics: Balchunas highlights the NYSE's potential loss of dominance in ETF listings to NASDAQ and CBOE due to the demand for new product types.
- Apple’s Challenges and Strategies
- Alex Kantrowitz provides insights into Apple’s current position:
- AI Problem: Apple’s Siri is lagging behind competitors like ChatGPT; potential solutions include acquiring AI startups like Perplexity.
- Market Reactions: The stock market might react positively to strategic acquisitions, particularly if they enhance Apple's service offerings.
- Future Prospects: The competition with Google and the need for innovation are critical for Apple's growth trajectory.
- Meta's Position in AI
- Kantrowitz discusses Mark Zuckerberg's aggressive recruitment of talent to compete with AI leaders:
- Competitive Landscape: Zuckerberg aims to build superior AI capabilities, reflecting ongoing investment in AI technologies.
- Financial Implications: The spending on AI talent could position Meta favorably in the long term, despite the challenges of scalability.
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Key Takeaways
- Dollar Dynamics: The conversation emphasizes the importance of understanding the dollar in the context of wealth creation, not just nominal value.
- Investor Behavior: Retail investors demonstrate resilience and commitment to long-term strategies, particularly through ETFs.
- Apple's Strategic Needs: For Apple to regain market competitiveness, significant changes in their approach to AI and potential acquisitions are necessary.
- Meta's Aggressiveness in AI: Zuckerberg's moves suggest a recognition of the importance of AI innovation, reflecting the broader tech landscape's competitive pressures.
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Additional Notes
- Sponsorship Reminder: Visit Grayscale for insights into cryptocurrency investments.
- Follow-Up: The hosts will return next week with more discussions and insights; tune in for future episodes for ongoing analysis in business and investing.
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Disclaimer: This podcast is for informational purposes only and should not be construed as financial advice. Always consider consulting with a financial advisor for personalized guidance.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:10Welcome to the compound and friends. All opinions expressed by Josh Brown, Michael Batnick and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
0:53Hello. What is up, everybody? Today is Tuesday, 5 o 'clock on the East Coast time. It's an all new What Are Your Thoughts with me and just me, Michael Batnick. Nice to see you. Josh is flying over the Atlantic as we speak. He'll be in the seat with me tomorrow for a new compound and friends. But for tonight, I am very excited. I thought we'd do something a little bit different. Spice it up. Know what I mean? So I have three very special guests. Shout out to Barry Ritholtz. The first one is Cullen Roche. We're going to be talking about the dollar, the decline of the dollar, the death of the dollar.
1:32Who's going to replace it? I don't know. Maybe Cullen does. Next, we'll have on my friend Eric Balchunas to talk about the spiciest ETFs out there on the marketplace, some of the biggest themes. There are a lot, a lot of happenings. And then finally, we're going to end with Alex Kantrowitz. What is Apple to do? How do they get their mojo back? And what's going on in big tech across the big tech universe? So we'll get to call in a second. But first, a word from our sponsors. Today's show is sponsored by Grayscale. Curious about investing in crypto and not sure where to start? Start with Grayscale.
2:07Grayscale is the world's largest crypto native asset manager and has been in crypto, in crypto, since 2013. That's a long time when you consider how early we still are in crypto adoption. Grayscale also offers the widest selection of crypto investment products in the U.S., over 30 different funds for investors to choose from. That's plenty of choice for both first-time crypto investors or crypto experts. And the best thing about investing with Grayscale, many of their funds are available right in your investment or retirement account. So no hassle of setting up a crypto exchange or account or a wallet or anything like that.
2:39Think crypto. Invest Grayscale. Investing involves risk, of course, including loss of principal. For more information, visit grayscale.com. Colin, get in here. Enter, if you will. All right, my man. Great to see you. Thank you for doing this. You bet. Great to be here. Okay. 2025. five. Interesting year. A lot of macro cross, cross currents, and you are the smartest macro guy I know. So I want to start with a visual bold statement. Fine. The most handsome, smartest, like the intersection of handsome, smart macro, you're the guy. All right. That's better. I want to start off, but maybe stupid. Okay.
3:22I want to start off with a chart that gives me the feelings and I'm sure it gives them to you as well. I want to get your reaction. Gentlemen, chart on, please. All right. For people that are listening, we're looking at a picture of the dollar over time. And it is a visual. You've got George Washington on the screen and it used to be the full dollar bill back in 19, I don't know, 10 or whatever it is. and then it's just, George is disappearing. He crossed the Delaware and he sunk. A dollar is not worth what it used to be. So Duncan, Duncan, I'm sorry, Cullen, what is your response when somebody tries to scare people out of, or, you know, no context.
4:07How do you feel about that? I mean, inflation's a legitimate bad thing in context. So it's something that you do have to be thoughtful about. But the sort of misleading thing about a chart like this is that it assumes you did nothing. It assumes you never earned an income. It assumes you never invested any of those dollars. And so if you took$1 and you put it under a mattress in, say, 1913, and then you woke up today and tried to spend that dollar having done absolutely nothing, having earned no income, yeah, that dollar has technically lost like 98.5 % of its value since then. But that's not the way life works.
4:49It's certainly not the way that life works in the United States where everybody sort of busts their ass all the time. And so if you had actually invested that dollar, for instance, in say the U.S. stock market since 1913, that dollar is worth$1 ,500 today and adjusted for inflation. So you've had a huge appreciation in that dollar if you did something productive with it, even more so if you actually were out working a job or, God, you even could have have put it in, if you'd put it in just treasury bills in 1913, you still today have a dollar and 20 cents adjusted for inflation. So even T-bills, you know, putting that dollar to work and just earning interest from it still protected you from inflation to some degree.
5:32So, I mean, there's validity to it in the sense that like, yeah, you shouldn't do nothing with your money. But I think the big takeaway from that is that when dollars are utilized in a productive sense, that that's not what really happens to our dollars. Our dollars grow in nominal and in real terms over time. Well said. I knew you're the person to ask that question to. Okay. So I want to talk to you about the fiscal deficit and how it relates to the dollar. Because I think that is the existential threat among investors. Like, forget about AI, forget about whatever happens, tariffs, I mean, who cares about that?
