Real Men Don't Panic Over Bonds

24:19And speculation thrives on liquidity. When you say liquidity, sorry to interrupt, but what does that mean to you? Liquidity to me means capital that is available to invest or speculate or trade, whichever word you want to put into there. Lower interest rates will make the cost of money cheaper. So if the cost of money is cheaper, you can borrow that money and go trade in the stock market. Leverage. Leverage is cheaper. That's the way to think about it. If the 2021 is the peak liquidity we'll probably ever see in our lifetime. Yeah, absolutely. But the liquidity today is not even close to that.

24:52So that was Michael's question, and that's what I wanted to zero in on. So I think if you look overall at financial conditions, financial conditions have gotten back to being relatively easy. Credit spreads are pretty narrow. Bank lending standards have tightened, but not meaningfully so. The Fed is not raising rates. The stock market is up, right? You're seeing all these different things that argue. And my divining rod for liquidity, if you get that thing, divining rod, liquidity, follow along with me here. That's what Moses used to find water in the desert, the divining rod. Exactly. I was a reformed geo.

25:26We didn't go into it. Yeah, exactly. Surface level knowledge. Yeah. Okay. But anyhow, my divining rod for liquidity is Bitcoin. The Bitcoin thrives on easy financial conditions. I think you're – I get the concept. I really feel that Bitcoin lives its own existence outside of the traditional financial markets, even though it's been welcomed in. I would agree with you. I still think it's the strangest asset. It's very strange. I would agree with you if other cryptocurrencies didn't have like an 80 % correlation to Bitcoin. Ethereum just went up a lot. Yeah, Ethereum and – Fartcoin. Fartcoin. But Rich, this is the question though.

26:10So in 2022, the rising rates and the threat of much higher rates acted as a governor on everything from SPACs to tech stocks. SPACs are back. To Bitcoin. And they're not right now. And they're not anymore. They don't seem to have threatened these earnings-free companies. These stocks are rallying. You saw the quantum computer stocks had a massive day today. It's very bizarre. I would argue that there's not a lot of financial easing in the system. The housing market is frozen. The Fed funds rate is above inflation. Like, this is not a free-for-all. And yet, in the market, it feels to be. Well, what it's saying is that there's still too much, whether it's residual, I don't know what the right word is, there's still a lot of residual liquidity hanging around here.

26:58There's too much money. Yeah, there's just too much money. You know what's interesting about that? I agree with you. I think it's like sitting in private equity, private credit, and companies that would have normally been struggling by now because of 4 % and 5 % rates leading to 8 % borrowing costs. They're just like getting checks written to them. Correct. Exactly. By Blue Owl Capital and J.P. Morgan. 100%. And private credit underwriting data center buildouts. So what could change that? There's just too much money. Like the overnight lending rate is not affecting it. No. So what it says to me is that the overnight lending rate is still not high enough.

27:35We haven't disintermediated a lot of these things. Now, it's interesting that you brought up the private debt thing, because private debt is something I'm not sure the Fed totally understands. Normally, and that's a big statement, they're smart guys, don't understand, but I don't think they understand this completely. normally when the fed raises rates they do so explicitly to disintermediate the banking system in other words they want to suck capital down they want them to slow down they want them to slow down they want to suck capital out of the banking system yes so the t-bills become very very attractive relative to everything else like when i was when i was in college the same you know in when was when we talked about reconstruction 1870s when i was in college um i was taught that When the Fed raised rates, they did so because of Regulation D, I think it was, which said that savings and loans could not offer passbook accounts higher than 5%.

28:33And so when the Fed funds rate got above 5%, money would come out of the savings and loans. Yes. And it would go into treasuries. Yeah. And therefore, savings and loans could make mortgages, and you'd slow down the economy. Think about that example in a much grander scale. That's kind of what the Fed's role is in the economy. The problem is for private debt, their deposits, if you will, meaning the commitments from investors, basically give them free money. Insensitive to the Fed funds rate. Completely insensitive. At least for now. Right. And once you commit, you're stuck. Right. So the Fed is screwing around with the rates that impact the cost of borrowing for banks.

29:20Correct. What if the economy is not reliant on banks to the extent that it used to be? Exactly. And you've got KKR, Blackstone, all these firms sitting there with a trillion dollars in dry powder. What the hell is an interest rate change going to do? It's basically a negative interest rate for those firms. But hang on. I also don't want to lose sight of the fact that in 2022, when interest rates were going up dramatically with inflation, all of these growth stocks got destroyed. They did. All of the growth funds got destroyed. And all of that liquidity dried up immediately. And it's not this time.

29:50And it was dead dry for like two years. And now finally we're starting to see a lot of liquidity. But it's bizarre. So it's not like higher interest rates didn't impact that space because it crushed it. Right. So here's the way to think about what we're talking about. How many Fed fund cuts are priced in for this year? What is it like? Two, right? 200%. Yeah. And I would say it's zero and it could be a rate hike. Really? So that's the difference. He will be fired so fast. If he raised rates. How would he possibly do a rate hike and then get out of the country in time? Anyway. Seriously. He'd put on glasses and a nose.

30:30A fake mustache. Let me tell you something. If Jerry Powell decides to hike rates, he has to join MS-13 that day because he's going to f***ing El Salvador. There's no way that's happening. It is a bizarre market. I'm just saying from a pure economic point of view. But I think where the market really is wrong is that he's going to cut two times. All right. That, I think, is what's propelling part of the market here. Let me ask you, let me ask you, not like a prediction. OK. So you think the Fed is not going to have the opportunity to cut twice? I don't think so. OK, you're way smarter than me. My gut instinct tells me demand destruction is coming.

