Why Oil Could Be Next Year’s Gold

10:58Michael Batnick:Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

11:21Downtown Josh Brown:All right, guys, guys, let's just talk about this. We are taping this the day before Thanksgiving. We have one of our fan favorite, greatest guests of all time in the house. Somebody we look forward to catching up. We would be doing this whether the cameras were on or not. Would you agree? Absolutely. When I want to talk markets, not for the purpose of making a show, but just talk markets. There's less than 10 people I think about I really love to hear their take on. You're always on the list, almost no matter what happens. So am I on your list? Absolutely. I love the realness of the conversation.

12:01Downtown Josh Brown:I think we talk about things as they are, not as we want them to be. I agree with that. Okay, guys, Peter Bookfar serves as chief investment officer at One Point BFG Wealth Partners. A mouthful I know. Did you put that in? Now, what is that? One Point big f***ing deal? What is the BFG? That's BFD. Well, the BFG was for Bleakley Financial Group just to sort of maintain the firm's history. They rebranded. Rebranded because Bleakley was the last name of a founder 40 years ago who left 35 years ago. And they just maintained it and felt like, okay, it's time to move on from that last name. Okay, one point is a strong name.

12:38Downtown Josh Brown:Can I make a prediction? Yes. They're going to drop the BFG within two years. That's in the plan. Oh, so I already won't. Nailed it. All right. Peter is also the author of the book report on Substack, a widely followed weekly blog on markets and the economy. Are you writing three to four times a day still? Pretty much. I'm getting them. Yeah. And you know what? I write just because it helps me put together my thoughts. Yeah. And just to put it down on paper, I think it's helpful. So it's a good aggregator in my head of what's going on. And it sort of forces me to do all the work to get the information.

13:15Downtown Josh Brown:You are still doing succinct summation of the week's events. Each Friday. Which used to be published on Barry Ritholtz's blog. Is it still there? I think Barry's still. I did that bullshit for years. Michael had to do it. Sorry, Michael. Sorry. So that's like a Friday piece where it's like, here are all the things that happened this week. Yeah, just a quick reminder of what went on, both good and bad during the week. You do that for yourself? It's a good, another aggregator at the end of the week. So I'm just copying, pasting what I wrote during the week and sticking it in. He's totally AI-ing this thing 100%.

13:48Downtown Josh Brown:You're feeding your blogs to the AI and the AI is giving you your list. You know what? Copy and paste was one of the original AI brilliant inventions. Okay. All right. We agree. Speaking of AI, the big thing that happened this week or over the past week was this insane reversal of the pretty short but pretty sharp sell-off of AI stocks at the end of last week. so that took place on thursday and then on friday we had a reversal and then the weekend came monday we rallied i think tuesday we rallied and some of these stocks may broke out to new highs all of them at least have found the bottom was that it was that the ai sell-off well what i think was interesting about the week is the market sort of differentiated what camp are you in you were Now, are you in the Google camp?

14:40Are you in the OpenAI camp?

14:42Downtown Josh Brown:OpenAI at Microsoft camp. So that was the interesting thing is, you know, the thing with technology, when something new comes out, everything goes up because it's this new, exciting thing. And then you reach a point where, well, not everyone can win. And then the market starts to differentiate the winners and losers. Look at this. It's unbelievable. Perfect example. Right. That's a great chart.

15:01Michael Batnick:So we're looking at the Google exposed infrastructure versus OpenAI. And you know the names. It's the OpenAI. It's Oracle, AMD, Microsoft, NVIDIA, and all. And the absolute, the massive divergence is extremely noteworthy. And you know exactly when this happened. It's right after the podcast with Sam Altman and Brad Gerstner. Right, when Sam got pretty defensive, right, to Brad's question, no doubt.

15:24Downtown Josh Brown:The Google exposed infrastructure is obviously Google. Then you got Broadcom. Then you got Lite, CLS, and TTMI. I guess those are the suppliers to the Google cloud. I would actually argue that this can stretch back to Oracle. Yeah. When people realize that, oh boy, 500 billion of these RPOs, the obligations. It's a lot. Is open AI. And then people say, wow, you know, 1.4 trillion of obligations over the next eight years. That's a lot.

15:54Michael Batnick:Yeah. It's a lot of math. So it's weird. It's weird to think about like, was that it in the context of this great bull market? The S &P had a 5 % sell-off and we're talking about is at the bottom. But listen, maybe it was. Warren Pies, who we had on last week, has this great chart where he looks at the speculative short ETF volume. And that spiked to 43%. And he said, outside of Liberation Day, this is the highest percentage in more than two years. And 40 % has marked the bottom of most corrections. So what is it? A percent of what? The percentage of ETF volume that is short, like the inverse ETFs.

16:31Downtown Josh Brown:So inverse ETF volume was 43 % of all ETF volume? Of the speculative stuff. Okay. So of the leveraged ETFs, the inverse spike. So the bearish. Correct. All right. 40 % has marked the bottom of most corrections. When else did we see that, just for argument's sake? After Liberation Day.

16:51Michael Batnick:So he runs this chart and he zooms out, but just generally speaking. And you had like people in terms of investor flows, people got really defensive. Our friend Todd has a chart where he shows the category flows since Bitcoin peaked, which was earlier in October. And munis, treasury bills, long-dated treasuries, all were gathering a ton of money. And on the opposite end of the spectrum, people were selling crypto. They were selling loans. They were selling high yield in cyclical sectors. Like people got defensive pretty quickly. What I find interesting now is that there is a fundamental backdrop to some of these moves too.

17:26It's not just the wave of flows in one direction or the other. I can argue small caps maybe are trading better because the Fed's about to cut interest rates again. And a lot of these small and medium-sized companies that are borrowing Sofa Plus maybe are getting some cost of capital relief. Private credit, loans, well, I think there's legitimate questions being asked about, you know, the quality of these loan books. Tech is now differentiating. It's not all just a one-way trade. People are thinking, okay, who's going to win? Who's going to lose? And so I think that's actually a good thing for the market.