6:19The big threat is what if my dollars aren't worth a damn because the government is printing so much money, the deficit is exploding that people are not going to want to lend us money. I guess that's the story. So gentlemen, chart on, please. We have two charts here showing the federal surplus, LOL, or the deficit. And then we normalize it as a percent of GDP. So is this unsustainable? How do you think about the deficit and the dollar and people willing to lend us money? Again, it really depends on the context in which we're thinking about this. I think a lot of people look at the government deficit and government debt, and they just see big numbers, and they assume that this is the driving causal factor of things like inflation.
7:14And, of course, there's some truth to that. I mean, we know from COVID that if the government tries hard enough, if they spend enough money into the economy, we'll get pretty high inflation. So, you know, they ran$5 trillion deficits for a few years in a row there. And we got 10 % CPI, which is, it's disastrous in a lot of ways. It's disastrous, especially if it's sustained. And so, but I think the other important lesson from COVID is that, and really from the last like 40 to 50 years, is that the government deficit is not always the causal factor of inflation. It's, or I should say, it's not the primary determinant in terms of what is causing inflation to gyrate over time.
7:59And we kind of know that's true because the government's deficit and the government debt has exploded in the last 40 years. And the rate of inflation has gone down. So there's kind of this conundrum of you have to consider, well, what else is going on here, especially inside of the U.S. economy, that is causing the rate of inflation to remain anchored so low? And there's lots of factors there. My basic conclusion is that the U.S. economy is so enormously productive. We create so much wealth that there is just this sea of other assets that overrides the issuance of what the US government does. And so to put numbers on this, you know, like I hate debt to GDP figures because it's a it's what economists call like a stock flow measure, which is like comparing an income statement to a balance sheet.
8:45And the two are related, but they're not an apples to apples comparison. And when you look at the apples to apples comparison, for instance, look at the private sector assets, there's$250 trillion of assets. That's a quarter of a quadrillion. Like this country has so much in terms of net wealth and total aggregate assets. It's mind boggling. And so$36 trillion of government debt is a lot, but we create so much wealth in so many other ways that it offsets that asset issuance by the government, that liability issuance by the government in so many other ways that I think that it overrides the inflationary impact of what the government ultimately does.
9:30And that's not to downplay that like the government, we know, again, from COVID, we know that if they print enough money, if they issue enough assets into the economy, yeah, it'll water down everything. It'll cause inflation. It causes and inflation is really a it's a demand reduction. It's the demand for other things relative to dollars is increasing, basically. And that's the right way to think about what inflation ultimately is. And so we know that the government can cause inflation. We know that's especially true when you look at other governments. I mean, if the Somalian government spent$36 trillion next year, what would happen?
10:06Well, of course, it would cause hyperinflation in the Somalian economy. But the reason that the United States has relatively low inflation is in large part because we are so productive. We create so much wealth and our domestic incomes are so high that the government actually has kind of a hard time creating inflation in an economy like the United States. So you mentioned some of the denominator stuff that we're not talking about when you just look at the nominal number of the deficit. You bought a chart showing the federal government spending as a percentage of GDP. And I'm glad you did because this tells a much different story than some of the headlines that we're seeing.
10:44So talk the listener through this, please. Yeah. So I think there's kind of two conclusions from this. And the same thing can be, I think, concluded from the deficit chart that you showed earlier, that the trajectory of some of this stuff is not great. Like everything's kind of, we're kind of spending more and more as a percentage of GDP per year. And that's indicative of a potential risk that I think people need to be mindful of that, you know, the trajectory of this maybe is moving in the wrong direction. But at present, we're not in a position where I think that like there's some sort of catastrophe around the corner necessarily.
11:23So when you look at that chart, you kind of know that, I mean, government spending as a percentage of GDP got as high as 45%. And so again, this is an income statement to income statement metric. And what that shows is that when the government gets above, say, 35 % or so, they can cause big inflation. But the other conclusion from this chart is that over the course of the last 30, 40 years, the metric has been mostly, it's averaged like 21 % or something over the course of that period. We're at 24%, which means that, okay, the government's probably causing inflation to be a little bit higher than it otherwise would be if we were at the, say, the 20, 21 % range.
12:06And that's consistent, I think, also with the fact that inflation has been a little bit sticky the last few years. But we're not in this level again, where we're spending so much that we have the risk of like runaway inflation or high inflation even. So I think that when you put it in that context, there's a couple of big lessons from, you know, the COVID era, which is that, yeah, the government can definitely cause inflation, but also that when government spending as a percentage of total spending comes back to some more normalized level, inflation is not as much of a concern from the government spending perspective.
12:43I wonder what would have happened, and we'll never know, had the supply chain issues not been what they were. Like how bad would inflation have been? And like I said, we'll never know. But I just want to stick with this for a second. What about like interest expense? That's something that people cite a lot. 5 % of the money is going back into just to pay for everything, just to pay for all the borrowing. Is that number alarming? But also, I think one of the things that people don't talk about with the expense is that, yeah, it's a liability of the government, but it's an asset of the lenders, which are, in many cases, us.
13:19Yeah, I mean, this one, you can get really deep in the weeds on this one because what the Fed's really trying to do, like there's a knock-on effect here where, like, yeah, the government is technically – they're issuing more money through interest payments to the private sector. But the point of raising interest rates is that they're trying to suffocate the credit markets. And especially, look at the US housing market or the commercial real estate market. Private lending markets in general have been really soft for the last five years. And that's what the Fed has been trying to do. And so I think when you look at this from an inflation perspective, it's pretty clear that interest rates have helped to bring down inflation to some degree.
14:00They certainly haven't. There were a lot of people who said that raising interest rates would cause inflation to go up because the government was spending more. It causes the deficit to be higher than it otherwise would. And the rate of inflation has fallen almost since the month the Fed started raising rates. And so I think that the Fed has succeeded in bringing down inflation. And that's been in part because the Fed has crushed the housing market. They've crushed commercial real estate. They've crushed private lending markets. Really, bank-led lending has been really soft for the last five years.