31:06Yes. I don't care that private equity is able to keep a lot of liquidity going in the system. I think the combination of a four and a half, what is it, four and a half percent now? Fed funds. Yeah, yeah, yeah. That's high. Four and a half percent Fed funds rate. Deceleration in hiring. Eventually that will flip over. Yes. There'll be job loss. Yes. And I think the Fed is going to have no choice. Correct. But to cut at least twice. Correct. So we're sort of on the opposite side of this. But let me tell you what you can watch. Just watch weekly jobless claims. Because that's the leading indicator of employment.

31:38I have a leading, leading indicator. You have a leading, leading indicator. Yeah. I have some of the biggest hirers and growth engines in America. now very cleverly coming up with ways to say we're hiring way less people this year because of AI. I have commentary from Mark Zuckerberg, from Meta, where Mark Zuckerberg is telling managers, I want you to make more people fit into the poor performers bucket. Okay? So they bucket everybody. That's a prelude to more layoffs at Meta. Got layoffs at Microsoft last week. got the CEO of Shopify saying, if a manager wants to hire someone, they have to demonstrate why AI can't do the role that they're about to hire people for.

32:23Yep. Look, these are anecdotes. I'm with you. This is not data. I'm with you. But directionally, this is happening now. Correct. But I'm just saying, if you want to follow hard data, follow - I want to follow stories. You want to follow stories. Well, what's the hard data telling you? The hard data is saying that the labor market - It's fine. Yeah, you're right. It's okay. And that's going to handcuff the Fed a little bit. All right, let me show you what's not okay. This is Bank of America's – this is your old post. You weren't the chief economist. No, I wasn't. Okay, this is the chief economist at Bank of America.

32:57Mortgages are the elephant in the room. At 70 % of all U.S. household debt, by contrast, mortgages dominate the liability side of the balance sheet. 70 % of household debt is a mortgage. at 0.9 % mortgage delinquencies are still below pre-pandemic levels, but they have been picking up steadily since the second half of 2022. That's already three years ago. New 30-day delinquencies are also rising, suggesting further increases in the pipeline. Even a modest further increase in mortgage delinquencies, like just to the levels we saw in 2017, would have a bigger impact on total delinquent debt than the combined effect of credit cards and autos.

33:41That's how big mortgages are. So while other categories got a lot of attention, mortgages are clearly the elephant in the room. Our sanguine view on household debt has been premised on low mortgage delinquencies. If the facts change, we will change our minds. You can see the uptick now. It's not a microscopic spec on the chart. The dark blue, the dark blue just below the green. I'm not suggesting like, oh, here comes the next financial crisis, but most of the earnings, if they're not AI related in the S &P are thanks to the consumer. Yeah, without a doubt, of course. So if this is where we're headed, where all of a sudden the biggest category of the consumer balance sheet starting to sour, again, it's another reason why the Fed might have to be doing more than two cuts.

34:26They might not have a choice. It may be a question of timing between when we're talking about cuts. Yeah, we agree. But let me give you, since you're already kind of swimming in the deep end of the pool here, let me give you a little other thing to make you concerned. I think the next recession, whenever it occurs, I have no idea when it's going to occur. Yeah. Next recession, whenever it occurs, is going to be a doozy. Why? Because consumer confidence - Cut his mic. Consumer confidence is already pretty shaky. Yeah, with no problems. With really no problems going on, right? Now, here's the thing to consider.

35:03You could now be 38 years old, roughly your age. I wish. And 38 years old and never have experienced a real recession. Yeah. Right? So you now could be head of household, kids, mortgage, the whole thing. And now your neighbors get laid off, which you've never seen before. Do you react? How do you react? I think you react worse than you would have if you had seen recessions along the way. Michael and I were arguing this exact point, but as it pertains to bear markets. Yeah, absolutely. You have 30 million account holders at Robinhood, none of whom have ever invested through a recession. We had a two-month recession in 2020 and nothing prior to that until back to 2008.

35:49Yeah, exactly. So you have a whole generation that knows only one thing works and it's by the dip and it's right every time, including this time. and the gratification is coming faster and faster. This time it took you 10 days to not feel like an idiot for staying long. Do you think when you say the next recession could be a doozy, that same psychological situation could play into it? 100%. Absolutely. Because if you think about what's offsetting some of that mortgage debt right now is that on the household balance sheet, the equity side of their debt equity is still appreciated. So what happens if they have a mortgage and their equity side starts depreciating?

36:32Equity of the home price. Equity home, equity, just the equity of their balance sheet, their overall balance sheet starts depreciating, right? Let's just say the stock market goes down 20 or 25%, like in a normal recession type thing. How do they react to that on top of everything else? Rich, there are people who say, there are people who say, just ignore every economic data point and focus only on the labor market. if the labor market stays good, you can skip the conversations about used cars and whatever. To some extent, that's absolutely true. Okay. To some extent, because it's household cash flow.

37:03And what's the source of household cash flow? It's a job. Income, working. It's a job, right. Okay. So if you only did that right now, you'd be pretty okay with where we are. So 229 ,000 initial claims, almost nothing? It's nothing. Okay. And I don't actually think that, I think people are spending right now too much time worrying about the economy, not enough worried about corporate profits. I think that's the bigger issue. The profit cycle is starting to peak out. And I think that's the more important thing to focus on right now, not whether the market's going up or down. We were blown away by corporate profit.

