Warren Buffett vs American Capitalism

28:59The second point I wanted to make, which is the one that really got people angry, was that Warren Buffett has this very, very famous concept of the wide economic moat, which is, if there is any one key to his success, arguably that's it. That what he's most interested in is... Non-disruptible, difficult to compete with companies. Yes. Yeah, I think most people would agree with that. And obviously, it's not easy to find them because everybody can see that it's a good idea to find such companies. And Warren Buffett has been better at finding them than anybody else who's ever lived. So I'm not saying it's easy to do that.

29:43That's the part that you got the most blowback from. Simply because what that tends to mean. Besides from Chris, like other people. Oh, no, no. Chris, I mean, I've got one of the rudest ones here if you'd like me to read you some. I would. Okay. So, Buffett versus American Capitalism article. Only, this probably sounds better in a British accent. I imagine the guy who wrote it doesn't have a British accent. It sounds more like me. Only the wormy, envious parasites in the MSM find it necessary to write unsophisticated, passively aggressive drivel about Buffett and his incredible success. Your bloviation is even more ironic considering you are a W-2 junkie working for a billionaire who made his own moats by becoming the largest and arguably most watched financial news purveyor.

30:33So let's bring Mike Bloomberg into this while you're... Yes. I'm allowed to say this word on this forecast. Yeah, you can say whatever you want. Who the f*** are you, a writer, a craft with so much innovation and positive human impact, to judge businesses that employ hundreds and thousands of people and purchase billions of dollars of inputs, are not good for America, unquote. In your insular, zero-economic-value, opinion-writer world, You create nothing but hot, subjective air, and yet have the hubris and ignorance to denigrate the world's greatest asset manager and ultimately philanthropist, who has created massive, lasting economic value for millions of people all over the world, including donating his billions to many charities.

31:12What a pathetic, insignificant little parasite you are. All right. Duncan, do you want to apologize? He really needed to take a deep breath and tell us what he really thought. Hold on. Did this guy identify himself? Yes. oh okay i'm not going to do that i don't no no it's okay is it somebody that works in in finance or a professional investor or just like a regular person it seems to be just a regular person okay um have you anger management issues yeah well yeah i mean i've had letters which were not obviously as quite as over the top outspoken as that but i've had no letters on on a similar tenor from people's corporate email addresses and from their bloomberg okay i've been on tv for 14 years, you should see the shit people send to me.

31:53Oh, yeah. If somebody owns a stock and you say the slightest thing that's not positive about that stock, it's just you're opening up the floodgates. How did you respond to that? Like, how did that land on you? To be honest with you, that particular one, I laughed uproariously, shared it with my daughter, my wife, my parents. What else could you do? Shared it to her own family. I mean, there comes a point when you can't respond to something like that. Like, dear sir, I am not a worthless parasite. Yeah, yeah, yeah. And I am not, you can't, you can't. I like what Bill Buckley used to do when people would write an angry letter to him at the National Review.

32:34And they would say, finally, cancel my subscription. And he would send a postcard back that said, cancel your own damn subscription.

32:44um no in general i've it was interesting i should say i i got quite a lot of very positive feedback as well almost all of it from people in the industry who are just delighted for anybody to say anything negative at all about warren buffett yeah um i did get it i did get and by the way you didn't get person you didn't say anything negative personally i think you were describing a system in which Buffett has been able to thrive. I was very careful to make clear, I said this at the end, one of the most remarkable, there are so many remarkable things about Warren Buffett, to have made that amount of money over that period of time.

33:23And I could count maybe two or three intimations of impropriety in the whole time he was making that kind of money. It's extraordinary that you can make that kind of money while still... And not even personal impropriety. Yeah. Stayed married to his wife until she passed away. Yeah, the guy from Precision Cast Parts was not great, but Buffett got rid of him. The Solomon Brothers episode, he bought the company. The American Express salad oil thing very early. Right, these are so minor compared to... Had to get out of that. Agreed. Yeah, so I certainly, if I tried to make some sort of escapist attack on the man's character, that would have been seriously...

34:01Here's where I took it. I didn't. Here's where I took issue. I'd love to hear what you guys think. It's true that he likes to invest in businesses with wide economic moats, to which I would say, A, who doesn't? And B, let's not act like for every Coke, there's not a Pepsi. For every American Express, there's not a Visa. For every Burlington Northern, there's not a, I don't know the names of the other railroads. In the case of American Express, bear in mind that he also has Visa and MasterCard. Okay, fine. Fine, fair. It's only a triopoly, but he does have all three of them. Fair, but I do think that there are countries and there are companies in countries, specifically in the emerging world, where there are true economic monopolies.

34:45They're government mandated. They don't even try to hide it or pretend it's not that way. In the case of the Berkshire businesses, if you name one, and I know there are 400 businesses he owns, 300, forgive or take. If you name one, I could probably, without a Google search, tell you what their competitor is? That's fair enough. Okay. Obviously, the word you can get into, you can get into sort of very nitpicking about the language. A monopoly really does require just the one company. You can refer to monopolistic factors when there's more than one company. You can change the word to oligopolistic or you can just continue to say monopolistic.

