Animal Spirits Take Las Vegas

Summary

Animal Spirits Take Las Vegas — Podcast Summary

Date: November 15, 2025
Hosts: Michael Batnick & Ben Carlson
Location: Live at FPA (Financial Planning Association) event in Las Vegas

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Episode Overview

In this lively episode, Michael Batnick and Ben Carlson bring their signature Animal Spirits energy to a room of financial planners in Las Vegas. The episode focuses on the evolving landscape of portfolio management, zeroing in on two dominant trends: the impact of Artificial Intelligence (AI) on markets, and the growing prominence of private investments like private credit. Throughout, Michael and Ben toggle between skepticism and optimism, offering a nuanced, practical perspective for advisors navigating client concerns amid market concentration, rapid innovation, and shifting investment opportunities.

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Key Discussion Points

1. The AI Boom: Bubble or Paradigm Shift?

• Client Anxiety: Advisors are getting flooded with two main questions about AI:

  • "Are we in a bubble, and what should I do?"
  • "Are we underinvested if this is the next major wave?"
    (02:18)

• Market Context:

  • The S&P’s last 3-year gain is 88%—high, but not unprecedented.
  • The "AI trade" survived a major bear market (2022); fundamentals justify much of the run-up so far.
  • The hosts compare the moment to both the dot-com bubble and earlier tech booms—drawing distinctions:
    • Today’s tech giants deliver massive real profits, not just "potential."
    • AI infrastructure is capital-intensive—Meta’s new Louisiana data center alone is nearly the size of Manhattan (04:00).
    • Market cap concentration is at extremes: The 'MAG7' (top 7 tech firms) equal the rest of the S&P 500 combined in size (12:01).

  “For most of the 2010s, everything was in the cloud or software. Now it’s physical… it’s way more capital intensive.” — Michael (04:22)

• Bubble Check:

  • The “bubble” debate is unsatisfying—nobody can definitively call it in real time.
  • Market is strangely risk-on/risk-off: AI enthusiasm climbs amid aggressive Fed hiking and market unease, making this a “weird” bubble if it is one at all.

  “If this is a bubble, it’s one of the weirder ones we’ve seen.” — Ben (08:21)

• Unwinding & Risk:

  • Companies are collectively planning $1+ trillion in data center spending this decade.
  • OpenAI is cited as an example where exuberant investment ramps up expectations—if growth doesn’t materialize, watch out below (11:00).

2. Market Concentration & Fundamentals

• Mega-Cap Math: Apple’s iPhone segment alone out-earns entire Fortune 500 companies.

• Market’s current structure: owning an S&P 500 fund now means heavy tech exposure, sometimes more than clients realize (13:43).

  “If you own any type of market cap-weighted fund, you’re going to have a lot of tech exposure—whether you like it or not.” — Ben (13:43)

• AI Saved the Cycle?: The 2022 bear was "saved" by the AI play. Unlike dot-com, today’s run-up is largely justified by real earnings growth (e.g., Nvidia’s profits matching price gains).

  “The big difference between now and the dot-com bubble… the fundamentals for these companies have matched the price growth.” — Michael (14:18)

• CAPE Ratio and Valuations:
  Cyclically adjusted P/E ratios (CAPE) remain high, but comparisons are hard—as profit margins and corporate efficiency are at levels unmatched in history.

  “Corporations are so much better run today than they were in the past in terms of how efficient they are and how well they can handle shocks.” — Ben (22:37)

• Forecasting Dilemma:
  The hardest question: What’s already priced in? How fast can expectations outpace reality (Cisco/tech bubble analogy)?

  • "I do think the S&P is going to 10,000… it’s just a guess. Who knows?" — Michael (17:26)

3. Advising Clients Amid Market Mania

• Behavioral Challenges: Many clients with large, concentrated wins in big tech stocks struggle to sell on time—behavioral biases and capital gains taxes make it easy to stay too long (28:04).

  “I know I need to diversify, but it’s hard to get them to say, 'let’s hit the sell button.'” — Ben (28:04)

• Drawdown Reality: The “Magnificent Seven” stocks have seen 40–75% drawdowns, even in recent years—volatility is still real.

  “These stocks can and will get dinged… you can also see unbelievable volatility.” — Ben (30:14)

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4. Private Investments: Credit & Equity

• New Asset Class… or Not?

  • Private credit is the “hottest” new thing but still small compared to total fixed income. Its appeal surged after 2022, when both stocks and bonds disappointed.
  • Rise is partly due to regulatory changes post-GFC that forced banks out, opening the door for asset managers (Blackstone, Apollo, KKR, etc.) to fill the gap (32:22).

• Sales Machine:

  • Asset managers need this to get bigger—high fees, margin growth. Massive marketing push now hitting the “wealth channel.”
  • Advisors MUST be ready for client questions—transparency is rising, and headlines stoke anxiety (“Just look at 1929!”).

  “You don’t need to be an expert, but you can’t tell them, ‘don’t worry about it’—your job is to worry. That’s why they hired you.” — Michael (35:11–36:09)

• Market Realities:

  • Private asset fundraising is slowing, suggesting some froth has cooled.
  • If more money chases alternatives, expected returns will compress—these are not “wild west” opportunities anymore.
  • Illiquidity and yield are easy to “sell” but can be dangerous if misunderstood.

  “If that’s your only criteria, well, just take the one with the highest yield. That can get you into trouble.” — Ben (34:42)

• Regulatory Advances:

  • 401(k) plans may soon include private assets—potentially a risky expansion.
  • Advisors need a clear rationale for their stance on alts, not just “no.”