37:40My theory is that earnings season is what saved the stock market in April and May. Yeah, absolutely. These reports were fantastic. They were great. Were you as surprised as Michael and I were? We were a little surprised, but it is towards the peak of the cycle. And at the peak of the cycle is when you get the best news. How can you be sure it's the peak of the cycle? You just look at, we do a lot of modeling of corporate profits that involve all kinds of different macro variables and estimate revisions and all kinds of things like that. And we're kind of reaching peak momentum. It doesn't mean that the dollar value is going to go down.

38:11It means the growth rate is going to go down. So right now, I think through first quarter, I think reported earnings were up about 14%. I think our forecast is like 1 % or 2 % by the end of the year. Oh, wow. So we're heading in that direction. That's meaningful. I mean, that's meaningful. It doesn't mean the market has to go down. It just means you should see a more defensive flavor in the stock market. Which, not yet. Not yet. Not at all. Not at all. Pretty remarkable. Do you want to do this diversification stuff? Where are we at? I think we're – no, we're higher. you wrote about rich you wrote about diversification versus the siren song i'll set this up with your own words um because this is a pretty important topic always but right now it seems really apropos you said 25 years ago i wrote a book called navigate the noise that posited people have difficulty building wealth because they follow a siren's song of high returning yet quote riskless assets instead of following time-tested wealth-building principles.

39:16Continuing the Greek mythology theme, investors' portfolios just steer toward the hauntingly attractive story of riskless, high-returning assets eventually crash on the rocks. So it's, is it Jason and the Argonauts or is it Odysseus? That's Odysseus, yeah. That's Odysseus, okay. So the beautiful women are like standing on the island, calling to them. Right. And he puts wax in his ears and they lash him to the mast. Correct. And that's how he gets past the hazard of the sirens who would otherwise have him crash the ship onto the rocks. Absolutely. And men are driven mad by that. So it's a great metaphor.

39:54I never thought of the sexist implications of that one, but that's okay. No, we're going to give you a pass on that. But yet, like all of that's true. Look what the best stocks are off of the lows. Yeah. Yeah. It's incredible. Meta, Tesla. I mean, it's the same thing over and over and over again. NVIDIA is going to report next week. I wouldn't bet against that being a great. Yeah, yeah, yeah. Right. So here's what's interesting. It's not, I think, when you talk about the magnificent set, well, first of all, let's get to the diversification issue for a second of the wealth building. I think in the last six months to a year, people have said to me, when I talk about our diversified portfolios, they say to me, oh, you mean, it's not diversification, it's de-worsification.

40:37Well, last 15 years, pretty much. That's basically, but I haven't heard that as much as I've heard it in the last year. Let's say everybody. And, you know, I get the point that you could have bought the MAG-7, you could have bought an index fund. I get all that. But to put all your eggs in one basket, whether it's an index fund or a MAG-7, has never been a good idea for an extended period of time. I mean, we all know that, but. But this period of extended time has extended way longer than most people, myself included, would have thought. because it started, I think the Megs were coined in 2017.

41:12Or no, the FANG, my bad. It was FANG. It was FANG, right. But that was, it's been eight years. The cloud computing era kicked off in 2015. Amazon reported some like insane quarterly report. Way back when. And after that, these gigantic cloud computing stocks just, and like how long did the nifty 50 period go on for? Two years? Right. And they still talk about it. I don't think for most individual investors, they were up to their schnoz in like mag seven stocks until maybe four years ago three four years somewhere in there right and i think that's really the period that that i would focus on because yeah there was a there was a change there was a real fundamental change and everything and i'm not disputing that at all um and um but i i i guess my point is that uh the data pretty much show that individual investors are now shunning diversification, right?

42:07They don't want it. They don't care about it. You know, if you talk to financial advisors, they're having very frustrating discussions with some of their clients about the financial plans they all set up and all this kind of stuff because everybody wants to punt their financial plan. The good news is that peaked at the end of 2024 because in early 2025, these things had a 30 % drawdown. Absolutely. Absolutely. But the problem now is in the last couple of weeks. They came all the way back. Yeah, they're right back. And so now everybody's - That makes it worse. Look at this. So Rich, this is the MAG7 from the last time that you were on with us.

42:40It's up 42 % since then. But it had a massive fall and a massive comeback. Yeah, the volatility is pretty big. The problem is if you put the diversifiers up next to this - Yeah, they look like shit. Like you put the Russell 2000 up, people are like, why the hell would I do that? Yeah, exactly. Merging markets? You can put anything up there. Almost anything. Put the equal way to S &P. Yeah. Right? I mean, you can put anything up and it'll look terrible. I agree with you. Advisors, if they're still allocating to these other asset classes, they're not talking about it. Yeah. And some of them are not at all.

43:12But this is an important part, Rich. So this is from Michael Sembalist. He said, an astonishing sign of the success of tech and interactive media stocks. They now account for 35 % of market-wide earnings versus 19 % a decade ago, which is wild. So the accompanying chart that we're looking at is the price to book on one axis. And you've got the consensus forward ROE for the S &P 500 industries or sectors versus the rest of the world. And look how much better in terms of profitability and quality and specifically return on equity these companies are. Here's the thing. It's in the upper right-hand corner.