14:31And that's the goal, is that you don't want those other balance sheets to be expanding. Because when those other balance sheets expand, it can cause big inflation. Or it can cause big-time asset price increases, too. And we saw that during the run-up before the housing bubble. So when interest rates are really soft or really low, you get that risk of private credit being much stronger. And we haven't seen that because the Fed's been pretty tight for the last four or five years. So I think that the risk of interest payments causing inflation in the future, it's probably overstated because, I mean, I actually think that if the Fed were to reduce interest rates in the next two to three years, I think the housing market would absolutely catch fire.
15:18You'd have a ton of people borrowing, a ton of pent-up demand from people who want to get into housing and haven't been able to. And so I think that would cause inflation to probably tick up a little bit. And that's the other thing is that the Fed can control interest rates with a dial. I mean, if the Fed wanted to nuke interest expenses tomorrow, they could. And Trump is saying this all the time these days that Trump is of that mentality. He seems to think that interest payments are contributing to inflation or something like that. And so he's been berating Jerome Powell every single day about this.
15:54And Trump is going to put in somebody who's going to cut interest rates. I think that is like – that's the whole job interview there. At the end of the year when Trump starts interviewing people for the new Fed chair next – what is it, next May? There's one question you need to be able to answer to get that job and is are you going to cut interest rates? And the person who's most qualified, who says yes to that question is going to get the job. And so, you know, they can control this with a dial. And I think that over the course of the next two to three years, I think that interest expenses either fall because the economy slows or because you get a yes man in the Fed who is going to cut interest rates.
16:33All right, Colin, last topic for tonight, the dollar. We've got two charts. Please, let's go. one is showing the rolling. Nope. Next. All right. The rolling six month change in the dollar, the dollar is down 10 and a half percent in the last six months. It's one of the weaker six month periods coming off a strong system period. We should note, but the next chart I think is more significant. So obviously we mentioned earlier, zoom out and the decline in purchasing power is sort of silly as you eloquently mentioned, Colin, But they are selling dollars. So the dollar has had the second worst start to a year through wherever it is, June, what is it, July?
17:16Geez. Down 10.5%. And you're seeing other assets, catch a bid, gold, Bitcoin. Are people, chart off, please, are people selling the dollar and buying gold because they are worried about all of the things that we've been talking about? I mean, that doesn't sound, that sounds reasonable. Yeah, I mean, I think there's certainly an element of that in play. I mean, coming out of COVID, I think we saw that the government was willing to be reckless enough that it, I think, probably hurt the credibility of the currency a little bit. I mean, I think the bigger impact here is, I mean, this really started when the sort of macro regime changed, when the tariff stuff started.
18:00And the whole goal of the tariff policy and the US-first policy is to become more isolationist. And that's in a relative sense. And so currencies are a relative play. And so on a relative basis, we've seen that a lot of especially foreign assets and non-US dollar-denominated assets become more attractive because the US economy becomes a little more isolationist on a relative perspective. And I think that has, in a weird way, it's positioned a lot of foreign economies as stronger, whereas part of the reason the dollar was rallying so much over the last 15 years on a relative basis is because we were just beating the pants off of everybody in economic terms during that whole period.
18:47And so a lot of what we've done with the tariff stuff has made us less competitive on a global stage. It's yet to be seen whether it makes us better off on a more nationalistic stage. But on a global stage, the US economy has certainly become less competitive in the last six months. And that's been, I think, part of the goal of the policy approach here. And so the currency market just reflects that, I think, reduction in competitiveness that we're now seeing play out. So in summation, dollars are not meant for hoarding. They are meant to be productive, even if that is in short-term T-bills, short-term cash equivalents.
19:26That's the real rate of return. Everybody knows I'm a big advocate of the T-bill and chill strategy. They're the best cash management strategy. Screw high-yield savings accounts. Screw CDs. Banks are ripping you off. Go straight to the government. Buy those T-bills. T-bill and chill. All right, Colin, you're the best. Thanks, man. I really appreciate your time. Thanks, Michael. Thanks for having me. All right. That's Colin Rush, ladies and gentlemen. Let's bring in our next guest, Mr. Eric Balchunas. What's up, dude? Great to see you. Likewise. Good to see you. So I'm excited for this because I feel like at least once a week, probably more, I show a chart and I say, or a tweet, this is from Eric Balchunas.
20:08So I'm happy to have the source with us tonight. So we're going to start off talking about, oh, look at this, One of your tweets, Eric, you said ETF investors were rewarded big time for hanging tough during the tariff tantrum and sell America narrative push. A stock's rebounded 24 % since April 7th. They are getting good at doing nothing. They are the smart money. Eric, what's going on in this chart? Yeah, I don't know why CNBC and even Bloomberg TV, although we try on ETF IQ, how are they not interviewing Vanguard investors at this point? I mean, they clearly are outperforming all of the institutions.
20:46I saw the Bank of America fund managers report, and they were all getting out of the U.S. around April. Well, that didn't work. You read some of these hedge fund tracker people, and they're talking about hedge funds dumping the U.S. in April. That didn't work. Look, I think U.S. investors who use ETFs are smart. OK, first of all, they made it through a lot of people trying to sell them bad stuff. OK, so they they found the ETF or they got found a good advisor who uses ETFs. And I think they've realized three things. And these three truths make them immune to selling. OK, first is they've given up on market timing.
21:26They have truly believed they can't do it. It's too hard. I just don't want to hate myself later. So I'm not doing it. Number two, they love the fund they're in. I mean, a three basis point Vanguard fund like VU is taking in$62 billion this year. And it was hauling in cash in Q1 right when it was really dark out. I'm not going to do better than that. Like, I am now married to this fund. I don't need to leave my fund. So I'm good there. And number three, the U.S. has treated me well. When they think of Europe, they think people don't work that hard. Sorry. I mean, I know it's not totally true. This is what they think.
