Trump Is Winning His Trade War, Michael Cembalest on 20 Years Running Research at Jpmorgan, Earnings Reactions Galore

27:40And so people tend to overestimate the impact of some of these geopolitical risks. And second, I do agree. If you look at a chart of oil consumption per unit of global GDP, the world gets more energy efficient every year. There's also some substitution going on slowly for whether it's gas or electrification for oil consumption. But in general, there's just not a lot of evidence that geopolitics drives markets for more than a few weeks. Yeah. No matter what the events happen to be. I think saying Middle East also is like probably not helpful from an investing standpoint. Iranian oil is technically not even on the market.

28:24If there were a conflict that involved Saudi Arabia, crude oil might react very differently. That's right. Yeah, I mean, there is this issue that the vast majority of Saudi oil is located in the eastern province, and the vast majority of the people that live there are Shiites. And that piece of territory happens to be in close proximity to Iran. So those are real issues. But look, I'm much more concerned. If I had to pick one geopolitical issue, if I wake up one day and I find out that China has imposed a naval blockade on Taiwan, which I expect them to do before the decade is out, I'm much more worried about the market reaction to that than anything that would take place in the middle.

29:03You expect them to do that within the next five years? I think so. I mean, that's a personal opinion. That's not the opinion of the firm or JP Morgan or its employees or its anything. So there are some cases where geopolitical risk would have an enormous impact on the stock market. In my opinion, that would be one of those. That would be one of them. Why? I don't know. Well, first, there's only four months a year where this can be done. You like iPhones? You know, for weather and tidal reasons, there's only four months a year when this could happen. Taiwan used to get 50, like 50 % of its electricity from nuclear.

29:42And they decided to unilaterally reduce that to 5%. So they have effectively abandoned a lot of their energy self-sufficiency because now they're big importers of LNG. And I think I read that they have something like 12 or 18 days of coverage for natural gas. So it wouldn't take very long for a naval blockade to kind of bring Taiwan to a screeching halt. What happens there, I don't know. But, you know, I don't think that the Chinese government has infinite, endless patience with the status quo. That's the signals that they're sending. This is one of those things where the hardest hit sector would probably be technology, at least initially.

30:25And then you'd have to see, like, where does it go from there, right? What would happen to export policies and import policies for semiconductors? We don't know. Think about this. There's so much discussion about Europe and its pre-Ukraine war exposure to Russian energy. So about 25 % of European energy came from Russia before the invasion. The world is 70 % to 80 % reliant on Taiwan for advanced chips. Yeah. So it's in another league of dependence. Yeah. And so now, you know, there are scenarios where naval blockade or not, Taiwan is still able to supply the world with advanced chips. But, you know, that's the question.

31:11Okay. Do you want to get to how markets bottom, or do you want to do your indicator stuff? Let's do the indicators. I think people want to hear about that. All right, so. Which are kind of, oh, that one. Yeah. All right. This one was interesting. Go ahead. So, and for all the right reasons, the markets were really focused. And you remember this. It was just two years ago. In the summer of 2023, yield curve is inverted. And the yield curve since 1966 has a perfect papal infallibility record, eight for eight in predicting recession. We've had Campbell Harvey on the show a bunch. So, yeah. And I think the SOM rule was flashing then too, or was that in the next year?

31:50Shortly thereafter, it started. And by the way, even Claudia came out and said, ah, people are misreading it. So eight for eight, inverted yield curves predict recession within nine, 12, 18 months. But we went back and we looked at what was going on at the time of those recessions. And this time just looked different. And so dangerous to say this time is different. But I had no choice. This time looked different. 23. In the fall of 23. In August 2023, we wrote this Rasputin piece because it was evocative of how higher interest rates were not killing the U.S. economy, right? Because remember Rasputin?

32:27He was kind of stabbed, shot, drowned, and poisoned before he died. Couldn't get rid of him. Couldn't get rid of him. Like Nordberg. Yeah. So what we did was we said, well, wait a minute. In the past, when the inverted yield curve caused a recession, it was because the front end real rates went very high. Whereas in 2022, they were barely above zero. So, yes, they raised them, but raised them from minus six to plus 0.2. The base that they came from had never been the base for a prior episode. Then chart at the lower left. In the past, every time the funds rate went up, you saw evidence that corporate interest payments were rising.

33:09This was the craziest chart of all. But during a decade of financial repression, who didn't know that they were supposed to term out their liabilities? We financed. The Fed did it. Here's the funny part. Who did it? The Fed, corporations, and households. Who didn't do it? Banks. Banks. Yeah. Right? So the banks in general were the worst asset liability managers during this period of financial repression. But as you can see here, yes, it's bad that the policy rate was shooting up. But corporate interest payments as a percentage of profits were still falling. So the transmission mechanism from rising policy rates to recession wasn't there.

33:47And maybe the most important one of all is the chart at the lower right, which is in the past, why did rising policy rates cause recessions? right? It's because at the time the Fed raised rates, it was a shock to the system and the financial and the corporate sector was offsides. A negative number means that the corporate sector has a negative financial balance, which means they're spending a lot more than they're earning. In 2020, the corporate sector was in surplus. Yeah. So in the past, Fed raises rates, companies are offside, radically retrenched capital spending and higher. Because they have to borrow and they have to pay more for borrowing, which would raise the hurdle rate.

34:29Right. You would say, ah, maybe we don't need to do this expansion of our business. This time around, they weren't worried about that because in aggregate, the corporate sector was in surplus. So we felt that there wasn't going to be a recession. And then we had the eye on the market the next January was the pillow talk one about the bears falling into the pillow. Yeah. And that turned out to be the right call. And you had corporations like Apple and Berkshire Hathaway with hundreds of billions of dollars in cash where actually higher rates was more net income. Right. And we have never seen anything like that before.

35:00And that was very out of consensus at the time. Everybody expected a recession. Everybody was. All right. So what indicators do matter? You have another chart that shows some of your favorites. Let's talk about these. Yes. Now, these shift around depending upon what time period you're looking at. But we try to run these here. We did this one over like, you know, almost 30 years. And we run these over a long period of time. And we're trying to figure out, like, if you didn't know what was going on, but you just invested based on these indicators, would you make or lose money? So, for example, when the leading indicator index is above average, you make 1.6 % a month investing in the S &P.

35:39Compared to when it's below average, you only make 0.4%. That's a good indicator. It's big. So it's a good indicator. Yeah. What I love about the geopolitical risk index is the sign is negative, right? You actually would lose money if you didn't invest when the index was high. So it sends - High meaning more risk. More risk. It's sending you in the wrong direction. Yeah. And it doesn't mean that it would never work. But over long periods of time, there's just no benefit to the signals. So for the people listening to this, not watching it, some of these other quote unquote good indicators, CEO confidence, payroll growth, GDP growth, forward 12-month profits growth, expectations, small business optimism.

36:23Most of these are intuitive. Yeah, that's right. Like most of these, you just assume if I invest during a period of time where this indicator is rising, things are good. That's right. Isn't that most of the time? Most of the time this works. Most of the time these things are positive, not negative. And this is the thing that feeds into that semiconductor-looking chart with all the symbols on it. So we just mentioned that no indicator is infallible. Nothing works forever. Right. To me, one feature of the market that I would say is permanent, works today, worked 100 years ago, will work 100 years from now, is that the stock market will bottom well in advance of everything else.

37:00The stock market will bottom and rebound, and the news will get blacker and blacker and blacker. And you'll say, what the f*** is going on? Why is the Dow up 300 points today? They'll say disconnect. Stock rallies on terrible news. Well, yeah. That's what happens. So talk about this. I think my favorite one of all— This is a great group of charts. And we have charts here that go back to the Great Depression in the compilation, which people can find online if they look for it. Yeah. We included a whole bunch of charts from the Depression. Same thing. But look at the chart at the upper right, okay?

37:36So if you look at the S &P Bank Index, right, whether it's the S &P Bank Index or you can remember you can look at the KBW, same signal. That index bottoms in early 2009 at a time when only 8 % of the eventual bank failures had taken place. It's the most bizarre anticipatory signal in the equity market that I've ever seen. Part of it was driven by the ESCAP program, which was the Geithner-sponsored recapitalization of banks and things like that. But you see this again and again. At the lower left, it works in Europe too. In Europe, the European equities bottomed during the balance of payments crisis in 2012.

38:17And it took another two years before the unemployment rate, which is a horribly lagging indicator, stopped rising. So you just see this again and again and again. And it's, oh, actually, the one on the left, on the upper left, that one's from the depression. So only half of the bank failures had taken place by the times that Dow Jones had actually bottomed. So you just see this again and again. So with stocks, it's hard to know what amount of risk is pricing. It's hard to quantify that. But with credit markets, you can and you did. So this is from December 2008. And this is just math. So talk about, I'm sure you remember this very well.

38:56Yeah. What did you see and what were you saying to investors about what sort of risk was being priced in? This was one of the only times that I can actually remember begging. So we were begging our clients to read this line. Please read this eye on the mark. You don't have to do anything, but you have to promise me that you're going to read it because you're never going to see a piece of paper like this ever again. Okay. And I understand the level of shock. Okay. So let's not be too much 2020 hindsight. It's December 2008. We're now looking at the second 40 % decline in equity markets within a decade, something that hadn't happened since the depression.