43:47But not only. Wait, let me finish. So that says that the price to book is high as well as the growth rate. That means the market is aware of it. This is not like something that the market is unaware of. If it was sitting at, wait, I got to make sure I get the, if it were sitting on the bottom floor of that elevator that it's on right there, that'd be a huge story. I guess that'd be a great opportunity, but it's not. Here's the point. Here's the point, right? Here's the point I want to make. Look at the third one down is consumer staples. Wild. Like who gives a rat's patoo about consumer staples?

44:22Nobody. But if you take a stock like Apple, which I have to, full disclosure, we own in some of our portfolios, blah, blah, blah. Don't apologize for it. I'm just saying. No, I'm just saying. Full disclosure, right? We have in some of our portfolios and some of the ETFs we hold, hold it, just in case for the lawyers. Right now, Apple's growth trajectory and growth history looks very much like that of another company that we may own, blah, blah, blah, everything else. Looks like Campbell's Soup. Yeah, it's not growing. I mean, if I had told you about Campbell's Soup and not told you any of this, would anybody who's listening to this have said, oh, wow, Campbell's Soup sounds so interesting.

45:04Yeah. No. Yeah. And that's my point. I think the opportunity here is in things like consumer staples. So I want to get to your consumer staples, but just a little bit of pushback on why is that Apple has the ability to change the world again. Obviously, Campbell's Soup will not. We got the interesting announcement yesterday between OpenAI and Johnny Ive. Like these companies continue to push the ball forward. It's unbelievable. I'm not disputing that. But all I'm saying is in that chart, how much of that is unknown? Zero. Yeah, that's my point. That's my point. Investors are paying for Apple more than they're paying for Campbell's Soup because Apple has 40 % gross margins or whatever.

45:44Yeah, but their earnings growth is roughly the same. I think investors think that Apple can have another spurt to Michael's point. Of course they do. The next time they reinvent something and it'll be too late to buy it. But if you were to compare Apple to Coke or Philomores or all these other companies, which we may own in our portfolios just in case. There is a lot of weird things happening in the market, like the premium on Walmart, on Costco. Yeah, yeah, yeah, yeah. Some bizarre things going on. Yeah. I think people are allocating. So it doesn't seem bizarre to me. I think people are allocating to quality and reliability.

46:15and people worry about the economy or the dollar or the political situation. Like the one thing you feel like you can count on is that Apple's got this replacement cycle thing on Smash. Anybody who needs a phone is just going to go to the Apple store, get another one. So Verizon and AT &T started to act better than they had for a while. Well, Verizon, AT &T are kind of defensive stocks, right? Yeah, well, I think they all, all of these companies demonstrate something in the eyes of an allocator who's buying stocks. And I think that thing is like, you'll wake up tomorrow and they're going to be here.

46:49Yeah. I think they're getting like that benefit and that's what's in those multiples. So I think I'm going to send you a chart and I don't know if you want to go down this rabbit hole about international quality. Oh, I don't know if we have that. Go ahead. Talk on it. So anyhow, the story is that if you look at the growth expectations for the MAG-7. John Chart 11. And you compare that to other. Oh, no, not that one. That one shows the Magnificent 7 aren't unique. Its stock's growing 25 % or more. No, not that one. That's showing you the U.S. is in trouble. Maybe we didn't send it. We might not have sent it.

47:26But basically what we try to show you is that international quality, which are big names that are going to be here tomorrow, are selling at a fraction of the price of the Mag 7, have a dividend yield that's really meaningful, and their growth trajectory is better. Yeah. Give me some examples. So it would be, I don't want to, and this one I don't want to name names. These are not endorsements, which is just speaking extemporaneously. We know them all, whether it's the big food companies in Europe, the big drug companies in Europe, the big luxury goods companies. There's tons of companies in Europe.

48:01They're typically traded at a discount to their U.S. counterpart. Oh, without a doubt. It's an amazing discount. Do you think that discount ever closes? I think it will. You do? I think it will. Why? Well, look, if we had been here 15 years ago, we would have been talking about the outstanding growth of non-U.S. markets and of emerging markets. Yeah, that's true. Right? And at that point, developed markets ex-U.S. were a larger part of the world market than was the United States. Yeah. Today, nobody – and nobody wanted to be in the U.S. The U.S. was a crappy market. Nobody wanted to be in the U.S.

48:36Today, we're talking about U.S. exceptionalism. So you think it's a pendulum and we've already hit the far end for the U.S. exceptionalism and it's going to swing back. What's the story where European stocks get a higher multiple or is it just U.S. multiples fall? I think it's a combination of two. I think if you think about the European stock market, let's say, what do we have the European stock market doesn't have? 401ks. Well, besides 401ks. It's a big one for me. No, no, no. But I'm saying we don't have – Europe doesn't have a big tech sector in their market, right? They have some tech. No, Rich, I think my story is better.

49:09They don't have a captive investor every two weeks contributing money to the equity market. But they don't speculate the way we do either. Well, they don't. Right, right, right. But I'm just saying, if you just look at the characteristics of the markets, their stock market does not have this big tech sector that attracts a lot of investors, growth investors primarily. And so if, if, not everybody's going to say it's going to happen, if technology retraces, if growth retraces, a lot of these other markets are going to start looking pretty attractive. Because now we're talking about an even keel.

