TDI Podcast: Reality Bites (#962)

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0:54Forecast contracts are not suitable for all investors. Go to ibkr.com slash forecast and turn your views into IBKR forecast trader contracts today. Last trading day for this contract is March 11th. The Disciplined Investor is all about you, your money, and the markets. Sit back and get ready for this edition of The Disciplined Investor Podcast.

1:21Danielle DiMartino Booth:This episode of The Disciplined Investor is sponsored by Horowitz & Company. If you're looking for a portfolio manager, look no further. Horowitz & Company, from seed through harvest, cultivating financial success.

1:39The market's not thrilled with tech. Mortgage rates slip below 6 % on the 30. February ends with a dud and looking at the Fed's next move with our guest, Danielle DiMartino Booth, founder of Quill Research. All this and much more on episode number 962 of the Disciplined Investor Podcast.

2:14Hey, it's Andrew Horowitz and welcome to another great episode of the Disciplined Investor Podcast. Thanks for joining me and thank you for all your notes and things that you've written, said, commented, and I appreciate you. I just want you to know that. Now, before we jump into this week's AI earnings drama and what it means for your portfolio and some of the things that we'll talk about with our guests, I wanted to take just a quick second to shout out something awesome from last week's show. And if you caught our discussion on annuities, especially those variable annuity ones with their long lockup periods and steep surrender charges, that whole 1035 exchange game where agents will reset the clock for more commissions.

3:00That's the whole point of it all. You know, we didn't pull any punches during that discussion, right? We talked about how these products felt like to a degree financial handcuffs and with those really long penalty periods to get out and if life throws you a curveball, you're stuck, like a health issue or needing for some cash, I don't know, fix your roof or something like that. And I warned and I talked about all these sales incentives that often really are put ahead against your needs. It's really what's the needs-based selling that's going on here. It's the agent's needs that are basing the selling of what's going on here.

3:45But what I wanted to tell you was that the response kind of blew me away. So many of you reached out and contacted us about, you know, what is going on. Let me know what's happening. You shared your details about what exactly you're holding in your portfolios. And here's an eye-opener. A shocking number of the stuff that came through was exactly what we talked about last week. You know, these high variable annuity fees, contracts with multi-year surrender schedules, and these riders that sounded really just too good to be true, which they probably are, but eating into returns because it's so expensive and there's guarantees that come in with these really steep hidden costs.

4:39And it was kind of, I was at first when we started to think about if we wanted to really punch this in the face pretty hard, this whole idea of this annuity practice, we're like, well, you know, is that something we want to do? Because we don't really talk about that too much on this show. But I said, you know what? We even have a place in my book, The Disciplined Investor, Essential Strategies for Success on annuities, on guaranteed investment contracts or GICs, GICs. And I said, you know, it's about time we talk about this. Nothing that should be hidden or not talked about. It's something that needs to be discussed because so many people have these within their portfolio.

5:16And it was, it was, it was, I was really happy to do it. It validated the reasoning and rationale as to why we were going to do it. But at the same time, I found it a little concerning. to see how widespread these issues really are. And don't worry, you're not alone. You're definitely not alone here. I can tell you're not alone because of all the people that wrote us, right? You're not alone in this whole thing. And I say that because so many really smart and diligent investors got sold on this whole safety pitch. So a lot of people asked a lot of things, you know, what should I do? Should I say 1035 this?

5:58What can I do? Could I ladder? So we're going to circle back on some of those specific issues, maybe in an income, well, we will eventually, in an upcoming segment. But maybe even dedicate an entire episode talking about this and maybe bring some experts in, aside from just hearing it from me. But if you're sitting on one of these wondering if it's still right for you, you know what? Listen to the last episode. So thanks for trusting us with this, and that's why we do the show, by the way. It's your feedback, your participation in this. It's not a one-way conversation. This is definitely, if you haven't figured it out yet, it's a two-way conversation.

