Nasdaq Euphoria is Hitting its Limit with Kai Wu and Ben Carlson

4:17Michael Batnick:I was at the Silverdome and Detroit. How many guys or how many people in the last 75 years do you think were on the top 10 globally most famous, like most recognized name list? 10. There's only been 10 for the last 75 years? Well, you said how many people are in the top 10. I'm saying it's a, shut up, asshole. It's a small list. It's a list that doesn't turn over a lot.

4:41Downtown Josh Brown:You know what I mean? No, no, no, no, no. He's one of the most famous athletes who ever lived. People. 100%. People. Yeah, maybe people. one of the most instantly recognizable people on the globe right so so there's that part of it also he had not like a rise and fall he had a rise a fall a rise a fall it's like maybe four or five cycles of everyone loves him everyone hates him it was cinema it was i mean it's a really it's a really great doc and it was very well done he was in rocky three and he inspired me to get some uh so vince mcmahon told him if you go do rocky three you're fired like he's like no no you have to be at an autograph signing somewhere and hulk hogan's like oh yeah brother yeah let me tell you something brother he's like no i have to go to la sylvester stallone called me and said i could be in the movie thunder lips vince vince vince said if you go you're fired you're fired can you imagine good luck yeah good luck with that so i i thought it was uh i thought it was really well done.

5:40Downtown Josh Brown:Big, big recommendation. So, what else are you watching? Kai, we're on a podcast. Yeah. Wait, what else are you watching right now?

5:51Michael Batnick:I need a new one. Playoffs. I'm watching basketball. Shows. There's a new show on Apple with the guy from Matt Reese. What's it called? Anybody else watching that?

6:03Downtown Josh Brown:Oh, the guy from the Americans. Yeah. What is it called? What is it about?

6:09Michael Batnick:It's hard to... It's basically... They're on a Nantucket island off the coast of Massachusetts. And if you leave the island... It's stupid. Is Hulk Hogan in it?

6:19Downtown Josh Brown:It's a little Shutter Island. If not, I'm totally out. No Hulk. No Hulk. No Hulk. Oh, Margot's Got Money Troubles. Did you try that? I watched the first one. It's... Don't watch it with kids. Oh, I won't.

6:34Michael Batnick:I've been telling this to Ben. I've been trying to watch your friends and neighbors. I'm on episode two my kids are because Kobe's going to sleep later he's like going to sleep like 9, 9.15 you can't watch that with kids obviously no the point is I'm sleeping by 9.45 I just don't have the bandwidth I just go straight to sleep can't stay up

6:51Downtown Josh Brown:that's a good one that's a good one did you watch that? your friends and neighbors that's a good one

6:55Michael Batnick:it's rich people in Connecticut

6:56Downtown Josh Brown:yeah and now they're on season two that's a good one

7:00Michael Batnick:John Hammond and Amanda Pia the reason why I like this show I was telling Ben even though these characters are obviously so unrelatable in terms of the way that they live their life Like, I don't know anybody like that. The characters themselves are relatable. Just in terms of, like, the human element of these people. Even though they're, you know, gazillionaires or whatever. They talk about real shit. Goddammit, Kai, say something. Michael's trying to get you to chime in. Are you a non-TV person? I have a one-year-old at home. I watch two shows, Coco Melon and Sesame Street. There we go. So, unless you want to talk about Elmo.

7:32Coco Melon is a slab. Oh, my God. It goes in your head over and over and over again.

7:38Ben Carlson:Every day, right? Every day. Because they want to see the same thing over and over again. At one point, I got my daughter into K-pop Demon Hunter, which actually has decent music. Oh, yeah. Great music. But that was a fad, and she kind of got over it. Now she's back at the Coco Mel.

7:48Downtown Josh Brown:So is she walking? She is, yeah. She's a very good walker. Oh, that song from K-pop Demon Hunters could drive a grown man to the brink of insanity.

7:56Michael Batnick:I like it.

7:58Downtown Josh Brown:Like Golden?

7:58Michael Batnick:Let's talk intangibles.

8:00Downtown Josh Brown:Yeah.

8:00Michael Batnick:All right, now you got me. Let's turn Ka-yad. Now I'm here, powering up.

8:05Downtown Josh Brown:All right, let's go, Johnny. All righty. Do it.

8:08Ben Carlson:Comp out of friends. Episode 242.

8:11Downtown Josh Brown:All right.

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9:05Downtown Josh Brown:This episode is sponsored by ClearBridge Investments. Amid rising geopolitical tensions and continued market uncertainty, investors are looking for stability. Even before recent developments in the Middle East, stocks backed by real assets were gaining momentum and can offer more predictable cash flows as volatility increases. Position your investment portfolio for wider equity participation with fundamentally driven ClearBridge Active Equity Strategies. ClearBridge, a Franklin Templeton company. Go to clearbridge.com to learn more.

9:52Ben Carlson:Welcome 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.

10:13Downtown Josh Brown:Episode 242 of the number one investing podcast on planet Earth. My name is downtown Josh Brown. First time listeners, first time viewers. Thank you for joining us. This handsome gentleman, well-dressed gentleman to my left is Mr. Michael Batnick, co-host of the show. Say hello, Michael. Hello, hello. All right. We have two returning guests, and I'm super excited for this episode because we are in a market that is literally on fire right now. We have so much to talk about. Ben Carlson needs almost no introduction. Ben is the head. What does Michael do? Yes. Yeah, do the stupid point.

10:53Michael Batnick:I don't do a turkey neck, do I? Come on. I'm trying to.

10:58Downtown Josh Brown:All right. Ben needs almost no introduction, but we'll give him one. Ben is the head of institutional asset management at Riddle's Wealth. He is the co-host of the wildly popular Animal Spirits podcast with Michael Batnick. How long has that been running? We started November 2017.

11:16Michael Batnick:2017, yeah. Oh, my God. Coming up on nine years. Now the time flies.

11:19Downtown Josh Brown:And he is the author of A Wealth of Common Sense, which is a blog that for more than a decade has been required reading for anyone serious about investing. Ben is a CFA. He spent his entire career managing money for endowments, foundations, and long-term investors. He is also the author of the brand new book, Risk and Reward, which we're going to dig into today. Congratulations, Ben. No one will read it. No, I'm just kidding. This is a huge accomplishment for you Not just because of how prolific you are In terms of publishing books But the blog Three days a week-ish The blog helps me write the book So that I totally understand as a blogger Turned author, but still It's a lot of work Very impressive, congratulations Alright And another returning guest, Kai Wu Kai is the founder And she

12:15Downtown Josh Brown:Founder and chief investment officer of Sparkline Capital, an investment management firm applying state-of-the-art machine learning and computing to uncover alpha in large, unstructured data sets. You have two ETFs. We're allowed to say it, but you can't confirm or deny that they exist. Is that how it works? Somebody told me the ETF compliance rules. it's literally the most insane shit I've ever seen. So you can't talk about your own ETF on your own podcasts or blogs, but if somebody interviews you for their magazine or website or whatever, then you can engage. So I can ask your question. I can respond to your question.

12:58Michael Batnick:So Kai, you are the founder of Sparkline Capital and you have two ETFs, ITAN and DTAN. Can you confirm or deny?

13:03Downtown Josh Brown:Do not say anything until I check if you can. Okay. Okay. And you must answer in the form of interpretive dance. So I don't know if you want to say it. All right. The AI trade came back to the front burner very quickly after Liberation Day. It basically became the only game in town. I said on TV today, I really don't think there's anything good going on in the economy other than the AI CapEx boom. I think it's basically taken over. anywhere that you see economic growth, you could trace it back to something that has to do with a trillion dollars in CapEx spending directly related to this AI build out and everything else is kind of boring and or bad.

13:47Michael Batnick:But I don't want to gloss over the fact that the AI trade was dying. Like the Oracle blow up as a result of what Sam Altman said on Brad's podcast was, wait, wait a minute. People got super spooked and there was a lot of questions about, hey, wait a minute. How are they paying that five-year,$300 billion contract to Oracle? Oracle stock fell 60%. And then time passed a little bit. And the model's improved a lot. And every other day, we're hearing that Claude is at a new milestone in terms of the revenue. So I think the market is reacting to changing fundamentals. Yeah. I think what happened was Claude Co stayed in the market.

14:23Michael Batnick:Yeah. Right. I mean, people say there's two ChatGPT moments. There's a release in November 22 of the consumer product. And then there is Claude Co and the Opus model that came out november december last year and it just kind of sparked a whole wave of developer sonic 4.6 that's right yeah um and yeah i mean just massive adoption by by uh software developers and that's just

14:42Downtown Josh Brown:you know kind of completely changed the narrative the revenue growth that um anthropic announced was like the most insane people's jaws dropped because we all understand it's growing but i I don't think people really processed the sheer tens of billions of dollars that are, it's, I don't want to say out of thin air. No, it is. It feels like it's, I mean, it's not even a public company.