49:43Yes. And could - Germany has an ETF savings mechanism now for their retirement system. Okay, step in the right direction. All of these, Larry Fink has written extensively about this, capital markets being the strength of the US. I will stipulate that point that we have these tech giants and Europe doesn't and they would love to and they don't. Therefore – we have companies with 20 % growth, 40 % profit margins. Companies like CrowdStrike and they just do it every single year. There's nothing in Europe even remotely close to that. Okay. They do have the fat loss stuff. They do have lithography.

50:23They have one company, ASML. It's Dutch. Freaky. All right. Fine. Right. But I stipulate that. But I also - Triple A-rated country, by the way. Yeah, but we have 200 million US adults whose money is either going into a 401k or a pension. Right. And there is guaranteed buying of stock happening that the Europeans aren't doing. But why can't those retirees or the pension funds or whatever buy European stocks? They won't. They will until they underperform and then they stop. They were buying emerging markets when we started our firm. Yeah. I mean, I remember people would not invest with us because we were so bullish on the United States.

50:59Yeah, they wanted to buy the bricks. They wanted exposure to the middle class of Brazil. That was a big thing. And there was the phrase that people came up with at the time, the bricks were passe. Now it was the mints. I remember the mints. Mexico, India, Nigeria. Nonsense land. What was the T? Was it Taiwan? Yeah. I don't care. I agree with you. I was selling Nigerian mid-caps for a couple of years in that 06, 07 period. Didn't go well. It is foolish to say that business cycles, that market cycles are dead. I will never say that. Oh, I don't think they're dead. But my God, this has gone on for so long.

51:37And you have to be open-minded to the fact that the Apples and the Googles of the world are fundamentally different. They've proven it. They are different than companies of previous bubbles. I'm not saying that this will go on forever. But what if we're in a world four years from now where we're having the same conversation, where Google is$4 trillion, NVIDIA is$6 trillion, Apple is$7 trillion. At some point, I know I'm making make-believe, but I will point to you and say, holy shit, maybe this is just different. Let's assume you're right. I'm not saying that for the time. No, no, no. Let's assume you're right.

52:11I'm fine with that. Let's assume you're right. What are the economic consequences of that happening? Remember, the stock market is not separated from the real economy. It's a capital formation tool. So let's say that the MAG-7 becomes the MAG-5. I don't know. Let's make this up and keep going. It becomes the MAG-5. Everything else is left behind. I would tell you that is hugely inflationary. Why? Because you're denying capital to all these other industries and all these other things that we need in life. Okay. But here's the problem. there are hundreds of other stocks, not thousands, but hundreds, that are up 3 and 4x in the last four years, and they're not being starved of capital.

52:55They're just not as big as Apple. I'm not saying that's where we are right now. I'm saying if you take Michael's example, and we keep going in this direction, I mean, companies will have a very tough time raising capital. Let's do the small cap example. small caps historically were the first to lead the market out of um economic downturns like that was the the upcycle would start with a big bang small cap rally um small caps historically they were thought to be higher beta because they would like they had higher growth some of them and okay here's the problem they're just not being born anymore the the most successful ipos that come along huge these are companies that in a prior era would have been russell 2000 holdings for 10 years yes then graduate to the mid-cap 400 then if they were lucky get to the s &p 500 now they come public as airbnb and snowflake and they're in the s &p 500 within 18 months they skip the small cap life um uh life cycle and then you're in this russell 2000 you're like why aren't small caps acting the way they have historically.

54:06Well, because the only small caps left are fallen angels. Formerly good companies that are now bad and too small for the S &P. We're not, I was at the New York Stock Exchange today. There were two IPOs, MNST. It's a billion dollar valuation right out of the gates. God forbid they have a good earnings report. It'll be 3 billion. It'll never be in the Russell. The other one is something called Hinge Health. I kid you not. This is digital physical therapy. They use their finger. No, I don't know. What is digital physical therapy? Do you know? Duncan, are you enrolled? Never heard of it. I'm guessing it's like Peloton, but for physical therapy.

54:45Yeah. So a chiropractor pops on your screen and tells you to slam yourself into the wall. I don't even know. Fine. Whatever it is. Okay. My point is, it's great to see that. We had two IPOs happen within a half an hour of each other. But like over the last five years, we've had a drought. And then you get a core weave. when did Corwin become public? January? A month ago. How big is Corwin's market cap? 50 billion. Okay. It's never going to be in the Russell. And if it is, it's got real problems. This is why I say, I understand it's a cycle. Things come back and forth. Right. The Russell might be permanently because they're not getting that newborn inflow that they used to get.

55:22I agree that you said I would take out the word permanently. Okay. And the reason I say that is that I think that this shows the strength of the venture capital community. that they have decided we need to return capital to our investors. If we skip over this point in the life cycle, we tell everybody it belongs here and this is the valuation, people are going to swallow it and we're off and running. And they skip that whole life cycle, if you will, and they go right there. The interesting thing is that people tell me that it's not a speculative environment because we're not getting pets.com. We are, but it's not trading.

55:58It's not pets.com. It's digital physical therapy. Well, that one I'm bullish on. Let me give you another one. I think this is important just to continue the conversation of like just tech won't stop. So yesterday, so this is from the Wall Street Journal. Right. Altman and Ive, right? So OpenAI merged or purchased Johnny Ive's company for$6 billion or something like that. Right, right. Altman and Ive offered a few hints at the secret project they have been working on. The product will be capable of being fully aware of a user surrounding and life will be unobtrusive, able to rest in one's pocket or on one's desk, and will be a third core device a person would put on a desk after a MacBook Pro and an iPhone.