6:44Yes, I'm the only one with the microphone right now, but the bottom line of all this is that you are involved. You're listening because there's something you're getting out of all this. and I think a lot of that is making sure that you you are validated in what you're doing and making sure you're staying on the right path so we're going to cut through of course the noise from all that's going on in the markets and talk about what's happening there's been a bit of a roller coaster ride courtesy of of Nvidia we saw that Nvidia came out with the earnings the day before they came out the earnings we'll talk about that and then where happened so I guess we should just start with the headline, right?

7:24What we saw was on Wednesday of last week, we saw that there was earnings after the close that came out for NVIDIA. And everybody was really pent up and thinking about like, what is it going to be? Is it going to meet all the excitement that we think it's going to be? And, you know, when we talk about what's happening, well, NVIDIA ended up down about 5 % on the day after the earnings. They were up about two and a half, 3 % on the print because the numbers came out pretty strong, right? The day before on Wednesday. Everybody was in high anticipation of this. The S &P climbed on Wednesday about almost 1%.

7:56NASDAQ jumped about 1.3%. That was pretty much given back after the NVIDIA earnings. Tech was leading. Tech was fading. And NVIDIA, again, was really up ahead of its earnings because there was this big hype and buzz and valuation to be damned. Who cares? Let's just get in there. Thursday morning, we saw the realization click in a little bit. Revenue was$68.13 billion. Pretty big beat, by the way, on expectations that were up enormously on a year-over-year basis. Guidance looked really solid, but again, 5 % down the next day. Again, it was on the print with all the numbers that came out initially right before Jensen Wong really got to the stage talking about things in the morning that he did some interviews early, early morning on Thursday, it was.

8:52NASDAQ was down about a percent and a half. The S &P dropped around 1%, give or take, throughout the day. It was down about 1.2 % for part of the day. It did come back a little bit, but what's really, what's eating Gilbert Grape here? Like, what's the problem? I think the fact of the matter is that even though this came back a little bit, the truth of the matter is that this rotation about maybe there's a better place to be right now is something, right? So why was this big sell-off happening? You know, what happened here? The only thing I can think of right now is it's this classic sell-the-news phenomenon.

9:29But I think deeper, if you really think about what's going on here, that I think investors really wanted this reassurance that the AI spending spree, this massive hundreds, well, trillions of dollars, really, but hundreds of billions of dollars by the hyperscalers, like Microsoft, Amazon, and Google, Meta, Oracle. Hoping it was going to deliver returns fast enough to justify the trillions in capex that's being spent right now. And I don't think this was really about one earnings report either. I think it's a microcosm of 2026 in totality, right? Big investing story so far has been that, hey, we're very worried about what's going on here.

10:09Can they really keep up? Are we going to see the returns? And that AI trade that dominated 2025 that carried into January, which pushed the S &P 500 above 7 ,000 miraculously for the first time ever. February was like, oh, man. As a matter of fact, the Nasdaq is having the worst months in many, many months. I think it was a reality check. The check about lofty valuations, the questions about AI return on investment, ROI. And when we saw that the broadening out of investors thinking that maybe there's other places to invest, like energy, like health care, like utilities, those areas got a lot. Remember, don't forget, January, what happened there?

10:58We saw the S &P was up about 1.5%, the JOW was up 1.7%. and that was all despite all the geopolitical noise, all the headlines that said anything other than buy, right? It was like, no, but the markets were resilient. Energy surged, 14 % materials, staples were up a lot, and again, techs and financial lagged. Now, what did that say? I think that was a hint. That was a little bit of a tell that there was this rotation going on away from this pure AI play that had been in vogue for a while and going toward the cyclical sectors. Now that we saw NVIDIA, it almost feels that that rotation was spot on.