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Notable Quotes & Moments

• On AI’s Uncertainty:

  “When you’re in a bubble, it’s impossible to tell in the moment… There aren’t certainties like that in these environments.” — Ben (09:14)

• On Market Narratives Ending:

  “It's going to end when their narrative changes… after an earnings call where the company says, uh-oh, we weren’t expecting that.” — Michael (18:33)

• On Behavioral Dilemmas:

  “I think trying to time it—there’s more mistakes made trying to time this type of environment than just having a portfolio that’s durable enough for you to ride out whatever happens.” — Ben (30:32)

• On Private Credit Hype:

  “I don’t think that in 10 years we’re going to look back and say: holy cow, remember private credit? Wasn’t that crazy?” — Michael (30:50)

• On Advisor Communication:

  “We wanted to be as transparent as possible… clients can just talk more about their financial plans and what’s going on with their own circumstances and their lives than the headlines.” — Ben (43:32)

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Key Timestamps

• AI investing climate and client questions: 02:18–06:05
• Capital spending by tech giants and market comparisons: 06:28–08:21
• Bubble vs. new normal debate: 08:21–11:00
• Tech concentration & MAG7 significance: 12:01–13:43
• How fundamentals compare to dot-com bubble: 14:18–15:24
• Discussion of profit margins, CAPE ratio: 21:12–23:56
• Private credit and private investments breakdown: 31:08–43:09
• Advisors' communication and transparency strategies: 43:32–44:53

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Tone & Style

Michael and Ben keep the tone energetic, witty, and relatable—peppering in self-deprecating jokes about "hedging" ("Grand Rapids hedge"), Las Vegas outcomes, and the contradictions of modern investing. Their approach is skeptical but open-minded, coaching financial planners to balance realism with clear communication, patience, and humility.

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Useful for Advisors

• Client Communication: Be proactive, transparent, and nuanced—clients need context and education, not just product pitches.
• Portfolio Construction: Expect market concentration and AI enthusiasm to remain challenging and evident in client portfolios; behavioral coaching is critical.
• Alternatives Education: Don’t ignore alts—understand enough to answer questions and construct a rationale for your approach, even if that approach is “pass.”
• Risk & Return: Remind clients that volatility still applies—even to the hottest names—and that nothing is truly without tradeoffs.

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This episode serves not just as a market commentary, but a practical field guide for advisors helping clients through hype cycles, big new ideas, and the ever-evolving risk/return calculus in today’s market.

Transcript

[A]

Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben.

[B]

Are solely their own opinion and do.

[A]

Not reflect the opinion of Ritholtz Wealth Management.

[B]

This podcast is for informational purposes only and should not be relied upon for any investment decisions.

[A]

Clients of Ritholtz Wealth Management may maintain.

[B]

Positions in the securities discussed in this podcast. Thank you to the FPA for having us. It is an honor to be part of this event. All the great work that they're doing to move the industry forward, and thank you to you all for sticking around. Heard. It's been a long week. I heard you guys had some fun last night. Anybody had some fun last night? Yeah. All right, who here is familiar with Animal Spirits? Do we have any listeners in the. Yeah, a few. Okay. All right, well, for those of you who are not familiar with us, Ben and I have been doing this podcast for seven years now. I think we've got a pretty good groove going, so we're excited to bring it here. My name is Michael Batnik. I am managing partner, one of the four co founders of Ritholtz Wealth Management, and Ben is the director of Institutional Asset Management. So today we know that you guys are financial planners, financial planning oriented, and I think probably, I don't know when the line eight years ago, index funds were fine. The investing side was what it was. It was fairly easy and everybody understood what was going on. But now both the demands of clients are a lot different than they were in the past, and the market looks a lot different today than it did a couple of years ago. So today we're going to talk about two of the biggest topics in markets investing, portfolio management. We're going to talk about. Of course, sorry, we can't avoid it. It is what it is. It's the topic of the day, of the decade. We're going to talk about AI and we're going to talk about private investments. Sound good? Yeah.

[A]

And we have a lot of charts.

[B]

Lots of charts. Yeah. All right, Ben, kick it off.

[A]

All right, so we'll start talking about AI because we kind of have to. We're getting more and more questions from our clients about AI and how to think about it. And I think it kind of runs the gamut, but most clients are really asking, if this thing is a bubble, what do we do? What do you do? As my financial advisor, how do you think about this? And then I think there's some other Clients who say if this is really going to change the world, are we under invested in this space? And so I think it's two different worries that people are looking at. So we wanted to look at just how the S and P has done in the past three, five, ten years just to see how this cycle kind of matches up. You can see things have been moving up lately. It's not out of the realm of possibilities. It's not super crazy yet. I would say maybe getting there for some but it's not like this is completely off the charts. These returns that we've seen.

[B]

The three year number is getting there. So not coincidentally, ChatGPT came into the world three years ago and so three years, last three years has been 88% not bad. I don't know Ben, what's better? I guess end of the dot com bubble. I mean there's not many periods now if you zoom out five years it looks a little bit more reasonable. 108%. I don't know what the average is but it's not crazy outlandish because that.

[A]

Includes the bear market of 2022.

[B]

All right, so we spend a lot of time as market people just talking about the valuations, the market cap, the growth, the this, that, the concentration and maybe we're not technologists, none of the people in this room are not enough time talking about well why is all this happening? Where is all the spending coming from? Are the bets that are being placed today going to bear fruit in the future? So, so Mark Zuckerberg at Meta gave this presentation on one of the data centers that they're building in Louisiana. Now it's not, I don't think it's to scale exactly, but whatever. It's almost the size of Manhattan. It's 4 million square feet.

[A]

I think that sounds right, yeah, it's massive. So for the first time in a long time, for Most of the 2010s, the tech companies, everything was in the cloud or software and now they're actually, it's physical now which is, is I guess a risk and an opportunity because it's, it's a risk because it's way more capital intensive. There's going to have, it's going to be harder for them than it was in the past.