15:06Michael Batnick:So listen, do the numbers. So, so John, you have chart for it for a second. So Oracle stock is trading at a multi-month high because they're, look at, look at Oracle because, Hey, wait a minute. The numbers that we're hearing from, uh, from these LLMs are actually pretty insane. And maybe the contracts are money good. So this morning, I listened to Patrick O'Shaughnessy interview Krishna Rao, the CFO of Anthropic. And Patrick tweeted a list of surprising and mind-boggling stats in this conversation. Here we go. Net dollar retention is over 500 % on an annualized basis. Anthropic's first -

15:43Downtown Josh Brown:What's net dollar retention?

15:44Michael Batnick:Basically, how much money you are retaining and growing from your customers. This is for Anthropic. So 100 % is like, all right, great. Wait, nobody canceled in the aggregate, but you're not growing those contracts. 500 % on an annualized basis. Anthropics' first dollar of revenue came in March of 2023. March of 2023. Yeah. Over 90 % of code inside Anthropic is written by Cloud Code. The head of tax is the heaviest token user on the finance team. Run rate revenue went from$9 billion to$30 billion in one quarter.

16:16Downtown Josh Brown:Sequentially.

16:17Michael Batnick:Quarter over quarter. Reportedly on pace for$50 billion by the end of next month. Cowork is growing faster than Claude Coe did at the same point in its life. And signed, he said this on the podcast, signed two double-digit million-dollar commits and a 20-minute Uber ride to the podcast. We've never seen this shit before.

16:38Downtown Josh Brown:What do you think? Are we, like, overly excited about this? Or is this like... You can't possibly be overly excited. It's insane. I mean, here's the thing, though. So if you annualize at that rate for the next two years, Anthropics, the biggest company in the world. You'll have the Fed's balance sheet. Yeah, exactly. So it's got to slow down. But it's impressive. Yeah, I mean, certainly impressive. Kudos to them. Where is this money coming from? It's got to be coming. It's got to be spending that would otherwise have gone somewhere else. It's not like new money is materialized to contribute to a$50 billion revenue run rate for this company.

17:10Is the answer everywhere? Yeah, everywhere. I mean, tech startups, enterprise companies. Industrials, everywhere. Other hedge funds. you know, multi-million dollar.

17:17Ben Carlson:There's a lot of big financial firms that are now totally on board. Like I've talked to some huge BlackRock and those kind of places are all in on this stuff.

17:23Downtown Josh Brown:BlackRock launched, I was at the New York Stock Exchange today. This, the Cerebris IPO, which we're going to talk about in a second, was going public on the NASDAQ. But on the New York, I think BlackRock had a digital realty trust IPO. I think that either they were celebrating it today or it actually happened today. I don't even know. But like to that point, Everybody is all in on this. And again, it's the only economic growth story that there is right now. There's not a second one, unfortunately. Cerebris raised five and a half billion. They sold 30 million shares, plus four and a half million more, which I'm sure they'll do the green show.

18:06Downtown Josh Brown:Valuation out of the gates. What was it? We don't know the close.

18:10Michael Batnick:The bankers priced it at 185, I think, right? That's the number?

18:13Downtown Josh Brown:Yeah.

18:13Michael Batnick:It opened at 350. It's now 326. So is this$100 billion market cap?

18:19Downtown Josh Brown:I think that's what it would be.

18:20Michael Batnick:And they did, I think they did a billion dollars. They're on a billion dollars AR. Now, obviously we could all do the math. That's absurd.

18:27Downtown Josh Brown:Why can't it trade 300 times revenue?

18:30Michael Batnick:So I don't know anything about this business. I'm not going to comment on the valuation. Their revenue is growing rapidly.

18:37Downtown Josh Brown:Order book was oversubscribed 20x. they said at the open of trade they had five orders uh five orders to buy for every share available like and so who is that who are those orders coming from retail um everyone is in already this is so every every institution already owns it because now we have ipos before we have ipos they did a series h round you know how much fun right fidelity is in the stock how many letters do we have fidelity is in the stock in size prior to the ipo so everyone's already in it so it's only retail um this is the biggest u.s tech ipo since snowflake they raised 3.8 billion in september of 2020 it didn't go well after the first day the stock promptly collapsed but whatever it's still you know the company's fine um actually hold on snowflake also went public at 100 plus times

19:35Michael Batnick:revenue.

19:36Downtown Josh Brown:Yeah. So the story here is they have a master agreement with open AI for 750 megawatts of inference capacity, which the only person in the room that knows what that is, is Kai. Expandable to two gigawatts by 2030. They actually were trying to go public a year and a half ago. They pulled the S1. The concern was customer concentration. People didn't want to buy a semiconductor company that effectively had like two or three really giant companies nobody cares about that anymore so that's the number the biggest risk in the s1 is that open ai contract and i think they have a big deal with uh the uae risk so uh yeah i don't even know why people are

20:19Michael Batnick:worried about that what wait what does the company do they're trying to compete with nvidia inferencing

20:22Downtown Josh Brown:so they're not doing tiny little uh nano chips they're doing big f***ing wafers there's a technical term and the idea is that the memory sits right next to the compute so that there's no latency and this is what they say is the ultimate chip for inferencing so explain can you explain it any better or what what did i miss i mean look that that's the high level i mean i think this is this is exactly what you expect to happen in a time like today right nvidia has these huge profit margins grown like a weed at huge scale what are you going to do you're going to compete with them, right? Their margin is just so attractive.

20:59Somebody has to. Yeah, exactly. So whether it's this company or the next one, or, you know, even NVIDIA's customers, right? Google and Amazon, everyone's trying to get in the chip game because that's where the money is. So this is, you know, very, very much in line with where I think we are in the cycle.

21:12Ben Carlson:So how do you talk about something like this without sounding like a cheerleader? Someone asked me yesterday, like how, what's the difference between now and the dot-com bubble? And I said, the biggest difference now is probably that the financial media was a bigger cheerleader back then, but I don't know how you as an analyst can talk about what's going on in these growth rates and what these companies are doing without sounding like a permable and a cheerleader. It's impossible.

21:34Downtown Josh Brown:Well, the earnings growth is there. So that's how you do it. Sean put this together for me for the show today. I'm not saying like the semis are cheap, but they're 27 times forward earnings. And that is inclusive of the fact that the SMH is up 220 % since liberation day. So yeah, the stocks are up huge, but so is the earnings growth. And a 27 multiple does not rhyme with 1999. All right.

22:01Michael Batnick:I have another side, the other side of that. Not anything, what you said is correct. So NVIDIA, the stock has gone sideways from August of 2025 to today. So that's like a, that's a long sideways digestion, considering that the market's been generally pretty positive. And then, of course, it broke out, as we're speaking. Had a massive move over the last couple of weeks. Over the last seven days, NVIDIA has added$900 billion in market cap, which is as large as McDonald's, Disney, Boeing, Uber, Starbucks, and Royal Caribbean combined. This is seven trading days. What are these numbers?

22:41Downtown Josh Brown:These numbers almost don't mean anything anymore. All right.

22:43Michael Batnick:So in terms of thinking about NVIDIA and the valuation that it should trade at. NVIDIA is too big to get a market premium. Next chart, please. It's one thing for NVIDIA to trade at 50 times forward earnings or 60 times forward earnings when it's earning$20 billion in net income. So you could look at the chart on the right and say, oh, the forward P has gone down. It's gotten cheaper. It's like, dude, come on, give me a break. It's$223 billion of what they're expected to earn in net income over the next 12 months. it can't possibly trade at a premium it is too large what would the valuation so what would the valuation be if it traded 30 times earnings so glad you asked josh look at the next chart

23:23Ben Carlson:so chart goat matt is working hard today this is awesome all right so check this out so right now uh at a forward p.e of 25 nvidia is at a six trillion dollar market cap give or take a little

23:36Michael Batnick:bit less and it's 8.5 percent of the index the reason why i say it can't possibly trade at such and large premium is because it would swallow the index. If it was still trading at 45 times forward earnings, it would be$10 trillion and it would be 15 % of the market. It has to have a size discount. Yeah, there'll be two companies, NVIDIA and Anthropic. Right. Right. So I think the way that the market has been treating NVIDIA, letting it digest, even though the revenue and the net income and the margins keep going up to the right, I think it makes total sense. Perfect sense.

24:08Ben Carlson:So last week or two weeks ago, it was like, Google almost reached NVIDIA's market cap. Now NVIDIA has a trillion dollar lead on them. Because there's enough shares outstanding plus the gain.

24:19Downtown Josh Brown:You know what's so crazy though? This stock to Michael's earlier point sat at 180 for six months. Like any, you could have bought as much as you, now where's it now, 230?