17:58And it's really thinking about individual stories and sector-specific things. And it makes it a very interesting and investing environment with that. It's not just one big decision type moves.

18:11Downtown Josh Brown:A lot of these AI ETFs were built in 23 and 24 and earlier this year in a moment where if somebody wanted to, quote, get long AI, the trade was you buy the MAG7 plus Broadcom and maybe you throw in some of these like optical networking plays and you had an AI portfolio. I don't think that's going to work anymore. Yeah, because just within that. Will the ECF change to like, in other words, I don't want you to speak for Dan Ives. Does Dan Ives have to decide as a sell side analyst covering the space? Yes, I like them all. But I think this group of names is better than this. Therefore, I'm changing the underlying index.

18:51Downtown Josh Brown:What do they do now? Yeah, no, that's very interesting. I mean, the creativity of Wall Street will certainly find the open AI, non-open AI ETFs, I'm sure. Can you imagine like on-off, remember those ETFs? Oh, risk on, risk off. That was Gartman. Can you imagine? Yeah, Gartman. I haven't said that name in a while. Like long Sam Altman, short Sam Altman, two different, or - Oh, that's coming. Long ex-Sam Altman, I guess would be the way to express that. But also, it's also reflective of, we're reminded again about how fast technology changes. You know, it's not like Procter & Gamble selling razor blades and shampoo.

19:24You know, if you're going to invest in technology, you have to be really up to speed on the constant changes. And we're seeing that real time right now.

19:31Downtown Josh Brown:Michael and I made this point last night on what are your thoughts? He was saying like, think of all the AI narratives of just of 2025 that have come and gone. Apple is losing. Now it's Apple did the right thing. They stayed out of this CapEx mania. um Oracle is winning uh oh Oracle is stretching itself too thin um Meta is winning because Reels is the most AI enabled monetized product in the world uh oh Meta is seeing attrition of all these billion dollar AI scientists right and Llamas losing Llamas losing um Alphabet yeah that's a great example they're dead now they're the king um at Microsoft thank god they have this deal with open AI They nailed it to, oh my God, they completely tethered themselves to this kid who may or may not know what he's doing.

20:25Downtown Josh Brown:So like the shifting of all of those narratives, that's just inside of this year. And I think for investors, the takeaway is like, write these things down in pencil, not pen. Don't get married. Because to your point, if you're investing in tech, you almost have to be reading every day or you're going to miss the next shift. And you might not care, then maybe invest in a different sector. And also what heightens the importance of all this is just the amount of dollars that have been invested in the sector, the trillions of dollars, to the point where we know it's highly concentrated the stock market, but we know the U.S.

20:59economy has been highly dependent on this actual build-out, to the point where most of GDP growth in the first half of the year was the physical infrastructure build, whether it was the chips to the steel makers to the cement makers. So in a way, we've become highly dependent on this economically and market speaking. And that's why I'm not a good technology investor because I don't know enough to be up to speed on this thing. And that's why I don't like to naturally invest in these things because I'm just not good at reading up on all these industry periodicals to know, like, who's in the next garage that's going to put my company that I own.

21:41stock and out of business.

21:42Michael Batnick:We forget how fast the narratives change. So Google, for example, earlier last year, there was an article, I tried to look for it, I couldn't find it, where somebody was talking about the death of Google, how the culture is atrophied and it's just so toxic and they had lost their way. Even earlier this year, Google's forward PE was 14 times. Now it's 31. The narratives change so fast. Google is having its best year since 2009. It's added$1.5 trillion. Next chart, John,$1.5 trillion in stock. I mean, it's unbelievable. People thought AI would turn Google search into Eastman Kodak. So I have receipts for this.

22:27Michael Batnick:Sheil Minot quote tweeted, Koto, who knows a thing or two about investing. Back in July, they created their Fantastic 40, which was an index or a list that they created, Microsoft, NVIDIA, Amazon, Meta. So Sheil tweeted, Google was considered so out of the race in July that KOTU didn't even include it on their list of quote, companies best positioned to lead in an AI and technology driven world. Do you guys remember when Nate Silver and others were like, why is like Gemini so woke? Who negatively impacted society more? or Elon tweeting memes or Hitler. Like, remember all of that? Like, why is Google inserting itself into the conversation?

23:14Downtown Josh Brown:Well, in fairness, they were. They were. No, I'm not - And they fixed it because they heard the uproar and great engineers didn't want to work there and employees were embarrassed to work there. You would search, you would ask Gemini 1.0, show me pictures of Nazis. They would show African-Americans because very obviously somebody internally decided representative pictures of any group. It's going to be African-American because this is us fixing the past. And it obviously backfired spectacularly, but that's what Alphabet was doing. And then the guy's office got raided. People forget this shit, but I don't.

23:55Downtown Josh Brown:Sundar's, one of Sundar's VPs had their office raided by employees who were staging a fucking Gaza protest. Right. And they got the police in there. They got rid of them. But in my opinion, that was when it was time to turn over the hourglass on this bearish Google narrative because, I mean, I'm saying that in hindsight, but that was when the company probably decided, okay, you know what? This is a for-profit enterprise. We're not hiring activists anymore. We're not putting up with this shit internally. And we're going to get serious about this challenge from the other AI players. And we're going to build it into search.

24:33Downtown Josh Brown:and we're going to do all these things. And they did it. Okay, they literally did it.

24:36Michael Batnick:So it's not to say that that, to your point, at the time, the narratives were real and accurate, but they change so fast. And you have to be nimble or don't invest. And so I give Google credit for being able to pivot that quickly because the history of technology is littered with companies that do not pivot and they go away. But also Google had access to all that information. I mean, Google search was basically Gen AI when it was created. It was aggregating all the information out there. So they had all the tools to create that great product.

25:09Downtown Josh Brown:Yeah. And having that, all you need was the right people and they did it. So I got this wrong. I sold Google way earlier than I should have. I sold it closer to 200 than 300. It's embarrassing. But the takeaway for me is you probably shouldn't bet against the potential of a pivot from a company that has a printing press in its basement. Like if any company, like this is me in hindsight now, if any company under threat were to have the resources of Google, the better bet is probably financial resources, let alone talent, technology, of course. The better bet is like, all right, they're going to respond to this challenge.