[B]

Every hype cycle looks a little bit different. So the comparisons that are being made of the moment that we're in today versus the previous ones, it's the railroad build out the transcontinental railroad in I guess the late 1800s and then it is the fiber optic Networks and the telecom bust and boom and bust. And obviously there are similarities, there's lots of differences. One of the differences is that you guys remember when it was Jim Cramer actually that started the FAANG thing. He coined the term in 2017, I believe. And at the time it was Facebook. That's crazy.

[A]

It was only one Apple, Netflix and Google. Right.

[B]

Amazon wasn't even there.

[A]

We've had to change it every few years. Remember it was the.

[B]

But so. But we've been talking about this concentration and like ugh, diversification isn't working and like that topic is we've been talking about this for years and years and then just the next leg higher. So.

[A]

Well, I was thinking about this today. We had people who we get emails from all of our listeners of our show all the time and they ask us for advice and someone in 2019, 2020 said, I'm thinking about going all in on tech stocks. Is this crazy? And it seemed late cycle then think about how much further we are along.

[B]

But a lot of the names in the previous episodes, not that they came out of nowhere, like Microsoft was obviously a company well before the dot com bubble, but it was a lot of names that did come out of nowhere that had nothing but eyeballs and promise. In that respect, it's obviously so different. So this chart, we stole this from ourselves. Okay, I thought we stole it from somebody.

[A]

Shows the credit buffs on this one. Great chart.

[B]

Yeah, great chart. This is the capex ramping up from Amazon, Google, Microsoft and Meta. And on the most recent quarter, I mean you see the numbers, they're outlandish. Even Meta, which is spending the least, spent $60 billion in the most recent quarter. I'm big into audiobooks these days. Anybody else? Just me one. One guy in the front. Okay. I listened to American Prometheus, the book that the Oppenheimer movie was based on, and we spent $34 billion adjusted for inflation, I think it was 3 billion at the time. We spent $34 billion over I guess a three year period building the atom bomb. And these companies are spending collectively $250 billion a quarter and ramping up.

[A]

And they've said, listen, we think the risk is underspending. So if we overspend by 2, 3, $400 billion, we think that is less risky than under shooting it. So obviously the worry for investors is have we pulled too much forward? Are expectations way too high? Is it going to be hard to see a handoff from all this investment to roi? And when will investors start requiring that? And that's the hard thing to wrap your head around is that you never really know how much of this is actually priced in.

[B]

And in terms of where we are in the cycle, a lot of the. I'm going to use a. Be aware, just the inflating of the bubble, of the enthusiasm, whatever you want to call it, a lot of the inflating has been done weirdly in a risk off or. And what would be a traditional risk off environment, a pretty aggressive Fed hiking cycle, which is bizarre. So now we're on the other side.

[A]

Of that gold hitting new all time highs all the time. It is, it's a very. If this is a bubble, it's one of the weirder ones that we've seen.

[B]

But in terms of like what inning we're in, I mean.

[A]

Well, the Dodgers game went 18 a couple weeks ago, I think. So Ben, we gotta be getting close.

[B]

Ben on our show, he's a very, he's a middle of the road sort of guy. He is on the one hand, on the other, which is, listen, it's fair. I mean, especially in what we're talking about. Nobody can see the future. There is a lot of nuance in this conversation, but I think I'm from.

[A]

Grand Rapids, Michigan, so Michael calls it a Grand Rapids head.

[B]

Yeah. So.

[A]

Because I believe most financial decisions don't exist in black or white. There's a shade of gray.

[B]

I think everyone would agree with that. But from the listener's point of view, I don't think that they like the Grand Rapids hedge and I'm a hedger myself, because who knows? But they want somebody to say, guys, we get it one hand, we know. Tell us.

[A]

Because my point is when you're in a crisis, everyone knows you're in a crisis. If there's a recession, everyone can feel it, right? People are losing their jobs, companies are cutting back, businesses are going under. When you're in a bubble, it's impossible to tell in the moment, right? Is this time really different? Is this something new? Wait, we've never had companies this big, these hyperscalers, this big, that have these types of profit margins that are creating this type of operating cash flow. And, and so in the back of your mind you go, okay, it feels like a bubble. It feels like the real world bubble. It feels like the dot com bubble. But what if, and that's the hard part is that you can't go through a checklist and say, okay, this is definitely a bubble. We know for certain there aren't certainties like that in these type of Environments.

[B]

All right, so maybe we're going to do a little bit of column A, a little bit of column B, because I don't know how to handicap this. You're right. We're going to hedge it out. All right, next chart, Ben. Okay, actually, I'm sorry, previous chart. Just before we get off, chart six, where are we? Do we not have the same deck? Do you not have this?

[A]

Oh, no.

[B]

Okay. All right. It's okay. I'll talk you guys through it. All right, so the chart that's on the screen now. No, go back to that one. So, $434 billion in spend on these data centers this year. Projected to be 591 billion in the following year. 700 billion. Excuse me, in 27. And they're talking about a trillion dollars in spent by the end of the decade. Now, if this doesn't happen. Yeah, there's a bus stop. I mean, obviously this has to happen. So the chart that I'm looking at, that I'm going to walk you guys.

[A]

Through, but all these companies, they're burning the boats behind them. You invest in us, and we'll invest in you, and you invest in them. It's all circular. And so these companies have said we're not going to just let someone take the lead and go with it. We're all in this together, which is either really scary or actually really intelligent.