39:36And, you know, I consider our firm to be pretty smart. Our firm bought$2 billion of Fannie Preferreds over the summer that eventually got wiped out, right? So even JP Morgan didn't understand the depths of the problems at the GSEs. Now, that said, like you said, where were things priced? Look at that investment-grade first row, investment-grade corporate bonds. Implied default rate of$40. The default rate was 14%. Right. And the worst ever. The worst ever was three. And we were assuming a 20 % recovery rate. I mean, investment grade bonds rarely default, but when they do, the recovery rates are well north of 80%.

40:18Let's look at high yield. The implied default rate was 55%. Which is like the end of the world. Right. End of the world. So now there were some discussions. The worst ever for high yield junk bonds, the worst ever default rate in reality was 34%. And this was pricing at 55. And this was pricing at 55. Okay. So now, if you invested then, you couldn't have any leverage at all because a lot of the pricing still deteriorated until March. So we made clear that when we were investing and when clients did it on their own, that you can't lever this at all. Also, wherever you got the leverage from, they could pull it, which is another risk, a counterparty risk.

41:01So you have to have the discipline every time something blows up to say, what's the embedded pricing assumptions, particularly in credit, because they'll just kind of jump out at you. On equity markets, you had the thing on the right, which is that the markets were basically pricing in zero forward earnings growth after, you know, 26 years at 10 to 15%. Jim Shano said in bull markets, people put a premium on promises. And in bear markets, they put a discount on reality. And that's what that is. I think so. That was a pretty remarkable time. It was. So as you were begging people to read this particular piece, did they?

41:43Yeah, they read it. They all read it. And look, in our business, we have a combination of discretionary funds that we oversee, that we control. And then we have other funds that are self-directed. And so we did what we were going to do in our discretionary business. And some of the self-directed people came along for the ride as well. Another similar episode, when Lula was first elected in Brazil, remember him? Yeah. He's back. But when he was first elected in Brazil, one-year default protection, which is the equivalent of going long a corporate bond, you could sell one-year default protection in Brazil for 30%.

42:23Really? Right. That's how much fear there was around Lula. We went out to all the clients. The only people that did it were Brazilian. Okay. They weren't as worried. They weren't as worried. So let's assume at some point in the future, there will be another downturn. The stock market will fall. The economy will contract. You wrote bank equity injections had historically been much more successful in boosting real GDP growth and boosting equity markets than government purchases of bad loans from banks. So my question to you is, do you think that the next rescue plan will look more like 08, where we have all these programs and you have QE and monetary stimulus, or will it look more like 2020, where there'll be more fiscal stimulus, which obviously had a much different and larger impact?

43:16Yeah. Depends on the nature of the crisis. Yeah, but I understand the question. To me, I don't think you get an alphabet soup approach like 2008 again. Because think about all of the stuff that was taking place in the financial sector back then with GE Capital and with Wachovia and WAMU. WAMU was underwriting mortgages and they were making 3 % on them at a time when the rest of the banking industry was making half a percent. Those are some pretty funky mortgages in order to be able to make that much money. So a lot of the kinds of things and derivatives particularly that have now been all moved on to centralized exchanges instead of being bilateral, I don't think you have the same kind of risks in the banking system.

44:02And by the way, look what's happening with private credit. A lot of the cuspier bank loans that used to exist within the financial system have been shunted onto private credit where people are dealing directly with investors. So I think the next crisis is not about the banks. I think I don't fully agree with that part. I think we've sent a lot of the cuspier lending activity out to the private credit industry. Yeah. But now there's this recursive thing happening where the investors in those funds are coming from the wealth management operations of the systemically important financial institutions.

44:37The banks themselves are not taking balance sheet risk. Their clients are. Yeah. I mean, let's be honest. Yes. I agree with that. That's where the money is coming from. I agree with that. But that has different implications. Agree. If something goes wrong, it's not a direct implication. Now, rich people have bigger problems than corporate executives on Wall Street. My point is that fiscal, sending people checks is a much quicker way to stop the bleeding, the economic bleeding. Unfortunately, we did that in a time where people had nothing to spend the money on except to buy stocks. And so, and then in crypto, and then we turned the power back on.

45:13There was so much money, not enough supply of goods and inflation. Yeah. Unfortunately, I think that will be the prevailing lesson is that when you send checks, you get rampant inflation. In reality, we don't know what would have happened if there wasn't. They're never going to run that back. They made Biden a one-term president. No, I understand. I understand. Yeah. Yeah. No, I mean, what was so unique about the COVID situation is that there should have been a normal recession, but it was short-circuited because of the PPP loans and other things that were done. So that doesn't almost, it almost doesn't count as a recession because the normal transmission mechanisms from weak economic growth to rising defaults didn't happen.

45:49So, you know, we haven't had a real traditional recession since the financial crisis. I mean, this says it all, right? Like you have a chart that shows a stimulus response to COVID and there's nothing like it. No, there wasn't any. We thought that the, you know, the global financial crisis was a lot of stimulus. look at that chart on the right in terms of money supply growth. It's unbelievable. It needs its own. I want to talk to you about the role of humor in your work. You're a funny guy. You really are a funny guy. Because I'm an idiot, this is my favorite thing you've ever done. Do we have this?

46:26Is this CGI where there's really next to you? Oh, no, they're still on my couch in my office. So this is your Liberation Day tariff webcast. I bought them on Amazon. And for the people listening, it's uh michael semblist with his two panelists one is a uh emperor penguin and the other is is that a uh rook what do they call baby penguins it's a rook so uh what what did you gain what kind of insight did you gain from your guests that day what do people say when they see that everyone's in on the joke right well no i i can't really tell anybody in advance that i'm doing this no of course not just in just in case you know people get cold feet and say oh my god i made a whole career out of surprising people rather than asking for permission.

47:07You know, I think it was, it was,

47:14you have to remember the fact, you have to remember how we got here. Yeah. So Howard Lutton comes out with the cardboard thing and here are the liberation day tariffs. Okay. Again, the president ran on, I love McKinley. McKinley was the father of the modern tariff. I like, I don't have any problem with the president implementing policies that he ran on and the voter said they wanted. Yeah. The issue is, how do they do it? So they come out with these Liberation Day tariffs and they say, we're doing it based on this formula. The morning they get announced, I actually get an email from the guy, the academic who wrote the formula that they based it on, and they completely botched it.

47:56The formulas would have been, the Liberation Day tariffs were four times higher than they would have been had they correctly interpreted his work but they were looking for bombast they weren't trying to they weren't trying to say something that was formulaically accurate they were trying well but then don't then don't put a formula in the footnote well okay you got to base it on something you gotta be well then then copy paste but so but so the joke here the joke here is uh the mcdonald islands the the herd and mcdonald islands were included on the initial How did they get on there? Well, because they basically had some 19-year-old intern grab a list from Wikipedia of all of the countries that exist and paste them into a thing.

48:43And they said, let's put tariffs on everybody. And that's how it showed up. I just think that if you're going to do something like this that reverses 100 years of policy, you should have somebody who is able to rent a car do the analysis, right? We have to be 25. So do it right. Find somebody that will substantiate what you're trying to do and do it responsibly. And I didn't think they were doing that. So this was my way of suggesting that it could have been done better. The market reaction to that was chaos. Yes. Because the rollout was chaos. Yeah. What do you expect? Right. Right. Now, that said, we had a 20 % correction.

49:26And then, you know, I went back to the toolkit. And on the webcast that we did, on that same webcast, I showed a chart saying, going back 100 years, every time there's a 20 % sell-off, you know, 85 % of the time, a year later, the markets are higher. Yeah. So for all the concerns that people may have. Nobody has a problem with that. The problem with that is does 20 become down 40 first? That's right. That's the issue. It's not will we recover. It's what happens between now and the recovery. Right. It gets way worse. But, you know, an 85 % success, a 20 % sell-off covers a lot of sins. You just buy.

50:06Economically and earnings. And so we felt that it was enough to justify some additional risk taking. All right. There's another one I loved in real time when you did it. I think this one spread like wildfire. I picture the FT Alphaville people who I'm friends with. They must like wait with bated breath for the next Michael Sembalist during a European financial crisis. This is your son's Legos. Right. And you basically construct this hierarchy of who has to bail out who to save the European financial system. And for people that are not watching this, they're listening to this. uh michael's got every relevant group spain and italy um the german parties finland the german social democrats you've got uh the european central bank and they're all represented by various lego stormtroopers characters there are stormtroopers on here i was i was i was on the storm i'm sorry who are the stormtroopers in this uh the eu commission yeah i must have loved that This didn't go over super well in Europe.

51:08But this, okay, so first, a couple of important things. Normally, I wouldn't have the time to do this because this took a lot of time to stage. But it was during one of those LIPA blackouts on Long Island. Oh. And so we had plenty of time. What's that? Was this Sandy? I don't remember exactly what was happening. We had like a five-day blackout. And I had plenty of time for this kind of diorama work. So second, this was actually part of one of the most important decisions that we ever made was there was more carnage in the U.S. than in Europe during the financial crisis. And a lot of people were overweight Europe and stayed that way for much of the decade.

51:48in 2010, as you saw in the compilation, I did not like the dynamics that I was seeing, which we can get into, but we were violently and massively underweight Europe compared to the US and have been since then. I don't think there will ever be an asset allocation position that we will have in portfolios that will ever make as much as what we've made on that. And so that funny looking diorama was one of the pillars of the reasons why we were so confident. Your conclusion was that the U.S. stress tests were— Were real. Very real. They were— Geithner, to his credit, used a 9 % default rate, which had only happened during a brief period during the recession, to stress test the capital raise.