25:48Downtown Josh Brown:They're not just going to. Now it doesn't always work. Sometimes you lose. But they responded. They did respond. And that's that was the better bet. Hang on to the stock, deal with the volatility and let Google respond. and I didn't let them respond and they did. And this is one for the ages. This is one of the best turnarounds we've seen. So here's a question. I know you guys talked about it with Warren in terms of the level of CapEx and whether the business models in terms of the capital intensity has changed, which it clearly has. I mean, that's one thing of the beauty of technology is it's typically been asset light.

26:27You can create a product, you can design it and you can have somebody else make it for you. You don't have to build factories. Even, you know, in the chip market, the phone market, and just hardware generally, you don't have to physically make it. Somebody else can. And are these companies sort of embedding this higher level of spend for a longer period of time, which doesn't affect the product at which they're selling, but it raises the capital intensity in terms of running the business on an ongoing basis? You know, I went through all the quarterly numbers of the big companies just to sort of quantify the level of spend.

27:04Oracle was the most egregious. Oracle is spending, is expected to spend 52 % of their revenue, not cash flow, of revenue on CapEx. It was - When? Next year? In their fiscal year, so 25 into 26. Okay. Their calendar, not initially their calendar, but whatever they - It's the most aggressive spend. It was 10 % in 2021. even meta has gone from now meta you know mark zarkberg when he believes in something he's going to invest in it just like he did the metaverse so he doesn't care the pushback that wall street gives but he's spending about 35 of revenue it was low teens and even microsoft and google spending 25 to 27 it was low teens is this sort of a a few year thing and they can ratchet back cap spending or are they embedding this higher level that's going to affect our returns on equity and free cash flow?

27:55I don't know the answer, but that's the thing that I think people need to think about.

27:58Downtown Josh Brown:I'm going to hazard a guess. Alphabet, part of the narrative here is that they're showing a new way that this can be done. They're going to use these tensor processing units not to replace their GPU demand, but to augment it and make it more efficient. And I think just like we saw that era of efficiency thing take hold to pull us out of the tailspin of 2022, I think in 26, you're going to hear these companies start talking more about more bang for their buck. Like, yes, we're spending, but we're way more focused on more near-term ROI because they're now all going to follow in the footsteps of what Alphabet is doing.

28:37Downtown Josh Brown:I think Alphabet's leading the way. And that's why you see all of a sudden Zuckerberg come out or a report. We didn't hear from him. A report that Zuckerberg is considering using cheaper chips. that would have been a mark of shame six months ago. The market would have said, don't do that. Use the best chips. That's what we're rewarding your stock prices with. The more GPUs, the better. Grace Blackwell, great. Buy the next, okay. The market's not rewarding you for doing that anymore. The market's rewarding Alphabet for getting some discipline and thinking about cost. I think there'll be other companies that do that next.

29:11Michael Batnick:So look at this chart. Josh mentioned the flexibility of Google's balance sheet to do whatever they're doing. So Google has$42 billion of debt. They've got$99 billion of cash and equivalents. And they've got$127 billion of EBIT. So what we're looking at is the leverage ratio of these companies. And we're considering the total net debt. So debt less cash divided by their operating earnings over the last 12 months. And Google has plenty of flexibility to push it forward. Oracle's not on the chart, but I'm assuming it's way higher than all of these other companies. And Peter, your question is the right one.

29:42Michael Batnick:Forget about this depreciation question that Burry is hammering at home. It's not about that. Four years, six years, it matters, of course. But the real question is, is Meta still spending 35 % of their revenue in three years from now? Because if they are, that is obviously going to continue to weigh on margins. That's going to be pretty difficult to have any sort of multiple expansion under that scenario. And if they're still doing that and they're not figuring out how to generate some operational efficiency and leverage out of this spending, then the stocks probably aren't going to work. Yeah, that's the question.

30:13And also, let's just say the efficiency part and these companies don't sustain this current level. What does it mean for the picks and shovels company, companies that are selling into the actual physical building structures?

30:25Downtown Josh Brown:Yeah. You know, because they could be a collateral damage if Meta decides, you know what, instead of spending 35 % over me, I'm ratcheting that back to 20. Here's the counterpoint. Somebody at Microsoft would say to you, our co-pilot users will pay any amount because they have now built this into their workflow. They have actually built this into the way that they hire and they're forcing employees to upskill to utilize these tools. We can't get rid of them. It's like the new consumer staple, but on a corporate level, enterprise level, like we can't cancel this stuff. So it's here to stay and it's got pricing power.

31:02Downtown Josh Brown:Whatever we were getting for a co-pilot license last year, that can go up 10 % a year. Companies are making so much money as a result of using it. That's what Microsoft would answer back.

31:13Michael Batnick:Is it possible that these companies can continue to spend aggressively, forget about what the precise number, but also their revenue grows commensurate with it? Is that possible? That's the case that I'm laying out. Right, on Microsoft's ability to monetize. And that also adds another question to this. The extent to which they can monetize, if there are multiple models out there that consumers can choose from, and I also want to invite China into this conversation because China wants to be a player on this stage as well in terms of not just creating their models, but selling them to the rest of the world, not just using it for themselves.

31:46Downtown Josh Brown:Their models will not get into enterprise US. Not in the US, but in like just saying - Fortune 500 enterprise tech. Right, but let's just say in competing for that European customer or competing with the Japanese customer or whatever, are they gonna be to a point where US technology companies, and I don't know the answer, is US technology met its match in terms of global competition? Not for US customers, but for global customers. Yeah. One of the more interesting takes on that, and this is me repeating something that somebody much more knowledgeable than me said, it's always going to look like China is leading in this AI era.