35:29But it's the same. it's only a somewhat watered down version of the same thing. So in terms of where the moats come from, I should also say I'm fascinated by this because I actually covered, when I was at the Financial Times, I was the Mexico bureau chief for four years at the point when Carlos Slim took over as the world's richest man. Yeah. And he basically had the deepest, most impregnable alligator-filled moat you could possibly imagine built for him. He ran the cell phone company. But the thing that was interesting was that he successfully bid for the landline monopoly and then stayed so far ahead of the regulators and the lawyers that he parlayed that into the cell phone monopoly.

36:14Right. And he got the money to do that in the first place by doing... He, like Warren Buffett, recognized the importance of cash. He owned more or less every cigarette distributorship in Mexico. and the way that tax collection for cigarettes works in Mexico is that you, the company, collect the tax when you sell the cigarettes to the punter and you only pay them over to Hacienda, the treasury, once a year. So you've got an even better version of a carry or float that you can invest than Warren Buffett got with Cuyco. Before you pay your taxes, you can earn money on that money. But anyway, so I am fascinated by monopolies monopolies and how they stay on.

36:57But in the case of Slim, he was gifted a monopoly, almost literally gifted. He didn't even pay enough for it when they sold it. And then stayed ahead of the law to make it a far bigger monopoly in far more areas over 20, 30 years. Now, for a Buffett-relevant example of something which is not a monopoly in the sense that there's no competitor, but where it's behaving in a way that isn't really what we like to think of as capitalism, creative destruction, building the world. There is Coca-Cola, which is the biggest. It's far more dominant over Pepsi in Mexico than it is in the US. Mexico is its second biggest market total.

37:46Well, maybe that's out of date by now. But Vicente Fox was the head of Coke in Mexico and parlayed that into becoming the president. The Mexican equivalent of 7-Eleven, OXO, belongs to Coke. So they start the shelves with what they want. They have vertical integration. Yeah. You don't get any Pepsi there. You get plenty of stuff that isn't Coke in terms of brands for products that they don't have a competitor to. go to any tiny, pathetic, poor pueblo out in the countryside, there will be a beautiful table outside the restaurant with the Coca-Cola logo on it. All the umbrellas have Coca-Cola written on them, etc.

38:43It's not a monopoly in the sense that nobody can compete with them, It's very hard. But in terms of they have built verticals from it to make themselves impossible to compete against in huge swathes of the economy and to make it very much easier for them to set their own price in many contexts. Now, that is monopolistic behavior or it's totally rational behavior for a capitalist to do. And if you've got a relatively weak government like Mexico, which will let you do it, why shouldn't you do it? And they obey the law. But as somebody who cared about living in this middle-income country that is forever trying to break through to becoming a wealthy country and failing to do so, I would have preferred a kind of capitalism that actually disrupted and creatively destructed.

39:40And as Coca-Cola is one of his most famous holdings, I think that's a good example. Yeah, I get the - I'm not a socialist, but I - Sure. There are varieties of capitalism, and that's not necessarily the one I'm happiest with, even if it's one that makes a lot of money. I guess I get the idea that that's an emblematic investment for Berkshire. It's one of the stocks they've made the most money on. It's also at an all-time high right now, which I think would surprise people. What's always struck me as so funny about Coca-Cola is that for most people, you sit in a restaurant and you say, I'll have a Coke.

40:14We'll have a Diet Coke. We don't have Coke. We have Pepsi. Who cares? Sure. I don't know. I always thought of those two things as being interchangeable. Speak for yourself. Okay. All right. Go on. But no, I'd say first, I read everything that John writes. I think he's one of the most informed, thoughtful columnists. And when you talked about, you know, if Barry had written it, you were going to go over and strangle him. I was going to go over and strangle John on this one. And the reason is I think that the language of using a term like monopoly is provocative. And it's provocative in a way that the less you know, so unlike the points that you're raising, the less you know, the more you think of it as something illegal.

41:02Right? A monopoly bad. And so to say now. I think my readers are probably reading it to the level where that may not be. Well, that's true. I do take your point. But it's also, and then when I look at, you know, if I look at the portfolio of any successful large cap investor, let's just start with that. You know, you're looking at a couple of hundred companies that almost by definition exist in what you would call an oligopoly because three or four companies have a big position. This is a power law, though. This dominates everything. It's a power law. And so, you know, you think about the history of Berkshire, a huge investment in Wells Fargo.

41:41They had a huge investment in CapCity's ABC. You know, these – so I think when you think about a moat as being inherently monopolistic versus the idea of a – for example, Costco. Berkshire doesn't own Costco, but we own Costco for a long time. and you could argue Costco has no moat whatsoever, but I feel by the way you were writing, you might argue that, oh, it's another oligopolistic, advantaged wide moat business. And yet it's fiercely competitive and it's competitive because it's low cost. Geico is competitive because it's low cost. But moats are, I guess moats are not a negative thing. So if you open a Walmart next to a Costco, you're probably gonna take 20 % of its sales away, but you're not gonna take 100 % of its sales away because the shopper at Costco is paying a membership fee.

42:36And that is the moat that they have built so that they still exist and Sears doesn't. Kmart doesn't. Gillette razors, once you've got the razor, you then pay for their blades. This is my handle, therefore I buy the blades. But do you want a cool Charlie Costco story just because I'm looking at him here? But if you wanted to think of something extraordinary, because you could look at that membership fee and say if instead of, there's certain people that will not pay a membership fee, right? Just they are against it in principle or they're disorganized. So there are customers that do not go to a Costco, that would go to a Costco if they didn't have to pay a membership fee.