52:34But what that did is it forced the banks to raise enough—raise too much money. To either raise capital or dedicate pre-provisioned income to rebuilding their balance. In Europe, they were smoking crack. They assumed a$3 billion loss for the banks. For the entire financial system in Europe, they said the capital shortfall was$3 billion. I'll do you one better. They were raising interest rates. They were worried about inflation in 2010. The other thing, and I don't think you put it in the deck, but the other thing that people can see in the compilation that's amazing is if you go back before the euro and you look at things like industrial production and current account deficits, the north and the south move the same.

53:14They put the euro in place, and then they broke apart. It's actually a textbook definition of the opposite of what a currency union is supposed to do. A currency union is supposed to force all those macroeconomic variables to converge the way they did. Remember, there were multiple dollars in the early 1800s. And as the regular dollar became the standard across the country, inflation and growth and income and all those metrics across the United States started to converge. In Europe, they blew apart. And so that was a signal to us that something was seriously broken. And that brokenness would, in fact, affect earnings and multiples and everything else.

53:53And boy, I mean, I'm comfortable with that diorama and our positions in Europe being put on my tombstone. That's how much money we pay from. You have a chart showing the absurdity of—you showed the dispersion between European countries was further apart than if you had just created a currency based on all the countries whose first letter is M. That's right. Like you said, these countries have so little in common that if we just took the M countries around the world, that would be a more cohesive - Or the countries at the 40th latitude. I mean, you can create, or you could reconstitute the Ottoman Empire.

54:31That ended up being the right allocation call because it's a dysfunctional, it's effectively a dysfunctional situation. It's a political vision, right? It's not an economic reality. In a way, there are wonderful things about the European vision. Similarly, Europe is leading the world in decarbonization, right? And there's a chart in the compilation. Europe is leading the way with respect to renewables displacing other forms of fuel. Europe's also leading the way in terms of industrial shutdowns and departures, right? Europe's also leading the way in the cost of electricity. So Europe has certain political objectives that at times override market and economic objectives.

55:13And as investors, we have to be able to respond to that. The front page of the journal today, the big debate in Europe is air conditioning or not. So this is an example of what you mean. Can we just spend a minute on that? I would love to. So that people understand what's going on. Something like 90 % of homes in the United States have air conditioning, even in really northern climates. In Europe, that's not the case. Okay. So you have fossil fuel-based heating. So there's a huge push in Europe for people to electrify their home heating with a heat pump, right? So for everybody listening, what's a heat pump?

55:46A heat pump essentially is an air conditioner that works in reverse. And it's very efficient. It can convert one unit of heat into three units of electricity. So it's a very kind of energy-efficient device. But if you give people these heat pumps for their winter heat, they'll just flip them and use them as air conditioning in the summer. So we ran some numbers, and for countries like Turkey, sorry, for Italy and Greece, all the CO2 emissions benefits that they would get from pushing these more efficient heat pumps would be lost if people start using air conditioning. In July and August. And it's a classic unintended consequence thing that you see in Europe all the time.

56:25Right. So I want to, I know we have a few. That's a good transition. Let's end on leadership. Yeah, let's do this. Already done? Well, let's do, let's, you gave us the hard out. We don't have one. No, no, no. Michael and I will sit with you all night. Let's do this thing about what was Lehman doing because it's a great segue into the leadership at what was J.P. Morgan not doing that Lehman was doing. And you were there at the time. So I think that's a really great lesson for investors to take from this. Well, you know, part of this dates back to the first Bush administration. And you guys will probably remember this.

57:06Before 2004, there used to be something called the broker-dealer net capital rule. 12 to 1. 12 to 1, exactly. That's the max leverage a broker-dealer could take. That's right. No matter—forget about risk-adjusted, like 12 to 1, hard stuff. Which is a lot already. Yeah. And under the first Bush administration, you know, the broker-dealers were effective at lobbying the SEC, and they rescinded this rule and essentially put in some squishy, touchy-feely limit. But within two years, all the big five broker dealers were 30 plus in terms of - Spare, Lehman, Merrill - Goldman and Morgan Stanley. Goldman and Morgan Stanley, okay.

57:41And so part of the backdrop was understanding how what looked like a footnoty thing in the journal about a change to risk-based capital rules had this seismic impact on what was going on in the actual markets. and we saw it. And, you know, that was also kind of a scary thing that was taking place. And, you know, we responded by kind of gradually pulling our horns heading into the financial crisis when we saw this. The reason that I put together the chart on the right was all the banks were essentially bum-rushed into taking the capital, whether they needed it or not, with the exception of U.S.

58:19Bank, which was the one bank that said, no, we won't take it. and but not all the banks are the same and you know jamie gave a couple of talks where like look we'll take our lumps and we'll continue to take our lumps but putting all the banks together in one boat and kind of blaming them for everything was what didn't make sense because there were such it was a very heterogeneous group and look at this chart right there was that giant alphabet soup of all the facilities that were required citigroup merrill lynch and morgan stanley and AIG, you know, used the vast lion's share of this. And so, you know, at the time that we published these charts, we said, look, you know, we have issues like everybody else, but there are differences in terms of how banks run themselves and how they manage risk.

59:05And these were some of the charts that we used at the time. So in your compilation, you point out that Lehman was running at 35 to 1 and in one part of their business, 100 to 1. Yeah. And JP Morgan was not doing that. No. I want to ask you if this is true. There's an apocryphal story that I heard from someone who was working on a trading desk at JP Morgan right in the heart of this, the run up to the crisis. And Jamie was taking a tour as he frequently does and just talking to people on every floor. And he asked somebody to quote something, probably a bond, maybe a mortgage something. The trader gave him a quote of where it was trading, where it was being valued.

59:46And this is at a time where people were worried. And the way he tells the story, Jamie said, what's the price? He quotes the price. Jamie said, oh yeah, sell some. He said, what do you mean? He said, let's see if that's the price, sell some. And of course, the trader can't get a sale off at that price. And that was kind of like a microcosm, I guess, of a bigger story where JP Morgan realized where the market was versus where the reality was were not the same things. You believe that? You think that story's true or something like that? I haven't heard that one, but it's having seen - It's a good one though.

1:00:21Having seen Jamie in action, it's entirely plausible. He's very involved on a detailed level in terms of when he meets with management teams and they present to him. Put it this way, that experience is entirely different than that same experience with the CEOs that preceded Jamie. Like everything about the level of preparation, the consequences for being unprepared, you know, and the kind of questions and due diligence that are going to be asked of you. That changed radically. So on leadership, he stands so far apart from the other leaders of that era. One of them was the best golfer in the world, apparently.

1:00:59We won't name names. One of them was a world champion bridge player. Jamie didn't have the reputation for having those hobbies. He was focused on the risk-taking within the bank and what to do about it. And they're the last one standing, literally. Yeah, and I've mentioned this before. My job requires me to know a lot of things about a lot of things and do so pretty deeply. And there are a lot of times when I need to reach out to people and get help on certain things. Sometimes something will happen and I'm starting out with a deficit of knowledge that I have to build really fast. a couple of years ago.

1:01:38Remember when Credit Suisse blew up and there were the cocoa bonds, which were the European version of preferred stock, but they were kind of different than the way US preferreds function. And nobody had ever heard of those. And the devils are in the details. Like there's a lot of times when I have to get up to speed on something really fast or something within the energy space. And I need to understand really quickly how some new technology might work. The halo effect that Jamie has created for the firm over the last 20 years is amazing. I can call people and say, I'm the chief investment officer at JP Morgan Asset Management.

1:02:12Will you talk to me? And almost always the answer is yes. And I attribute that having nothing to do with me because they, most of the time, never heard of us. But because of Jamie and the impact he's had on the organization, they return your call. And one of the only times that people, that that didn't work was - You called Elizabeth Warren. I'm not going into that. During the summer of 2008, we were getting a lot of calls from clients. Why can't you guys make 11 % annualized return with a 2 % vol like this Madoff guy? And so I said, well, I don't know. Let me look into it. So I start looking into it.

1:02:58I can't find any information. and, you know, the whole thing is very sketchy. I went on to the early version of Google Maps and I looked at the building in which the custodian was allegedly housed and it was the back of a Chinese restaurant. So the whole thing seemed really kind of funky to me. So we said, okay, let's do a due diligence trip. So we get in the car and we go up to Connecticut to see the feeder fund. You remember they had that, I'm not going to mention any names, but, you know, there was that feeder fund. This is the fund that's raising money from people and passing it over to Madoff.

1:03:36Right. Okay. And, you know, we had like a 19-section questionnaire that we wanted to ask. And the first one is, can we meet the principal? And the answer was no. And I said, okay, we're leaving. And they said, well, no, no, no. And we just, we got up and we left. Because if we can't meet the principal and talk to him, the rest of the questionnaire is irrelevant. So I went back and I put some notes in the files. saying like, I don't understand what's going on here. And I drew a picture of a unicorn on their total return chart. And I said, I don't get this. This doesn't make any sense. Yeah, it looks like private credit.

1:04:11Right. And wait, so wait, hold on. He's a$50 billion fund then too. Right. So I just drew a picture. I'm not even a good like artist, but I drew a picture of a unicorn, put it in the files and forgot about it. And then eventually the SEC ended up deposing me. What did the chart look like? Up and to the right? Up and to the right. It was the 11 % annualized return with 3 % fall. Yeah. And I got deposed by the SEC who wanted to know what I knew when and why didn't I tell everybody and what was going on. And, you know, I answered all the questions. I mean, there wasn't much to say. They wouldn't talk to you.