11:49Now this whole big AI infrastructure spending, the binge that has been going on with Alphabet but just raised, what was the number? Like$30-plus billion in bonds. And let's not forget, we'd be remiss if we didn't mention the 100-year bond that they issued to fund their data centers. Oracle did, what, a$25 billion bond earlier in the month. So combined, the AI spenders are issuing like$120 billion already last year with projections topping$500 billion potentially, $2.5 trillion in total corporate issuance this year, up nearly 12%, and leading that is, of course, the AI trading. Now, right now, bond investors, usually the calm ones in the house, are ranking the AI bubble as their top risk for the first time in a Bank of America study that recently came out, up from 9 % in December to 23 % now.

12:59And software stocks, they got hit hard early this month on fears of this disruption by Anthropic and any other, name anyone, any other AI that you want. But Anthropic's been the one, like what happened when they announced the COBOL Enhancer that really whacked IBM the worst performance in any day, down 13 % this week, or that one day actually, on this hit. And that was the worst since like 2008.

13:30So crazy. At the same time, let's not count AI out. Let's not kind of throw the garbage pill and say, that's it, done, fine, it's gone. NVIDIA's results show an incredible demand for GPUs, right? Micron, which you may have been watching, memory chips for data centers, up 50 % in 2026 after like a 240 % gain last year. You see what's going on in Korea? Korea up 53%. The market in Korea, the stock market in Korea, up 53 % this year. It's called Kospi. Cloud giants like Amazon, Microsoft, massive backlogs, even though their stocks dipped. So we're still looking for about a 12 % increase in overall growth in 2026, well above the 8 % long-term average.

14:19So that's something to be said there. So I think that's important. Now, when we look at some other things, right, the Fed holding rates steady in January with maybe two to three, and we'll ask Danielle DiMartino Booth about this, but, you know, what's going to happen? Inflation has been cooling a bit. Jobs adding modestly, but, you know, we say 4.3 % rate. So we've got policy wild cards, Supreme Court ruling on tariffs,

14:49which didn't really change anything. It's just throwing a 10 % and a maybe 15 % on top of it. So what does this mean, all of this? When we take this and consolidate this, compile this together, and think about what is going to be in the future right now. I do think that there is a lot of sagging optimism, which means, is it called de-optimism? Like dis-optimism. like disinflation. We have disoptimism. But AI isn't dead. It's maturing. The easy money from the hype is probably over right now. Now we're looking for execution, profitability. We have to see the revenue. You got to look at things like what's going to happen with a turnaround from companies like Snowflake and Salesforce.

15:34But I think we got to really consider diversity beyond mega caps, right? Energy, materials, staples, healthcare, pretty good. valuation is going to matter again. That's the important thing here. The S &P is at premium levels right now. And if earnings growth accelerates as forecast, it's going to justify those prices. That doesn't, I don't think that surprises anybody. But any slowdown in the AI adoption of Fed pauses, that's where you're going to have some problems. And I think that's what we're seeing, the geopolitical uncertainty starting to kick into all this right now because it's not all just, you know, peaches and cream right now.

16:14Look, volatility's back, VIX at 20. And I think what this week's action reminds us is that markets are great at climbing walls of worry. Let's agree with something, right? AI, it's transformative, but not immune to scrutiny and questions. So as we head into the rest of February, we've got to stick on earnings season, Fed signals, whether the bull broadens out right now. I think that's a lot that's going on that we need to pay attention to. But as with every cycle, there's overhype and then pullback. Right now, we may be in the pullback area. It may not last a long time. As we've seen, one, two, three days is probably all I can get in any pullback has been a sign of any, you know, just let's buy, let's get in there, let's go for it.

17:05That could be what we're seeing right now. It may be a great opportunity right now. But the rotation where we're seeing small caps pick up international to amazing. And just tech is the one that's really being questioned right now. Not the worst thing overall for people that are smart and looking for the right place to be. If you're just a passive index investor and that's all you do, well, you know what? That's what you're going to get. You got the opportunity on the upside. And if that caves and those 10, 15 stocks don't do well and you're sticking on the S &P 500 and the NASDAQ 100, well, what's going to happen there?