24:29Michael Batnick:So you were saying this to Brad. I thought you made a really good point. It was, so it's 235. It was there for almost a year. You could have picked it up, But I guess it wasn't.

24:40Downtown Josh Brown:Under$200. You could have bought as much as you want.

24:42Michael Batnick:But you know what? I understand why investors didn't. Because in October, when we were in Austin, it reported a monster beat. A monster, monster, monster beat. Like an LOL type beat. The stock popped up 4%. And it ended up closing down 4%. And it was very understandable for investors to say, all right, I guess the trade's over. And it was. Until it wasn't.

25:01Downtown Josh Brown:Is it irrational to have NVIDIA be a 10 % position in a portfolio? Seems like a big position. But is it irrational given the size and scale of the business and how important it is to everything else?

25:16Michael Batnick:Kai, last week Adam Parker was saying NVIDIA is a sector. So back to Josh's question. If you view it through that person. The category of accelerated computing is a sector, but they have competition, right? As we discussed, Cerebra is just IPO today to compete against them. We have their biggest customers, Google and Amazon, also competing against them. So like, you know, the history of this stuff is cyclical, right? But NVIDIA was one of the most cyclical companies for a long time until more recently. So I think you have to take that into account. I mean, this goes to the question of like, yeah, obviously the market's up big.

25:46And so it's up big on the back of fundamentals, earnings that have increased. The question is not so much, you know, are valuations extended, prices extended relative to earnings? It's more how sustainable are these earnings to the extent that they're all kind of downstream of one phenomenon, which is massive capex by the hyperscalers into building a data center, which goes, feeds the chip companies and feeds the, feeds the power companies. It's all one trade. It's all one trade. Yeah. And so that's the, that's the big question, right? Which is like, at the end of the day, what, what matters is will the enterprise adopt AI?

26:18Will, you know, right now all the, all the CEOs. We know the answer is yes. I think the answer is yes. No, you know, the answer is yes. We know the answer is yes.

26:25Downtown Josh Brown:Well, otherwise, where does$30 billion in quarterly revenue, uh, in revenue run rate for Anthropoc come from? That's not. Well, it comes from, you know, folks FOMOing in, right. Some from like business leaders being told, hey, by their board, hey, if you don't adopt AI, you don't digitally transform, then you're fired. Yeah. So I think right now there's, you know, obviously an arms race by corporate America to say, hey, we're on top of the ball. We're doing stuff. Now, the question is, if they will actually generate meaningful like revenue boosts from this adoption, if so, then they'll keep paying.

26:56And if not, they'll pare back and say, hey, that was, you know, that was an interesting experiment. We're on to the next.

27:01Downtown Josh Brown:We had the company that's built our data lake here yesterday. They're called Invent. They're geniuses. And I wasn't like there for the whole meeting. You know me. I just pop in and say the most outrageous thing. So I walk in and he's sitting there with my president, with like, you know, my vice president, like going through all. And I'm just like, guys, let's cut to the chase. Are we doing AI? They're like, yeah, we're doing AI. I said, all right, awesome. That was my contribution. But it's sort of a joke, but it's sort of not. Like every business leader in every segment of the economy at every company, just make sure we're doing some AI shit.

27:43Downtown Josh Brown:Like that's what we have to do. Everyone else is doing it. Not just do it, but like let's do it in a way where I can go back to my board of directors or I can go to my shareholders and say, we made X dollars because we're doing this or we saved X dollars because we're doing that. That's the pressure that every leader feels right now, which is why none of this seems like optional spending. Right. It seems like they're all compelling. I think people talk about this AI bottleneck and this kind of fact that Anthropics compute constrained. But I think that there's this, as you point out, kind of FOMO in corporate America.

28:20And then you couple that with this idea that these businesses, Anthropic and OpenAI, are in a competition with each other as well. They try to lock the market up. Right. This is the kind of classic Uber playbook. We want to be we think it's winner takes all when it takes most. We want to win market share. And so therefore they subsidize token costs. Like token costs are below what they should be. These companies are not profitable. Yet they're willing to run at a loss because they want to capture market share. Right. So it's not a true price signal. The fact that we are compute constrained now doesn't really mean anything.

28:50So I think like we should kind of look past that and ask the question of do we actually think that technology will be useful to driving ROI for businesses? And if the answer is yes, you know, how much can the labs and the hyperscalers capture of that versus their customers?

29:04Michael Batnick:What do you think? I think the answer is yes. I think that, you know, having, you know, I was an early adopter of a lot of these tools. I've been, you know, I trained my own LLMs starting in 2019, 2020. I think this stuff is for real. I think the technology is tremendously useful. Obviously, it's not perfect. You know, certain things I wouldn't trust AI for. But in terms of like, you know, kind of lower level stuff, you know, basically the history of disruption is this. that whenever a new technology comes out, you want to start by giving it kind of low-end tasks where mistakes are forgivable.

29:32And I think, you know, at first, AI was a good analyst. Now, you know, I'll give you an example as a quant. So I'm a quant. I, you know, I code a lot. I run models.

29:42Downtown Josh Brown:We still accept you in this room. Yeah, you can tell I'm a quant, right? I mean, I threw a blazer on to try to disguise it. We know. He's like the bun with a quant.

29:49Ben Carlson:That's a first thing, right? I'm a Brooklyn quant. There you go. See? Yeah. No, so I used to employ analysts whose job was to give them as a research director tasks. Hey, I want you to go run this experiment, see how this factor would have performed in this market. Cloud Code or Codex as well are perfectly capable of doing a lot of that analysis. Hey, Codex, here's the API key. Go to this database. Here's a schema. Here's a script. Can you mimic this? I want you to study X. And it'll come back and we can iterate together. So I think it's starting to climb up the ladder.

30:23Downtown Josh Brown:It's taking the place of you having a back and forth with another quant who you're assigning things to. Now you're talking directly. Like the user interface is like it's call and response. That's right. You're saying things to it. It's saying things back. That prompts you to say the next thing. It's conversational. Yeah, it's an iterative process.

30:44Ben Carlson:So the question I have for you, and I have like the cognitive dissonance in my brain has been firing for months. Like I know the history of this stuff, but I also know that sometimes these things are different. So like your background fascinates me because you worked at GMO with Gransom and Chancellor. And so I listened to your recent, so you've got a great new podcast called The Intangible Economy. You talked to Edward Chancellor, who's the author of one of my favorite history books of all time, Devil Take the Hindmost. I love that book. I recommend it all the time. And you were talking to him about capital cycles.

31:12Ben Carlson:And you're a very forward-looking person. You're also a quant who knows market history. How do you deal with this understanding history that, hey, and Chancellor was basically saying, listen, every time this happens, we spend too much money. These CapEx cycles, they follow a pattern. This is going to end in tears. Versus, I think Templeton one time said, listen, 20 % of the time, it really is different this time. So how do you have, because I have those competing thoughts in my brain all the time right now.

31:38Downtown Josh Brown:That nagging suspicion that this is going to look like every other CapEx boom that's ever happened, where they'll go way overboard with spending and we're all going to pay the price for it in the form of stock prices.

31:50Ben Carlson:How do you handle that? Make us feel better about it.

31:54Michael Batnick:What's your secret, Kai? Look, I think two things can be true at once. I think a technology can be transformative and it may also be a bad investment. The question is, as investors for us, is less will AI, is AI a bubble or not? That's too simplistic. It should be, where will the value accrue? Through the value chain. Will it be the model providers? Will it be the chip makers? Will it be the users? Chancellor's Frame was really interesting. So he's a capital cycle theorist. He studied the booms and busts around electricity, the railroad, the canals, the dot-com boom. And in every case, aside from one, telephone being the one example, one exception because it consolidated into monopoly.

32:35But in every single other case, what's happened is all the capital comes into the sector on the supply side to build out the infrastructure needed to run the new technology. But they kind of get over the skis. Too much money comes in. Demand may materialize, but perhaps too slowly. So there's an air pocket. it. And, you know, and then the, there's a shakeout where prices fall, capacity is unused. And the, the, the ironically, the, the guys who invented and built out the infrastructure end up going bust, right? Hundreds of railroads, hundreds of auto companies, all the telecoms.

33:06Michael Batnick:What would you say to this? That companies know so much more about how to run a business than they did a hundred years ago. We have such through sight into how much, what the supply demand imbalance might look like. It seems hard to believe that one day we're going to wake up like, whoops. I think the problem is it's behavioral. I think it's companies can't help themselves. You have like Zuckerberg, you have, you know, the CEOs of all these companies saying, I'd rather go bankrupt than lose this race. Like it's, I think they all know. It's like peer pressure. They have to, right? Because, you know, if you're running company X and, you know, you're like, well, actually, if Sam Altman and OpenAI get AGI and I'm not even doing anything, I'm done, right?