1:04:43They wouldn't talk to us. But at one point, the deposition kept going on and on and on. And I said, well, you know, why didn't you read the Harry Markopoulos note from 2001 that said Bernie Madoff is a fraud and the lawyer that was representing me in the deposition almost had a heart attack. That was the end of the deposition. Yeah. Michael, this isn't what we're here to do. We're not here to score points. By the way, if I could just say a couple of other things. Please. My favorite of all the pieces in there is the one on why the financial crisis happened the way that it did. We have this. We like to do it.

1:05:21This is my favorite in the market. And the reason it's my favorite one of all time is the public narrative from the government and all of its agents and both parties was the private sector did it. The rating agencies are responsible. The banks are responsible. Reckless bankers. Reckless lending. It was policy. Now, you'll have to read the piece because this is like a spaghetti chart. But I want to show you something here. Those red lines are rising. And now we're looking at the 90s here up until 2005. These represent the portion of Freddie and Fannie underwriting that is effectively subprime and alt-A risk.

1:06:04This is before, look at the black line. That's the private sector. So the GSEs loaded up on alt-A and subprime risk way before the private sector did. And why did they do it? because of the blue line of the GSE low and moderate income lending targets that Congress established. And there's a quote that we pulled from the year 2000 from the HUD reports that is the most amazing smoking gun I've ever seen in the history of smoking guns, where they say, you know, let's have the GSEs do subprime type lending without calling it subprime, and we will eventually lure, like the sirens, we will eventually lure the private banks to their death.

1:06:50This was Bush, the ownership society. This was George W. Bush extolling the virtues of homeownership and we need to create more homeowners. This was a combination of Clinton and Bush. And by the way, Andrew Cuomo was the head of HUD when some of these things happened. So, you know, and to read about how aggressively the public sector tried to, after the financial crisis, change the history of what actually happened, I'm glad that I had the historical records to kind of show, no, that's not what happened. This is what happened. And, you know, there are some lessons to be learned here about risk-taking and risk underwriting and things like that.

1:07:31So I love that one. There was also a piece at the end for how I ended up in the asset management business that's also worth learning that has to do with a piece of candy in the lunchroom. That was a funny story. In the lunchroom. So, Michael, we think this is just an extraordinary document, and it is the culmination of decades of your work. And it's just incredible. Where does the artwork come from? Because that's a really big part of the presentation. Well, no. For the vast majority of the history of the eye on the market, we would commission Brooklyn-based artists. Almost like a magazine. Yeah, to draw.

1:08:04And they're beautiful. And then more recently, we've been using ChatGPT just to do certain things. But I hire artists once in a while. There are things that GPT can't do. Can we get 20 more years? Yeah. Ten? What do you think? Ten? Can you keep going? No, there's a lot of fish I've never caught. I've never caught a permit, which is on my list. You can do both. Let's talk about it. Go catch a penguin. I'm going to – I'm going in late August. I'm going to British Columbia to catch – on a kayak, I'm going to fish for sturgeon, like seven to eight foot sturgeon. So I've done it before and almost, you know, it was pretty dicey.

1:08:44So I can't, I'm looking forward to trying it again. Well, on behalf of everyone on Wall Street, everyone off Wall Street, anyone who's ever read Eye on the Market, anyone who's a regular reader, Michael and I, and we here at the compound would just like to say thank you for your extraordinary contribution to our knowledge. I get smarter every time I finish reading one of your pieces, I learn something and I want to thank you because I kind of like Boo Radley. I lived in silence for most of my career. And you guys were the first place where I went, you know, to talk to a broad, like, podcast-y type audience.

1:09:20But now you have your own show. How do people find your podcast? Yeah, let's tell people where they can get more. Well, I post every eye on the market on LinkedIn now. So if you go to my LinkedIn profile, you can find the anniversary piece. You can find the other pieces that I write. This is amazing. Thank you so much for being here. You're welcome. We appreciate you guys. Make sure to follow Michael Semblist on LinkedIn. If you want the latest eye on the market piece and by all means go and hunt down this 20th anniversary compilation and get it as a PDF. It is extraordinary. You will absolutely become a better investor once you've digested it.

1:09:58Thank you so much.

1:10:21okay okay here we are hey guys we're not late well just dave is in the chat saying where are these guys they're late probably jet skiing what do you mean we literally started at 459 Come on, guy. We're right on time. James Sykes is here. Dr. Horton, Roger Weatherford, Pedro, we see you. Brian Gill, Shylock, Georgie D. All the gangsters are in the chat tonight. Did you just say Shylock? That's somebody's name. Riley Anderson. Yes, it is. Nope. Yep. It is. Go back and roll the tape later. What do you want me to tell you? Hamoud, Walls World. James Dean, you're going to dispute me on that one. I don't think it's the actual.

1:11:10So, I'm just saying. All right, guys, welcome to an all new edition of What Are Your Thoughts? We are your co-hosts. With me tonight, as always, is Michael Batnick. Michael, say hello to the folks. Hello, ladies and gentlemen. Super dramatic pause. My name is downtown Josh Brown. For those of you who are new to the show, we are here to talk about the biggest issues happening currently on Wall Street. in the markets, in the economy, et cetera. We are super excited to be here live with all of our pounders in the live chat. Those of you listening out in podcast land, we appreciate you too. Tonight's show is brought to you by public.com and the public trading.

1:11:51I need to tell you the reason for the pause. I need to defend my honor. The meter is running, dude. Okay, I know, I understand. The reason for the pause, sir, is because sometimes you introduce me and then you keep going. And sometimes you tell me to say hello to the folks. So I pause because I don't know which way you're going. Okay? Good improvisation. I appreciate it. Thank you for your attention to this matter. Okay, great. All right. Where was I? Public is the investing platform for those who take it seriously. You could build a multi-asset portfolio of stocks, bonds, options, crypto, and more.

1:12:30that's right josh plus for a limited time you can earn a one percent match on all ira deposits ira transfers and 401k rollovers easy bad easy bad guys fund your account in five minutes or less find out more at public.com slash w-a-y-t as in what are your thoughts that's public.com slash W-A-Y-T, paid for by public investing, full disclosures and podcast description. Okay. A couple of things before we get into topic one. I have a couple of mini subtopics. Really interesting reactions to earnings. And I know we're going to do a whole thing on earnings, but just in the last day, it's pretty wild what's going on with some really big stocks.

1:13:17I'll tell you the ones that stood out to me. Tell me what you think. Like UPS just absolutely hammered. The stock is down five years in a row at this point. Yeah, always, always. Oh my God, did they beat the shit out of that. UPS said, hey, no guidance for the rest of the year due to macro uncertainty. It's wild. You know, this might be the cleanest downtrend you'll ever see. It hit the 200 day about 500 times over the last couple of years. So I, you know what? But I don't get stuck in stocks like this anymore. Like anyone with using any kind of trend line stop or whatever is just watching this thing fall like a knife.

1:13:58No one's long this stock unless they're completely on fundamentals. Like you can't be looking at this chart and saying that there's anything attractive about the rate at which people are willing to sell it. PayPal, they smushed it. um spotify down 11 worst day in two years and spotify this is a really weird call a really weird quarter spotify was supposed to do 5 million premium subscriber ads they did 8 million but they had a surprise payroll tax because of gains in the stock price that they owe for employee shareholders and it like wiped out, you know, on an accounting basis, wiped out the profit on the quarter.

1:14:46And they didn't have great things to say about the ad business. Apparently, they said, we're going to have to use more AI to figure out the, you know, how to get the ad business growing. So that one seemed deserved. I want to say one thing about the Spotify thing. Spotify is even after it's in a 20 % drawdown, the stock is still up 100 % and 93 % over the last 12 months. This is still the premier name in the space. And so, you know, it's a giant winner that's given some back. No big deal. I would. I mean, I don't want to talk, so it's easy for me to say, but you know. Yeah, I'm not in it currently.

1:15:24I would way, way rather buy this down 12 % than sell it. And I'll do you one better. Go ahead. It's actually, even with this little micro crash. It's still above its 200-day. Yeah, it looks buyable. The 200-day is 562. Stock went out at 621. So it's like still in an uptrend, which is unbelievable because it's far off the high now. I'm going to keep this one on my radar. Last one I wanted to mention is Starbucks reported after the close. they missed by 15 cents. But the press release was like, our turnaround is ahead of schedule. So the stock is higher. And they announced something called green apron service, or they're talking about this green apron service, which I have to ask you, personally - You don't know about my product placement?

1:16:27Very well done. Thank you. I hate this idea. They want to talk to the customer more. they're going to sunset all of the pickup window stores and only build coffee houses from now on and they want to have like like the employees have to smile at you don't fucking look at me ever stop it and then they have to i don't know i don't want to make eye contact with strangers on the street like in this day and age are people looking for more smiles like forced corporate smiles is anyone does anyone want that the employees don't want it i don't like this take The writing of the name on the cup. Does anyone have time for that shit anymore?

1:17:07I got a smiley face. I mean, why are we making people do that? Grown adults have to take a Sharpie and misspell people's names. I thought we advanced away from that. What part of the customer experience is that enhancing? Is anyone like, oh, I stopped going to Starbucks, but now I hear they're writing people's names on the cups? Are you asking me for a reaction to you not liking smiles? I mean, this is nonsense talk. No, this is his turnaround plan. This is Nickel's turnaround plan. And I guess I feel like it's going to turn around, but it's not going to be because of green apron service. Okay.