17:42We're going to get to our guest segment right now, but I'm going to talk about IBKR for a second. Because I know you do your research, right? You research your investments. You analyze markets. You manage risk. But did you research your broker? In 2025, IBKR clients outperformed the S &P 500. Retail clients averaged 19.2%, while hedge fund clients averaged 28.91%. Compared to the indexes, 17.9%. IBKR's lower trading costs, competitive rates, efficient execution, and access to more than 170 global markets helped investors keep more of what they earn and put more capital to work. Over time, the broker you choose makes a difference.

18:27Interactive Brokers, member SIPC. If you care about performance, find out why the best informed investors choose interactive brokers at ibkr.com slash 2025. Let me introduce Danielle DiMartino Booth, a crowd favorite. She's the founder of Quill Intelligence and what she wanted to do when she set that all up and founded it. She wanted to launch a research revolution and redefine how markets intelligence is conceived and delivered. So to build Quill Intelligence, she brought together a core team of investing veterans to analyze the trends and provide critical analysis on what is driving markets, both in the United States and globally.

19:13She's considered, and I agree with this, a global thought leader on monetary policy, economics, and finance. She's also the author of Fed Up, an insider's take on why the Federal Reserve is bad for America. Has a column on Bloomberg View. Is a business speaker, commentator frequently on CNBC, Bloomberg, Fox News. What else? Fox Business News, Yahoo Finance. And prior to Quill, she was spending her time at the Federal Reserve Bank in Dallas, where she served as advisor to President Richard W. Fisher throughout the financial crisis. So let's bring her on and get it going. Hey, how are you? I'm great.

19:58I'm fantastic. How are you? I'm pretty good. Pretty good. It's been a little bit cold down here in south sunny Florida in the 40s, but I guess compared to the rest of the country, it's pretty good. We're going up to 80 tomorrow here in Dallas, So I'm just as happy as you are. Yeah, exactly. Well, I want to talk about, you know, I like to, you've been on many times, of course. We talked about some things here, but I kind of got a few things I wanted to ask you about, like to find out more about you. And I kind of dug up a few things. Uh-oh. Oh, yeah. So we all know about your business side, your acumen, all the things you do.

20:38We're going to get into the discussion of the Fed and what's going on, interest rates, your predictions and all that. But what was going on in Mexico when you were 17? Oh, wow. That's kind of a timely thing, given I spent most of my time in Guadalajara, which is in the news these days. I was supposed to be there, by the way, on March 9th. I was going to Hacienda Patron. I was invited to do a tequila tasting and farm tour and dinners, and they were putting me up, but we canceled it. Yeah, it's a really iffy time in Mexico. You know, when I was there, after I graduated from high school, that was my trip that I went on with my best friend in the world, who's actually still my best friend in the world.

21:20She lives a block and a half away. We met when we were 13. But, you know, I had grown up in San Antonio, Texas, in a certain area where Mexican nationals had second homes, took their children to send them to U.S. schools. uh i kind of grew up speaking spanish and living the culture so i um so off i went to go visit mexico for six weeks there was a bit of a solo time there too wasn't there um i mean i no it was just with her no no i mean i i mean i think the funniest takeaway from that trip is, and it really doesn't have to do with tequila, but it, you know, I had read naively, don't drink the water.

22:11Well, this was, you know, prior to bottled water being a huge thing. I didn't drink, I almost lost a kidney because I really didn't drink any water for like a very long time, which by the way, I don't recommend. Yeah, no good. And then you had a summer internship in Venezuela. I did. I think that all of the professional and academic experiences that I had, that was in between my first and second years of business school, getting my MBA in finance before I went off to Wall Street, that I learned the most about economics over that summer in Caracas. the country clubs were on the water which is the Caribbean I mean astonishingly beautiful you had to drive through poverty that was absolutely indescribable to get to these country clubs and it was you know it was Venezuela's answer to the great Gatsby and I remember as I was leaving the country thinking to myself you know this is not going to end well.