32:21Downtown Josh Brown:And there's a reason for that. All the great stuff that US companies are building is within their own closed, controlled environment. And they release these as fully formed products when they're ready. the Chinese are doing this differently. Everything's open sourced. Everything is within the community and people have the ability to improve the models on their own, which is what's happening. So as a result, that's all out in the open and it looks like it's far more advanced than our own capabilities. But is it still competitive? It just isn't true. Is it still a competitive threat though? I think it depends on what we're talking about.

32:55Downtown Josh Brown:Like for example, if you tell me like, if you tell me Goldman Sachs, Charles Schwab, Fidelity, all these financial institutions are now utilizing AI, you know, within their organizations to speed up workflows or to save on hiring or whatever reason. Like they're not looking at an art. They're not doing an RFP and then sitting down with Alibaba. No, they're not. But I'm talking about in terms of the global customer. Yeah. China will use China's models. And actually, China, I think, is going to continue to use Chinese hardware where we're U.S. technology companies are losing China as a customer.

33:34Downtown Josh Brown:Yeah. Because of, we basically incentivize them to create their own. And not only are we losing them as a customer, are we going to now invite a competitor, not just an AI, but on the hardware side too, on the chip side or whatever. I just think that when looking at over five to 10 years, obviously is irrelevant in the short term, China is a player on the competitive stage. Not for selling into our market, not for us to sell into their market, but for all the other customers around the world. Yeah, I think the bullish case is that they are, which then forces our companies to work harder to compete.

34:08Downtown Josh Brown:So I think that's good. I also don't think the Germans and the French would listen to this and say that they don't have anything to say on this topic. They're having AI festivals and helping to fund their companies. I know they're not going to ever have their own Silicon Valley, but are they developing models? Yeah, Mistral in France. Mistral in France. And, you know, like, is it just U.S. versus China? and no one else is developing models, I'd say that's probably bullshit. Saudis want to create their own model. There'll be sovereign models out there. That's the business that Nvidia is trying to tap into now.

34:39Downtown Josh Brown:Yeah, I agree. And I think that's bullish, not bearish. I don't know why we need companies with global domination and 70 % profit margins in every single endeavor that they ever compete in. It's just not realistic.

34:52Michael Batnick:Peter, part of the story last week that also wobbled stocks with some of the economic data that we got. And on the flip side, we had some economic data this week some Fed speak, particularly who the president is looking to insert. That is definitely impacting the market. You're seeing rates go down. The 10-year broke four percenter is right there. And holy shit, nobody saw this coming on Thursday afternoon, but the Russell 2000 just had its best four-day performance since post-election. The Russell 2000 up 7.7 % in the last four days. Let's see this. That's pretty notable spike. Well, one thing that we've learned in markets over many years is the action in the back half of November into December, every move gets exaggerated.

35:32No one wants to miss a rally to the upside, and no one wants to get caught in a downdraft. John Williams, I think, was the friend to the Russell 2000 because going into his speech, the Fed funds futures were pricing in only about a 32 % chance of a cut. And if there's a constituency of businesses out there that are going to benefit from a lower cost of capital, it's small, medium-sized businesses, particularly those that borrow SoFerPlus. Now, people borrow across the curve. Some people borrow, whether it's in real estate or business, on the five-year, others the 10-year, but there's a lot of SOFR.

36:01Now, that said, I think this also ties into what's going on with private credit and just some questions being asked about, you know, the lending environment that we're in. When all this money enters the space, there's too much money chasing not enough good loans. So if the Fed cuts interest rates by 25 basis points, well, that SOFR plus 300 may be SOFR plus 325 if we're worried about the economy. So that benefit of lower, of 25 basis points, decline in SOFR, but offset by a 25 % rise in the spread may not help that small business. But I think the initial reaction was that's cutting rates. Small caps are the best beta to own in that sort of rate cutting environment.

36:41But then that begs the question is how much are they going to really be able to cut? Is a big dove coming in, which they probably will to replace Powell? Well, how does the long end respond to that or the dollar? So there's just so many moving parts here.

36:53Downtown Josh Brown:The BDCs stabilized with the Russell over the last week. I feel like I'm not hearing, I don't follow the tickers, but I'm not hearing about them either.

37:01Michael Batnick:So yeah, they bounce pretty significantly, particularly Blue Owls. That story seems to be behind it, the worst of it. But yeah, they bounce. They're stabilizing. Yeah, that's the hope. But the interesting thing is, is by the Fed continuing to cut interest rates, that reduces the interest income of these BDCs.

37:13Downtown Josh Brown:Which is now expected. Yeah, but you know what? I think the bigger risk in the BDCs, people, is the credit, not the yield. Everybody knows that the yield's coming down. ETFs, people started to get worried about the dividend cuts because of the cuts in the Fed funds rate. I mean, even B-Cred, Blackstone's product, they cut their dividend a few months ago. Yes, but that 30 % drawdown across the board is like accounting for the fact that everybody gets. The distribution is going lower next year, not higher. Everybody knows that. I think the bigger worry is that money is too tight. Rates are too restrictive.

37:45Downtown Josh Brown:And some of these companies have made loans that they probably wish they didn't. And that's the bigger worry than how much is my dividend. Well, also, the good news is these loans are floating rate.

37:54Michael Batnick:And so the companies that were under distress are going to be more easily. The lifeline. Yeah. It's a little bit of a lifeline. There is that relief. It's not fully a match between the money, their cost of capital and what they pay out. But there's definitely a tight relationship. Anyway, the public BDCs are bouncing pretty violently. Peter, to your point about market behavior towards the end of the year. So we shared this chart from ChartKit at the end of September. November the average path in Q4 when the market is up a certain amount. And yeah, we know what happens. People chase higher. Now we were, I don't think anybody was saying that it's going to play out exactly that way and it hasn't, but the point remains that we are, um, we're still up a decent amount going to the end of the year and absent some sort of news causing another sell.

38:38Michael Batnick:Maybe Sam Altman going on to the podcast, the chase will be on. The only pushback I have to this chart is a lot of the times when November, December is up, it is because September, October are soft. This September, October flipped. It really was not soft. Yes, we had that quick 5%, but there was a V bottom. When September, October are soft, you usually get that year-end rally. When it's not, you usually chop around. Would I love a year-end rally? Of course. I'm just not necessarily expecting it because September, October are relatively benign.