1:17:46Can we talk about the business and not the smiles? So it is six consecutive quarters of same-store sales declines. Not good. In the US, it was negative 2 % and the rest of the world is even worse. But the stock is up 4%. I do own the stock. The stock is up 4 % because expectations were obviously worse implied in the price. And we found that out just in the after hours. No, it could be down tomorrow. Who knows? But I was looking at this this morning. Chipotle's performance and Starbucks performance since he left. One is up 20%. One is down 20%. Yeah. Chipotle is one of the worst stocks on the board.

1:18:22So Chipotle looks like Nike. Looks terrible. I think the reason the stock - Nike bounced. Nike bounced, by the way. I think the actual reason the stock is up in the after hours is the biggest overhang on Starbucks, aside from the penmanship of the baristas. And not enough smiles. Aside from that is China. It's their most important international market by far. And they've been struggling there. And they announced that they have received 20 companies have submitted proposals to be their joint venture partner in China. So basically, if you don't have a joint venture partner in China that is Chinese, you ain't going to win there.

1:19:04And that's very deliberate. That's just how that country works. I totally get it. So they can't go in alone in China any longer. Or the Chinese-owned coffee houses are just going to eat their lunch. So I think the street is encouraged to hear that they're moving forward with finding a JV partner and signing something that's advantageous to Starbucks shareholders. because the status quo is just not, it's not going to work. What else caught your eye? PayPal was like not a bad report. SoFi is getting so much credit just because they're like, you know, they had great guidance, revenue guidance, 60 or 70 million above what was expected.

1:19:47But it's not, it's just weird to see that dichotomy between PayPal and SoFi. They're not identical businesses, but I think their customers are identical. I think the people, right? So it's just, it's odd like how much credit, SoFi is ripping. That stock looks amazing right now. And I'm not saying they didn't have anything good to say, they did. PayPal is just getting annihilated. And I don't know what, that's another turnaround story that never seems to turn around. We're like in year three of the PayPal turnaround. And this thing, every time it gets going, they report earnings. and it just is annihilated again.

1:20:27Yeah. So those were the big ones that I was looking at over the last day or so. And I know we're going to do some more earning stuff later in the show, so we can put a pin on that. Can we talk about Trump? I suppose. I'm disinterested in this topic, but it is your topic, so let's go ahead. Well, the show is called What Are Your Thoughts? I'm hoping you have some thoughts because this is probably the third biggest story in the market this year. and the conjecture on Wall Street appears to be that Trump is winning. And Wall Street was, I would say, universally opposed to tariffs, just to a man or a woman.

1:21:09Anyone writing research on the sell side, any strategist, anyone covering companies, just everyone said, this is inflation, this is gonna crush the economy, this is gonna destroy the man, this is gonna leave layoffs, This is going to lead to huge earnings problems, et cetera, et cetera, et cetera. And it is, but he's kind of getting what he wants from the countries he's negotiating with. And I want to just put this graphic up. So the threats, the 145 % with China, for example, all the way on the far right of this graphic, the threat against Vietnam, the threat against Canada, Mexico. As you can see, the imposed tariffs or the agreements are substantially, obviously, better than some of the things that we were most concerned with.

1:22:01And that's by design. And everyone knew. It's called negotiating. Yeah, it's how he negotiates. What's like a worst case scenario? Let me throw that out on the table. Okay. So we got through that part. He made a deal in the last four days with Japan and then the EU back to back. The Japanese deal seems unclear that they even know what they agreed to chart off, which I think is really funny. There's a handful of articles today where people from the trade ministry or whatever are sort of like, I don't really know if – I don't think that – I don't think we are certain of what we're doing. But what the Japanese deal and the EU deal have in common is they both involve foreign countries buying more things from America.

1:22:45So it's not just about tariffs. It's now about like make investments in the United States. How does that part get enforced? So I'm really glad you asked that. We'll go there in one second. The headline on the Japanese trade deal, before we go to Europe, auto tariffs reduced from 27 and a half to 15%. The Japanese automakers actually rallied on that, believe it or not. Japan pledges$550 billion in investment capital under US direction. That's the part the Japanese weren't so sure. Wait, it's like a blank check? That's what it sounds like. And there's like profits that go to the United States or maybe directly to the White House.

1:23:26I'm not sure. Commitments to purchase U.S. goods, aircraft, energy, and agriculture. That's very good. Here, U.S. claims the majority, 90 % of returns from the investment package. I don't know if the Japanese agreed to that, but fine. um what japan gets that sounds scientific that sounds crazy what japan gets they avoid the 30 to 35 percent threatened tariff um on exports they maintain access to our markets greater certainty blah blah blah elevated diplomatic status because they're accepting the new framework before europe and uh and before china and uh you know some other shit but like it's funny to me that like the first headline is like we have a deal it was a 70 minute phone call we closed the deal and then the japanese were like wait what but the market doesn't care um the eu deal you asked the question like how do how do we enforce this i thought this was a really funny story um basically uh chart off i'm sorry guys so trump's sitting in the room with the Europeans.

1:24:36And he says, how could we be certain the Europeans won't shrug off their plans after a deal is agreed upon? The EU leaders assure him that their investment plans are real. And Trump goes, his words, prove it, according to one of the people who's in the meeting. Reasonable. This is the Wall Street Journal. EU officials rattled off the names of companies they said already were prepared to invest. With a trade deal in place, planned investments of almost$200 billion would grow by even more, they told Trump. At the end of the talks, Trump said he would impose 15 % baseline tariffs on the EU instead of the 30 % he had threatened.

1:25:19He said the EU would now be investing$600 billion in the US under the deal, including a separate commitment to buy another 750 billion worth of American energy products from the US over three years. European officials said the 600 billion is based on private companies investment. So that's like Volvo is gonna build a plant in Indiana. I'm making that up, but like, that's what that means. So just on the surface, based on what I'm telling you, doesn't it sort of sound like Trump is winning this thing? Given all time highs in the market and basically getting huge investment commitments from these countries.

1:26:01What do you think? I do think that's what it sounds like. I mean, that's what the smart people are saying, like Neil Dutta, for example, and he knows more than I do about this stuff. Yeah, we're gonna take Neil's quote in one second because I thought that was really - Not much of a market reaction. Like European stocks rallied, which you mentioned already, but - Because 15 is better than 30. That's really what it boils down to. And one of the interesting things is that the EU has the authority to negotiate trade on behalf of 27 countries, right? And they don't like it at all. And they're making themselves – they're making their opinions heard.

1:26:39We actually have some examples. Benjamin Dusa, who is the trade minister from Sweden, said, quote, the least bad alternative to a standoff. The French prime minister mourned it as a, quote, somber day that he called tantamount to, quote, submission. The German chancellor, the head of the largest economy in the EU, said his country would, quote, suffer considerable damage under the agreement. The Spanish prime minister said he could support the deal without, quote, without any enthusiasm. Hungarian prime minister summed it up best. Quote, Donald Trump ate von der Leyen for breakfast, end quote.

1:27:22So that's the European reaction. It's the European reaction is do it. Let's just let's just be done with with this topic. Here's Neil Dutta. And then and then we can move on. He says, I can't help but wonder that as every academic and critic of the White House lights their hair on fire over the effective tariff rate, America is taking some steps to rebalance our economy. For the PhD academics losing their minds, the issue is that this is a win in the traditional sense of the word. Entering a hot dog eating contest might be stupid, but if you eat the most hot dogs, you win. So Neil kind of likens these tariffs to having the same effect as a consumption tax or a VAT tax.

1:28:08And that's the right way to think about it. When you listen to the company calls today and yesterday and the way that they're talking about how they're dealing with tariffs, They're eating a little bit of it. They'll pass a little bit of it on. It ultimately takes the form of like an invisible – it's visible, but an un-itemized that tax. The more you consume, the more of these tariffs you're going to end up paying. And it wasn't – the White House doesn't frame it that way, but that's sort of how it turns out to be. Okay. Well, if it had to be, I'm glad that we won. I don't like tariffs and I wish that we never did it.

1:28:47But if I'm a patriot and I'd rather win than lose. But who knows what sort of ramifications is it going to have long-term? Like these are our biggest, most important training partners or at least certainly near the top of the list. And you're forcing them into submission and really pissing them off. I hope it all works out. Yeah, I think it's not even just the long-term thing. I think it's long-term, but then it's also like we haven't really seen a material pullback in spending across the board, but there are certain categories where this stuff is just, it's making people switch to something else.

1:29:24And you might say, good, switch to something American. All right. There'll be some of that. Listen, I hope we look back on this and say, we were all making a big deal out of nothing. We switched and the world went on. That'd be my hope. All right. Let's speak to moving on. Let's do that. So last week or the week before, we were talking about semiconductors and the AI trade is powering everything. That is where it starts and stops this market rally. It is not being powered by the consumer. It is not being powered by anything other than artificial intelligence and the hyperscalers continuing to spend - Was I early to this?

1:30:06Half a trillion dollars. Yeah. I think I was. I was saying like six months ago, the only thing that matters is AI. Yeah. And it's kind of like everyone just accepts that now. Well, it does because the market is making all-time highs as earning expectations are making all-time highs and embedded in those expectations is monster profits from NVIDIA and the likes. And so that's it. That is all that matters right now. But getting back to the question, can the market rally without semis? I honestly do find it hard to believe, not forever, but for today, that is what's powering the market. But Chartkin Matt made something interesting that this is a question that we've asked in the past.