22:03They think there's no growth. And in China, they think everybody's copying everything. It's all like imitation. Like somebody once said, the U.S. innovates, China imitates, and Europe regulates. And I generally think that's how U.S. investors view the world. and even with the headlines were so fear-mongering. I think most of people in the media aren't thrilled with this administration generally. We knew that from the first term. They just don't like them. So they're throwing all of these negative headlines, trying to hit the administration over the head for any possible thing. It had created this, like I call the kitchen sink of negativity and these investors didn't care and it's remarkable.
22:44And so that's why I think they are the smart money. whether they're whether what they're doing is high iq intelligence or just street smart or emotional intelligence it's smarter and has been shown to be smarter over the years take covid you sold then you got screwed too and the market rebounds look for the next one they're not going to sell because again every time people have tried to bail out of the u.s market uh they've gotten burned. So this is a real interesting new era where you have a lot more sticky money. I feel like every time there's a correction or even a bear market, you always hear people say, wait until retail capitulates.
23:26And I want to be like, what year are you talking about? Do you know what year it is? They don't capitulate. It's the opposite. If they see a burning fire, they run into it. What are you talking about? Yeah, look, people, this is a ivory tower point of view from somebody who might even not know themselves. If you ask that person who just said that, ask them, hey, buddy, what about your PA? Have you sold? And like, no, no, I'm just keeping my Vanguard funds. Well, I mean, dude, you are retail. So even people who are writing said headlines probably didn't do anything. This is the biggest secret in financial media is everyone is just in Vanguard funds.
24:12Yet we write about all this stuff going on and no one really is doing anything. It's a lot of algos fighting each other. Of course, there's active managers and we need active. But to your point, this retail investor is underrated and misunderstood. Because again, like I said, in the 80s and 90s, everybody dated active managers. When the active manager didn't do well, you dump them, right? And you went on to the next five-star active manager, whatever. That did create retail capitulation. Yeah, for sure. But what happened is Vanguard got cheap over the in the 2000s. Their funds got below 10 bips.
24:50And it was a utopia for investors that was basically given to people. So once Vanguard got under 10 basis points, it was like, oh, the hell with everything else. I'm getting married to this Vanguard fund. And they're off the market. They're gone. wrong. And that creates a resignation that I don't think people understand that enough and respect it enough. We call it the Vanguard put because if the Fed put goes away and the Trump put goes away, which it looked like that in April, I'm like, well, hey, you still got the Vanguard put. These people are going to buy no matter what. And they did. It's not enough to send the market up like the Fed put or the Trump put, but it's enough to limit the downside.
25:34So if anything, these Vanguard investors, in my opinion, they might limit a severe downturn that is long-lasting in like 2008 style because a lot of this money came in since 2008. All right. I hadn't thought about ETFs this way, but you, as you often do so eloquently, nailed this. You have a chart from today showing the listing breakdown percentage by year of the New York Stock Exchange, which is traditionally where you saw IPOs, the NASDAQ and CBOE. And you said New York Stock Exchange could lose its crown in new ETF listings for the first time ever this year. NASDAQ and CBOE are closing in, thanks to being home to most of the newfangled stuff, which sounds like a backhand of the compliment, but okay.
26:27In what is going to be a record year for ETF launches, possibly 1 ,000 dwarfing IPOs again. This seems, chart off, please. This seems to me like a big deal. What's the story here? Yeah. So we love races and competition that tends to get decent readership because people like conflict. It's drama. This is interesting because it reflects the changing nature of the ETF industry. We have this overarching theme, no industry for old analysts. Just have Dave Nading on here to find out what I'm talking about. There's almost 20 % of those 1 ,000 are going to be 2x single stock ETFs. Another 10 % to 15 % are going to be buffer ETFs, which are just structured products.
27:11Then you throw in crypto and themes, and you're almost at 50 % is not your grandfather's ETF market. Most of those list on CBOE and NASDAQ. And so NYSE is just more of the conservative traditional place to list. But CBOE in particular has really wined and dined those more unusual products. And because the vanilla space is taken by Vanguard and BlackRock, the only thing launching there is these legacy active managers. Now, that's pretty good business. I think a lot of them will list on NYSE. But so many of the launches, the spaghetti cannon, as Ben Johnson calls it, is put towards these other newfangled products.
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27:50And so I wouldn't be surprised if CBOE and NASDAQ might pass NICI. The other interesting thing is Ibit listed on NASDAQ. Ibit, if you compare it to other IPOs in the first year, it will blow away the volume of any IPO. I mean, it is the biggest IPO. If you would consider ETFs IPOs, some of these ETFs blow away regular IPOs in terms of maybe not volume in the first week, but over the course of a year. It trades$2 billion,$3 billion a day, which would make it like, say, if it was an equity, it'd be like the 12th to 15th most traded equity every day, right, of all of them. So to be an IPO and to get up into that big boy status is hard, right?
28:34Now, IBIT is quite an anomaly. It's a once a year kind of launch. But there's a couple others that get close to that billion dollar mark. So the ETF market has really supplanted IPOs, I think, for these exchanges in terms of generating volume and interest. People get mad at the media for salacious headlines and causing drama. and as everyone knows, they are in the business of generating clicks, but it's maybe less nefarious than that. They're giving people what they want. They are in the business of making money. And so if people weren't reading what they were writing or putting on TV, it wouldn't exist.
29:17It's the same thing with ETF launches. You could get mad at some of these. I saw YieldMax is launching a DraftKings. I don't know if it's 80 % yield or whatever it is. But my point is this, there are buyers for these products because if there weren't, they wouldn't be launching. Oh, dude, the yield max, guess how much assets the yield max micro strategy ETF has? Oh, God. Is it 2 billion? 5.1 billion and it yields the yields 130 but now i know so by the way just the story on yieldbacks i go to the money show sometimes which is like a pure retail conference i like going there because you can skip all the middle the industry basically and go right to the people and i was doing my bullpen presentation on what i call the many flavors of hot sauce because at the money show they're looking for new kind of cool stuff to invest in and i'm going through like the pros and cons of leverage and this and that and the other, I get to yield max spice.