39:07Downtown Josh Brown:But you already know what's going to happen, don't you? Yeah, typically, you know, human behavior doesn't change. Think about how many people are now going to look at the dispersion of these MAG-7s and say, Ooh, some of them are in 25 % drawdowns. But meta opportunity. But that also means that the outperformance the rest of the year could continue to be the smaller caps and the divergence can be in the S &P because the market's separating out the top names in the S &P now. How about international stocks up 30 % this year? Like people have something to chase. Josh, in dollar terms, they're up even greater.

39:42The Spanish IBEX in dollar terms is up north of 50%. The Italian stock market in dollar terms is up north of 40%. Yes. The Hang Seng's up almost 30.

39:52Downtown Josh Brown:Okay, so now people have something legitimate to chase. Like they sort of, I don't know. I just - Well, that was the great thing about this year is the market widened its lens of opportunities. Yeah. Don't you feel like people want to say something different is going to happen? But so often the most obvious thing in the world is the same old thing is going to happen. By the Mag 7. Yeah, like everybody wants a new narrative. They get so excited when small caps have a 7 % four-day stretch. They get so excited when healthcare stocks outperform for 90 days. I'm excited too. Because every value investor is saying, this is it.

40:29We're finally here.

40:30Downtown Josh Brown:The prophecy. This is what I've been prophesying for 12 years. Here it is. So I get it. There's this proclivity to want change and then to wish cast it. Like it becomes your forecast.

40:42Michael Batnick:Don't we all want it to a certain extent? Like, aren't we all, like, can't the MAG-7 just chill out? I know. You can't have it. Peter, I want— Well, the MAG-7, I think, has splintered up into its own stories. For now. For now. But I'm saying in terms of—it's no longer one big trade. You need to pick and choose a bit. We had a chart yesterday on what are your thoughts showing the correlation of the MAG-7 on a rolling 60-day period, and it crashed, which is wonderful. It's what we're talking about. This is an opportunity.

41:07Downtown Josh Brown:What if you don't have to pick and choose? What if the theme still works? It's just different stocks leading it. because that's really been the history recently. It's this rotation inside of the Mag7. So right now, obviously, like NVIDIA and Meta are not riding high. They might be in two months. Tell me what the narrative is, I'll tell you. Right now, it's about like Apple and Alphabet. Both of those stocks were so severely out of favor just six months ago. So that could change on a dime. I'm not saying it definitely will, but maybe the theme still works because there's always a couple of giant winners that pull the rest of the theme with them.

41:47And from a portfolio standpoint, it's just easier to own them all and not have to try to figure out who the winners are.

41:51Downtown Josh Brown:Think about how hard that is to do. Tesla goes from 52-week low to 52-week high. Who the hell could do that, right? So I don't know. Part of me just feels like large cap managers this time of year, they're going to look at the ones that lag the most because they could explain it. They could just, I'm buying Meta 25 % in the hole. Like - Right, they want to show it on their P &O. It's a great sale. And they could say - Story. And they could say like, yeah, of course I bought it. Okay, it didn't work, but here's why I bought it.

42:23Michael Batnick:It's like explicable. Peter, one of the fun things about November was that we stopped saying the word bubble. Like it really, it was enough already. When you see this chart, chart 11, please, John, we're looking at the forward PE of the S &P 500 normalized by profit margins, which are obviously a huge, huge part of the story. What does this say to you? Yes, I'm looking at it right now. Yeah, compared to 2000. I mean -

42:50Downtown Josh Brown:Is this Mike Wilson? Yes. I don't know. I wonder what his assumption is how he adjusts for profit margins because is he lowering the long-term profit margin? I'm sorry, is he taking the current profit margin to call it 13 % and he's lowering it to a more mean reverting number. I'm not sure what his assumption is.

43:11Michael Batnick:I don't know what the arithmetic is, but I think his point - Because I know the case Shiller, that also normalizes profit margins and that is the opposite. So I wonder what his assumption is. Wait, hold on. The Shiller P doesn't adjust for profit margins. Well, what it tries to do is by smoothing out for a long period of time, it inherently adjusts. But profit margins should not be smoothed out over the last five years. Five years ago, ChatGBT wasn't a thing. Well, if a lot of these companies are more capital-intensive businesses, that would maybe say that profit margins are going to be lower over time.

43:45So by smoothing that out, to me, I think valuations, people like to throw out their favorite number. If they are bullish, this one is cheap. If they're bearish, this one's expensive. I think you've got to look at a variety of ones. I'm curious to see what this one is because that's interesting. Then you can look at price to sales or price to EBITDA. You know, I know people like to look at NVIDIA, for example, and on one year of earnings and it looks inexpensive, but then people say, well, that only assumes a 75 % profit margin stays that way for many, many years. And I'd rather value it on price to sales.

44:22To me, this whole bubble talk was sort of conflated. I would hear, is AI bubble? Well, AI has been around for 75 years. So AI itself is clearly not a bubble. I think the debate was more of, are we building too many data centers? That's a legitimate conversation. You know, to think about this, the one incredible thing about technology is the hardware over time always gets smaller, but the computing power and the software always gets more powerful. So when MET is building a 4 million square foot facility in Louisiana for$27 billion, maybe in three years, maybe they only need 2 million square feet.

44:56They'll have greater compute power coming out of that facility, but maybe they only need half the space. So I think there are legitimate questions about, are we building too many? And is this build-out similar to the internet, where the users of it and the development of the internet just was exponential, but the infrastructure contributors to it? Well, we know Cisco stock is no higher than it was 25 years ago. So that, I think, is a legitimate conversation, but not as AI bubble. No, AI is software that has gone up in leaps and bounds, and we're all going to benefit from it. It's just the physical buildings.

45:32So there's a data center. It's a very simple test.