43:15Yes. And if Costco raised their prices, the membership fee I think represents about 2 % of revenue. Is that true? Yeah. But it drives the rest. Well, it's their net. The tail that wags the very big dollar. Their net margin is 2%. Their average markup is 10%. Now, I think I could be wrong. I think Walmart's average markup is about 28%. But here's the interesting thing that Charlie said to me once is he said, if you were to look at the difference in shrink, which is the fancy word for theft, shoplifting, stealing, between Costco and the average big box retailer, that would be 100 % of their profit margin.

43:56Yeah. So people steal less. And remember, theft is half employees and half shoplifters. And that's an incredible thing. And of course, part of that is the membership fee, right? It's very unlikely you're going to register as a Costco member and then try to loot the place. Well, in the same way that if you're a government employee, you are likely to be a safer driver. If you were a USAA, you're more – army officer is less likely to commit fraud against an insurance company. So you were intelligently choosing who you wanted as customers but using a separate variable. And so it's an interesting part of Costco's model that I admire.

44:39But anyway, so I just felt that monopoly was a bit provocative because it – whereas moats I think isn't. And I don't think they're the same thing. I think they are different things because of, you know, a culture can create a boat. Well, in the Middle Ages, many moats were taken. Well, did you quote Elon Musk in your article or did I read that after? I quoted, no, I quoted Elon Musk and made it fairly clear that I thought he'd been proved wrong. Yeah, but he said, what was it? Moats and moats? He said moats are a really, really shitty way to defend a castle, you know, sooner or later. And I didn't make the point, given what's happened to his - Moats are lame.

45:19Elon Musk, moats are lame. Moats are lame. And then made the point after what has happened to Tesla's sales in the last few months. Yeah. Turns out he could use a moat. He might be looking for a moat. All right. His brand doesn't give him the moat he can. Let's close the chapter on the Berkshire stuff. I think the big story right now in the markets is obviously we just had this huge burst of volatility that came and went just as quickly. it's one of the most remarkable things I've ever seen. One of the stats that Sean put up, I forget, I think it's the second best 27 day return for the S &P 500 ever from the lows of April 8th to now.

46:03I forget if that's the actual stat, but it's something crazy like that. Yeah, I've played around with the numbers. It's up there with the four or five biggest rallies ever. Yeah, I think there was a - Post-COVID, there was a big one. Yes. I think there was a 15-day stretch of all gains, consecutive. It's just the NASDAQ 100 is up 25 % from the low in under four weeks. So in other words, the largest technology companies added back a quarter of their market cap in like a month. And they were the best understood, best known companies on the planet. Yeah, so that tells you how efficient the market is.

46:44All right. Chris, you added some notes here about the disruption of the tarot violence in the markets. I'd love to get your take on this. Well, I think one of the most peculiar tensions in the market is that there are three massive transitions happening at the same time right now. So there's this monetary transition, right? We had 15 years of functionally free money, no inflation, magical thinking, made up theories that deficits don't matter, you know, that interest rates are free. Earnings 20 years from now are worth as much as earnings today. Crazy optimistic growth rate. So obviously that began resetting about two, two and a half years ago.

47:22We saw some UK pension plans have a blip. We saw, you know, a few, you know, First Republic, Silicon Valley Bank have a blip. We've seen some commercial real estate. The SPAC boom came and went. But I would say we're in the early innings of the implications of that transition. That has a long way to go. Return of real interest rates. Real interest rates and debt rolling over that was at 4 % that's going to be at 10 or 11. And so there'll be big changes there. So there's a lot of hidden leverage in the system. Transition one. That's one. Transition two is this geopolitical transition, right? My whole life has been the story of globalization.

48:01I just finished a beautiful biography on Keynes. you know, and, and just in time. Yeah, exactly. All right. Now I understand this. And, and, you know, everything about globalization versus national, you know, all of that is becoming unwound in a way that we don't know how it will play out, but it is a massive shift and it will shift supply chains. It'll shift margins, productivity, inventories, all sorts of things, returns on capital. Third transition is of course, we are in what will be the greatest transition probably since the industrial revolution, of course, with AI. And we are in the, not even the first inning of a match.

48:44The foothills. Yeah. So think of those three big transitions on one side. And then on the other side, you have the market at not an all-time high valuation, but at high valuations. Elevated. Elevated valuations. Top decile for sure. High concentrations, very optimistic growth rates, and essentially a belief that momentum is a good way to invest, which the idea of momentum means that what happened in the past is going to continue. So you have massive - For a short time, at least. So you have massive disruption - And we're only in just after I've got out. Yeah. Coupled with complacency. Yeah. And that rubber band is very, very taut.

49:24And so if you were to ask me if, you know, I think we've seen the end of volatility, I definitely don't think so. And I do think that, you know, the indexing wave has been a feedback loop like a momentum trade. The more that works, the more it tends to work. The U.S. versus the rest of the world was a momentum trade that's worked for 20 years. Growth versus value, momentum wave that's worked. has it. So I think that we are in a period of huge transition and yet we have complacency and valuation. So I think that's pretty interesting. This is what's so hard about being an investor now, John, I'd love you to weigh in on this.