[B]

So column A, not bubble. If this spend comes to a fruition, then it's early innings, like, game on. Column B. Wait a minute. Of course this is a bubble. Is OpenAI doing? I think their recent numbers were $13 billion in revenue over the last 12 months. Obviously, it's ramping like stipulated. But let's say it's understated. Let's say because Sam Altman took a day, let's say it's 20. Whatever. Who cares what it is? They're committed to spend $1.4 trillion over the next how many years? So if they can't do that, then all of these numbers are obviously nonsense. And then look out below. All right, I'm mixing up my columns. But another point for. Maybe this is a bubble. Is the Mag 7.

[A]

Well, here. So this is the concentration one. And you made another one that apparently didn't get in my.

[B]

But we're not sharing a Google Doc. No. Okay. We're looking at different docs, so it's.

[A]

A good thing we aren't powering AI because it wouldn't work very well.

[B]

So the chart that I'm looking at, can you guys see this chart. No, I'm just kidding. So the MAG7, the market cap of the MAG7 is $22 trillion. That is equal to stocks 52 through 500. So the bottom 449 stocks are equal to the top seven. But again, this is the type of thing that like, well, all right, if you say, if you just had that context, you would say timeout. I want to get off the bullet, right? Like I would take like, get me off. This is like, this doesn't make sense until you think about. You have to zoom in and understand what's going on with these companies. Ben and I made a chart for the show this week breaking down Apple's revenue by their big. By their different segments. The iPhone alone, the iPhone does more revenue or did more revenue in the last 12 months than bank of America and Facebook. Not combined, just the iPhone, the iPad, which is like, it's a $28 billion revenue. Like what? That's more than AMD. No wearable. So the AirPod and the watch did more revenue than Schwab Giggles. I agree. It's insane. And then servers and then. And the wearables. I'm sorry. Okay, the Mac, the Mac did more revenue than Starbucks or just about as much revenue, $36 billion as Starbucks and as Salesforce. And then lastly, services did as much revenue as Target. So when you put it that way, okay, I mean, what should the market get be.

[A]

So I think the point is this is we're in a new normal for now and maybe for a while of concentration in the stock market. And if you own any type of market weight, market cap weighted fund, you're going to have a lot of tech exposure whether you like it or not. And the question is then, okay, what do we do about this?

[B]

Right? So again, we know that people in the room, your planners first. But this has to be part of the conversation because I don't need to tell you guys about sequence of returns risk. Sure. A lot of you have people that are entering retirement now and it matters a lot. The next couple of years are critical for people that are in retirement.

[A]

So it is kind of crazy the handoff that we had. So 2022, we had a bear market. It was fairly run of the mill. If you look at a non recessionary bear market, the average is about a 25% decline. That's about what we had in 2022. But it seems like it was saved by AI spending. And this is the hard part to wrap your head around is that the fundamentals for these companies have Kind of matched the price growth better than it's not. So this chart shows Nvidia earnings growth versus price growth. And you can see that the fundamentals have actually outshot. And so that's the big difference between now and the dot com bubble. And the dot com bubble, it was all dreams. It was, people were still hoping for a lot of these companies. It wasn't even revenue yet. These companies today, a lot of the most of the spending is coming right out of operating cash flow and the growth is happening right along with the prices. So obviously the valuations are elevated. To your point about these being the biggest and best companies, those elevated valuations have actually made sense because the fundamentals have tracked them. And I think if those valuations weren't elevated at this point, then the market would be totally missing something that would make less sense than where they are.

[B]

That would be weird. These companies, there's no analog in history. Like there's no comparison. Microsoft Cloud has done 20%. It's a $100 billion revenue business. They've done 20% growth every quarter for the last decade. And it's not like people didn't know where this was going. And it's not like analysts don't raise their targets, but consistently they've been able to deliver and exceed.

[A]

I think the reason so many people have, maybe some people have some disbelief though is the fact that we had a whole tech cycle and it ran almost perfectly into the AI cycle. A lot of those tech stocks got dinged pretty bad in 2021 and 2022. But then AI took the handoff pretty quickly and then it's kind of back off to the races. And you can see this next chart we showed here. On the one side we have consumer staples and health care as a percentage of market cap. You can see even back in the mid 2010s it was a quarter of the market. Now it's down to less than 15%. Apple and Nvidia alone are now worth as much almost as the consumer stables and healthcare segment of the market.

[B]

But importantly, the market generally gets it right with the exception of what it does and obviously at tops. But we've seen charts floating around where it shows the market cap of tech or Nvidia whatever compared to whole sectors. And you say, my golly again, I want to get off, I want to sell. This doesn't make sense. But you have to adjust for the business. And the market cap of the staples sector matches the net income market's getting it right. And same thing on the other side. Of the aisle.

[A]

All right, so I guess this is where the rubber meets the road is kind of the forecast. And this is the hardest question to answer. I think in financial markets is always like, what's priced in? Have expectations sort of caught up to reality or have they exceeded them? And this is looking at Nvidia and we're talking net income and revenue going forward from here. And the numbers just keep getting bigger and bigger and bigger to astronomical levels that we've literally never seen before.

[B]

So some gray hair in the audience, some bald heads, which I love to see. Remember the late 90s and you might be saying, like Michael and Ben, you guys are young, you don't remember. I saw this with Cisco, the promise. It all came true. Cisco did grow 15% a year for a 20 year period. The problem is that expectations in the stock were for 20% growth and you didn't get it. The stock fell 80% and it took 20 years to recover. And so I will give my opinion on where this goes, which could obviously be very wrong. I do think that the S and P is going to 10,000. It's just a guess. Who knows? Obviously.

[A]

Are you giving price targets now?

[B]

Yeah, I'm giving price targets. There we go. I'm not going to make a time prediction on that because then I can't be wrong. It could be 50 years from now. I mean, he's going there eventually.