1:30:45It's not the first time we said, can the market rally without? So chart on, please, John. Here's Apple. And we're showing that Apple's weight in the S &P peaked. And in my estimation, it will never be higher than it was. It was 7.8 % in the summer of 2023. It is now down. This is a big change. Its weight is down 27 % from 7.9 % to 5.7%. That's a big deal. And the market is up 40 plus percent over the same time. Not an apples to apples comparison, pun intended, but just an Interesting thought experiment. So I think that market cap went to NVIDIA and Microsoft. I think it's that cut and dry. Yeah.

1:31:31Almost like a direct transfer. Microsoft is going into its earnings tomorrow at record highs. Its market cap is up by a fifth in the last two months. That came right out of Apple. Would anyone dispute that? The money did not come out of Apple and go into Wells Fargo. I think we all sort of understand that large cap managers who are invested in the AI theme are pivoting to NVIDIA and Microsoft and away from Apple. They may pivot back, but that market cap doesn't disappear into the ether. You know I'm one of these guys who has to know where did it go. That's where it's going. However, if there is a moment in time – Put Matt's chart back up.

1:32:14Ask the question, do we need Apple in a bull market? Well, no, the answer is no. I mean, we know that we don't, but we do need an Apple replacement. Like you need another mega cap. That's right. We need leaders. Microsoft. So for the listener, for the viewer, I don't know when the last time you looked up Microsoft's market cap, you probably think it's$2 trillion. It's actually about to be$4 trillion. So like do we need Apple in a bull market? No, so long as we have blank. And in this case, it's NVIDIA and Microsoft. Like they're passing the torch back and forth. That's what's happening right now.

1:32:56But would you agree the biggest risk to the bull market, at least today, it's disappointing AI numbers or guidance, obviously. That's it. I think that's the biggest near-term risk to the market that one of these – and we've said this. One of these companies shocks Wall Street with like a guide lower because they're spending too much on AI. Like an earnings shortfall because they just don't have the ROI from the investments they've been making. Not yet. It will. It's not happening yet. It's not yet. No. Google just got up their guidance, their capex by$10 billion. It's not happening yet. It will happen eventually.

1:33:36but not yet. Correct. So, but that is the day that happens, you literally could see a circuit breaker on the NASDAQ. If it may never happen, maybe all of this, maybe all of this spending is super profitable and, and they'll outrun that concern, but I'm pretty sure that at some point in the future, I don't quote me in a time. We will get ahead of ourselves if we're not there. It's just crazy to me to have like bellwether stocks for the real economy, like Chipotle and UPS just like dive bombing to 52-week lows and people saying the consumer is holding this up. No, it's not. It's not. It's hyperspelling.

1:34:18Stock market Americans are holding up the entire thing right now. And stock market American spending is being fueled by the wealth effect created in Silicon Valley as a result of the AI CapEx race. And that's it. and there's no other story. I don't give a shit what you think. There isn't. And I can't imagine people don't see that connection. Now, this will age really poorly if we never have that moment. And like the economy, the overall economy re-accelerates, but - We will have that moment. At some point, there will be a disappointment. Obviously, that's where the stock market works. Callie did a thing on her site today.

1:34:56I think this is right. She's like, if you own the SPY, like a third of your portfolio is now in three stocks. Like that's what's holding everything up right now. And what's so funny is there's a lot of circular spending going on. Like Meta and Microsoft are the ones buying all the chips from NVIDIA. NVIDIA is selling those chips and the end customers are spending on all this cloud compute in return right back at Microsoft and Meta. Like it's extremely circular. And I don't think the extent to which that's holding up the market is fully appreciated. Everyone's like, yeah, yeah, yeah, tech is dominant.

1:35:48Man, if this goes into reverse, I don't know what catches us. Yeah. There are no stocks big enough is my point. There are no stocks big enough. Apple reports this week. let's do it. Let's do like a couple of quick previews here. During the previous quarter, Tim Cook said the tariffs could add 900 million to Apple's costs for the Q3 fiscal quarter. Well, I guess we're about to find out because we're there. Revenue expected 89 billion, which would be a 3.7 % year over year gain and a 2.1 % gain in earnings per share. Barely growing. I mean, this is just not a growth stock. Has it been for a while?

1:36:31Barely growing. Let's put this chart of the EBIT up. Here's the quarterly year-over-year growth in cash flow. Yeah. It's like effectively nil. All right. Microsoft, a little bit more of a bright spot. $73.8 billion in revenue expected,$3.38 in earnings. That would be 14.1 % and 14.5 % growth, respectively. And if they do those numbers, this company is just incredible. last quarter they beat on the top and bottom line let me see what else I would say oh Azure revenue growth last quarter it was 35 % year over year hedging out changes in currency which was better than the 31 % growth this quarter analysts are looking for the same thing 34 to 35 % and they've already guided CapEx to be 80 billion for the year John throw that short on the CapEx one.

1:37:26This is it. Yeah. This is it. This is the entire story. We're looking at CapEx to revenue. We shared this chart a couple of weeks ago. But if you're listening, it's Microsoft, Alphabet, Amazon, and Meta. Notably absent as Apple because they're just not spending any money. But these companies are supporting the stock market. And as long as they got higher, and if you think that Microsoft and Meta are going to be out of step with what Google said last week, you're crazy. No way. Not going to happen. Meta is the same night expecting revenue of$44.8 billion. That would be a 14.8 % year over year. Earnings should be up 13.5%.

1:38:08EBIT should be$17 billion, up 14.6%. Meta has grown operating income the last three quarters. 46%, 39%, and 31%. they already increased the midpoint of their CapEx guidance. Also, they went from, they were at 62 and a half to 68 billion in April and they raised it. So that's all this week. Gun to your head and Amazon, which we previewed last week. We jumped the gun a little bit. We don't have to do that again. Gun to your head, which one of these is going to have the best, I won't even say report, but reaction. You have to pick one. Yeah. Not Microsoft, just because the stock is just perfect. There's no hiccup.

1:38:57I would say Amazon. Okay. I want that to be right. I think it's going to be meta. And I'm purely basing that on the advertising numbers from Alphabet last week. I hope these, you know what? I hope all these stocks get hit, frankly. I'm not in it. It's fine. No, no, no, no. I don't want anybody to lose money, but we need a reset. Just a little bit of a reminder of what risk is like the desert needs water. People are out of control. I wonder if the analysts are going to push Zuckerberg on some of the hiring that he's doing. Like he's giving people billion-dollar salaries. Like I wonder if anyone's going to be like, so hold on.

1:39:37You're just going to acquire every AI startup or take 50 % stake or whatever. you're just literally going to spend billions of dollars on aqua hires and i want to hear him say yeah that's what we're doing because that's literally what they're doing it's i mean it's insane they're building this meta super intelligence thing that is like their the new thing they're calling their ai effort and they are just going out of control like recruiting people out of everywhere and paying top dollar and i wonder if anyone's going to ask them about like is that sustainable. John, we have that headline from Apple.

1:40:12Keep talking, Josh. What's the headline? Apple has lost its fourth AI researcher in a month to meta, marking the latest setback to the iPhone maker's artificial intelligence efforts. Who the f*** is that sitting in the chair? Is that an AI? That's an actual person? I don't know. When I have gray hair, I want to have hair like that. That is a delicious head of hair. Tim Apple is obviously going to get a lot of questions about like, what are they doing? Well, is it sustainable? And the last time they embarked on like a spending spree like this, almost completely unchecked, was the metaverse era.

1:40:54And it only took like one or two really scary stock price reactions for them to knock it off. And they eventually knocked it. It took a while. You think so? I feel like it took two quarters. No, no, no, no. it took a really yeah anyway let's keep it moving let's do some more stuff all right let's do uh growth reactions etc all right i asked sean for this and and uh chart kid matt two of the goats at uh red holtz wealth management well done boys so far 168 s &p 500 companies have reported that's going into today so there's more um but just to give you a flavor uh this week we're going to get 162 reports.

1:41:37So this is a really, really big week. It's like the Super Bowl. In addition to all these MAG-7 names, you also have a Fed meeting and a GDP report thrown into the mix. Jobs report on Friday. Blended earnings were for the S &P 500, which is actual plus estimates up four and a half percent year over year, which is 171 basis points above estimates at the beginning of the seasons. That's good. Five of 11 sectors posted a year-over-year increase in profits. What is this chart? Oh, this is the blended earnings growth. So you can see it's about half and half, but all the market cap is on the left side.

1:42:18Communication services, tech, financials, these are the biggest market caps in the market. These are the ones that matter most. And they are holding up the market, quite frankly. The only reason we're at a 22 multiple. Let's do the sales growth. Next one. Can't fix sales. So the only sector with negative sales is energy. But again, that's hugely commodity dependent. It's very noisy. And it's not really the way to think about those stocks. But every other sector blended is seeing year-over-year revenue growth. Last one is actual earnings growth. Energy negative 25%. technology plus 17.2, communication services plus 17.2.

1:43:05It's AI. Like, I don't know. And people are like, well, financials is an AI. Yes, it is. Yes, it is. All these bull markets that these financial companies are feasting on are directly related to AI. It's all one trade. It's all AI. By the way, speaking of AI, I was out to dinner I think we agreed to Aoi nah I was at dinner with Dan the other night and his ETF guess how much is in the Ives ETF he launched this when? July 16th holy shit it just launched guess how much? 300 400 no way really? oh my god he's like I don't want to say anything else, but it's unbelievable. $400 million in like two weeks?