56:36I've referred to a new design movement. So what if it just keeps going and now it's AI and now whatever's coming, you can't even imagine? So here's the way I would answer your question. I think investors in general have a very tough time separating out an economic story, or in this case, a technological story, from an investment story. And I don't think they're the same. I think the economic story, will AI change the way we live? Will it change the economy? Of course it will. There's not a doubt in my mind about that. I don't care. But the important thing that people have to remember is the technology always changes the economy.

57:12I mean, the internet changed the economy. Look what you guys are doing here. How's that going to be distributed through the internet? The automobile, my personal favorite, the light bulb. Monster in productivity-enhancing technology because it turned the economy into a 24-hour economy. You can't have a graveyard shift in the dark. So I wholeheartedly embrace the notion that AI is going to change the economy. I don't think that's the right issue. I think the way to think about this is to say, historically, how does that technology permeate the economy? And one of the ways it does it is that investors overcapitalize the sector.

57:49Let me cut it. You're going to love this. Wait, wait, wait. Let me finish the thought for a second. Do you remember how when the internet came out, there were all these charts that showed the adoption of the internet and how quick it was relative to other technologies. Nobody put it together and said, why did that happen? The answer was we dramatically overcapitalized the sector, which gave greater accessibility and greater new products and all these different things. And it swapped the economy. But if you were an investor, you didn't make any money. Right. I kind of think that's where we are again.

58:18You're 100 % right because OpenAI is currently valued at$300 billion. We'll never be in the Russell 2000. And their most recent funding round was$40 billion led by SoftBank. So it might be the first company to open up as a Dow component. I got an IPO day. A new issue. Hey, we have some charts. We should blaze through some of these, Mike. Let's do this top 10 GWIM stocks. This is a rich one. Yeah. Tell us what's, so what are we looking at here? This is one of my favorites. This comes from Michael Hartnett, who is the chief strategist at Merrill Lynch or Bank of America Merrill Lynch. It shows you the beta of the top 10 holdings in the Merrill Lynch private client system.

59:02Wow. And so you go back to the beginning of the bull market, 08, 09, the beta was 0.75. Below one. People are under their desk in the fetal position, right? They don't want the risk of the market. So it's less than one. We started writing about it when it hit about 1.2, 1.3 in there. That 1.2, 1.3 went to 1.4, which went to 1.7 at the beginning of the year. Then they got scared. It went to 1.3. Oh my God, you know, like let's cut back. And now it's back to 1.4. So the average private client's brokerage account at Bank of America Merrill Lynch has a higher beta than the S &P 500. Yeah, more risk than the S &P 500.

59:41So they're taking more risk than the market. Right. Now, in truth be told - They're doing that in like the Palantir's and the - Okay. This is their top 10 holdings. Now, if you take their top 20 holdings, you don't get the 1.4, but you do get the highest still that they've ever had. Can I be so bold as to call a top? I mean, how much higher can you possibly go? I never expected to go to 1.7. Unless they're going to be holding levered ETFs or levered stocks. I mean, this is nuts. It is nutty. That's what I was saying before about diversification. They punted it. Yeah. They punted it. It's crazy.

1:00:11All right. Here's a diversification. Here's a diversifier. This is one of my favorite charts of all time. Walk us through what this is. Okay. This is the white line is the NFIB Uncertainty Index. NFIB, National Federation of Independent Businesses. That is the lobbying organization. Of the barbershops. Of small, yeah, restaurants, barbershops, all this kind of stuff. They have something they call the Uncertainty Index. What's the Uncertainty Index? They basically ask people, are things better, worse, or I don't know. good, bad, I don't know. This is a summation of all the I don't know. Oh, it's a survey.

1:00:40It's not components. It's not like the inflation rate and the, that's the misery. And that's something. No, no, no. It's, it's, I don't, I have to admit, I, the detailed paper I have, I don't remember, but it's basically, I don't know. Got it. If you're answering, I don't know or I'm uncertain, you get copied in this thing. And I overlaid that with the gold one, the gold line being gold, the year to year percent change in gold. It's pretty good. It's a pretty good line. It's a pretty good line. That's actually great. And it's 10 years. I'm usually anti-tune lines, but this is pretty good. That is pretty good.

1:01:09Anti-tune lines. That's pretty good. So anyhow, the point I'm trying to make here is just that gold is a good hedge against uncertainty. That's why we keep it in our portfolio. It works as uncertainty grows. As uncertainty grows, it is the ballast against uncertainty in your portfolio and lowers the volatility. I don't think people should treat gold as the next mag seven. Like, what's the next momentum play? I think that's very hard to do with gold. But if you hold it as part of a portfolio, I think it's very prudent. Paradoxically, my favorite thing about gold is that there's a such thing as certainty in gold.

1:01:45And when that peaks, that's probably because the stock market has just gotten killed. Gold has risen a lot. Wait, what do you mean? In 2011, GLD crossed above SPY as the highest market cap ETF. Really? Do you know that? I did not know that. Is that not the mother of all buy signals for stocks? I would say so. That happened within two weeks of the generational top in gold. We only now just surpassed. That's fantastic. And I think the S &P at that point was probably 25 % off the high. That's outstanding. That's outstanding. It is. I hope it happens again. Looks like it's on the way. Next, we did the 10-year Germany.