30:16And I swear to God, I'm showing the chart of the yields and it's like a hundred percent, 80, not, you know, and I might have like 20 people and like my audience doubles. Like, it's like they, they sniffed out those numbers and they start coming. And I'm like, this is, and I'm telling you, there's something about yield and income. Even if you tell them, you're literally just taking your principal and returning it to you. This is almost what you're doing here. They're like, it's like a psychological phenomenon. And I know you as an advisor can appreciate that because we have really the power of psychology in the past couple of years.
30:56We've almost compared the ETF industry to the pharma industry. We feel like buffer ETFs are drugs to cure anxiety. Yes, I love that analogy. Single stock ETFs are drugs to make you feel something, you know, like uppers. Yeah, they're like cocaine for young people. And then these yield max are just like, I don't know. Yield max, well, again, but a lot of this isn't totally evidence-based, right? It's more psychological thematic investing. If you talk about theme ETFs to a quant, they laugh at you. But psychologically, people want to participate in things they love and know. So a lot of the ETF white space is in psychological, reaching people psychologically.
31:39and fixing something for them. And that's why we kind of compare the whole industry a bit to the drug industry these days. Because if the asset classes are all taken, where's the white space? And so I think they found white space in psychological needs. But this idea of tracking this stuff that's new and not that big, I'm obviously guilty of it. But the thing is, we all know Vanguard's great. I wrote a book about Vanguard. Vu takes in a ton of money. I cover it to a degree, but there's not a ton to say beyond that. Like, you know, whereas these new things are like, okay, what is this? Will it succeed?
32:16Will it fail? What's the marketplace? And I think that's why we give so much. That's a story. I mean, yeah, it's a story. News is new. So, and an analyst is like, our job is to like, say, okay, here's this. If you're a tech, you know, critic, are you not going to review the new gadgets coming out and just talk about the iPhone one all day? No. All right. So I'm curious your take on the yield products from the point of view of the buyer, because you mentioned you were at The Money Show. You're talking to the audience. On the one hand, it smells like dumb money. But on the other hand, I know how sophisticated some of these investors are.
32:57And while there are obviously people that don't understand the mechanics, obviously, I'm not so sure that people that are buying this are as dumb as some people might think. Like what's your sense, maybe even anecdotal, whatever of the buyers of these products? I mean, I, we met one of them, this guy from Texas. He was in a story that I think Valdana wrote and we had him on the, our podcast trillions. And we asked them why he was so into the, he liked the yield max funds and he kind of like two X stock. It was like, okay, this guy's like a consumer of hot sauce. Why do you like this stuff for yield max?
33:31He said he just likes yield first of all, but he can use that income to, he got to use that income to get a mortgage. Wow. Because it's income, you can actually use it. This is why some people think tokenization might be popular because you can use, somehow you can use certain things as collateral for a loans, which is a whole different ball of wax. But he was pretty smart. He, I will say, you know, is he smarter than somebody who buys VU and BND and waits 30 years? No, he will not have as good of an outcome. There's no way. But it's not like he, it was an idiot. It's just his choice. And I didn't know about the mortgage thing.
34:14I thought that was interesting. He's also a guy who has a little mini YouTube channel. He just likes investing and he does it on the side. And there's a lot of hobbyists who just like are into this stuff. And these are like new, these are like, again, these are the new tech gadgets from the, I've always said, ETFs to the Silicon Valley of the financial world. And so these are some of the latest gadgets. And if you were to write options and have to consistently write the options, regardless where the option was out of the money, which would be for hedging, or right near the money, which would be for yield, it's a pain in the ass.
34:50Yeah. So there's a convenience factor to it. If that's a strategy you like, well, by all means. But I think most analysts are like not they don't totally see the total benefit. But I'm like you, like I've really lightened up over the years, even with active mutual funds. If you want to spend 90 bips for beta, like fine. You know, as long as you know why you're doing it. And like I always thought that ETFs could use movie ratings. We have a system that's similar, but we're only on Bloomberg. We're not out in the wild. But our system is just like saying, like, to me, these yield max would probably be an R rating.
35:26They wouldn't be a hard R, but they'd explain to you that this is, you know, kind of yield that is synthetic. And here's why. So anything that's sick or is complicated, we tend to put more in the R basket, which we call a red light product. but for the most part, these, even a 5 billion that's popular, but even if you added up all of these yield max type ETFs, you still get to like, like 0.4 % of total ETF assets. So we analysts spend so much time dumping on some of this stuff, but in the end it's, it's really small, but it's interesting. That's why we talk about it. All right. So you mentioned it like a, these are hobby type things.
36:09It's like fantasy, uh, fantasy football for investing in ETFs. What kills me is like, you could literally walk into a casino anytime you want and put your life savings on red or black and lose it all in a second. That is completely legal. And in many ways, easier than opening a brokerage account. And we're going to get mad because there's a little, uh, you know, volatility drag on the two X you lost 2%. Like I get it. But like, Like, this is America, man. People can gamble on anything. It's just, this is a reflection of the country we live in to a degree. That's more or less where I'm at. All right, last question for you, Eric.
36:48Maybe, I don't know if this is NC-17. I'd be curious to get your take. So this was a launch a couple of weeks ago, a couple of months ago at this point, Priv, which was the SSGA and was it the Apollo collab? And not really a lot of interest. Turn on, please. All right. So it was languishing at about 50 million bucks. And interestingly, I pulled this up. I was like, oh, they just got an allocation from somebody, but not a lot of demand for this one, the private credit ETF. Yeah, I think one issue here is that it's credit. And CLO ETFs, I think, stole a lot of thunder because they give you good return, low volatility.
37:29They're like a perfect hedge fund, high sharp ratio. And so for bond investors looking for something different, they're blown up. They're huge. So these came around, and I don't know. There's not a lot of extra juice for the squeeze. It's like we get a little extra, and it's only like a small percentage is actually in private credit. Now I see why they weren't a big hit. Maybe long term, these, if they get a bigger part of the portfolio of the ETF, they'll do better. I think what's more interesting is XOVR, which is a public-private crossover fund nobody knows about. It converted from some no-name active fund, and once it converted about eight months ago, It added SpaceX at 10 % of the fund.