1:43:57Did he pay for dinner? Dude, that's impressive. Very impressive. All right, next chart. On this show, we root for Dan Ives. All the way. All right. The beats are being rewarded at pretty much an average of 1.1%, which is pretty good. The misses are being annihilated. like the huge rally we had a 30 % S &P rally off the lows of April and the market is saying like okay we gave you the benefit of the doubt show us the number and God help you if you miss by a penny or two they're taking stocks down by an average of 5.2 % this is the worst one day price reaction for missed earnings you have to go back to Q1 of 2017 to find a more punishing environment.

1:44:48So you have an 82 % beat rate, which is good above average, but God help you if you miss like UPS, they are carrying you out feet first. And I bet you that continues. I don't think that's going to change. I think that's going to be the story of this earning season. We gave you the benefit of the doubt. Your stock price rallied 20%, 30%. You better put up. And not every one of these companies will um which brings me to uh my question for you do you think by the time we get to the tail end which is nvidia do you think this will have been a successful earning season from the standpoint of like all right we may not have made new highs but we held up, like we held the gains?

1:45:40Like, how do you think that'll be the perception? Yeah, I do. I don't think it's a debacle. You really need this week's MAG7 earnings then to be good. Yeah, and I expect them to be. But if they're not, it's another correction, right? Like another market-wide 10%. When you say they're not, I think it depends less on the numbers and more on what they say, more on guidance. I think it depends more on the reaction itself. No, I'm saying But the reaction will be a function of guidance, not what they did last quarter. I just don't see them being like, whoops, we got over our skis. I just don't see it.

1:46:20It's still so early. And based on everything they've said for the last couple of quarters, the idea that they're not going to affirm or continue could happen. I just don't see it. Heather McFarlane in the chat is reminding me of something Dan said. something like it's 9 p.m but this party goes all night long or something like how did he remember he said that i mean i know he said that a bunch of times okay or something like it might be midnight but this thing goes all night or something or something hilarious like that all right it's i guess it's too early for the mag seven to materially disappoint so as long as their guidance is good this should go down as like a good earnings i think so but also listen the If VIX is at 15 and people are going out of their minds speculating, if we get a little slap on the wrist, like, all right, I'm here for it.

1:47:12Yeah. All right. The weight loss drugs are crashing. This bull market is way past midnight. This bull market is now in a complete and total hangover from whatever went on last year. These stocks are just being destroyed. So Novo Nordisk, I guess, came out with an earnings report over in Europe. And man, they crushed this stock. It fell as much as 30 % at one point. Wiped out$93 billion of market cap. And the problem for Novo, and we've been talking about this on the show. We did a whole thing about HIMSS being sued, being like having a partnership with Novo Nordisk Break Apart over generic sales of semaglutide and terzepatide.

1:48:02and all of these compounders that are knocking these guys off. Well, it's like having a huge material effect. This company just lost$100 billion in market cap because of this. Novo cut their sales outlook, now expecting 2025 sales growth of 8 % to 14%. Down from the high end of the range was 21%. Oof. Yeah, really bad. Said operating profit would be lower than previous forecast. This is the second time they've cut their forecast just this year. Chalked up the diminished outlook to the availability in the US of copycat versions of WeGovie. The company said despite US regulators recently ordering an end to the practice known as compounding, it has continued with multiple entities still marketing and selling unbranded versions of semaglutide, the main ingredient in WeGovie and Ozempic.

1:48:58So they have to like I mean this is just going to be lawsuits Law enforcement Maybe like I don't really know I don't know what they're going to do I don't know if the FDA gives a shit really I feel like There are probably thousands of companies In the United States and around the world Just making their own version of this drug And selling it They're all running advertisements like crazy Hims is a really good example Hims has the distribution Novo has the patented product Which would you rather have right now? I think you'd rather have the distribution. If the consumer doesn't give a shit and they're willing to buy knockoff version, then you'd rather have millions of customers that are hooked into your website than have the stupid patent.

1:49:42What good is that? So that's crazy. We have some charts. I want to show you. This is Novo Nordisk versus its market cap. Michael, the losses here are staggering. this was almost a$700 billion company. And I think it was the largest market cap in all of Europe for like five minutes last summer. Do you remember us talking about that? Yes, I do. Yeah, the stock is down by two thirds. It's a$240 billion market cap and still dropping like a rock. And that's not over three years. That's over six months. Yeah. It's wild, right? Okay, here's Eli Lilly, not as bad. Eli Lilly almost hit$1 ,000 a share. It's been flatlining.

1:50:30It's in a 17 % drawdown. But compared to how much it had gone up since 2020 when this weight loss craze started, that's not terrible. It just looks like a pullback. Let's show this in isolation. To me, it looks very heavy. I'm not buying it. It looks like it's going to 600. Next chart. This is just the share price. so it's at 776 again it was almost a thousand last September and uh it's you know it's not looking good all of these rallies are sold you have this persistent pattern of lower highs not what you want to see and they're fighting the same battle that Novo Nordisk is fighting they might be better at litigation or something but like the trend is definitely against these guys um so I don't think this is a i don't think this is the type of uh blue chip stock being down 17 that i'm like yeah i can't wait to buy it agreed in the chat they're saying novo should donate a billion dollars to build trump golf courses suddenly there would be aggressive enforcement yeah you know what that's obviously hilarious but like uh i wonder if novo nordisk outside of the the general pharma pharma lobby has any power whatsoever to make this stop.

1:51:49Because I don't know what kind of money is being spent on the other side by the compounders to have it continue. It might just be a lobby battle until somebody gets serious about enforcing this stuff. And in the meanwhile, these stocks are just absolutely f***ed. All right. Let's rewind the clock. I feel like stock market investors always, but especially in 2025, I have a very short memory. There's a lot of risk-taking, a lot of speculation, and how quickly we forget what we just lived through three months ago. Ryan Dietrich quote-tweeted this tweet from back in May. This is in May 2nd, so I guess a month, three weeks after the bottom.

1:52:35Goldman said, markets might not have bottomed. Wells Fargo, could retest the lows. Morgan Stanley, retesting the low end of 5 ,000 is feasible. JP Morgan sees S &P falling to 4 ,000, worst case scenario. Bank of America sell the rebound in US stocks. So Yahoo Finance put together this banger of a chart that shows how the 2025 price targets have evolved over time. And like they always do, I'm not throwing shade. This is the job. It's impossible not to do this. I would have done the same thing. You follow the market. So you have the initial forecast coming into the year. They were all pretty aggressively bullish.

1:53:08And why wouldn't they be? And then you had the TAF reaction and the freak out. And of course, they lowered their estimates. And just like that, they're back to where they started, if not even higher. We could skip the next one. Wait, wait. Can we stay here? Sure. So Wells Fargo and Morgan Stanley never changed their target. good for them they they just uh they just like wrote it out and and were the last to react i guess my question to you would be why wouldn't everyone just not react why do they have to i know the market fell a lot i think because when you're when you're 20 above or below your year in target it just looks like sort of ridiculous i think maybe what other defense could there be?

1:53:56Doesn't this look more ridiculous? Well, yeah, with the benefit of hindsight. But be the last to downgrade then. Who gives a shit? No one's like – In other words, like – I understand what you're saying. Like game theory in the next 20 % bear market, like you know what? We didn't save anybody any money anyway if we downgrade now. What if we just don't? Yeah, that's not how life works, but touche. No, but you see what I'm saying? Oh, I see what you're saying. I understand. From a pure gamesmanship perspective. All right, we could downgrade it now and maybe it falls further. No one's going to give us credit for that.

1:54:37I agree. If you're not first, you're last. Or just don't even bother. Right.

1:54:45So Dietrich tweeted that the S &P is up 8.6 % year to date. It's about average. and then Balachunas just, you know, no, no. It's just a perfect 10 out of 10 response. Eric said, 8.6 % is amazing given the amount of negative headline firepower thrown at the market by the media. Adjusted for that, it's up like 30%. Yeah. Wait, so in other words, it's an average year, but like what's the, what is he saying? Four out of 75 years stocks have gained 8, 10%. like we almost never have an actual average year. All right, so we never have an average year because when the market is down, on average, it's down 13%.

1:55:29When the market is up, on average, it's up 20%, 20 plus percent. When you net those two out, yeah, it's like 8 % to 10%, whatever it is. But I don't care about that. I care about Eric's point is that when you think about how black it got in April, everywhere. The fact that we're up 9 % of the year is pretty remarkable. Again, I know we're beating this dead horse, but it needs to be said over and over again, at least for future posterity, pull the XLK out, pull the XLC out, and we are negative on the year. Of course. Yeah, no doubt. So it's only a plus 8.6 % year because of this once-in-a-lifetime CapEx explosion thanks to a software program that nobody saw coming as recently as three years ago.

1:56:26Like that's it. There's nothing else going on that could possibly have this market up 8.6%. But maybe that's the thing about a bull market. There's always something else. There's always something that bails us out. Yeah, but this felt like one of the all-time kick saves. I agree. And we can't run it back a different way. Like there's no – it's just what it is. There's no counterfactual. You can't prove it. Because people would say, what if something else came along? Yeah, maybe. Yeah. I don't know. All right. IPO. Did this go public? Is this going public tomorrow? Figma on Monday raised the preliminary pricing.