1:02:22Let's do this initial unemployment claims. Rich, there's nothing here, right? Nothing here. That's exactly the point. All right. There's nothing there. Okay. This is important. I think people need to hear that. what's the oh IPO SPACs are SPACs are not back one guy one guy's doing a SPAC that's it and we all know who he is yeah well and God bless him but I mean this is the performance of SPACs and get the f*** out of here all right next chart next chart you don't like that we're never doing we're never doing we're never doing that SPAC thing again it's not gonna happen you like my goal chart you don't like my SPAC chart this is good this is good I love this this is next 12 months earnings growth S &P 500 companies each bar represents of different companies' growth forecast.

1:03:02One Mag 7 company passes that screen. It is NVIDIA. Yeah, it would have to be. Yeah, there is growth elsewhere. What's on the left? Consumer to Squash? It's a mix. Hems and Herz? It's a mix. Hems and Herz is on the left. But I think the point of this is it's not, Mag 7's not the only games in town. So they may be magnificent, but they're not unique. I love that. That's the line. Okay. We did the Mag 7 total return. is this trade chart we're getting into? I did this more tongue-in-cheek than anything else about how we had a trade pack with the United Kingdom, but we have a trade surplus with the United Kingdom.

1:03:41So what's the point of that? The red bar here is our trade deficit with China. That's the big elephant in the room. Yeah, I don't think that's getting resolved this summer. Okay, he wants to sign something on July 4th or something. I don't know if it's going to happen. One year CDS spreads by country. Okay, CDS, what's the - Credit default swaps. Yeah, what's the probability of default? You know, that's really what this is looking at. This doesn't look good. It's the green line is the United States. Green line is the United States. The other multicolored things down below are AAA rated sovereign countries.

1:04:14Is it the probability or is it the amount of betting? The amount of, I guess they're using this for hedging. What's the measure? It's an insurance. They're buying insurance. Basically, if you want to insure against, I think this is one year, if I remember correctly, doesn't say. We didn't label it correctly. Pretty sure it's one year. You have to pay 60 basis points if you want to hedge against default in the next 12 months for the United States. That sounds, that looks mispriced. Yeah. Who the hell is paying for this? Only because I'm looking at the rest of the countries. Well, look at the others, right?

1:04:43It's Singapore is the nine, but the rest are all like three, four. Can I ask you a question? Do people trade this? Like nobody's actually - They don't, they trade it, but it's not, it's not the most liquid, not the deepest market. So why would you buy it? You'd buy it if you, look, you buy it if you're a hedge fund and you think people are going to wig out about the deficit. So you're buying it so that you can sell it higher. It's a tail risk. Yeah, it's tail risk. Like you put like 2 % of your portfolio into that. Yeah, do nothing. But my point is you know that's not going to pay off. So you're just trying to buy it to sell it higher in case.

1:05:12Yeah, yeah, yeah. It's basically, it's a very speculative market. But the interesting thing is you can do this versus AAA sovereigns. You go back in time. There was, although the CDS market was not what it is today, you know, you can see that the spreads are much narrower. You need an ISBN designation to trade these things, though. Oh, yeah. There's no retail in this market. No, no, no, no, no, no. There's no retail in this. You have to be, like, cleared to be a participant in that market. As far as I know, that's right. We don't trade in it. Okay. Expected total return. This is great. This is what I was talking about.

1:05:46helpful for people to picture it. Like what, like what's the risk, what's the upside of the sector fundamentally relative to, I guess, what's on the Y-axis. The dividend yield is like, all right. So walk us through what you're seeing here. Now this explains why earlier I was such a big bull on international quality, right? Because you want to be Northeast in this chart. If you're Northeast in this chart, Top right quadrant. Top right. It says you have a high dividend yield and you have a high projected growth rate. Those are the two main components of expected return, right? Now, valuation too.

1:06:22I get that. But humor me for a second here. So you want to be top right. That's why we're such big fans of international quality because that's top right. Look at where the MEG7 and MEG7X and video are. Not exactly. I would buy into this if you could do shareholder yield and not dividend yield. Could you throw buybacks in? Interesting point. I think that would mix this up a little bit. Why are some red and some green? Oh, red and green is what we're overweight and underweight. Oh, okay. So like if you could take, Apple's going to buy back$100 billion worth of stock to say that they don't pay a high dividend.

1:06:54That's a fair point. Absolutely fair point. Probably not relevant. Who doesn't do big buybacks, but does big dividends? Utilities. Utilities. It's probably like why they're there. Yeah, yeah, yeah. Relative to, okay. I'm with you. I like it. I like it. It's just an interesting comparison. Awesome. We had one more thing to do, but I think we did it, Rich. The AI, just like, we don't need data for this. Just your general sense of how fast AI is not the stock market. We know it's transforming the stock market. How fast it's about to transform the labor market and by extension, just the way we do business in this country.

1:07:32I think it'll be fast, but slower than people think. Ah, okay. How's that for hedging? It's going to be fast, but slower than people think. But why? I just don't think capital spending can occur that quickly. So that's the constraint? I think that's the constraint. Is the rate of the data center build out? The data center build out, how companies, how comfortable they are to dedicate their capbacks and their cash flow to this big time and things like that. I think it's going to be a slow process that will build through time. Think about how the way companies adopted computers 30, 40 years ago.

1:08:03It was slow, and then boom, then it took off. Do they seem to you as though they're going slowly when they're spending – Meta's going to spend$80 billion a year? Well, that's Meta. But I mean the ultimate story has to be that non-technology corporations are starting to buy it. Elon Musk tweeted that he needs another terawatt. Do you know what a terawatt is? It's enough to power the United States. One. Yeah, yeah. He wants one more. So just give me an extent of whether or not they're going slowly. So here's one of the interesting things that I think is going on right now, that everybody's gaga over AI and automation.