38:10And just doing that, all these flows came in. It now has like 350 million. And no one even knows that company, right? 369 million in assets. Nice. And Cathie Wood has a venture fund with all private equity, 100%. And like it has half the money. And that was launched during Arcmania. So what that tells me is the private equity is more in demand. It's sexier. SpaceX is something people really want. And so if the ETFs can figure out how to get it in there, that would be good. But Dave Nadeg brings up a good point. We argued this one time. I'm pretty liberal. I'm putting stuff in ETFs. But what I don't like is they're not marked to marketing SpaceX.
38:48If you're going to put it in the ETF, you have to market somewhere with reality, which, by the way, brings up a whole different interesting issue, which is private asset companies want to democratize private assets or dump them, exit liquidity. I'm not going to be too cynical, but you're trying to bring this stuff from like magical world of fake navs and move it into the reality of a market. And they don't want the market. And I think a lot of the allure will go away. So if in a weird way, by bringing this into the ETF structure, you could actually kill the golden goose of the volatility laundering and magical navs.
39:27And it will all seem like because you think SpaceX trades that much different than Tesla. I mean, they're going to be pretty close, right? So there's a lot of issues here with this that are fascinating as an analyst. But I just think Priv, Credit, and CLO stole the thunder, and that's why it wasn't a big hit. Private equity, to me, would be more interesting to see if they push the envelope there with ETFs. I think you'd get more interest there. Eric Balchunas, ladies and gentlemen, thank you for your service, keeping us smart on ETFs. You and your whole team are the best in the biz, so appreciate you hopping on with us.
40:03Great to be here. Thank you. All right. And thank you for Yabby Sali. Take care. All right. Last but not least, Alex Kantrowitz of Big Technology. Alex, what's up, man? How are you? Good to see you. I'm good. I saw you on CNBC yesterday. Well done. That's right. They're still letting me on. So I appreciate them for that. Okay, so this is a topic that Josh and I have been discussing for a while now. How does Apple get its mojo back? What do they do? Well, they have to do one of two things, right? So the question implies that they have lost the plot on AI, which I think is only part of the cliche, but the tip of the iceberg of the problems with Apple.
40:49Before we get to the problems of slowing China sales, before we get to the problems with flat iPhone sales or basically minuscule nudging up, there's obviously this glaring headline issue of the AI problem. The fact that Siri compared to ChatGPT or Claude or even upstarts like perplexity is just embarrassing and hardly functional. So there's two ways to go about fixing the AI problem if you're Apple. First way is to basically do a lobotomy of the brain of Siri. And that's why you've seen these discussions that Apple and OpenAI and Anthropic have been discussing possibly bringing in the GPT models if you're OpenAI or Claude and effectively swapping out the brain of Siri for one of these.
41:40So discarding the useless Apple model and then bringing in some of these really good off-the-shelf models to power Siri. Why is that not happening? What are they doing? The Siri is garbage. And surely they know that. Why are they so averse to making a change? Is it, I can't imagine it's sunk cost. They don't care. Why are we - They're deeply concerned about control, right? That's what they want. They want to control the experience. And the second you bring in somebody else's models, you lose a degree of control. So that's why Apple tried to build its own in-house models. It did this like cutesy type of runaround where it wanted to build them on device or like very powerful small models.
42:21Ultimately, these big frontier models that are massive and know a lot are the ones you're going to want. So Apple made its play to do this in-house. It had the money, if it wanted to, to try to go build the biggest GPU server farm in the way that Elon has and try to spit out a big model that way. But it didn't do that. And so it's like full on its face. So the thing with bringing in OpenAI or bringing in—and they already have a limited partnership with OpenAI. But the thing about bringing in OpenAI or bringing in Cloud is you definitely lose a degree of control because those models are developed and fine-tuned by someone outside of Apple.
42:58And there's just this unlimited universe of potential responses. So to give that up is completely un-Apple-like. But it is something they're finally considering. Earlier, was it December, the DeepSeek thing? When did that happen? That was January. January. Okay. So during the DeepSeek event, sure, that works. During the DeepSeek event episode. Yeah, there we go. NVIDIA got smoked. And a lot of these companies that are at the forefront of this war, stocks got nuked. I think NVIDIA was down 11 % on the day. And it's funny because Apple was more or less spared because this was a war that they were not fighting in.
43:41And so they were they were protected on the downside. But now that that is seemingly behind us and the race is back on, they're just not in the game. I shared this chart with Josh a few weeks ago. Can we show the CapEx to revenue of Microsoft and Amazon? This is CapEx to revenue. And needless to say, it is up and to the right in a way like we've never seen since really the early days of the internet. and then you contrast that with Apple and it's like, you know, the meme, come on, do something. Like, what are they doing? And you wrote a piece about the idea of Apple buying perplexity. Is that like real?
44:23Like, would they do such a thing? And if not, why not? So first of all, I think that chart that you showed just before just, you know, betrays a failure of imagination within Apple. They've become such a big company, right? They fall into this, as Jeff Bezos might put it, a day two mentality where they're just trying to harvest what they have. That's why you see the divergence in the capital expenditures that they have there. Now, perplexity would be a great way to put that money to use. So for those who are new to perplexity, it's an AI search engine that is also doing a lot of really interesting things.
45:00It has a voice mode. It has a growing partnership with Samsung to get more deeply integrated into Samsung devices. It is currently raising at around$14,$15 billion, maybe$16. Not more than that, which means that Apple, for a company that has more than that on its balance sheet, I believe, and did a$100 billion buyback this year, should be totally possible to give Perplexity$30 billion and make it happen. And the nice thing about buying Perplexity, even though Perplexity doesn't have its own models, so the criticism of Perplexity is that it's a wrapper on top of OpenAI's GPT models. But the nice thing about Perplexity is the company has clearly demonstrated that it has the capability to take these OpenAI models or whatever model and turn them into amazing products.
45:50And that is harder to do than it sounds. And Apple, which again, which has access to open source models or could have built its own, wasn't able to do this. And I think perplexity's ability to turn AI into product is something that Apple needs. It will give Apple the control over the product in a way that it might not have if it just drank out of the open AI firehose. And I think importantly, we're at a moment now where the Department of Justice has won a case against Google that's going to prohibit Google from paying, likely prohibit Google, from paying$20 billion plus a year to Apple to be the default search in Safari.