33:46Like that's the end of my business. So I have to compete. And so once Sam goes all in, everyone else has to go all into it. It's this game theory, the prisoner's dilemma.

33:53Downtown Josh Brown:Is he the horse? He's the ringleader, yeah. It's still him. I think so. Okay. I heard Bezos make some sort of a comment where he thinks AI will be transformative and beneficial for society, but he also sees it as an industrial bubble and most of the spent – I forget if he said most or a lot of the money being spent will end up being wasted.

34:15Ben Carlson:How about this? What would surprise you more? This is a huge bubble that pops and AI is still successful. Like the dot-com bubble. Everything we wanted out of the technology dot-com bubble, everything they wanted and more happened, but we had to live through the dot-com bubble to get there. That's option one. Option two is, no, this is a perfect handoff. The baton goes from spending to ROI and use it, and we're off to the races. Like, which one would surprise you more out of those two options? I just think so many things have to happen, right, for the baton to be handed off perfectly. What a hater.

34:42Yeah, I mean. Why are you so bearish?

34:45Ben Carlson:At this scale, it's never happened before, ever. We've never managed to perfectly execute the handoff. I also think that this cycle, this 15-whatever-year cycle, has had so many things that have never happened before that I'm willing to at least have an open mind that it could. Yeah. Right? Look, I think there's a chance that this all works out. I think the downside risk is probably not favorable if you're an investor in the infrastructure side.

35:08Michael Batnick:All right, you want to get nuts? Let's get nuts. John, chart six. All right, Jason Gebfer tweeted, look, I know none of this stuff matters anymore, but my God, this will be the fourth time the S &P 500 has hit a record high while 5 % of its members fall to 52-week lows. Here are the other three dates. July 1929. Not great. January 1973.

35:32Downtown Josh Brown:December 1999. Yeah. So we have a lot of stocks on the 52-week low list for a market that's for a Dow 50 ,000 party. And, you know, without even looking, you already know it's anything housing related. And then it's a lot of software shit. And a lot of consumer stuff. Home builders, Home Depot. The K-shaped economy. But like on steroids now. Does that bother you about the tech rally that it's not as broad as you'd like to see it? Or do you not get worked up about that stuff? In a way, it's kind of two sides to the same coin, right? Semi-Israeli and software sells off. right it's it's almost the same trade these days i don't think it should be we can get into why that is the case but you know that that is a narrative today that the more powerful is is ai the more disrupted is software can i tell you something yesterday i was looking at software charts i think they're going to zero i really do i know they want all um but i am starting to believe that

36:34Michael Batnick:they are newspapers hold on this is an absurd claim so when you say they're going to zero be

36:38Downtown Josh Brown:specific like a lot of publicly traded software companies uh are gonna be zeros like not like zero zero but never never coming never coming back and i i'm hoping it doesn't happen to the big ones but um i looked at like 20 software company charts every single one of them is either at a 52 week low or close there aren't even like up weeks some of these charts it's like 25 straight weeks lower close on Friday than the open Monday. Yeah. It's actually unbelievable. There have also been zero takeovers.

37:19Michael Batnick:So does a company like Adobe, let's use them as an avatar. Do those companies make it? I think so. I think so. I mean, I don't know about Adobe in particular. I mean, here's the question, right? So why are these companies down so big? They're down so big because people assume that their moat is code. and with Codex and Cloud Code, code's basically free, right? Any one of us here can effectively vibe code and replace Adobe, Salesforce, these products on our own. Okay, so if they have no moat, then they should go down. I guess the question I would ask is whether code was ever the moat for these companies, right?

37:52Like I think even -

37:53Downtown Josh Brown:You think distribution was the moat? Yeah, I would argue distribution, lock-in. Right, but so then why can't OpenAI and Anthropic mimic that distribution? They certainly have the capital. They're trying to, right? So we saw the OpenAI Development Company, this announcement this week, they're partnering with a bunch of PE firms to essentially launch like an army of four deployed engineers, basically consultants to go into your company and - And recommend you use their product. Yeah, you use our product and here's how you use it, et cetera. They're certainly trying. And I think it's interesting because I had this view for a long time that the luminaries on AI were kind of like these naive people that they kind of thought, if we build it, they will come.

38:30Let's just build a really cool product and then the enterprise will buy it. I think what they've learned correctly is that you have to sell too. You have to push this into the enterprise. Businesses are very slow to move. They're very slow to change. I think this is an important recognition. They've also done partnerships with the old school consulting firms, the Accentures of the world. And then we saw Google is hiring a bunch, like a thousand or something.

38:53Downtown Josh Brown:Yeah, you have to get to the decision maker and you have to push them over.

38:56Michael Batnick:But the market seems so convinced of it that these companies are, to Josh's points, metaphorical zeros. Like Adobe is the earnings per share and the 40PS are still at all time highs. I'm guessing that Salesforce has not seen a material contraction. But the market is like, all right, we don't care. You're down 60 % anyway. Yeah, I think Adobe is trading at a period of like nine and a half. It was up to 10 yesterday.

39:16Downtown Josh Brown:Yeah, and like Salesforce is 13. That's an automaker PE. What we're saying is that those earnings are not going to show up next year. That's the only answer. A software company with high margins trading below 10.

39:27Ben Carlson:So the stock market is like the economy in that. We've had these rolling recessions in parts of the economy, but it hasn't brought the whole economy down. And the stock market is the same thing where we're having these losers get separated. So the question is, could we have this whole thing with AI without bringing the whole market down?

39:41Downtown Josh Brown:Well, the semis are gaining more in market cap than the software companies are losing. So it's a net positive for the NASDAQ. It's a net positive for the S &P to that question. Like, yeah, we're sort of seeing 25 fairly large companies disappear before our eyes. But then there's 25 other very large companies that have just become gigantic. Like top 20 S &P market caps. This chart here shows that the SOX index, the semiconductor index, these companies are now 23 % of the S &P. Right. Out of nowhere. That's a baton being handed off. 23. Yeah. 23 coming up. So the market, so the overall market is not suffering, but there are gigantic companies whose market cap is literally vanishing.

40:29Downtown Josh Brown:So I say he's like zeros. I don't mean like there's no more earnings and revenue. I just mean like these are stocks that might never come back again. They could just, and I, those are take privates at some point. But that's, that's what I'm asking. Where are the deals? Nobody thinks these are cheap enough to LBO.

40:45Ben Carlson:It's way too quick for deals. Don't you think at this point it's so.

40:48Downtown Josh Brown:But if we think there's$3 trillion in dry powder amongst private equity, private debt, whatever, like we know there's a lot of money they want to put to work. Take one. But they're already oversubscribed in software. They're full. Right here. Buy our private credit fund.

41:05Ben Carlson:And also we're buying Adobe.

41:07Downtown Josh Brown:Yeah. Yeah. Why not? Can you imagine the media coverage of that?

41:12Ben Carlson:So wait. So you mentioned like the earnings side of this thing. and we've got a million charts in here that shows how great earnings are doing. Michael, why don't you pull up some of the NASDAQ ones that we, Michael and I talked to a guy from NASDAQ for Animal Spirits the other day.

41:23Michael Batnick:All right, let's do chart 14.

41:25Ben Carlson:And when you look at the earnings, this is the thing that, I said this is the most logical melt-up of all time because it really doesn't look as much like 99 when you think about the way that these companies are.

41:36Michael Batnick:So in 1999, so at the top, at the top of the bubble, 10.5 % of the NASDAQ 100 had negative margins. There was no companies that had margins between 50 and 100%. And it's just completely lopsided. So today, today 20 % of the Nasdaq 100 has margins between 50 % and 100%. 50 % of the index is between 25 and 50. That compares with just 24 % for 1999. Back then, most of the companies had a margin between 10 and 25 % or 0 to 10%. These were not the same businesses. Now, Dan Greenhouse made a fair point. Dan basically said, the biggest myth is that the tech companies today are real. And in the 90s, these were like just fugazi companies.

42:24Michael Batnick:And he said, that's not true. We had Cisco, Microsoft, Oracle. And at the time, Cisco was doing$19 billion in revenue. Microsoft was 22. I think if you inflation adjust this. So Microsoft was doing 23. Inflation adjust that's 44 billion. Cisco was$19. $38 billion inflation adjusted. So Cisco was doing what OpenAI is doing. These were massive companies. It's just that a lot of the rest of the index was pure shit.

42:52Downtown Josh Brown:Well, that's the thing. Forget about profit margins. We had pre-revenue companies. We had thousands of IPOs that we don't have right now. That's not what's happening.

43:02Ben Carlson:John, give me 16.2. 16.2?

43:06Downtown Josh Brown:Holy shit. Holy shit.