45:35Downtown Josh Brown:Talk to 20 people that are like intelligent people that work for a living currently, right? Not people using chat GPT for a brown USB, but people that are like literally incorporating into their work. And ask them if they would pay more. Or if I told you the price doubled, would you be willing to go back to working without it? Like it's a, it's a, it's a mental exercise. You can't really threaten that. If it quintupled, I would pay for it. I don't know what I'd pay for it. You can't live without it. I'm paying 20 bucks a month. This is my point. So is it a bubble or somebody, it's a bubble. Okay, tell you what, lose your login.

46:12Downtown Josh Brown:Call me in 30 days. Tell me if you want it back and what you'd be willing to pay. Right now, OpenAI is charging$20 for a month for a chat GPT license. Lose it for 30 days. come back to me, tell me you wouldn't pay$50 a month. Then tell me it's a bubble. Okay, so I'm with you. Is it a CapEx overreach in the short term? That's what the debate should be. Okay, I wouldn't be the one to know, but you can't tell me that this is the 3D printing bubble. It's just not. Agreed. Okay, you can no longer function without it if you are a working person in America. Look at how fast that happened. And don't tell me you're not willing to pay more if and when the time comes.

46:52Downtown Josh Brown:and Google says, give us more. You're going to give it. You know you're going to give it. Right. The use case is not the bubble. It's the actual infrastructure behind it. Right. So I don't hear people saying tulips, beanie babies. They don't mean it in a bubble in that sense. They're mostly talking about the CapEx. Well, it's the open AI. It's, wait a minute,

47:10Michael Batnick:you guys are doing$13 billion in revenue. You're supposed to spend 1.4 over the next X years. How? That's where the question is, obviously. Exactly.

47:18Downtown Josh Brown:It's who's going to finance it and is it too much too soon? Right. Right. Did Oracle get over its skis spending half their revenue? And a lot of these companies, I mentioned the percentage relative to revenue. Percentage of EBITDA is like 50 % to 75 % now. So we all hope that this works because that level of spend obviously changes the complexion of the business, which it probably will because they'll find efficient ways of using that capital. But right now, that's the debate. It's the CapEx debate is whether it's too much or not, not the use case of it all. I think what's really interesting is nobody talks about Grok in terms of its CapEx.

47:57Downtown Josh Brown:So I think everyone understands that they are aiming to be as competitive as every other LLM and every other AI company, but they're also private. Like it's XAI and it's not trading. And I guess people are trading Tesla as a proxy because let's assume the Tesla robots will use AI from XAI. It's a little bit like interchangeable, but like that's another really interesting part of this is like some of these companies are public and some are not. And we just don't get all the information. And we know Elon does not want to lose out to Sam Altman. If anyone's going to spend less, it won't be him. He will not be the first.

48:38Downtown Josh Brown:I don't think he'll be the first player in this game that says enough is enough. But that also, that ties into the CapExes. is the spending just because they need to win and they'll spend whatever it takes, which human nature, you end up spending more than you need. But they say it's existential.

48:54Michael Batnick:Do we not believe them? Right. Is it ego? Well, also, a lot of the spend, though, is assuming that they win and they can monetize. But Tesla's in an interesting position where they can sort of be like Google, where a lot of their spend, they're creating their own vertically integrated situation.

49:12Downtown Josh Brown:Yeah. Where now they're not in cloud, of course, they're going to use others, but in terms of creating their own chips and their own software and integrating into their own products. Yeah. One last thing on this, and then we can move on. A lot of the columnists that I read are now writing about how this is all going to come to a head politically probably in the next month or two. This is the next big fight. We're in this inflation battle. We've got consumer confidence, which I know we're about to talk about, which is severely impacted. You might say that's just the shutdown and it'll go away. Maybe that's true.

49:47Downtown Josh Brown:But like people are not happy with their cost of living. Yes, it's true that inflation is moderating. It's not moderating fast enough. And it's not, prices aren't going back five years ago. And now you have utilities winning rate cases with their state regulator to get higher prices. And if you read the documents that they're filing with their state regulator, what they're saying explicitly is, we need higher rates to compensate for the CapEx because we're building enough electricity to supply all of these data centers in this county, in that county. This is not gonna be popular. And we're going into a midterm election.

50:25Downtown Josh Brown:And I feel like AI is about to become a much bigger political issue, not just a stock market issue. Not just is it a bubble or is it not, but a bigger issue of, is this driving up the cost of living for people? It's a phenomenal point. It's 100 % right. I'm already beginning to see it. I'm very good at this. You nailed it. And I'm already beginning to see pushbacks in local towns and counties that are beginning to see this. Yeah. When inflation goes up 2 % a year, let's just call it, and I'm not a fan of the Fed's arbitrary number, but let's just say 1 % to 2%. It's a manageable level of an increase in your cost of living because your wages typically will at least match that or go up more.

51:03When you see a vertical rise in inflation, it's a traumatic experience where people's income is just not going to match that in terms of speed. And there's a lot of PTSD out there. And I think that the big anger point and tying into this utilities is just the cost of housing generally and the cost of buying a house for that young person and the cost of even renting for that young person. I mean, who keeps talking about that 25 to 35-year-old that is the most financially stressed? It's Chipotle. It's Sweetgreen that's tapping into that. It was, I think it was one of the retails, maybe it was Kohl's, for example, talked about that younger consumer because they're dealing with that.

51:44So they're the ones that can least afford a big rise in their utility bill because they're already paying a rent that's eating up a third to a half of their income. And that has created, obviously, this very splintered consumer out there that tied into the Fed. and I wrote about this today, like everyone says, oh, the labor market's weakening in terms of hiring, which it is, it's softened. And that means the Fed needs to cut. Okay, I understand that argument. But if one of the reasons why the U.S. economy is very mixed here and maybe seeing a slower pace of hiring is because the inflation that has been embedded into our economy, both in terms of hurting consumers, but also cost pressures for small, medium-sized businesses, particularly the impact of tariffs, which we can talk about that too, because I get an opinion on that.