46:30Now, we're still waiting to hear the final remedies there. But the judge in that case has suggested that that's table stakes as far as the remedy here. Who does that hurt more? That hurts. I mean, you know, it's very interesting because on day one of that, Google now has$20 billion in profit that it didn't have previously. It was paying Apple, and Apple has lost that$20 billion. But Google obviously was paying that money for a reason. It needs those defaults to be competitive. So, or really, not even. It needs those defaults to be anti-competitive, right, to just dominate the space in the way that it is.
47:04So I think it initially hurts Apple more because Apple loses that money. And I think long term it hurts Apple more. And the way that Apple can get out of this problem is to buy perplexity. And buy it now. Because it's going to take a long time to figure out how to monetize that search. And if you drop perplexity in after two, three, four years of attempting to learn how to make money off of AI search, you're going to be a much better position than if Google just goes away, poof, and you're left with nothing. What happens to Apple stock the next day or the day that they announce such a deal, hypothetically?
47:42I think it jumps. I mean, the market already has responded to this idea of Apple maybe bringing in another model. When that rumor hit, Apple stock was up like 2%, 3 % in the day following. So I think the market is going to give Apple a lot of credit. even though let's say maybe the dividend goes down a little bit or margins shrink a little bit. Because the other side of it is, so let's say Apple doesn't make that deal. You probably know this better than me, right? So you end up with a company that's low growth, right? The only thing that's growing is its services business. I think the services business is growing at 13 % and maybe MacBook is growing slightly.
48:23iPad's falling. iPhone is flat. and so you you need things that are going to attribute revenue to the services bottom line and then you start acting more like a growth stock versus a value stock because without this growing services business what are you so they're a company that is hemorrhaging cash flow i should say like uh not hemorrhaging spitting off a gobs of cash flow they're buying back tons of stock they're paying juice they're paying healthy dividends but they're not growing and does that sort of a company, maybe the only reason why they're even still fetching 25 to 30 times forward earnings is on the hope that maybe they do this deal.
49:01Because otherwise it makes no sense. Well, I mean, the thing is services have been growing, but a big part of services is that Google money. Do you know what would happen if that Google$20 billion a year, that payment to Apple were to fall away? Services would contract. And by the way, Not only services, the entire Apple would contract year over year if that payment went away. Not great. Last question on Apple. Is there any sort of politics from the investor class specifically in some of these private companies that might make some of these acquisitions tricky? Some things that like the average person just wouldn't know about?
49:38I mean, so if you think about perplexity in particular, the liability there potentially is Arvind Srinivas, the CEO, who has just basically been taking a blowtorch to Google from day one, because obviously Google's his competitor. But I think ultimately they should be able to make it work with him. Apple's culture is obviously very bureaucratic and siloed. And there's a reason why they've only done the Beats acquisition as far as their big ticket acquisitions over the years. That's still their biggest acquisition at$3 billion. Anthropic is asking them to spend billions a year just to put Claude and Siri.
50:21So there's a reason why they haven't done these big acquisitions. It's because their culture doesn't really tolerate, let's say, disruptive thinking. They're more of like a battleship. But ultimately, I think they should be able to ingest it. Because one thing about Apple is when they know that there's an opportunity that they need to get to. Even if they're a little late, the company does turn that way and put everything toward it. And the stakes are so high that they would basically have to make this work. All right, last, last thing. So I don't know if you're a gambler or not, if you're familiar with gambling parlance, but 12 months or over the next 12 months, what sort of odds would you put for Apple acquiring perplexity?
51:02Obviously it would be plus money. Would it be plus 300, meaning you bet$1 to win$3? What would the odds be if you had to handicap it? Actually, I said differently, what would you need? Plus, what would you need in order to put money on that? What are we talking about? How big of a long shot is this? I think it's still a long shot. All right, so plus up like six to one or even more? Maybe more. Maybe. Okay. If I'm going to put a dollar on it, fine. If I'm going to put real money on it, 10 to one. Okay. All right. So maybe. Yeah, I give it a 10, 20 % chance, which honestly is like about as high as you've ever had for Apple to do something crazy like this.
51:39Okay. There's been a real interesting divergence within the Mag 7. You've got Meta, Microsoft, and NVIDIA performing very well. You've got Tesla, obviously its own beast. You've got Google, Amazon, and Apple languishing. So let's go to Meta. What is Mark Zuckerberg up to? You wrote a post about Zuckerberg coming for Sam Altman. What is the story with these dorks? Oh, my goodness. So that story came out, I think, a couple of days before my first Compound and Friends appearance. And we talked about it. And I made the case that Mark Zuckerberg was not going to stand still as Sam Altman builds the killer consumer app of our time.
52:23Zuckerberg didn't stand still with Snapchat. He didn't stand still with TikTok. So why is he going to try not to build the best AI if Sam Altman and OpenAI have built what has been the fastest growing consumer app ever? Maybe outside of threads. Although, do you really count threads? I don't. And so basically all history pointed to this idea that Zuckerberg was going to make a run at Sam Altman pretty soon. I think actually you guys might have been a little skeptical that that battle was coming on the show. So I was hoping for an opportunity to come here and spike the football because that's exactly what's happened.
53:02Zuckerberg has gone after Altman's top people. He has spent tens, hundreds of billions, hundreds of millions of dollars recruiting them. He's offered, according to Wired, some pay packages close to$400 million for four years. He's even acquired Alexander Wang's scale, or not acquired. He's bought 49 % and brought Alexander Wang in for$14 billion. So he's spending this money in an attempt to fight with ChatGPT, really. I mean, he's calling it super intelligence. But basically, Zuckerberg wants to build a better chatbot than OpenAI has because he sees so much attention and interest going into AI experiences right now.