50:02You've got to hold two opposing thoughts in your head or else you will lose your career. So everything that you just said makes perfect sense. Then I look at the top stocks over the last two weeks or three weeks and I could have blindfolded myself and recited them by heart. It's Tesla, Apple, Microsoft, Meta, NVIDIA. So the more things change, the more they don't change. And for the investor class, this is at this point, this is all they know. They know it works. They know it works every time. And they, the experts keep telling them this is unnatural. It's not going to continue. And then they're like, holy shit for the 20th time in a row, it just continued.

50:43And capitulation works at both sides. What that reminds me of is my first stink covering Wall Street when I first met Chris, which is like 97 or 98, was in the late 90s. And as you probably remember, there was a succession of really quite scary market breaks. 97, 8, 9, irrational exuberance. Currency crisis, LTCM. Hong Kong, the Asia crisis. and every time you were right to buy the dip and every time it was retail at that point, the army of Schwab and Fidelity would get E-Trade then. And just every time they were proved right and every time they gained in confidence to keep doing it the next time.

51:29And then finally, it didn't work. Well, the multiples eventually became irrelevant because what's the difference? Who cares what price I'm paying? It's going up. Yeah, which to be fair to Keynes is his definition. It has a very valuable definition of speculation is that when you don't, when all you are concerned about is whether the price will rise rather than with it. And you plainly had reached that point. Counterpoint. That period you describe is a very, I was there for it. It's my formative years. It's a very compact three-year period of time from 97 through the end of 99. You're absolutely right how the way people were acting by the time it ended, it was in ludicrous mode.

52:12This has now been going on for 10 years. True. The cloud computing era kicked off in 2015. Yeah, but 72 had a lot of this characteristic. 72 was a culmination of something that really started in the early 60s. You know, when Larry Tisch famously said, get me a kid. Like, I can't keep up with this market. I need a kid. And you had a whole generation of investors that had gone through the crash of 29. And then you had a huge age gap. And then you had the kids who had never seen anything. The jury size. Yeah. So I think the real question is that are we approaching something that's more like 72 or something that's more like 2000?

52:50And the difference between those two is that in 2000, you know, the market went down 9%. The Nasdaq went down a hell of a lot more. But investors like us and investors that were sort of, you know, active stock, because we're up like 10%, 15%. So you didn't outperform by 300 basis points. You outperformed by 2 ,000, 3 ,000. And that was – whereas when 72 – and there wasn't much of a trigger in 2000, right? I mean, of course, there was 9-11. That was later. That was later. And that had the psychological effect. but you didn't have sort of economic calamity. You had psychological reset and bubbles being burst.

53:3372 marked sort of the beginning of a calamitous change in inflation. So stocks collapsed. We had stagflation all the way through the rest of the 70s. So you're saying you see this as more potentially akin to the 72 ushering in the 70s versus the 2000s? I would say those are two models that people should keep in their head. God, let's hope it's neither. Well, but when you think of the inflationary pressures that could be unleashed, when you think of just some of what we went through in the last month in terms of geopolitical chaos, the loss of American hegemony, huge currency fluctuations, you know, a lot unfolded very quickly.

54:16And remember, just think of the oil embargo, like something that had this huge change in. And so you could see things like that and you go back farther. But I think those are the sort of two models that I think people can toggle between. But either way, it seems like a hell of a good time to focus on durability, valuation, cash that you're getting up front. That gives you a much more convexity, a much more ability to adapt. Even Mark Zuckerberg wrote that fabulous memo about four years ago where he said, you know, the great thing about cutting costs and having more money now is it allows us to adapt.

54:53to a changing world. Well, that was like a ringing the bell that the end of free money was over. And I think that's where, you know, moving your portfolio, I think our portfolio is, I don't know, 14 times earnings, but yet we've got companies like Meta in there. And so I think that, I just think the stuff that's got to grow 20 % a year for another decade or two and have 50 % margins for another decade, there's a lot of optimism in some of those. John, what do you think? um i can't disagree uh i i've been banging the drum for value for god knows how long and every so often i'm proved right but mostly i'm not but um uh i think carrying on from what um from what chris just said i i i certainly agree that there is there is a distinct element there is a vibe of richard nixon ending breton woods the end of the gold peg in 71 there is a sense of a bunch of different trends coming to a fruition, coming to a conclusion that in many ways what Nixon was doing then was recognizing that this couldn't last.

56:02It wasn't sort of some immense shock. That the dollar was exchangeable for its equivalent value in gold. He said, forget that, we're doing something different now. And the Liberation Day tariffs, it's fascinating to work out exactly how, well, we still need to see exactly where the tariffs end up. But in terms of a final clear recognition - Oh, no, we know. It's 30%, but everything is exempt. If they're that cynical - That's what the stock market decided. That's what the stock market decided. I'm prepared to leave some money on the table if necessary and let other people make that bet if they want to.

56:39But there is something very similar. There is a similarity of the moment in terms of the old way of doing things isn't working and we're giving up on it, which is the gold peg and fixed currencies for Nixon, which is ultra globalization. So you and Chris share that insight about the end of globalization. We don't know what it means. We just know it's coming to an end. Yeah, and it's changing direction. I mean, it's not suddenly moving to no trade at all tomorrow, but new patterns and new shapes will form in the same way that we went through some very interesting gyrations before we settled on a sort of Reagan-Thatcher model that worked very nicely after Nixon.