[A]

Listen, if you go on CNBC today, there's a way to never be wrong. You say, listen, the stock market is going to crash. This is a bubble. But first go off top. You cannot be wrong. In that instance, you're covered both directions for sure.

[B]

So I think that the way that this ends and people are understandably paying a lot of attention, it's an interesting thought exercise, like, when does this end? How does it look? It's not just going to end because people get bored or because people think that they're overpaying. It's going to end when their narrative changes and their narrative will change after an earnings call where the company says, uh, oh, we weren't expecting that. And until that happens, and yeah, good, I Hope we get 50% pullbacks. We need that. It's normal, it happens. But until we hear something different from the companies, and right now they're all saying the same thing, not only are they not slowing down, they're accelerating. They all said they're going to spend more next year than they thought they were going to at the beginning of the year.

[A]

It's all feeling very toppy. All Right, let's look at the S and P. Same thing with the S and P. And obviously so much of this is driven by the tech stocks. But this just shows that actually the market has been pretty decent at not front running forward earnings. And it's kind of following fundamentals. Okay, Right. The actual earnings versus the estimates, they haven't gotten too far off track. And one of the reasons that the S and P has done so well this decade is because earnings growth. We're at nearly 10% earnings growth per year in the 2000s.

[B]

So one of the biggest questions for the market is, all right, well, what about the other 493? Because to varying degrees people have exposure to these stocks. I'm sure there are people in this room that are doing things outside of just the Mag 7, outside of just the S and P. Whether it's international or equal weighted or small or whatever. What about the rest of the market? And that's the question. So as we have belabored the point, margin expansion in tech is just off the charts, up and to the right.

[A]

I think the hope would be, because I know a lot of advisors do have diversified portfolios. It's not all just in VTI or SPY or the qs. I think the hope would be for this AI cycle that a lot of these smaller firms aren't forced to make the capital outlays that the big tech firms are making. And they're going to see the biggest efficiency gains, hopefully.

[B]

But if you look at this chart of the profit margins of US Market X Tech, it's really on trend. It's not great.

[A]

It's moving up at least barely.

[B]

All right, you guys remember well, but.

[A]

The market is made up of what, 50% technology stocks now? Almost. So that's the market. Right.

[B]

Let's talk about the Cape ratio. When we first started Redholt's wealth management in 2013, this was, this was a big topic for financial pundits. I remember I was on my honeymoon and I read a blog post from Henry Blodgett about why the stock market is going to crash. Because anytime the Cape ratio has gotten this high, we know what happened next. That turned out to be pretty wrong. Huh? Ben?

[A]

I think the problem with this as a. And I think it's great to have this. Shiller took it back to the 1870s or whatever it is. Right. It's great to be able to look across these different cycles. I think the problem is we've seen such. We've pulled forward and changed the way these companies are over the past 10 years probably more than any time in history in terms of their margins and their earnings growth that it's kind of hard to compare today to the last 10 years of earnings. It almost isn't a fair comparison.

[B]

Yeah. So what the CAPE ratio does, it stands for the cyclically adjusted price to earnings ratio because earnings are volatile, because prices are volatile. This takes an average of the last 10 years worth of earnings. It adjusts them for inflation and it gives you a smoother picture of where we are now. I don't think anybody is saying, certainly I'm not saying that stocks are cheap, but does it make sense to Ben's point, does it make sense to look at earnings from nine years ago, from.

[A]

Four years ago at this point, right before ChatGPT existed? I think this is one of my favorite charts to show how the stock market has changed over the years. This just shows the average margin by decade going back to the 1990s. And I think it's one of the most impressive things that corporations have been able to do in the 2020s. If you think about everything that's been thrown at corporations this decade, the pandemic, obviously we turned the economy off, turned it back on. People in white collar jobs, remote work, with no practice, just, hey, you're going to work from home for the next few months. And a lot of people have been doing it for years now. We're going to give you 9% inflation, we're going to give you supply chain shocks. All these different things that have been thrown at corporations and yet they've still managed to increase margins this decade. It's kind of incredible when you think about, and the corporations are so much, obviously they still get things wrong, but they're so much better run today than they were in the past in terms of how efficient they are and how well they're able to handle shocks. The Fed took rates from 0% to 5% in the quickest timeframe we've ever seen. And most of these corporations didn't really blink. It didn't really impact them that much. Not the small caps it did. Right. But the biggest companies in the world, they're able to weather that with little disruption at all.

[B]

I can't remember who said it. It might have been an analyst from bank of America said, don't underestimate corporate America's ability to protect our margins. And if you look at this chart, the dip after the pandemic that took you back to the previous all time highs, even after that, even after that perfect storm for corporate America they were basically at an all time high. Ben, go back to the Cape ratio chart one more time. So we've said this over the years a million times, but I don't want to take it for granted that everybody here has listened or read to everything that we've said. So I'll Repeat it. In 2009 after hopefully the worst financial environment stock market that any of us will ever see. Hopefully after a 55 plus percent crash in the market, the Cape ratio was at its long term average. That tells you all you need to know about this as an indicator. Who cares after the worst market ever got back to the average for a second. Said differently, it's been above its average like 99% of the time for the last 25 years.