53:47And he doesn't want to be left behind. When they write the book of the bubble of AI 20 years from now, is this going to be the coup de grace, so to speak, these nine-figure signing bonuses for these engineers? I don't think so. I mean, I'll give you the explanation for why I think it's wise on Zuckerberg's part. So there's been a couple of theories about what makes AI better. But the predominant one has been that if you build AI systems with the most GPUs, so you basically need a bunch of things. You need GPUs, you need a network, like a neural network, and you need data. If you grow all three in conjunction, you end up getting better models.
54:29It's called the scaling laws. They're not really laws, but it's just this observation that the more you put in, the better you get. So what's happened is that we've seen all these companies attempt to build about as big as you possibly can and scale as far as you can to build better models. That will be that we're already seeing with OpenAI, with this project Starlink that they're trying to put together. But even before, they're buying about every GPU they could find. These are the GPUs or the chips that these models train on in an attempt to build massive models. GPT 4.5, the latest in that series, was a disappointment.
55:07We have been talking in the tech community or people who watch tech about GPT 5 forever. And we still don't have GPT 5. So I think that is an indication that scaling isn't working for OpenAI in the same way they hoped. Same with Meta. The reason why Meta's LLAMA model, the open source model, wasn't as successful as they anticipated, I think, was because they tried to scale it up. Mark Zuckerberg had all these GPUs, and it didn't work as planned. And the same thing with Elon Musk's Grok, right? By the way, the GPUs cost$40 ,000,$20 ,000 to$40 ,000 each. And we're talking about hundreds of thousands of these together in a data center.
55:45And then you, of course, have to pay to do the training runs. It costs energy. So in that context, if you're not getting the gains, so to speak, out of scale, you have to look for something else. And you're looking for better algorithms and efficiency improvements and new methods to make these large language models better. And the only way you can do that is with talent. And so if Mark Zuckerberg spends a couple billion on AI talent, even if it doesn't pan out, I would argue that it's the right bet, given what's happening in the industry and where Meta wants to and needs to get to to be competitive here.
56:21These companies have raised so much money. I don't know what OpenAI's valuation is, but is it conceivable that OpenAI could raise half a trillion dollars like in capital from private markets before an exit, if there ever is one? I don't know. I mean, they're running out of places to go for the money, right? They're like at the last boss before Saudi Arabia, which is Masayoshi's son. So let's see how much they can get from SoftBank. SoftBank has pledged$40 billion in conjunction with some other investors. That is also contingent on OpenAI's ability to convert successfully to a for-profit because of course they're still a nonprofit, which is the craziest thing in the world.
57:03They've already raised, you know, the largest round in history twice in the past year. So I don't know. Are they going to have to go sovereign? Are they going to make the case to the United States? Like we saw Sam Altman and President Trump together at the beginning of the term. Are they going to have to make the case that to be nationally competitive, they're going to need a grant from the government? Will they get that? I don't know. We're getting into sums of money that are historic for sure and hardly and not easy to conceive in terms of where they go next. Alex, last question for you. We have earning season coming up in a couple of weeks.
57:40What is the one or two things that you are most curious to see these companies tell their investors? Well, I think the first thing has to be CapEx. Are they going to continue to spend this way? And I think the commentary on earnings calls will be really interesting because, again, if we've hit the end of this scaling paradigm, or I just heard it recently, this great line on a podcast. I'm sure you guys know it in finance. The trend is the trend until the bend at the end. The trend is your friend. Yeah, exactly. Have we hit the bend at the end? And if we have, I would imagine that these executives will talk about it in terms of their capital outlay to buy GPUs.
58:25So I think that's going to be one of the most interesting weeks or two weeks from that standpoint, because the numbers will tell us what the companies don't. The companies will always tell us more GPUs are better, but their finances will tell us whether they really believe that or not. And then, I mean, the impact on, I mean, obviously the whole economy is impacted by this, but the impact of tariffs are going to be really interesting. We had what we thought was a rush to stock up on things before the tariffs hit at the end of Q1. Did we see any impact in Q2, like is the economy as a whole going to take a hit?
59:04I've heard some crazy things. Just that like there was this bullwhip effect where for the first month or so, people stopped, you know, engaging in international trade. Then those 90 day pauses came in and then everybody wants to engage in international trade. Problem is it's not easy to get the supply online. So you have containers from China that are typically two thousand dollars to ship into the U.S. now going for five thousand. They were at like$20 ,000 during COVID times. But this stopping and starting has real impact on the economy. And of course, in the world I look at, that impacts consumer tech like Amazon.
59:45It impacts companies' roadmaps to upgrade or to move to the cloud. And it impacts advertiser spend. So it's going to be very interesting to see the answers to all that. Yeah, I don't know that investors are going to necessarily care about backward-looking tariffs that are not in effect anymore. But certainly there will be a lot of questions from analysts because as they're building out their models, they have to understand what to attribute to that really unusual couple of weeks versus what is going to be normalized going forward. All right. We are excited to see what the mega cap stocks tell us.
1:00:18Alex Kantrowitz, you are the best at this. We appreciate your time. Thank you so much. Thank you, Mr. Batnick. All right. Okay. That does it for this week's What Are Your Thoughts? We are back next week with our regularly scheduled show. We have animal spirits in the morning and a TCAF that you're not going to want to miss. This week, we have two special, special guests. It is a tandem, a duo of sorts, and we are excited to have them. Thank you very much for the production team as always. Thank you viewers and listeners for tuning in. We will see you next time.
1:01:01Whether you're just getting started as an investor or you're managing a multi-million dollar portfolio, Ritholtz Wealth Management has the solution for you. It all starts with building the right financial plan. To speak with a certified financial planner today, visit ritholtzwealth.com. Don't forget to check us out at youtube.com slash the compound RWM. Make sure to leave a rating and review on your favorite podcasting app. If you love investing podcasts, check out Michael and Ben every Wednesday morning on Animal Spirits. Thanks for listening.
From the publisher
On this TCAF Tuesday, Michael Batnick is here with a special edition of What Are Your Thoughts with special guests Cullen Roche, Eric Balchunas and Alex Kantrowitz. They discuss: who can replace the dollar, will the deficit crush us, the most successful ETF ever, if Apple should buy Perplexity, Meta vs OpenAI, and more.
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