57:24But boy, was that a messy decade before we settled on Reagan and Thatcher. And what's interesting about what you said about value and beating the value drum, the one caveat I'd give is that with all of these transitions, there are a lot of models, business models, that have been carved in stone that are not going to work. So if I describe this chaotic world that we've been in, And I told you that if your portfolio was Diageo, Estee Lauder, Nike, Starbucks, like safe, reliable, you know, Anheuser-Busch, Kraft, you know, that's a nice, safe, secure portfolio. That portfolio is probably down 50, 60, 70 percent.

58:04Yeah, yeah. And that's— It's such a great point. You thought those were blue chips. Those are the most susceptible companies to the disintegration of globalization. Well, globalization and digitization and the AI stuff, all of, because, you know, it used to be, if you could buy a 30-second TV spot, you, you, it was, it became, I won't say monopoly, but it became, the bigger companies tended to get bigger because they could buy the ad space. It became less competitive. Yeah. You know, so all beers collapsed to three beers, right? Now, how many beers are there? Well, I could start a brewery, start an Instagram account, a YouTube channel, and I could be doing a level of sales completely outside of the traditional system of paying supermarkets for shelf space, paying NBC and CBS for NFL commercial time.

58:58Like that's a – I would argue that's a great thing. Well, you got fragmentation. It's different. But the fragmentation was driven by a change in the way technology, the way people consume information. Right. And that changed fragmented brands that you can't imagine. Can you imagine going into a popular supermarket and they don't sell Crest? They don't sell Colgate. They don't sell Coke. They don't sell Pepsi. They don't sell Budweiser. Allow me to introduce you to Trader Joe's. Exactly. Exactly. Or Whole Foods. Yeah. So that was technology disrupted brands. Now, nobody thought of that when the internet came around.

59:37Like, oh boy, I have to worry about Budweiser. And I think AI will be like that. So I think the value trade of, oh, I'm just going to swing from growth to value is going to be overly simplistic this time. I think it's really going to have to be you're really going to want this active overlay, I believe. And, of course, I'm talking my book. But that it is going to be the ability to have both a reasonable valuation, durable growth, and the ability to adapt to changing times. That's a tiny fringe of companies. So I floated this theory on TV today. And of course, nobody likes it, which is probably why it's true.

1:00:11I think the stock market is the least cyclical it's ever been. The economy will always be cyclical. It's probably less cyclical than it was in the 70s because it's less reliant on bank funding and factory output. But I think the stock market has effectively become, at the high end, collections of companies whose businesses are predominantly subscription-based. and because they're not transactional companies, it's less likely that a weakening economy will have the same effect as it would have on the stock market even 10 years ago. So think about the largest market cap companies, Netflix. Is anyone canceling Netflix in an economic downturn?

1:00:54Probably not. I would argue Starbucks has turned itself into a subscription service with the app. It's 30 million app users and your order is waiting for you. It's one button. I would argue that looks more like a subscription than a transaction. This is where all the market cap is. It's in Amazon, which is Prime subscriptions, Spotify, which is music. And I guess my point is, we're definitely susceptible to an economic downturn in the stock market, without a doubt. But we used to look at companies like Alcoa and Caterpillar as bellwethers. I couldn't tell you when they report, what they had to say, or if anybody even reported on it.

1:01:33Yeah, now Alcoa doesn't go first. Yeah. What have they even called these days? It's embarrassing. They could report every week. I don't think anyone would notice. So that observation is only important insofar as you remember that when we invest in the stock market, we're not investing in economic conditions. We're investing in corporate cash flows. We have companies that have made themselves more recession resilient by means of converting their business model from I need you to buy something today to you've already committed to buying this thing and you're probably too busy to cancel it unless things get really bad.

1:02:08And that's a different stock market than we've had through prior economic downturns. How crackpot of a theory is that to explain modern valuations? So in terms of - John hates it. No, no, I'm fascinated by it. I'm just trying to think in terms of the Warren Buffett theory of - Do you believe in inertia? Do you believe in inertia? like the power of inertia. This is what the whole stock market is now based on. People not canceling things. Yeah. My bank account is still with HSBC. For no reason. The reason I opened my bank account with HSBC was they had a special offer for students. I got four TDK cassette tapes.

1:02:46Right. Free with my HS... Lord knows how much money they've made out of me at this point, but there is an inertia effect. How bad would the economy have to get for people to turn off the services they're paying Apple for or turn off their Amazon Prime membership, like really, really, really bad. An ordinary one-of-the-mill blip like 2022, that's why the stock market recovered so quickly because it never happened. It never happened. I don't know what you do with that information, but if this were an economy based on choosing to buy a pair of Nikes or not, we would have a more cyclical stock market.

1:03:22Yeah, it's an explanation or a justification. I'm thinking the Buffett metric of market cap as a proportion of GDP. Yeah. That would be a justification for the stock market being a higher share of the economy than usual because so much money-making capacity is tied up in a way that makes it safe. that you can... I'm thinking it through and I will... In about a month's time, you'll see my column once I've... And it's not an anti-value argument. No, no, no, no. You know what it's an argument for? We used to argue, do I want to invest in growth companies or do I want it defensive or cyclical? That used to be the paradigm.