[A]

So remember when I just finished the 1929 book by Andrew Ross Orkin and audiobook, everyone's audiobook. Yeah, I didn't read it. I listened. But Irving Fisher has the, you know, infamous that this is a permanent plateau. Hopefully they don't replay this for us after this thing crashes 80%. I just wanted to get that on the record. One more thing, just to show kind of how, how hard it is to use valuation as a sort of signal or timing indicator. There's this great subset called duality research that looked at this and they tried to adjust the forward PE by profit margins because obviously the profit margins are much higher. Again, it doesn't show that stocks are cheap, but it shows that the adjusted forward PE is actually lower. If you look for how efficient these companies are, I think this is what's making it so difficult to handicap this market. If you look at just the returns in a vacuum, the Nasdaq is up 20%. The Nasdaq 100 is up 20% per year for the past decade from the lows In March of 2009, which is admittedly cherry picked number, it's up 22% per year. That'd make Warren Buffett blush. Right. So just those numbers alone take away all the fundamentals you want. There's this idea that trees don't grow to the sky. And I still believe that. But you don't know when they need to be trimmed or when they're going to be cut in half.

[B]

Yeah, this is, this is what makes it hard because on the one hand we have, listen, dividing the price by the, by the earnings is not. We could all do that. That's not an edge. Right. Like all right, wow, you're smarty pants. Look at the forward P, it's at an all time high and we look at it compared to the 10 year average as they did on this chart. But you have to look at the businesses, you have to like, is this justified or, or is it just pure euphoria? And it's not because the 10 year average or profit margins are way lower than where they are today. And again, if you make that adjustment, it looks far more palatable.

[A]

Now the question is, with these investments being more capital intensive, can they keep the margins going forward? Is there going to have to be way more investment? And that's the hard part. We don't know how quickly does AI come in and make these businesses more efficient?

[B]

So that's the next part of the cycle is all of the borrowing that we're seeing. Meta just borrowed $28 billion for this data center in Louisiana. Your clients need. So you don't need to be an expert at all of the inner workings of the stock market in these companies. But the problem is that the way that our clients consume the news is, is for people that are motivated for you to read their articles. Obviously, if it bleeds, it leads. The more salacious, the better. And there's going to be questions in the future. I'm sure you're already getting them about the market. And so it's your job as the advisor to be able to answer the questions that they ask of you.

[A]

One of the things that we're seeing a lot with our clients, I'm sure many of you are too, is they're not only invested in the market through index funds and mutual funds and ETFs, they own a lot of these individual stocks themselves as well. And to their credit, a lot of the prospects and clients we have have come to us and said, listen, I made a crazy amount of money putting stumping into Nvidia in 2020 or I've been in Apple for 10, 15 years, I got money in Tesla early, whatever it is, I'm sitting on crazy returns. I know I need to diversify, but it's hard to get them to say, okay, so let's hit the sell button and figure out a way to, in a taxi, efficient manner to do this. And a lot of them don't have a hard time letting go. They know they need to diversify, but what if I just wait a little longer and squeeze a little more juice? And I think that's the hard part. And you can see here, we just wait, hold on.

[B]

Last name? Joy. Sorry. But the good news is for investors and for you, the advisors, there are more tools and options available than ever. To help your clients navigate these conversations. Right. Okay. I don't want to sell everything. I don't want to just rip the bandit off and pay all these taxes. I want to sort of glide it down systematically, tax neutral. You could do that for them.

[A]

And these are definitely bull market conversations. Right? Oh, my biggest problem is I have too many capital gains. Right. Michael Scott in the office said my biggest weakness, I care too much. So what we plotted here was just the max drawdown in 2022 and then earlier this year, even in April for the Mag 7 stocks. And you can see there's some, there's some magnificent declines here. Right? Meta was down 75%. Almost. Nvidia was down by two thirds. Tesla was down over 70%. Even just earlier this year, Nvidia was down almost 40%. Tesla was down almost 50. So these stocks can and will get dinged just because, like Michael said, there's a bad earnings report or something. So I think that this, this is a good reminder to clients that kind of no pain, no gain. If you're in these type of stocks, you've seen unbelievable returns, but you can also see unbelievable volatility. And that becomes harder after the fact because, well, wait, do I want to wait till sell until it comes all the way back to the all time high again? Did I make a mistake here? I think that's the problem is understanding that the volatility is a big piece of it too.

[B]

All right, let's turn to private investments. Enough of this AI nonsense.

[A]

Wait, besides your AI, beside your 10,000 price target, what's your other prediction here?

[B]

Do I have another prediction?

[A]

Yeah. I'm comfortable calling this a bubble and I've said this, but that doesn't mean I know how it will end.

[B]

Wow, very bold of you, Ben, going out on a limb.

[A]

But I think one more point. I think trying to time it, there's more mistakes made trying to time this type of environment than just having a portfolio that's durable enough for you to ride out whatever happens. That's my. How's that? That's my Grand Rapids hedge.

[B]

Okay, I'll make another prediction. As we turn to private markets. I don't think that in 10 years we're going to look back and say, holy cow, remember, private credit wasn't that crazy. What do you think?

[A]

I mean, it's such a big new asset class now. I think that makes sense. I think the asset managers have a really big stake in the idea that they need this to get bigger and to work. And so now they're coming for the wealth management channel.

[B]

Okay, but it's not new. Next chart please. So just comparing the size of global fixed income versus global and global equities versus global private capital. It is still private markets, relatively small. And Ben, you and I started talking about private credit like three years ago. I was like, hey, wait a minute, why am I getting like out of nowhere seemingly overnight? Why am I getting 15 emails a week from a company offering private credit? How did this happen? Next chart, Ben. All right, for people that are listening or people that can't see in the back, this is a chart showing the growth in debt outstanding since 2010. And we're looking at bank loans on top and investment grade bonds on top. And all the way at the bottom is private credit. It's still a very, very, very, very. It's a relatively small piece of the market. Am I going to unhedge myself? Again? It's not small, but compared to the.

[A]

Public markets, fixed income is massive.