43:08Ben Carlson:Are you sure you want to whip this out? Uh, targeted this for me. So this is NASDAQ 100 earnings growth for 20 years. This thing has printed 14 % annual earnings growth. So you had Mobuson on your podcast. He always talks about baselines. I can't back this up. I'm just guessing. There's no way we've ever had a period like this with earnings growth this high for this long before. So in terms of baselines, the question is, could this continue? Could we see earnings? So yes, because the NASDAQ is up 20 % per year or something over this, over this period. is is ai again back to the baton handoff thing can ai keep this kind of ernie's growth going uh

43:46Downtown Josh Brown:robotics could do it you want another decade you want another decade of 15 revenue growth how about uh 10 million robots how about a million humanoid robots and automating literally every inanimate object in the in the entire world that's what's coming now golden era biotech yeah well that could do it too we live live to 120 yeah that'll move the needle so that's how you get 50 that's i think uh i was talking to my friends who are not professional investors i said the work maybe the worst thing you could do is have too much cash at too young of an age not that the market won't at some point have a horrific event where you wish you had more cash but like that's going to get bought really fast all over again which part if we have another, if we have like anything non-recession, any kind of market crash, right?

44:42Downtown Josh Brown:That'll get bought up in two seconds. We'll get another V. We'll get two. Yeah. We'll get another V. You know why? Because people see the degree of change happening and the speed and the acceleration of automation. And I think they realize they can't not own the chips, the robots, the AI. So I'm not saying like the market's not going to fall definitely well. I'm just not convinced we're going to have like a two-year bear market with this much innovation happening.

45:09Michael Batnick:So I remember back in March of, oh, this year, this was two months ago. Micron was at 470, had another earnings report that we all laughed at. The numbers were like, wait, what? And then Micron swiftly went from 470 down to 310. in March, in like 10 sessions, it fell 30%. It went from 310 to 800 in a month or two.

45:39Ben Carlson:Right. If this cycle turns for whatever reason, it's going to fast. John, give me chart 16 real quick. 0.3. This is the melt-up. Matt did this for me. So the NASDAQ in the 90s, like the NASDAQ 100 over the past 10 years, it's kind of approaching that. But after the 90s, the NASDAQ fell 83 % and it took like 12 years to break even. That's the kind of thing we're not going to get again.

45:59Downtown Josh Brown:I don't think so.

45:59Ben Carlson:I don't think so. There's no way you can, I don't think we can have that kind of fall for that long again. Here's why.

46:03Michael Batnick:Chart 15.9. So in the dot-com bubble, 32 % of the index constituents were trading between 60 and 100 times earnings. 34 % of the index was trading over 100 times earnings and 10 % of it was unprofitable. Today, 60 % of the index is trading between 20 and 40 times. between 20 and 40 and 20 is trading between 40 and 60. We have 10 % me index that's trading at stupid levels, but we're not, we're just not valued the way that we were in the 1999. So yeah, the market can get cut in half. It always can, but is it going to fall 80 %? That would be very hard to believe at this point.

46:42Downtown Josh Brown:What do you worry about in this, in the midst of like everything that's going on? What do you, what do you think is the big risk? Maybe even if it's an obvious risk, what do you think is the thing that we should be focused on? I still think that AI is a risk. if only because it's the entire market, right? Like the S &P is, you know, 33 % mag seven. You add in these chip stocks, checking 50, 60 % of the passive index, which we're all told that, oh, that's like diversified, is one thing. And so like, yes, I mean, as things continue to be going well as they have today and the past month, that's fantastic.

47:15But I just think there's a lot of concentration.

47:17Ben Carlson:It's also such a big part of the economy now that if this turns, Michael and I were trying to figure out what that mean, like how far would they have to pull back on the spending? but you'd probably get a recession and a bear market together. It wouldn't just be one.

47:29Downtown Josh Brown:There's a different answer to that though. We all assume that this ends badly because of the hiccup in the CapEx story. And people have been saying that now for three years. I've said it. All right. So everyone, but like the other risk is that this works really, really well. And the job displacement just hits harder and faster than any of us expect. And that becomes an economic risk, which I don't know if that affects the NASDAQ. I don't even know if the NASDAQ and the actual economy have any relationship whatsoever left. But to me - It depends if Anthropoc and OpenAI are in the NASDAQ at that point.

48:07Ben Carlson:Yeah. I had a family member who said, I'm worried about my job because of AI. You know what I said? Buy stocks. Well, I've been saying that for 10 years. Right? Just own the damn robots.

48:15Downtown Josh Brown:I mean, I don't know what your alternative is. But do you think that that is an underappreciated risk that the job loss materializes and it's bigger than people thought? I think it's a possible risk, but I actually think that that's an overrated risk. I think the average person, because they've been watching sci-fi movies, over-indexes on that as a possible future relative to what I think is actually attainable. Now, never say never. Things can happen that we can't predict. But I'd say that that is probably not the first thing I'd be worried about. Electricity. You worried about that? not having enough of it.

48:52Downtown Josh Brown:Yeah. In the short term. Could that stop this CapEx boom from booming? Yeah. Could that be the fundamental constraint? So we've heard about chip shortages. We understand with short compute. Could the strain on the grid be the thing that diminishes our chance of hitting these earnings expectations? Yeah, look, there are a lot of bottlenecks potentially in the value chain. And, you know, it's weird because if you step back, I almost feel like it's a good thing, right? So like talk about the job loss scenario. It's like a governor. It's a governor. It kind of slows down the bill. I like that. Like if things happen too fast, the government, you know, regulations are too slow to adapt.

49:29The job market, you know, retraining employees and restructuring companies happens too slowly. So in a way, the best case scenario is one in which AI ends up delivering abundance, but it takes like many years for that to happen. The scenario that we worry about is one in which that happens overnight and then everyone's laid off and it creates like a doom loop.

49:45Ben Carlson:So how about like getting, again, everyone knows that risk. So you got a chart in here, John do 28. So you have talked about how the MAG-7 is going from intangible asset light to asset heavy. What if it's just a re-rating and they go, all this spending and you becoming more of data centers and it's physical. It's not intangible anymore. What if we just get a re-rating that way of valuations? That is my base case, actually. So I don't think these companies are going to go bust.

50:11Downtown Josh Brown:Sorry, a re-rating lower.

50:12Ben Carlson:Yeah, just valuations have to be lower because you're more capital intensive.

50:15Downtown Josh Brown:So let's use an example. Let's take an alphabet. that we loved this business for so long because of how uncapital intensive it was. Basically, they invented search 25 years ago and they've been eating, they've been dining out on that innovation and the margins were crazy. And then cloud computing, amazing margins. Now, obviously, nobody's calling AWS and Alphabet overall or Microsoft. Nobody's calling these companies CapLite. They're the opposite.

50:48Ben Carlson:So because of your research on intangibles, you're saying that's your baseline now.

50:52Michael Batnick:John, throw that chart back on. Kai, speak to what we're looking at here, please. So we're looking at the MAG-7, CAPEX to—CAPEX is a percentage of revenue. CAPEX to sales ratio. Okay. Yeah, so— This one. Yeah, to Josh's point, like, the MAG-7, why are they the MAG-7? Why do they have their own acronym? It's because they just have delivered amazing ROIC, return on invested capital, over the past, you know, 20 years, 15, 20 years.

51:15Downtown Josh Brown:Unprecedented. Unprecedented. Never seen anything like that. Never seen before at such scale. Like, yeah, OK, it's possible to build asset-like businesses that are small, but at the trillion-dollar scale, no one thought it was possible. And the way they've been able to do that is through these intangible assets, through leveraging brand, human capital. Network effects. Network effects in particular for Google. And that was a great thing while it lasted. And so here's the irony, is that these guys are on the forefront. Google invented the transformer. They're now kind of, in a way, engineering their own demise because they invent this new technology.

51:45What does it do? Well, it changes the rules of the game. Entering the AI revolution, the way it worked was there was a handful of digital services, and these businesses kind of like carved it up into their own fiefdoms. You get searched, you get social, you get shopping, and it was a good cozy little oligopoly to have. What happened is with AI, now the perception at least is that it collapses all the markets into one. Now it's all about who gets agents first and who wins that market. If you win AI, you win everything. And that's ignited this game theoretical prisoner's dilemma situation where you have all these companies saying, wait, this is an existential risk.

52:17I need to do this.

52:18Downtown Josh Brown:They're still spending, therefore I'm spending. If they're spending, I got to spend. Ideally, they would all moderate their investment, be incremental, continue to make AI not a disruptive, but a sustaining innovation for the incumbents. In this case, though, however, if Altman's going to spend a trillion dollars, then you got to spend a trillion dollars too. And so I think what's happening is that they are, again, they're better run companies, no doubt, than the companies in the 90s. That being said, they just can't help themselves. Like there's, it's just, it's rational based on game theory for them to be doing what they're doing individually.