1:04:08It's a bullshit paradigm now. The largest, highest multiple companies also these days tend to have incredibly defensive characteristics in terms of how their cash flows come in. I agree with you. Although I think you underestimate the cyclicality or sensitivity of advertising revenue, which is of course a huge driver of earnings at those companies, right? When you think of Meta, when you think of Amazon. How about this though? Here's my answer to that. I've heard this. Tell me what you think. The portion of the advertising that is now moving to Google and YouTube, and Amazon's the third largest advertising platform in the world.

1:04:46So do you know Walmart said their advertising business was up 50 % year over year? Yeah. 5-0. Okay. The percentage of advertising moving to those corporations, even if the overall pie is shrinking, is good enough for the stock market. You know where it's leaving? Mainstream media. Comcast, newspapers. Yeah. But there's not much left there. Not much left. Sorry, not much left to take. Okay, fair. Unless they sell Bloomberg. But I mean, you could just, you could look back at, you know, at what happened to, you know, Meta's revenue and, you know, in the last sort of swoon. And that caused the stock went down 70%.

1:05:23And now - Was that revenue or was that spending on the metaverse? Well, it was both. It's that their revenue disappointed. So people saw slowing revenue and I think - Huge spending. I think they actually had, they may have had negative revenue at one, but - and then there was the belief TikTok was rising and so on. But you've also got in those big companies, you have Tesla, you have NVIDIA. And of course, when you add up all their earnings relative to the earnings of the S &P 500, what you would say is, well, we got, those earnings might not be as sensitive, but what amount of the market is vulnerable?

1:06:03And I agree with you that the nifty 50 is a good analogy because the view was, you know, it was Coke, Procter, Disney, Xerox, Polaroid. And out of all those companies, it ended up things like Xerox and Polaroid had huge risks. Very disruptible, it turns out. Yeah. And then there were growth companies in there that were 10-year-old racehorses, Tootsie Roll, Kodak, and so on. But there was also Philip Morris and Coke and some others that if you bought them and held on to them, even if you went down 50 % for a couple of years, you did great. And I think the adjustment that needs to be made with the tech investors is just recognizing that these have become stalwarts, exactly like you say, but stalwarts don't grow 20%.

1:06:48And so having to figure out what is in the valuation expectations for these businesses, is it that they are high growth, you know, 20 % year over the year? Or is it, no, they're growth stalwarts, they're the Procter & Gamble's of this generation? So this year, when I read the Netflix earnings report for this quarter and the Spotify report, I said it's both. Yeah. I said, Spotify, think of this, 700 million users. How many companies in history have ever even had 700 ,000? 700 million. Yeah. So like from my perspective, will they be able to get away with another price increase this year? Maybe not.

1:07:27So maybe that limits the revenue growth. But just think of the size of that. That sounds defensive to me. Yeah. Unless everyone cancels all at once. I want to ask you guys about inflation. We got a year-over-year CPI that was up 2.3 % in April. It was the lowest CPI reading since February of 2021. I have a chart here. John, let's put up headline and core inflation trends. Yeah, John wrote a good article about this. Thank you. Okay. Is this the last of the tame inflation reports? This seems really calm. Remarkably, right? By all the criteria, obviously, we all know a bit more about inflation now that we've had some big wave for the last few.

1:08:10By all the sensible criteria, this was as good an inflation report as you could possibly hope for. OK. Coming into it, if you looked at the median, if you looked at the trimmed mean where you remove the outliers, if you looked at sticky prices, which Atlanta looks at the ones that are very difficult to cut, everything was gently trending downwards. And the one that they were most worried about, services excluding shelter, came down really quite sharply, down to 2.7%. So there was nothing wrong with this. I mean, it's still a bit too high for the Fed's liking. There's no trade war stuff in it. It's April.

1:08:50So what happens in May? That's the problem we have with so much data because people knew that they didn't know what the tariffs were going to be, but they knew they were probably coming. So obviously first quarter GDP, you don't really know what to do with that. PPI, which we've had remarkably fell. PPI was today, that was down. My best guess is that next month we're going to see a bump because we can only see a bump because that's when the tariffs really were in effect most enough. If we know that that embargo is over and China - We can probably look through it. So that's the question. Do you think investors will look through an aberrant CPI print a month from this week?

1:09:42Probably. Okay. I mean, again, I've been doing this too long to be certain about anything. Probably. I think the balance, I think that the, like you were saying earlier, I think the consensus on the market is too bullish. The overwhelming consensus on the market thinks tariffs are a bad idea and the lower they are, the happier the market is. I think the market, I think my most likely final scenario for tariffs is a little higher than is in currently implicitly being bet on by the markets. Yeah. You know, it's so funny. They said 30 % tariffs at the start of the year. The stock market was rallying into February.

1:10:26Everybody was fine with it. And they said 145 % tariffs. We had a 20 % lightning fast sell off. Now they're back at 30, which is what we assumed. And the stock market has gained back everything it lost. by which you can conclude the stock market never believed the fairy tale where we would get rid of income tax because tariffs would take care of it. Okay, that's not true. We also can conclude there's hardball and there's talking about playing hardball. And in this case, we were just talking about playing hardball. But it really did look for a few days. Yeah, I agree. Peter Navarro coming out and saying this.

1:11:03There were a few days until the first reversal. or the day of April 9th, right? After the low in April. When you really did begin to think, hang on, have I been wrong about this? Yeah. My column on Liberation Day channeling John McEnroe, the headline was, you cannot be serious. Yeah. And it turns out I was right. And you said first takes are dangerous. Yes. You should not go with your first instinct. I'm happy to report to you that Peter Navarro has been spotted. Oh, really? Yes, he is on planet Neptune negotiating trade. They've sent him to the outer rim. You may never see him again. Hey, John, give me that second inflation chart.