52:34Well, shouldn't the Fed still be focused on taming inflation? Because if you tame inflation, you can get a healthier economy that leads to more job growth. If you take your eye off the ball at inflation and says, oh, I need to cut because that's going to help the jobs market, but then you risk inflating inflation again, well, then you're diluting the impact of those cuts. So we're at a very delicate balance here because inflation is a nightmare for the average person. And yeah, look at Mamdami winning. You can argue that's inflation. The politics is defeated with this.

53:09Downtown Josh Brown:We don't have to argue. It's literally the affordability crisis writ large is Mamdami. I sympathize with the people that want the Fed to cut to help the labor market. But if they take the eye off the inflation part, the inflation is the disease. the symptom of that is a softening hiring market.

53:27Michael Batnick:Yeah. Let's focus on the disease of inflation. Does Powell finish his term? Because - Yes. Yes. I say that confidently, not because I know, but because I know he doesn't want to be bullied out of the job.

53:38Downtown Josh Brown:And it's too close now. And it's almost done. And he's already making his summer vacation plans and his tea times. So he sees the light at the end of the tunnel being the sunlight on the golf course. But he's not going to get bullied out. Okay. So Kevin Hassett comes in. His economic philosophy is whatever Donald Trump says. A 50 basis point cut today. Well, no, it might be if Donald Trump says 100 basis points, then that's what it's going to be. He might try to talk him out of it, but in the end, he's an operative. That's what he is. He did it for George W. Bush. He's been around a long time.

54:12Downtown Josh Brown:This is not news to anybody. The market sniffed that out. Probably why you got a small cap rally. Housing stocks rallied hard. Yeah. Okay. So they are, forget about take their eye off the ball of inflation. they're already telling you right now, we don't give a shit. We actually don't believe that there is inflation. We think that this is a Democrat plot to get people to think that their cost of living is unaffordable. And the truth is, Trump is doing these amazing things and the last piece of the puzzle to make them actually help is get the rates down. They're saying it. It's not me being a smart ass or trying to piss off Trump people or Mom Donnie people.

54:49Downtown Josh Brown:I don't give a shit. I hate you all equally, okay? So this is just me as a normal, rational person. I'm listening to what they're saying. They are going to come in and drop rates even further. They don't care about the inflation piece. Do you think I have that right? You do. Okay. How much gold then do you want to buy in that scenario? Or what do you want to buy? Well, I think a key part of that will be the reaction in the dollar and the reaction in the 10-year yield. European Central Bank has cut interest rates 200 basis points. They've taken their deposit rate from four to two. Yields in Germany and France are higher from when they started.

55:26Yeah, wow. The Bank of England has cut interest rates. Gilt yields are higher. So what does that tell you? And even the Fed has cut 150 basis points and now we're pricing in another 25. So call it 175. The 10-year yield from the summer of 2024. So before we had that big drop in the 10-year down to 360 on the day that they cut 50, the 10-year yield is barely down. And versus the 360, the 10-year yield even at four is still 40 basis points above those lows.

55:50Downtown Josh Brown:The belly of the curve is no longer responding to what central banks are doing because it's focused on a bigger risk, which is when they have to reverse all these cuts. Right. That's what you're saying? But also, debts and deficits matter. They matter in Japan. We're seeing yields go up almost seemingly every day in the JGB market because people are now seeing the fiscal package that's being announced. In Germany, they're spending a lot more money. So debts and deficits matter. So what a central bank does on the short end doesn't mean the long end of the rest of the curve is going. So if I'm looking to buy, I mean, I can count on multiple hands the amount of real estate people that told me coming into 2024, the Fed is going to save me.

56:32Or I should say the back half of 24 going into 25, rate cuts are going to save me. But the 10-year is what mortgages key off of. Right, and they barely got helped. And that first-time buyer, they barely got helped.

56:43Downtown Josh Brown:Yeah. And the other, one of the other problems we have in getting back to inflation is what did the Fed do over the last 25 years? You know, they played God over interest rates and they lowered rates below where they should. So what they did was they stimulated the demand for housing, for example, because we know if you're going to move interest rates, what's it going to impact? It's going to affect autos and housing the most of any other thing. Overnight. Because that's where people borrow. Well, if you increase the demand for housing via lower mortgage rates, but you don't have a coincident rise in supply, Well, all you're doing is raising the price of the home that then completely offsets the benefit of lower mortgage rates.

57:21So people that says, oh, we need to help the housing market by cutting interest rates. Well, if I got to pay 10 % extra more for the house because interest rates are stimulating demand, I get no benefit from lower mortgage rates. So they got to be very careful with this. We have 25 years of an experiment where artificially low interest rates doesn't necessarily mean that the economy gets stronger. And again, we saw that in Europe. We've seen that in Japan. Japan would be this booming economy if cheap money mattered.

57:50Downtown Josh Brown:Yeah. So there's this delicate balance. Free money for 40 years. Yeah. It didn't work. So here we have inflation right now, tending on if you look at the PCE or the CPI, call it two and three quarters three. Now it can be trending down. I think on the services side, inflation is decelerating on the rental side. But another cut in the Fed funds rate gets the Fed funds at about 365, call it. That's not that far above inflation. You're actually where you should be because I believe that monetary policy should always be above the level of inflation. If I'm going to lend you money, I should get back more than inflation in return.

58:24Downtown Josh Brown:Slightly, but restrictive enough that it's not encouraging more inflation. Exactly. So historically, before the financial crisis, the Fed funds rate was 200 to 300 basis points at the rate of inflation. Now it's down, now it'll be down to 65 basis points and people are still calling that restrictive. It's not restrictive. It's restrictive relative to zero. It's restrictive. What do you say to the people, Peter, though, that say, okay, of course, we don't want to take our eye off the inflation ball, but we also don't want to be late to when the layoffs start because once that gets going, it's too late to deal with.