52:49We have not seen the multiples derate yet though.

52:51Michael Batnick:9.7s are at an optimum high today, the group. So what caught, what's the catalyst for rerating? Well, I think the challenge, I think once the market catches up to the perception that, wait, these are no longer the asset-like businesses of five years ago, these are utilities, right?

53:02Downtown Josh Brown:And very tangible. Yeah. Very capital intensive with massive depreciation, right? That's the other thing, which is, you know, Chancellor talked about this on the podcast. He was saying, look, like it's just mechanistically in any of these up cycles. What happens is you have companies spending on CapEx, but CapEx is an capital asset on a balance sheet that gets depreciated over time. So for a five year depreciation, you're only spending for each dollar that's been spent on buying data centers. You're only spending what 20 cents each year hits your net income, whereas NVIDIA gets to record the entire dollar as revenue.

53:33And so you end up with this kind of just, again, accounting based inflation of net income.

53:38Downtown Josh Brown:So Michael and I had this discussion two days ago. We were talking about the CapEx, just CapEx in general, not really being great for shareholders. And this is, of course, like the biggest CapEx cycle we've seen. And the example that I don't know if it's a good example or a bad example. So I want your opinion on this. The example that I used is like AT &T and Verizon. the amount of money that they spent from 1g to 5g just 25 years of endless billions of dollars these stocks are the same price they were in 1997 right for i'm like i'm not even not even

54:17Ben Carlson:exaggerating verizon you're being paid to wait with the dividend though yeah the dividend is not

54:21Downtown Josh Brown:even the dividend is not even great verizon i think it was still called bell atlantic in 1998 was$45. It's$45. And I know there's a yield on it, but like I guess my question is these companies won. The entire wireless business is three companies. It's E-Mobile, it's Verizon, and it's AT &T. And that's it. And what did we win? These stocks don't go up. Great. 5 % dividend yields. Alright, so it's not zero. It's a bond. So it's not clear to me that this is materially different. I'm pretty sure Amazon, Alphabet, Oracle, I'm sure they're going to win. But what do we win as shareholders? So that's my question for you.

55:09Downtown Josh Brown:What are your thoughts? Yeah, I mean, a couple of things. So first of all, if you look at the CapEx to sales ratios, for many of the hyperscalers, it's higher than AT &T at the height of the dot-com boom. Right. So they're certainly in the same category. And yeah, it's a Pyrrhic victory. You can win the market, but is it a market you want to win? Because if your margins are like 60 % doing search, why do you want to get into this other business? I'll do you one better. You know who won? Apple. Like Apple is the beneficiary of the combined CapEx spending of Sprint, which got sucked up into T-Mobile, AT &T, even Verizon.

55:43Downtown Josh Brown:Apple doesn't own any of the networks. They built the best product on top of the network. Right. So it's not that CapEx bad, CapEx good. It's that who – what layer? Where do the profits accrue? Now we know in wireless, the profits accrued to the iPhone and the iOS ecosystem. We don't know who's going to win, like really win this.

56:02Ben Carlson:So where are you looking for winners? It comes down to barriers to entry. It comes down to competition, right? If you're in a sector where it's easy for people to compete, if your only moat is, oh, I have more money to throw at the problem. Well, then like, you know, I could call up Masayoshi or whatever and solve for that. So that's not really a true moat. And that's why historically capital intensive businesses have not actually been like the best place to invest from an ROIC standpoint. What are true modes are the network effects you mentioned, these intangible assets. You know, no amount of money could have replicated Google search at the time.

56:31Now it's, you know, arguable that maybe AI will help obsolete that technology.

56:36Downtown Josh Brown:But a lot of my searches are starting on Claude. Yeah. And I think that is a meaningful risk to that part of the business. But again, like there's the question around the disruption of the existing business. Microsoft is a good example of a company that's, you know, right in the crosshairs here. And then the question of they're going into this new business, will they win? And even so, do they want to win? There are people who think the profitability will accrue to the layer that Palantir sits on, where Palantir basically surfs atop all of these LLMs and is the company that gets paid by other companies to literally tell them how to make best use of all this technology.

57:10Ben Carlson:How about this? So you have this quote in here from Mobus, and I don't know what this is from. You said, I think you would have to argue that almost all the profit ends up going to the consumer ultimately, and that's because of competition. So what would that look like if you're saying all the utility goes to consumer? Yeah, I mean, it'll look like the railroads where all the railroad companies went bust. And, you know, but that being said, a ton of GDP was created by the railroads. I have this chart here. It is chart. Let's see. Hold on.

57:35Downtown Josh Brown:Just don't do 16. 36. This is from Azim Azar at Exponential View. This is a good one. Yeah, this is a good chart. So the blue line shows cost of railroad construction each year. The green line shows how much money, how much earnings the railroad companies earned. Oh, wow. And the red line shows the contribution of railroads to GDP. How do they calculate that red line? I don't know. What goes into that? You got to click on the link. Okay. They made it up. They made it up. They made it up. But I mean, look, if you take this at face value, what you see is, you know, the costs above the earnings, you can see the little spikes.

58:09Those are the panics when all the railroad companies went bust. And then even after all that work, at the end of the day, yeah, they were making some profits, but they're utility-like profits.

58:18Downtown Josh Brown:The users made the money. Who made the money? It was, you know. Yeah, you manufacture furniture in North Carolina, put it on a boxcar, ship it to another city and sell it. Ship it across to California. I understand that. That's right.

58:27Ben Carlson:So they'll be like, AI is going to help business formation or something. It's going to make it easier for people to do everything.

58:31Downtown Josh Brown:Now, well, so here's what the hyperscalers would argue. They would say, well, we're invested in the LLM layer. Like, we have partnerships and, like, literal investments in some cases. And they would say, we're going to get a piece of that, too. I actually happen to believe that the LLM layer is also at risk of commoditization. Take a look at number 29. um so so what this chart shows um oh my god what's going on here so this is what this chart shows is like the just the the y-axis is like how good are the models right go back to november 22 when chat gpt was released the underlying model was gpt 3.5 you can see that at that point the um open a had a huge lead over their competitors in fact they were like two orders of magnitude now it's a horse race and the the lead the leadership is switching back yeah it was gemini then it was Claude, then it was GPT 5.5.

59:19Downtown Josh Brown:Except Llama is a donkey, apparently. Llama, that didn't work out too well, yeah. Those efforts didn't work. Then you have DeepSeek, and you have the Chinese models. You don't think one of these players is going to break away in terms of capability. I don't think so. But one or two of them already have broken away in terms of critical mass, like the amount of users. Like, I think we have a Coke and Pepsi.

59:41Ben Carlson:That's like brand, essentially.

59:42Downtown Josh Brown:I think we have a Coke and Pepsi and Dr. Pepper, basically, at this point. I think Gemini arguably is Coke. Say Claude is Pepsi. OpenAI is Dr. Pepper. I think other way around. I think that Claude is Coke. Go ahead. Claude is Coke already? I think Claude is Coke. Or maybe OpenAI is still Coke. OpenAI is still Coke. Yeah, I think.

1:00:03Michael Batnick:Because the average person knows ChatDBT. That's right. The average person doesn't know Claude. Right, it's more of a brand.

1:00:07Downtown Josh Brown:Yes, but the average person is doing more AI stuff with Google and doesn't even realize it. Every search is now an AI workload. So I think Gemini is the number one AI in terms of usage. They're not doing it on purpose. They're getting Gemini results instead of search results. So Google has a special advantage is they have distribution. They're putting Gemini in my email. That's right. Whether I like it or not, it's in there. It's built into an installed base that is significantly larger than what OpenAI. We don't think that's bigger than OpenAI right now? I do. It could be measured. Depends on how you measure it.

1:00:45Yeah, it is a question also of like, you know, also the quality of the model. I think right now it's clear that Gemini is in third place. They will likely release a new model next week. And we'll see.

1:00:54Michael Batnick:Kai, I have a two-parter for you. So what first brought you to Intangibles? Like what attracted you? Because your entire operation is built around this idea. And then part two, what does all of the spending do to the Intangibles inside your portfolio? Yeah, so answer the first question. So I used to work for a company called GMO. We are, you know, kind of like AQR. one of the pioneers in quantitative investing, one of the bread and butter factors within GMO and other firms is the value factor. The idea that if you systematically buy stocks that are cheap relative to, say, book value and underweight those that are expensive, that that historically has earned excess returns.

1:01:33Ben Carlson:Did Chancellor say that you helped them update some of their models? Like, what did he say, quality? You kind of helped them update it a little to bring it up to speed? Yeah, that was one of the things I worked on when I was an analyst. Like modernize the way they're capturing that. Yeah, look, and it's been many years. I'm sure they've done more upgrades over time. And again, not specific to them, but it's been a challenging time for value investors as defined via these systematic factors. I had Mobus on the podcast. He made a cheeky point. He was like, look, the Fama French value factor is this academic factor that basically is an index of cheap value stocks, shorting or underweight expensive stocks.