[B]

Massive. So, all right, here's the story and I'll try and be brief. After the gfc, there were different regulations. Dodd Frank Basel liquidity requirements that made it more expensive for JPMorgans of the world to carry these loans on their balance sheet. These used to be syndicated loans and they still are. But where they would do a deal with a lender, they would get a bunch of clients together and then they would make the loan and they would service it and they would take care of it if there were problems and all that sort of stuff. But after the gfc, they could no longer profitably to the way that they wanted to run this business into the vacuum stepped. Of course we all know how the story went. The large asset alternative asset managers, Blackstone, kkr, Carlyle, Ares, Apollo, Blue Owl and on down the line. And the reason why our inbox, and I'm talking for all of us in this room got bombarded in 2022 was because stocks and bonds for the most part used to be enough. And our clients all made a deal with themselves and with us and with the market. I get it. Stocks are volatile like no pain, no gain. The price for the 10% compounded return is sometimes you got to get kicked in the teeth. 50% drawdown, run of the mill, bear market, whatever it is. But hang on now you're telling me my bonds aren't safe either. And in 2022, not only did bonds not keep you safe, they were the source of the pain in the equities. A hiking cycle destroyed bonds and it brought the stock market down with it. So there was nowhere to hide. Except One quirk of 2022 was getting back to what we said earlier about don't underestimate corporate America's ability to protect their margins. There wasn't really a bad credit default cycle. Everything was sort of fine. And we were looking like, how come high yield bonds, junk bonds are hanging in there. And the reason is duration. That was it. Credit was fine. And because private credit, because these loans are floating rate and because there wasn't a huge spike in default and because, hey, they're illiquid. So that helped. This was like the safe haven in 2022.

[A]

Plus there was the volatility laundering of it being illiquid asset. You don't have to see the marks on a daily basis. And I've also said this before, but private credit is the easiest alternative asset to sell. It's the yield, right? That's all you need to know. What am I getting? 10%. Okay, 12% in. So I think for financial advisors, it's a really easy sale to make. The problem there, of course, is if that's your only criteria, well, just take the one with the highest yield. That can get you into trouble.

[B]

One more part of the story there in 2022 and leading up to today was it was the perfect storm of private loans being this incredible safety, warm, cozy blanket for our clients at the same time as institutional investors were pulling back. And so, boom, Enter the wealth channel. It's not a mystery why this is happening. We all very much know what's going on. All right, so the last couple of weeks there have been a lot of headlines. And again, getting back to the story versus the headlines, I think a lot of people, both in public markets and of course journalists, want there to be a story because public market investors say this is like, it's not fair that I get marked on a daily basis and they just don't like, I get it, I get it. I'd be pissed off too. It doesn't seem fair. It isn't fair, but that's life. And then of course, again, not to go too hard on the journalist, but they want you to click on their. So here we go. How bad could the private credit crisis get? Just look at 1929. Are you kidding me? Okay, but the problem is our clients are reading this and if you've put them into private credit, they're going to ask you about this. And so it's not that again, you don't need to be an expert, but you can't tell them, don't worry about it because your job is to worry. That's why they hired you. And you need to have an answer, even if you're not recommending it. If they're asking questions. It's your job to be educated to understand what's going on. So the story with these particular so US Banks missed warning signs on Tricolor. Now their losses are adding up. BlackRock stunned by loans to business accused of, quote, breathtaking fraud. So in 2022, there was a lot of sloppy lending in the subprime auto space that is now coming to Rooster. But the irony of this is JB Dimon was talking on the earnest call this week about there's never just one cockroach. There's more to come. And I'm sure there are a lot of these were bank loans and the BDCs own very, very, very, very small percentage of this.

[A]

I guess one of the good things about this being this seemingly new asset class is that it has more attention on it because more advisors are looking at this, more clients are investing in this stuff is that there's going to be more transparency. And these stories actually are going to help people, I think, understand this better. It's not going to be this black box that people don't know what's going on and don't understand what's in it. I think this kind of stuff, when there are problems that flare up, are actually going to help advisors.

[B]

I think so too. And Ben, you keep saying the seemingly new. I know you know it's not new. Like this is how you started your career. Well, it's new to us. It's new to the Wealth Channel.

[A]

Yes, yes, but it's. Yes, you're right. It's still credit. It's giving loans to businesses. And maybe the way that those businesses are funded is different, but yes, it's still credit.

[B]

The industry is all in. And it's not just the alternative asset managers. It's everybody that we do business with. Envestnet, TAPS, BlackRock, Franklin for public private model portfolios. Schwab wants to end more private firm investments. JP Morgan tokenizes private equity fund on its own blockchain. Wait, what? How'd that get in here? Vanguard. The case for private equity at Vanguard, I mean, everybody is going in.

[A]

Can we get a quick audience survey? Like how many people in here have their clients in private assets or alternatives?

[B]

Smattering. Okay, all right. This doesn't help if you're not honest. So please wait. And how many people are being asked about it and or thinking about what they should do in the future for their clients. More, A little bit more. All right, So I mean, it is weird.

[A]

Like we've heard from advisors who say, listen, I don't have clients beating my door down on this stuff. They don't ask for it, they don't need it. And that for a lot of people that probably is the case. But to Michael's point, I think you still have to have a story and a narrative because we get a lot of people now who in the ultra high net worth space who say, you know what, I know I don't really need this stuff, but I kind of want it. And so I think you have to have an answer right or wrong, what you're going to do, why you're going to make a decision one way or the other. I think you have to at least you can't just say, nope, sorry, not us. I think you have to have a good reason for why you will or won't invest in this company.