58:56Downtown Josh Brown:It always goes to an extreme before we can get it under control. Do you believe in that or you don't? No, I'm very sympathetic to the desire to help the labor market with hiring now slowing. But what was Powell's big error with this whole transitory inflation? He didn't want to raise rates. Using the word transitory. He didn't want to raise rates because he wanted those jobs that were lost during COVID to come back. And he completely ignored inflation. And I'll get back to my point. You need low and stable prices as the foundation for a healthy economy. A healthy economy leads to more hiring. If you lose the narrative on inflation, you're not going to get those jobs back.

59:34So we talked about the biggest pain point for this economy right now is the cost of living for so many people. Yeah. And now we're going to start to cut interest rates that maybe can stoke another rise in the cost of living. So that's the thing that I am concerned about. And just to put a bow on this, you know, with CPI, we know that housing is the biggest component on rents. And we're seeing a deceleration in rents, which is great. Prices too. And home prices too, because we're beginning to see more supply. That's a good thing. But if we start to cut interest rates and start jamming up demand.

1:00:09Downtown Josh Brown:Do we screw up the progress we've already made? Do we start to, yes. And also you're beginning to already see a big drop-off in the construction of multifamily because we had this flood of supply last year and this year that created the supply to see the deceleration of prices. Now you're not seeing, you're seeing a big drop in supply because the cost of construction has skyrocketed and so on. And the cost of borrowing is still high even with these rate cuts. Are we sowing the seeds for an eventual increase in rental prices, which would lead to an uptick inflation. Like my worry is not perpetually high inflation, it's inflation volatility.

1:00:44We saw the spike, we've now seen the deceleration, or we can now sow the seeds for a pickup again in inflation. At the same time, we have the treasury secretaries doing what Yellen did and financing the US government with T-bills.

1:00:56Michael Batnick:Peter, your points are valid, but we are cutting rates. Oh, there's no question we're gonna do that. So what do you do with that information? So Josh mentioned gold, very bullish on precious metals. I think the dollar could take another leg down if they start cutting interest rates if the market pushes back on. Good for many stocks. Good for risk assets. But not all stocks. U.S. stocks. Well, it depends on how much you import from overseas because we know 40 % of U.S. imports are intermediate-term goods because if the cost of your raw materials go up, that's the offset to the weaker dollar if you're an exporter.

1:01:32International stocks are going to continue to do well. Other hard assets. my favorite asset class right now. What I think is the cheapest, one of the cheapest assets in the world is a barrel of oil at 60 bucks. Oh, I'm so with you on that. In nominal terms.

1:01:45Downtown Josh Brown:I'm so with you on that. When it goes, when it goes, it will go. It always does. When it goes, no one's going to be long. No one is long. It's less than 3 % of the S &P right now. No one is going to be ready. I will be. No, I should buy energy stocks. I think you're right. I've been telling you. There's some fundamental factors here too, is that, and you know, I do a lot of reading and I followed oil for many years, but I'm no in the weeds expert. But there are a couple of things that are taking place here right now. About 85 % plus of over the last 15 to 20 years of non-OPEC plus oil supply has come from U.S.

1:02:21shale. U.S. shale was a technological revolution that made the U.S. the biggest oil producer in the world, exceeding Saudi Arabia because of U.S. shale. The EIA, a couple weeks ago, came out with a chart that basically went through all the big U.S. basins, Eagle Ford, Haynesville, Bakken, Permian. The production numbers are all rolling over in all these key basins.

1:02:51Downtown Josh Brown:Is that because they've been tapped or is that because we're drilling less? I don't know the answer. They've been tapped because the depletion rates on shale is very high. And all the best basins and all the best pieces of them have been tapped.

1:03:03Michael Batnick:Not true. Are you watching Landman season two? Yeah. You might not be fully up to speed. I'm about to watch the first episode. I'm waiting for them to build up.

1:03:11Downtown Josh Brown:His son has just had a huge completion rate on a bunch of new wells that he's drilled. I'm going to have to change my thesis now. It's a great point. So, U.S. oil production may actually be down next year. At the same time, rate counts are just off the lowest levels since September 2021.

1:03:28Michael Batnick:Remember rate count Twitter? Like 2012? Yeah, rate count. Rate count versus dry bulk shipping. There's only a few of us now watching it.

1:03:35Downtown Josh Brown:Yeah. Is that why ExxonMobil is talking about Guyana? Because like the fields are moving. What's going to matter? Not only that, why do you think we're blowing up the Venezuelan drug boats? Yeah, that's next. Venezuela has the biggest reserves of oil in the entire world. Yeah, I'm bullish on Venezuelan oil. My car will only take the finest Venezuelan oil. All right. Dude, did you have fun on the show today? Always. Yeah, we have so much fun talking to you. You were cooking today. Great job. You absolutely were. It's always great hanging out with you guys. All right. You want to do an hour on healthcare or we're good?

1:04:09Downtown Josh Brown:All right. Guys, Peter Bookvar is an absolute treasure. I want to tell people how they can get more stuff from you. I get all your stuff. Can they go to - Go to Substack. The book report? Go to Substack, type in my name, and it'll bring you to the book report there. The book report, B-O-O-C-K. Yes. All right. So you go to Substack, put in Peter Bookvar, subscribe to Peter Substack. It's terrific. And you'll get a little bit smarter every day. Thank you, Chuck. I know that's what happened to me ever since I began following Peter, I don't know, 500 years ago, however long you and I have been at it.

1:04:45Downtown Josh Brown:Way back from the beginning. All right. I want to, I don't know if any of the shit I talked about Thanksgiving at the top of the show made it into the final edit. I want to apologize to all Americans. It's actually, I don't hate Thanksgiving. It's not that bad. I want to apologize to my wife's family too. I love everything about it. It's great. I hope it could be eight hours. And he can't wait to see you all. I would love for it to be 12 hours if that's at all possible. John, happy birthday, my friend. Thank you. Thank you for everything. And I hope you have a great weekend. Peter, we appreciate you.

1:05:16Downtown Josh Brown:Thanks to all you guys for listening. Happy holidays. We'll see you soon.

1:05:25Thanks, guys. That was great. No, I didn't see you. I don't think.

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