1:08:35and everything. I think one issue is the grid, as you correctly point out. And the other is that when I talk about re-industrialization in America, people says we're going to have to have robots and everything else. Here's the irony. We're going to have to import the robots. Oh, for sure. Japan. Japan and Korea are going to supply the robots. Yeah. So they're going to have to pay a tariff on the robots. Surely people understand we're not making robots in Midtown Manhattan. I own one robot stock. It's almost a penny stock, so I'm not going to say the name of it. And I thought I owned it because they were making robots.

1:09:05Magna International makes the robots it's a Canadian auto parts manufacturer they contract with Magna International to make these it's a bucket on wheels and they just like buy the thing from them but they're the robotic company that is hilarious I do a lot of due diligence as you can say Rich did you have fun on the show today? yeah great time we think the world of you and your research is always great and you have a huge following in the advisor community. And I think you're one of the people that if you ask advisors, who do you read, who do you pay attention to? Advisors who have broken away from Merrill Lynch will know you, of course, because you were the guy at Merrill.

1:09:47But I just think generally, advisors care about your insights and what you have to say. Where do regular people go to hear more from you these days? They can go to our website, which is rbadvisors.com. Okay. And they can follow us on Twitter at RB Advisors. Okay. And how frequently are you publishing? Are you putting stuff out these days? We put out on Twitter, you know, there's several things on a normal day. They prefer X.com to Twitter these days. Sorry, sorry. I don't use it at all. On X. Okay. We kind of, we put out on a good day, we'll put out several things a day. Little charts, like a lot of the ones we just showed here.

1:10:25Those will appear on X, sorry, very often. RB Advisors, you'll get our monthly commentary. If we're on something like this, this will be on our website. You know, TV appearances, our deputy CIO, Mike Cantopoulos, when he writes his stuff. There's a whole bunch of stuff. And you guys are SMAs? We are SMAs. We sub-advise a couple of mutual funds. We have an ETF called the American Industrial Renaissance that's been around. That's a mouthful. I have a better name for an ETF for you. You ready? What's that? Granny Shots. Just think about it. Just think about it. Tom Lee raised a billion dollars in his ETF in like five minutes.

1:11:05Exactly. The key is granny shots. Here's my thing. It's not AI. It's A-I-R-R. That's the ticker. A-I-R-R. What's the idea behind the industrial revolution ETF? Mid-cap and small-cap industrial companies that get 75 % or more of their sales from inside the United States. Okay. So this is a domestic growth idea. Domestic industrial growth idea. Okay. How long has the ETF been around? 10, 11 years. Oh, wow. Oh, yeah. Yeah, yeah, yeah. I'm telling you, we've been on this theme for a very, very long time. I would recommend my robotic stock, but Magna's from Canada. So they didn't even make the robots in this country, let alone make them themselves.

1:11:43We're going to have to pay a tariff for the robots. So we always end the show asking people what they're looking forward to. I think Michael's looking forward to game two. We need a little redemption. I'm looking forward to the summer. I went to the beach club today. You went to Catalina? Yeah. Did you move your stuff in? I did. Okay. You got the cabana or the locker? So I was moving my stuff in and one of the, one of the ladies there who was also moving herself in, she asked me for help. And I said, do you, I helped her, but I said, do you think I'm a cabana boy? And she said, yeah. I said, I used to be.

1:12:11Wait, where were you? I still got it. I still got it. What beach club were you a cabana boy? Sunny Atlantic for years. You're like the flamingo kid. Yeah. Yeah. Yeah. Were you a waiter? I was a waiter too. And a valet parker. Wait, that's where you met. That's where you met Robin. Yes. Okay. It really is. 2002, maybe? Yeah. 2002. It really is like the movie. You're a beach club guy? No. What are you doing this summer? Are you fish, beach, mountains? Sleep. Sleep. Oh, you're out east, though? Yeah, we are. Good answer. Good for you. What are you looking forward to the most this summer? What am I looking most to this summer?

1:12:45Honestly, just plain old family time. Okay. We love it. Can't get enough of it. Grandkids? No. Not yet. Stop prematurely aging him. All right. I'm looking at, I'm going to Delmonico's tonight for the first time. Do you know, do you know Delmonico's on, it's I guess Beaver Street? Yeah. It's right on that corner. It still exists. You've never been? No, I was at the original. They closed down for like five years. Oh, you're right. I've never been to this one either. And these new guys reopened it a couple of years ago. Like we did the whole place. I haven't been there since the original. You know, because Bobby Vann's on Wall Street across from the exchange is technically on Broad, closed.

1:13:22and there's like there's a capital grill there right by the exchange and then that's really it for steaks in financial district yeah so they reopened Delmonico's home to the famous Delmonico cut right so I'm going there tonight for the first time since it reopened and uh yeah I'll probably have a salad and anyway looking forward to that all right Rich Bernstein ladies and gentlemen please follow Rich Bernstein and Rich Bernstein Advisors wherever you follow uh email Twitter X.com great job this week John Duncan Rob Nicole Daniel Chart Kid Matt Keith Sean Russo all the compounders we appreciate it please leave us a rating and review and we'll see you next time good night I want to do it one more time I want to do it one more time

1:14:22Thank you.