1:11:45You guys are going to kick out of this. Who's going to look stupider? This is inflation expectations by political party, according to University of Michigan. Democrats think 5%, independents think 4%, and Republicans think 1%. The Republicans are getting, oh, this is, for one year inflation, Republicans think it's actually going to be negative. Yes, Republicans think there'll be negative inflation because the beautiful trade war. The independents are going with the Democrats. That tells you a lot about how the popularity of these policies. I mean, I think with these numbers, which are hilarious.

1:12:25Hilarious. I do think the independent line is the important one. It shows that roughly two-thirds of the population, half each on the left and the right, have got to the point where they're allowing their political lens to so completely obscure their judgment that they're saying things that are stupid. So the average Democrat said that was expecting inflation of 7 % over the next year. Right. Insane. And Republicans expected deflation. Right. Both insane. Equally insane. Equally stupid. That's right. Come on, guys. Think this one through. The fact that the independents seem to be getting that much into the bearish vibe of tariffs means inflation is probably one of the many good reasons why the White House is retreating from where it was.

1:13:13Over the last week, in addition to retreating from the tariffs, the Trump administration has been on a new tack. And I think Wall Street likes this one. He took 40 CEOs with him to the Middle East. Yeah. I want to read you something. Stock investors are much happier now that President Donald Trump seems to be pivoting from pushing prohibitive tariffs to pushing American semiconductors and Boeing jets in the Middle East. So he said he went from tariff man to salesman. Trump used a state visit to Qatar today to announce a large purchase of Boeing jets, 160 airplanes. um uh mbs in saudi arabia is talking about multi-hundred billion dollar ai investments and and investments in the united states um stock market loves this and then as the the capper nvidia's ceo jensen wang announced that the company will sell more than 18 000 of those chips go for a lot uh 18 000 of its latest ai chips to uh humane which i guess is their uh big tech concern.

1:14:20Also announced partnerships with AMD, AWS, and Grok during the president's visit to Saudi Arabia. So this is, I guess Trump said, all right, tariffing's not great. Let's go sell some product in the Middle East. And I think Wall Street absolutely loved it. He's a transactional guy. He is good at transactions. He's good at this, though. There's just no... What did you think about that? Well, who was the president who said America's business is business? Coolidge. Was it Coolidge? It's Coolidge-y. Yeah. Right before the end. Right before the end. But I, you know. The business of America is business.

1:14:59Yeah. I think it all comes down to it's, you know, if you're posturing for the headline or what really happens. And, you know, there are a lot of announcements. It's like when companies announce share repurchase. And then you look a couple of years later, you're like, what happened to that$10 billion, you know? But, you know, I certainly think that we have been it. You know, I'm a free marketeer, global believer in globalization. But, you know, we had an enormous disconnect in our system. And, you know, part of the anger is so obvious when you think about the fact that, you know, if you have a college degree in our country, you live seven years longer.

1:15:41Yeah. Like that is deeply, profoundly unethical. It's unseatable. We've had this sort of hollowing out. It's been good for the world. It's been bad for the U.S. Finding some balance in there is certainly rational. And I think the trouble is we have such a polarized debate, which your chart showed perfectly, that you just, you know, Charlie Munger said to me, one of our last conversations, he said, there are two true statements that none of my friends can believe both of them. And one is that, you know, Trump has seriously profound character flaws. Right. So he said, he said, my Republican friends just don't want to acknowledge that.

1:16:21And then my Democratic friends don't want to acknowledge that just because Trump says it doesn't mean it's wrong. Yeah. That's true. And Buffett repeated that as well. And I think that's, you know, that's it's a hard thing. You know, in this world where we try hard to be rational. we're in a world that's so intensely politicized and polarized. Even the good thing of getting a big contract for Boeing out of the Middle East, you know, we'll have people interested in putting a negative spin on that. When obviously that's a wonderful thing for. I would agree. And I think if this were the version of Trump's economic agenda going forward, I think the political rhetoric from the other side would be significantly less than that.

1:17:04Um, whilst, uh, we don't know if we're going to get factories out of this or what type of factories. Uh, we are now getting mergers and acquisitions though. Um, we have our first tariff era M and a Dick's sporting goods, which is hugely reliant on sneakers, um, is acquiring footlocker, which is completely reliant on sneakers. All of those sneakers come from Vietnam and China, Nike, Adidas, you name it. Dick's Sporting Goods announced they're going to buy Foot Locker for$2.4 billion. So this is the first of the tariff era M &A. I don't know if this matters to voters or investors particularly, but I thought it was an interesting sign of the times.

1:17:45Yeah. So. It's hard to know what to make of that. I mean, it also, you know, I don't know Foot Locker's business in terms of the value of their location. They make the people that work there dress like the referees. I do. All right. That's that one. But, you know, maybe the sense of being able to put more through those footprints than just shoes and, you know, who knows. But yeah, I agree with you. The tariffs create that sort of pressure. And I think we'll see a lot of M &A. I think that, you know, the Justice Department under Biden had a mindset that they were going to oppose everything, even if they thought it would eventually get through, just to slow the world down.