23:15And you know what? Shortly thereafter, Chavez rose to power. Yeah. It's like when I was in India, it's like in a way you have to walk over the dead people to get your cocktail. You know, it's like, it's horrible, right? You know, it's like this, you feel like the whole time then of course, you know, you, you, you enter a compound or something and you forget about, and it's meant to forget about everything else, but yeah, it's sad. And then I think, tell me if I'm wrong about this. You and I have something in common. We both have, preemie twins. Oh, gosh, yes. Mine are a little bit older than yours, I think.

23:51We've never talked about this before, but I have girls that are 35, and they were little bitty chicken nuggets in the incubators when they were born. So mine just turned 18, and they're seniors in high school, boy, girl. And they were 4 '15 and 5 '1. and the girl who was the smaller of the two dropped down and she had a three handle on her weight before things kind of stabilized. It was in the middle of an ice storm in Dallas when they were born. And I actually did not meet her until she was five days old when they finally pushed me in a wheelchair because I had maybe suffered a close to a heart attack the day the twins were born.

24:35So I was pretty sick myself right after they were born, but I didn't meet her until she was five days old. We're best friends now. So I love, love having the one girl. The three boys keep me on my toes. They, whatever they say about the frontal, you know, about their brains, not developing until they're 25 is true. I'll attest to that. Maybe 25, give or take. So let me tell me one more thing that people don't know about you just as a personal interest item, your favorite dessert, your binge food, weirdest thing that ever happened to the Fed, something that nobody knows. Maybe a few people though.

25:16So, I mean, you know, if if you've read my book Fed Up, you may remember this, but to me, at least the most shocking moment when I was at the Fed, mind you, I had been on Wall Street, you know, my entire career. And I dressed what I felt to be appropriately to go to the office. And one of these kind of

25:40scruffy academic sorts that would wear the the sweaters with the leather patches I can see this with the beard a scruffy beard kind of thing right yeah yeah yeah I mean nothing you would bring home to mom necessarily but he uh he said well you know if nothing else at least you do have a master's degree from Columbia and and you certainly dress better than anybody in the building and i was like i don't think that's an appropriate thing to say i didn't care i was never about sensitivity training um but it just it struck me as is so pompous and and you know and i i look now i listened to some of the things that these fed officials say that sound like they're so far removed from the rest of the population of the united states none of it surprises me but these they are far removed right but these guys also the heavy what doesn't be them but You know, the heavy academics, they're socially inept, right?

26:36They have social and they're not, they're not, they march to a much different drummer. You know, it's not like these are the guys and gals that you're going to go probably have weekend parties with and, you know, find them on a beach laying down. I mean, they're going to be head deep in some kind of really crazy book that's going to have the Dewey Decimal System all over it or something. Well, I will say that they're not socially, well, I will say that there's a lot of social awkwardness. Yeah, exactly. Yeah, yeah, yeah. Socially awkward. All right, let's talk about this now. On talking about the economic outlook.

27:15Now, am I understanding that your latest writings and your base case is for four rate cuts in 2026? Do I have that right? You have that right. I have that right. So, and I think concentrated in somehow, well, the first half of the year, but we'll let the timing go for a second. So I guess the question I have is what are you seeing from a perspective of key data points like, I guess, the unemployment situation that although the rate went down, we didn't count the million people, some of the corporate layoffs with regard to like the, the, uh, latest, um, who am I thinking? The Christmas, uh, Challenger Grain Christmas.

28:02I love that name by the way. Um, and what, what is driving your view on this to be confident that, all right, four great cuts when kind of a lot of people are saying much different comments. uh well so i i speak to the people at macro edge and they tend to have uh the jump on challenger data they follow job cut announcements in real time so looking forward they know that job cut announcements for the month of february are higher than what they were in january and january's were high so they i think there were about 112 000 um the warn notices from from individual states they have not dissipated.