1:02:08It made money every year for like 80 years. And then it stopped making money in 1994 when they published their paper. Right.

1:02:17Downtown Josh Brown:So, so, so that's the thing. So arguably like when America online came out, but you know what I mean? Like the internet changed the world. When we all got computers or, you know, and so that was the big question, which was like, you know, we were in a tough place because you're sitting there and you're saying, all right, well, like this beautiful idea, you know, that Ben Graham coined, you know, a hundred years ago with your security analysis. Dude, it's buy low, sell high. It makes perfect sense. It should work. No one is arguing that bio low sellout doesn't make sense. The question is against what intrinsic value, right?

1:02:44So that was always my contention. It's not that value investing doesn't make sense. By definition, it should make sense if you know what true value is. The problem is that the way we were measuring value was just obsolete, right? Because so many of the traditional metrics are backward looking. They don't take into account - Accounting stuff. R &D. They don't take into account advertising and marketing, human capital. They're based on just tangible assets that, you know, at one time, a hundred years ago, made a lot of sense. But as the economy has transformed from industrial to information-based asset light, companies like Google and NVIDIA have come to the forefront.

1:03:15Ben Carlson:So you consider yourself a value investor still? Absolutely, yes. Just valuing things differently. Yeah, exactly. Because, look, the challenge is that if we don't have an anchor of value, how are we going to invest? I mean, there's different ways to invest, of course. But, you know, I do think that being able to kind of marry the two schools, the idea of, you know, being a value investor, having some kind of price discipline, you know, buying bargains and knowing when to kind of sell and take profits, you know, is a really important stabilizer for markets, a really important thing to be doing.

1:03:45But we need to update our metrics, right? think about Warren Buffett and Berkshire, I talk about the story a lot, that, you know, he started off as Ben Graham's, like, actual disciple. And he, you know, bought Berkshire Hathaway, a struggling textile mill.

1:03:58Downtown Josh Brown:He was only buying struggling things. And yeah, and it worked okay. But looking back, you know, after meeting Charlie Munger, he talks about this. He's like, look, I'm never going to do that again, you know? And then he bought Coca-Cola and then Apple, right? And I think the implicit lesson there is that he added intangible moats to his framework.

1:04:14Ben Carlson:And Graham would have done that too. He used to buy stocks that were worth less than cash, like, guess what? That doesn't exist anymore. That's right. Although he would have updated his, I think by the end, he was saying like, he's an indexer essentially in the 70s, but all those guys, they don't -

1:04:25Michael Batnick:Didn't he retire the other piece? I'm like, yeah, shit doesn't work anymore.

1:04:27Ben Carlson:Yeah. Yeah. I want to say that like 84 % of Buffett's investments were purchased with a price to book above one. So in other words, he was not a price to book investor.

1:04:35Downtown Josh Brown:So he changed his mind over time, not just because he met Charlie Munger, but also like the world also changed. Yeah, the world changed and he had to evolve his process with it because as you point out, Ben, there just weren't enough things to buy other ones. He sort of also was an intangibles investor because he recognized the power of brand. Geico. Yep. Coca-Cola. He recognized the power of things like American Express and Coca-Cola and what the brand meant to the consumer before anyone else was really talking about that. That's right. So there's like a lineage from Buffett to what you're doing with your intangibles portfolio.

1:05:11Yeah, so what I'm trying to do is to kind of do a systematic version of that.

1:05:14Downtown Josh Brown:Yeah. Right, like trying to say, I think anyone with common sense can sit there and be like, yeah, I think brands matter. I think human capital matters. I think this company has a really interesting technology. The challenge is how do we quantify that? And so for the longest time, quants were in this tough place because we had CRISP, CompuStat, the traditional databases, which were all structured data. In your intro that you read for me, you mentioned unstructured data. Unstructured data is everything else. The information in patents, in trademarks, in company filings, in news, in analyst reports, on Twitter.

1:05:49All this information contains obviously very valuable information on companies and on their intangible assets.

1:05:54Downtown Josh Brown:If you can bring order to it. If you can parse it. And I think for the longest time, the challenge was that quants, we had linear regression. We had a few tools in our tool belt, but they were all optimized for a world where structured data was what we had available. Now, with large language models and natural language processing, we're finally able to kind of unlock this, you know, huge trope of information where I think the task, which at one time seemed, you know, unattainable of trying to codify a Warren Buffett style approach is now on the table. Not saying that I've done it or anyone has done it yet, but I think that we're increasingly moving towards a point where through AI and all these tools, a lot of the intuition that's baked into a fundamental investment strategy can be codified in quant.

1:06:37Downtown Josh Brown:So how do you quantify brands? Because we're in a market right now where I think the worst stock in the world is Nike. And Lululemon is down here too. Lululemon might be following it down the drain. Is there a way to parse the things that might go into a calculation where you could say, forget about the stock price having lost value. The brand was losing value a year before. And that was the signal to not be a Nike. Can we do things like that? Is it effective? Is that part of your approach to -

1:07:13Ben Carlson:By the way, these companies are both down 76 % from their highs equally.

1:07:17Downtown Josh Brown:Yeah. Crazy. Those are apparel specific. But just generally, like, how do you say that a brand is either gaining or losing value? Yeah, I mean, absolutely. If you were Peter Lynch or someone, you'd say, hey, you know, talk to your friends who are Lulu customers. Are you still buying their products? Right? There's a - Not to brag. I'm friends with Peter Lynch. Oh, there you go. Nice. Yeah. You should ask him then what he would say. I don't think he wants to see me again, but I interviewed him for an hour. That's awesome. He's a legend. And he was telling these great brand stories about walking into the supermarket and seeing like one brand being sold at the register and another being sold on a shelf.

1:07:50Downtown Josh Brown:And, you know, like he, he was doing this in a very analog way. Right. Okay. Yeah. And I think increasingly you can start to systematize some of these things, right? Social media data is an obvious thing. You can go on Instagram. Mentions, brand mentions. And like, what's the tone of the mention? Is it positive or negative? Right. Like, is it amongst the right people? Like there's a kind of in crowd of cool people. Are they, you know, again, you can buy influencers. You got to be careful for manipulation as you do with all signals. Companies can juice earnings, whatever. But if you're careful about it, yeah, if you track all this information, in theory, you can certainly capture where the trends are headed before ideally the stock price.

1:08:28Downtown Josh Brown:How do prediction markets factor into this? You must be really excited about that data because that is like, I mean, especially things that are very far afield from what would normally be in an 8K or, you know, some sort of like official filing. There's a lot of opinions being expressed there and you can quantify it. Yeah, I think it's a really important and interesting source of data. I'm not using a ton of it, to be honest, yet. I mean, I think because most of the stuff I'm doing is at the company level. Right. So it's very useful if you're trying to do macro forecasting, who's going to win the election.

1:08:58Obviously, there's a lot of sports betting and crypto stuff, which is, you know, less relevant there. But, you know, is Nike going to make a comeback? I mean, I don't know if there's a contract on that. if there were it would probably not be a very liquid one um i don't even know how come like how would you even i i one thing i've used it yeah one thing i've used is google trends google trends is an interesting source of data okay you can like look at what people are googling like terms like if they're googling you know the lululemon align like pants or whatever that's like a potentially good thing and if that's going down that's a little bit concerning you have two

1:09:30Downtown Josh Brown:etfs what's the difference between the two and which one should ben carlson buy um pitch it he's sitting right here get them to buy it um so yeah the first etf um is u.s based the one i launched in 2021 okay um it buys a portfolio of stocks i can the intangibles etf yes that one somebody else had to say it thanks josh and d10 is detangibles what's that one develop markets yep so international intangibles that's right yeah and so that the second one follows the same exact strategy both of which their goal is to buy stocks that are cheap relative to a expanded definition of intrinsic value that includes these intangible modes too.

1:10:10So brand human capital IP network.

1:10:13Downtown Josh Brown:You know about like how the IPOs are all going to join the major indices faster than ever. That's right. You making plans for that new world where you get a SpaceX and it's in the S &P 10 days later, probably similar thing will happen with Anthropic. Like how does your work get affected by that? You kind of have to play along with it. Yeah. If it's in the index, it's in the investment universe. I don't have, it's not a, it's an absolute return fund. So I don't need to have, I don't have a benchmark per se. I don't need to own anything, right? We're trying to make money over the long run. So to the extent SpaceX is added to the index, it's now investable, which is nice.

1:10:53I doubt it'll be in the portfolio day one, just given how -

1:10:56Ben Carlson:As a quant, do you have any discretion? Are you rules-based completely? Completely rules-based. The idea would be if there's something that looks weird that doesn't accord with fundamental intuition, I'll ask the question of why the model is missing that and try to adjust the model in a way that solves the problem, not just for this one case, but also moving forward.