1:18:22And maybe it had gotten out of control in the other way. I'm sort of apolitical that way. But I would say now – Well, this will be a slight change. Now we are sort of galloping. We're going to have mergers, but you have to be nice to the White House. Yeah. I mean I'm not saying that's good or it's bad. That's the reality. Shari Redstone is not getting her deal done with Ellison unless and until he's satisfied that the news outlets are going to cover him differently. Yeah. Like these are just – this is the reality on the ground. So now you have M &A, but there are a few conditions attached to it.

1:18:55And maybe that's better. Maybe that's worse. I want to ask you guys for just parting thoughts on the second half of this year. Hard to believe. We're already, it's May 15th. We're already heading into that conversation. Okay, now we know how the first half went. What do we think in the second half? Don't give me an S &P year-end target. But like, what do you think we will be struggling with or excited about? Or what do you think is the next shoe to drop? I'd love to hear what you think, John. Short term. Yeah. for the next, we're thinking in Warren Buffett time, so six months to a year to 18 months is short term.

1:19:31I think the chances, we have something very much like Trump 1.0 now. And we're probably going to get something pretty similar to the Trump 1.0 market. The stock market did pretty nicely. Then people were surprised that the tax cuts went through. Then we overheated. And eventually there was a revolt. 2018. Yes, in 2018. And that, I think, is a fairly good template. There is, just don't deny it, there is momentum behind stocks, and that will be difficult to stop for a while. And the thing that is most likely to stop it would be the bond market getting back above. If yields break significantly above 5%, that will, whether it should, but that I think will cause enough concern.

1:20:31I think 5 % is the ceiling for stocks. And I can imagine if, and now we need to, we now need to see exactly how inflationary, how fiscally loose the Trump administration turns out to be. Obviously, Doge. Mission accomplished. Well, with DOS, you can have plenty of problems about how they went around doing some of their things. These are honest people who they were firing in a way that robbed them of their dignity, which isn't okay. That said, what they were trying to do was, broadly speaking, the right thing, which is, yes, the government is spending more money than it can afford. We have to make some cuts from somewhere.

1:21:15Maybe the Musk approach of moving fast and breaking things might be the best way to break the logjam. So at one point, you did look as though we were looking at some fiscal tightness. At this point, there's a worryingly big consensus that we're bound to get an even wider deficit by the end of this year. You now have a much more interesting competition from German bunds. They're going to be issuing more of them. They have much less debt outstanding, so they have a pretty safe bet. So you'll probably find they make more of a competition for treasuries. If you do get the European defence bonds off the ground, again, they're not the same as treasuries, but they are a really interesting balance alternative.

1:22:05It's a new entry, yeah. So the risks that the bear market in bonds continues and ultimately is what checks the stock market. I think that's the dynamic to get used to for the next year. I think if there was any one factor that caused the turnaround, the walk back on tariffs when it happened, it was the bond market. The yippee bond market, which is one way to describe it. But boy, that man has a way with words. And I think we're probably now in a different era where it looks like we're getting fiscal looseness and stimulus and again the question will be is it when is the bond market going to call time on it okay i think anything that trump can control going into the midterms he will try his best he will want the market high tax reform goes through by the end of this year it's you know things are so tight in terms of majorities i i would say i am always short-term very pessimistic i when the market's optimistic i'm worried that we are the the the belief that somehow they can control the markets I think John's exactly right.

1:23:17There's a hubris in that. And the moment the market loses faith in the ability for them to control it, you could get things going badly the other way. So I always say I'm short-term pessimistic and long-term optimistic. And my short-term pessimism has been wrong for a long time. And I'm always pretty much fully invested. So, you know, but I just think the focus on resilience and durability is where people have, they have to get away from the magical thinking that just because it's gone up, it'll keep going up and really think about what do they want to own that will get them through to the other side.

1:23:50Guys, that was so fantastic. I just want to thank you on behalf of the viewers, the listeners for sharing your insights with us. We really appreciate it. I want to mention that Michael Batnick will be back next week. And we missed Michael on the show today. Michael is out West on business, but we'll see soon. I want to tell people where they can follow both of you, both of you guys to that. If they want to read more of what you have to say or listen to more of what you have to say, John, your column at Bloomberg Opinion, they could just look for John Authors and they'll find it pretty easily. Okay.

1:24:26Do you, are you on social media anywhere? I'm at John Authors. What are you tweeting? I'm at, yeah, I had a, I actually had my accounts taken over by a troll for a few weeks. I was sending out some sort of racy AI-generated soft porn for a while. That was good. I renewed my subscription. There was this scam, apparently, where I was inviting people to interview. And in the process of being interviewed by me, they would give me all the details I needed to put spyware on their computer. Oh, my God. I came out of that episode not wanting to ever turn on a computer again. Anyway, at John Authors, J-O-H-N-A-U-T-H-E-R-S.

1:25:13And if that account, at John Authors, offers you crypto or softcore porn, just say no. Chris, where can people follow you? I think Davis Funds has a website that they put up all sorts of useful stuff. Awesome. You guys are incredible. Thank you so much for joining me today. Huge shout out to the team this week. Daniel, John, Duncan, Nicole, Rob, Graham, Keith, Sean, ChartKid, Matt. You guys did incredible work for us. We appreciate it. That's it from us this week. Thank you so much for listening and for watching. See you next time on The Compound. Got it? Great.

1:26:03Thank you.