1:57:06It's not out yet, but I'm trying to think. I think it's this week. There's a few reasons why this one's notable. Okay, you and I used Figma when we were working with the company that built our last website. They used Figma as the design doc for us to all go into and point out mistakes in the design before it became live on the website. So that's the way Figma is used. and it's definitely a competitive space. They don't have it all to themselves, but it's a pretty big company. This is Martin Peers at The Information. Sometimes good things happen to nice guys. I'm talking about Dylan Field, one of the more grounded founder CEOs you're likely to meet in tech.

1:57:53His design software firm Figma looks to be sailing toward a very strong public debut in the next week. Figma raised the preliminary pricing range for its IPO Monday to between$30 and$32 a share from an initial range of 25 to 28. At the upper level of the new range, it's a market cap of$18.7 billion. Blah, blah, blah, blah, blah. Look, it's a 48 % revenue grower. It's got a lot of the attributes that people are looking for in a software stock. There's a lot of deep client capture, et cetera. All your designs are already in there. Why would you switch providers? Like we'd like these types of stocks.

1:58:40It's definitely at risk of AI doing what they do better and cheaper and faster and blah, blah, blah. But then, of course, this is the kind of company that will say, hey, we're going to do our own AI and our product is going to improve. So I think it's notable that we can still get these$18 billion tech stocks to market that aren't even AI plays. It's just a design software company. But I like that we're still seeing deals. Well, I love that line. Dylan Field, one of the more grounded founder CEOs you're likely to meet. Nobody would ever say the same about you. And it's great to see good things happen.

1:59:19What the f**k? You love seeing good things happen to good people. But wait, there's more. Throw this tweet up, please. I'm not one of the more grounded tech CEOs you know. No. All right. Jeff Richards, the last five technology IPOs are up 142 % on average. Amazing. That's kind of wild. The last 20 are up 93%, performing well beyond the lockup window. So he said the last 12 months, the prevailing narrative was there is no IPO market. Well, smart companies prepared anyhow, and we're ready to take advantage of favorable conditions. So you'll have to see it. This is really, really important to a functioning capital market that these new companies can be treated well by public investors.

2:00:01We need more of that. So good stuff. You never know when the window's going to reopen. A few good weeks in the NASDAQ and they're doing deals again. So that's exactly how it works. All right. So I am going to make the case that everybody needs to be cool. Maybe no more new positions for a minute. Let's let the market breathe. We have just had a spectacular run. The VIX is at 15. We're seeing a lot of silly behavior. And I'm not telling you to sell your 401k or stop anything like that. I'm just saying for individual positions, if you're feeling strong, relax. The market has been on fire. I, you, all of us, we're not geniuses.

2:00:48So just take a breath. And I brought data. So a few tweets from Bob Elliott. not trying to be a Debbie downer, just trying to be a little bit sober here. Speculative trading indicator, the three-month rate of change. We've seen this twice in previous history at the end of the dot-com bubble. It's a great trend. And at the end of the 2020-2021 mania. Okay, that's number one. Number two. Keep that up. Look at this. This is as clear as a bell. Yeah. The implication is maybe it goes further. Just calm down. But not much further. No, it might. You never know. All right, here's another one. Quantitative analysis from Bob, or I guess it was from Goldman that Bob tweeted.

2:01:33Stocks typically underperform after sharp rises in speculation, which is pretty intuitive, right? So they're showing sharp increases defined as a three-month change in the indicator exceeding 15 points or roughly the top 5 % of observations since 1990. And they show what happens 3, 6, 12, 24, 36 months later. And it's not a catastrophe, but you would expect a little bit of backing and filling. Another thing, this is from Jason Gepford at Sentiment Trader. So Helene Miser tweeted that the S &P at new all-time high and fewer than 100 stocks making new 52-week highs. So what that means is this rally is fairly narrow.

2:02:18It is AI. and only AI. And Jason shows that when that happens, especially when it starts to cluster, where you see new highs with fewer and fewer participating stocks, on average, returns aren't great. Not catastrophic, but just not great. So my point is, we're all having a great time. If you're in individual stocks, unless you're in the bad ones, you're making money and just pump the brakes a little because the wind has been an hour back for the last three months off the low is really uninterrupted and uh we're extended to say the least i got another i got another thing here for that um jim reed is the head of macroinformatic research at deutsch bank oh research okay now you have my attention yeah research is like finance when I say it, better pay attention.

2:03:13No, I'm leaning in. We're back to a boom in margin debt in the stock market. So this is investors borrowing against their own stocks to buy more stocks. So it's not like borrowing in general. This is specific. Don't margin debt me. I mean, of all the things. I'm talking to the listeners. I'm talking to the viewers. So this is like borrowing at stocks to buy more stocks, okay? The level of margin debt accumulated on the New York Stock Exchange in May and June was the fifth largest two-month increase since 1998. So we're talking about the rate of increase. Okay. So people are going nuts. People are going crazy.

2:03:55The only periods with larger two-month increases were right before the 2000.com bubble burst and right before the 2008 financial crisis. quote, while the current surge doesn't quite reach the extremes of those prior episodes and could therefore easily climb further, it still ranks among the most aggressive 12-month rolling increases on record. More ominously, perhaps, quote, margin debt, listen to this one, as a percentage of GDP now exceeds levels seen in both 2000 and 2007. I don't care about that. Adjust for the stock market. Margin debt as a percentage of GDP? Don't come through with that nonsense.

2:04:37Give me the stock market cap. Because the market cap relative to GDP is near all-time highs. Why would you adjust margin debt for GDP? It's not relevant. It's just a way of thinking about the level of speculation relative to the size of the economy. The point remains. There's a lot of speculation out there. And so, yes, this can continue. We could be up 25 % before the year is over. Who the hell knows? So I'm not saying like panic, sell your stocks. So what are you saying? What should people do? I'm saying that if you are thinking about putting on a new position because you feel like you missed it and you feel yourself buying out of the fear of missing further gains, if you feel that impulse, take a beat.

2:05:24Okay. What about existing positions? That's up to you. Use your own risk management. Whatever. I did a little bit of shaving last week, a little bit of shaving. Yeah. I sold a bunch of stuff, like some shares of things that I'm keeping or just like outright got out of things that just were a waste of time, like Pfizer. And I'm not like looking for like, ooh, what's my next stop? Because I hate it when the market is so extended. It's been above its 50-day moving average for three weeks straight. And it's just like, you feel like there's nothing to buy. now things are starting to get interesting again with all of these earnings reaction blow-ups in like really good companies and um i'm just like sitting back and uh i want to see i want to see if some opportunities get created guess what i guarantee they will i mean that's well they are already but like we're gonna get we're gonna get a what do they say 160 reports this week like we might have seen nothing yet just yeah don't feel like you're never gonna get another shot is what i'm saying okay yeah just just take it by the way unless unless you are fully invested with every dollar you'll ever earn and you'll never have a fresh dollar to put into the market this is great all right mystery chart okay um john please what is this um okay it's an it's a oh i know what this is this is the two year so close uh okay 10 no wrong direction uh oh uh okay uh three months fed funds oh all right whatever reveal you were close dude that was embarrassing all right um there's a fed meeting tomorrow i don't think we're i think we're almost out of time to discuss it uh put that chart back up please guys this is a big l for me i mean that my god you should like i feel like everyone everyone working in investing should like sort of be able to do that right i'm ashamed yes so we're showing you guys the federal funds effective rate and um we're hovering just below uh five percent and uh i don't think we get a rate cut tomorrow but maybe they use the uh the presser to set the stage for the September cut.

2:07:46And they'll use August, the Jackson Hole convention to like, kind of reinvest in the messaging from tomorrow. But that's sort of what's going on. We have one more chart. All right. So this is Fed Fund's rate expectations. So you could see the blue diamond represents the FOMC's own year-end estimates. The green diamond is market expectations, which you could see fell all the way down to, for 2026, fell down to 3%, but have since been rebounding, meaning that we think terminal rate is probably higher rather than lower. And the FOMC's long run projection is about 3%. So we're far away from these projections.

2:08:36If they're going to start cutting, they better start soon. And they might have to at some point. But right now, they don't have to. And they're not. And tomorrow is probably another non-event. What do you think? Yeah, nothing. Is there anything he could say that you think would be a surprise in either direction for the market? Oh, there is absolutely anything he could say. Is there anything that he will say? What if he's super dovish? What if it's a dovish hold? And he's like, yeah, listen, we could totally cut rates. Like, not in those words, but like if that's what he implies. I think – I mean, I think it's going to be a lot about tariffs now that there's more clarity.

2:09:15Right? Because that was the unknown. That was the only reason why they weren't cutting rates. They're going to ask him 10 different questions about what did the president say to you behind closed doors and blah. And do you have any plans to leave before May? And it's going to be like all the drama is going to be about like them trying to get him to say something about Trump. and he's too smart for that. I am not a Fed watcher. I will not be tuning in. I'll see the highlights. Not this one. I watch the good ones. This is a nothing burger. That's right. All right, guys. Thank you so much for joining us and making this show the platform that it is.

2:09:51Love everybody who comes to the live on YouTube. That's 5 p.m. every Tuesday. Those of you listening, thank you so much. We appreciate you as well. and you can always catch the video replay. And it's just, it's unbelievable how much engagement and how much you guys are responding to the show. So we love you for that. Tomorrow is Wednesday, which means it's an all new edition of Animal Spirit starring Michael and Ben. My personal favorite podcast. There'll be a new Ask the Compound. And at the end of the week, we've got an all new Compound and Friends with a returning champion guest. So from all of us here at the Compound, we thank you.

2:10:30We appreciate you. Leave a rating and review and we'll talk to you soon.