1:11:12Downtown Josh Brown:Are companies like SpaceX and Anderol and some of the things that were, some of the more exciting companies coming, are they intangible assets or are they tangible assets? Or are they, it's a - Obviously, everything's a mixture. Definitely a mixture. I mean, some of these companies are a little bit more physical, right? They're not pure software companies. I mean, SpaceX, they launched rockets. But obviously, most of their value is in their IP. I do think that a lot of their value is just in Elon Musk, in this case. That's the ultimate intangible. That's the ultimate intangible asset is Elon Musk's involvement.

1:11:44His aura, yeah.

1:11:45Downtown Josh Brown:Right. Hard Pivot. Ben's book. Can we say some words about it? Are you allowed to speak about it? It's not like an ETF, right?

1:11:53Ben Carlson:Yes, there's no compliance real soon. All right. I will say, I told Michael the other day I'm not good at sales or self-promotion. Like Josh, you're a salesman. Is that good? Yes. Okay. Josh could take a ketchup popsicle in 90 degree weather and sell it to a woman wearing white gloves. You could do that. Thank you. That's not me. Okay. So I'll make one hard sell for the book.

1:12:14Downtown Josh Brown:Okay.

1:12:14Ben Carlson:There's never been a better book for charts and tables than this book. I counted, because chart can't help me. Wait, say it again.

1:12:21Michael Batnick:That's a bold claim.

1:12:24Ben Carlson:There's 52 charts.

1:12:25Downtown Josh Brown:You have charts in every chapter.

1:12:26Ben Carlson:There's 52 charts and tables in this book. It's got more charts and tables and data than any book. And Chart Kid Med helped me, so I'm giving him all the credit. Yes.

1:12:35Downtown Josh Brown:Way to not sell the audio version. What are you doing? The audio version comes.

1:12:39Ben Carlson:You describe the chart? No, it comes with a PDF of all the charts. They send it to you. Ooh, that's a good idea. Right? Whose idea was that? Is that Craig? Yeah. Okay. So anyway, that's my, and I got a couple charts. I want to, there's one chart I want to run by you guys. So chart 50, John. Let's do it. Okay, so I looked at the worst days, the worst months, the worst years in stock market history. Okay? So I did one that looked at the worst months in stock market history. And most of them are in the 30s, 40s, the 1987 on there.

1:13:06Downtown Josh Brown:This is in chapter one. Yeah, chapter one. I read this chapter this morning on the way into the city. So I know exactly who you are.

1:13:12Michael Batnick:I can't believe you asked Nick for a quote and not me.

1:13:17Ben Carlson:The funny thing is, Nick was actually on the cover and they bumped him for Morgan. So I feel bad for him. Wow. Yeah, poor guy.

1:13:24Downtown Josh Brown:Is Morgan's quote even hot? Let's see. He has mastered the art of it. Ben Carlson has mastered the art of exposing the few big topics that matter most to investors. Let me hear Nick. What's Nick's quote? Nick's not even on the back. Oh, man. He's like, where'd Nick go? Is that the inside cover? So here's my point I want to make. I'm on the back.

1:13:42Ben Carlson:Talking about faster cycles. So there's been six times where the stock market has been down 20 % or more in a single month. I think you could make the case. And again, a lot of these are in the 30s. you could make the case that going forward, instead of having these massive, long, drawn-out crises, like, hey, we're down 60 % over three years, we're going to have these more air pockets because information moves faster, where we have these huge down one, two, three, four-month periods where it's like, oh my God, the stock market was down 25 % in a single month. That's where I think we're headed in terms of the speed of these things.

1:14:13Ben Carlson:I think there's going to be more air pockets. Speed running the correction. Because I wrote a chapter on the Great Depression and people keep asking me, do you think it could happen again? And I think we've completely cut that left tail off. So the question is, we've cut that tail off because of fiscal policy, monetary policy. Okay, you can't, the risk don't ever go away. What does that mean? I think it could mean we just get faster, more of these things.

1:14:33Michael Batnick:So buy and hold gets harder?

1:14:35Ben Carlson:Mate, don't you think that these cycles just speed up? There's no way this stuff is slowing down and AI is going to just add more speed. That is literally what has happened. My contention is that's where we're going, is just cycles are going to be supercharged.

1:14:46Michael Batnick:Of course, that's a contention. Right?

1:14:49Ben Carlson:What do you think about that? I think that's right. Yeah. Thank you, John.

1:14:52Downtown Josh Brown:Everything else is faster. Why wouldn't the market's ability to process bad news be faster? Everything's happening faster. There's a lot more trading, 24-hour trading. We're heading towards a world where, yeah, everything will be instant on your phone. Right. There's no rule that says how long a bear market has to be. I know the old heads like to say the average bear market is 13 months. When? When?

1:15:13Michael Batnick:We haven't had a true economic recession in a long time. we haven't had his credit cycle

1:15:21Ben Carlson:we haven't had a credit cycle

1:15:23Michael Batnick:we'll have another one

1:15:25Ben Carlson:I got one more chart I want to spike the football on some people's heads John, throw up chart 53 on Japan this is the question I get more than any other now show Japan

1:15:32Downtown Josh Brown:meaning the implication is why are people so obsessed with Japan? because Ben says it pays to be a long term investor and people are like oh yeah, Japanese people sat in down stock market for three decades

1:15:44Ben Carlson:I've never seen people show this yes, from 1990 to 2024 Japan did nothing. It was like one and a half percent per year. You wouldn't know. It was Japan peaked in 1989 in like December 1989. It bottomed in March of 2009, which is crazy. Horrible. But if you extend it, the returns were so good in the 1970s and 1980s that it was so compressed. It had to be bad. So from 1970 to 2024, you got almost 9 % in Japan. Long-term investing did work in Japan. It was just all those returns were compressed. Front and loaded.

1:16:16Downtown Josh Brown:Yes. So you did 22 % a year from 1970 to 1989.

1:16:20Ben Carlson:Small cap stocks in Japan did 30 % per year for two decades.

1:16:24Downtown Josh Brown:So then you do 1 % a year from 1990 to 2024, which is a lifetime. And guess what?

1:16:29Ben Carlson:The average worked out. You still did okay over the very long term in Japan.

1:16:32Downtown Josh Brown:Over the full 60-year period. That's a cycle. Right? That's a good way of thinking about it. I think most people would have preferred if the returns were back and loaded rather than fun. right in front of the Lord. All right, dude, the book is called Risk and Reward. I know Kai is very excited to read it. You're going to listen to it? Oh, I'm exhausted. Is Ben going to read it to you? Yeah. We're going to call each other at night. I'm going to listen to it. 100%. I have the audio book too. I'm going to listen to it in bed. All right, so I'm reading it because I'm old school, but I love it. So you know I'm like one of the biggest fans of your writing in the world.

1:17:09Downtown Josh Brown:And I make it through the first two chapters and I'm just like, yeah, man, this is what I need. This is the medicine. because it's all about things will probably be okay. It's unique. Most people writing financial books, it's the dollar is going to not be the reserve currency anymore or gold is going to replace. You're just saying like, no, no, no. Things will be okay. And here's how you know.

1:17:33Ben Carlson:The 10 % per year over the last 100 years is inclusive of all the bad shit that's happened. Right. The Great Depression. That's part of it. Yeah. Right? 1987. That's part of it. 70s. That's part of it. All the bad stuff that's happened is inclusive in the long-term return that are still good. That's the point. We've been through a lot

1:17:47Downtown Josh Brown:and things are still okay. And that's a really great message. I love it. We should end there. Guys, did you have fun on the show today? Great time. Yeah. Thank you. You brought the heat. Thank you. You're so smart. Why are you so smart? We'll do it. Let's do it another time. I want to tell people where they can learn more about your research because your research is really spectacular. Your funds are great, but like you're a thinker, you're a philosopher and you test your ideas with data. and I love anytime your stuff drops. Where do people go to learn more about Sparkline and your work? Well, thanks, Josh.

1:18:18Yeah, you can just go to my website, sparklinecapital.com.

1:18:22Downtown Josh Brown:Sparklinecapital.com. That's right, yeah. And you're active on tweets? I tweet sometimes. I try to respond. This guy's so smart he doesn't blog, he white papers. Right. He's writing white papers while we're doing blogs. Yeah, no doubt. All right, guys, thank you so much for listening. Great job to the crew. I know you guys worked your asses off this week. John, Duncan, Rob, amazing. Nicole, Daniel, Travis. Happy birthday to Graham Thomas. Again, everybody. Katie. All right. Guys, thank you so much for listening. We'll see you soon.

1:19:38Michael Batnick:Thank you. PANTA.com slash com.