[B]

It depends who you're talking to. If you're serving the, you know, if you're serving the million dollar client and your answer is, we don't need the illiquidity, it's not worth it. And whatever you say and they say, okay, good enough, fine. But if you are serving a different client, somebody sells their business for $50 million. If I sold my business for $50 million, I would want more than just stocks and bonds because there are other things that do provide, forget about alpha, but even diversification, like I don't know what the US business cycle has to do with, I don't know, litigation, finance or some sort of asset backed loans. And I know everything in a crisis correlation goes to one, but it's coming, that's here. So this is, I think, part of the story that is underreported because we talk about like it feels like a bubble. If you look at fundraising activity, it's falling off a cliff.

[A]

Well, this is, this is part of it is that a lot of the asset managers kind of need this to work. Right? My background is in institutional money management. So pensions and foundations and endowments. And I came up, you know, in the mid-2000s with that. And that's when all of these places decided, I'm going to be like Yale, we're going to be just like David Swensen. So we're going to put 30, 40, 50% of our portfolio into alternatives, hedge funds, private equity, venture capital, some credit funds. The asset managers see this and they go, well, you know, they, they don't have much wiggle room left. All these institutional investors already did this. So I think a lot of it is that the asset managers kind of need the wealth channel to work. And, and for them, you know, guess what? It's for the other places coming in, it's much higher fees than index funds. Right. It's a big greater source of revenue. Right. That's why we're going to push the 50, 30, 20 portfolio instead of the 60, 40, where the 20 is alternatives or private assets. And so we're not going to see a slowdown in emails and sales pitches for this stuff.

[B]

Yeah. So even though you guys might be like, I don't care about this, my clients don't care. Okay, maybe today they don't. But the biggest, most influential players in the industry are making big pushes. BlackRock bought a private credit fund. They bought an infrastructure company. They bought Prequen, who provides data for these. They are there.

[A]

We could start seeing this stuff in 401. The regulations have now allowed for the potential to have private investments in 401ks. We could see target date funds that have private credit or private equity in them, which is frankly a little scary to me. But I think this stuff is coming okay.

[B]

Private equity. One of the big pitches in the early days was, I mean, there was very little competition. And this is part of the same story. And therefore multiples on these companies were pretty damn low. Six to eight times. Throwing some leverage. It's a nice recipe for higher returns. Now the purchase price multiple has crept up over the last decade or so, but really like not, not keeping pace with, with public markets.

[A]

No. So, but it's because they're not investing in tech companies. Right. It's these old stodgy businesses in a lot of ways. But, but I think that's an important thing to make, is that if there's going to be all this more money coming in to private equity and private credit, one of the things that you should expect is a. That the returns are going to compress. Right. That's one of the things David Swensen said when Yale went into this stuff in the 80s is that it was a wild, wild west. But the spreads in these things were so much better. The valuations were better. It was easier to have those outsized gains because no one else was there. Now that there's so many other, what did we say, 18,000 private equity managers in the world.

[B]

There's a lot. All right, so we're running short on time. Let's just fast forward a little bit. So in Conclusion, you don't need to know the differences per se, depending on your purview and your seat, between this fund versus that fund versus that fund. I think it's not reasonable for what we do for our clients to be an expert in all of this. But you have to get yourself a little bit educated. When clients ask you a question, you have to have a suitable answer.

[A]

It's interesting because there's so many more asset classes now. We went through the same thing with Bitcoin, right? Whether you're going to invest in Bitcoin on the behalf of your clients or not, whether you're going to own gold or not, all these different things, I think you at least have to have an answer. And part of that is one of the big things for us at our firm is client communication. We built our firm with the understanding that we wanted to be as transparent as possible. I think that's one of the things that people thought coming out of the 2008 crisis that really sort of irked them is that I didn't really know what was going on in my portfolio. I didn't know what my financial advisor was doing for me. And so our whole thing was built on the idea that we wanted to communicate, communicate as much with our clients as we possibly could so they understand what we're thinking, what we're doing, what they own, why they own it. And so our whole. The backbone of our firm started out with blogs, right? And that's how we communicate with clients and how we got prospects. Then it moved into podcasts, and now we have YouTube channels. Some would say we do too much content.

[B]

I would say I'm pretty tired.

[A]

But we've found that it's a great way to sort of make our advisors more efficient because our clients don't have to call them and say, hey, what do you think about this? Rates are rising or inflation is falling. Or the Fed did this because we're already putting this information out there so our clients can just talk more about their financial plans and what's going on with their own circumstances and their lives than the headlines.

[B]

So we started a new show. So all the shows that we've done historically are just market stuff. It's this. But we started a new channel called Talking wealth where we talk more about our day job, more about what's happening in the industry. So that is on YouTube and Spotify. And then here's a plug plug for the advisors in the room who have trouble creating visuals to communicate with their clients. I spent a long time doing this it was annoying. It was cumbersome.

[A]

Well, one of the things that advisors often tell us because we do a lot of content, so we get advisors asking us, hey, I want to do more content, but I don't know where to start. I don't know how to begin. I don't do this stuff. I don't have a lot of time. Keep going.

[B]

So we started a business called exhibit a where we have a library of 120 charts, and we've got a new chart of the week every week that is timely with key talking points. And you upload your logo, you get a color scheme formatted the data updates every single day. You could send emails, and we've got decks for you and all that sort of good stuff.

[A]

So did anyone else win any money besides Michael? I took one for the team. Listen, when it comes to investing, I'm a big process over outcomes guy. So I follow the blackjack rule book, and it didn't work out for me last night, but it did work out for Michael. So that's why you can't be outcomes based. You gotta be process based.

[B]

There you have it. S and P. 10,000 in the next 2,500 years. I guarantee it. All right, thank you, FPA. It was an honor to be here with you guys. Hope everybody gets home safe and see you again.

[A]

Thanks, everyone.