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- [00:01]
A
Welcome to Ask the Compound show where you ask and we answer. I am Ben Carlson. The fast money was in crypto for a long time. Last year it went to gold because gold was booming. This year, semiconductors, because semiconductors are booming. Where will the fast money go next? These semiconductors continue to struggle. We'll answer that question and more on today's show. Let's do it. If you have a question for us or email, hear us at. Duncan is gone today. He is celebrating with his friends in Sweden for Oatley's 30% pop on earnings. On today's show, we have a very special guest joining me to answer questions about Mag7 underperformance. The two big risks in the market right now, how long explosive earnings growth can last, where the fast money might go next, and how to invest during the boom times. But first, this message is brought to you by Fidelity Investments. When timing is everything, you need powerful tools and resources that can meet you in the moment. With the all new Fidelity Trader plus platform, your charts and preferences show up consistently synced up across all your devices. So you can act fast whenever and wherever you're trading. You can save an order on your desktop at home, get a mobile alert when you're at work, and complete the trade in the Fidelity app without ever starting over. And with a downloadable Fidelity Trader plus desktop platform, you have more control with multi monitor views, enhanced tools and customization options, and integrated screen sharing with Fidelity Trading specialists. Try Fidelity's most powerful trading platform yet@fidelity.com Trader Plus, Fidelity Investments in the compound are not affiliated. Views, opinions, products, services and strategies discussed are not endorsed or promoted by Fidelity Investments. Fidelity Broker Services LLC Member NYSE SIPC all right. On today's show, we have a returning champion back on the show. He's a fan favorite every time he comes on the show. Jurrien Timmer is the director of Global Macro at Fidelity Investments. Let's bring him up, guys. Hi, Ben Yurion. I love the color today. You're rocking it in the summer. That's a very summer suit. I like it. I have a bunch of questions for you about what's going on in the markets. So we're going to get right into it.
- [02:05]
B
Great.
- [02:05]
A
Good. All right, first question. Let's do it, guys. All right. Concentration has been a big concern for a while now. The Mag 7 stocks are finally underperforming. The bull market is now broadening out. Is this good news for the stock market or late cycle behavior? All right, we got. We'll start with a. We got a good Chart for you. We can start with Throw the chart up. I got to do a chart on here. This is from your weekly newsletter. You show the s and P500 against the equal weight. And the equal weight is kind of breaking out a little bit and playing catch up from the past, I don't know, five years or so. So the bull market is broadening. Is this a good thing?
- [02:45]
B
For the bull market, it is. And so far, the broadening actually is happening in the best way possible. So you asked about the Mag 7. We've been in a secular bull market now, by my count, at least since 2008 and 9. And so investors have had a very nice long period of, I guess I would call it over, earning beta, because historically the market goes up 10, 11%, but for the last 17 years, it's gone up about 17, 18%. So it's been a great boom, of course, and for many, many years. The Mag 7 before that, the Fangs were really the driving force of that. It was really a, a mega cap growth story in the US and if you were anywhere outside of that particular style box, you were not participating as much as, you know, as you might have been able to. And so what we're seeing now is that the Mag 7 are kind of losing their mojo. They haven't really made a consistent new high since last October. The relative performance against the S and P has been actually making lower highs and lower lows. And for me, the most important metric, which is the payout ratio. So we think about earnings. Of course, earnings are the top line or the bottom line, but the payout of those earnings, so how much of those earnings are returned to shareholders as dividends or buybacks is really the engine that has been driving this bull market. And the payout ratio for the S and P used to be like 95%. It's now down to 68%. And it's a familiar story, of course, because companies are spending so much on Capex because of the AI buildout that there is no money left essentially for buybacks. And that's not necessarily a bad thing, but it is a change. And so the payout ratio for the Mag 7 is down to 37%. Payouts, buybacks are way down because capex is way up. And so the Mag 7 are no longer driving the bus, if you will. And I've always been concerned a little bit about concentration risk. I know we're going to talk about that. But right now the market is broadening without really any loss to the headline index. And just to give you an example. Since June 2, the S& P has not made a new high. It's down about half a percent, which is really not a big deal, of course, but the AI space within the S&P is down 15%. The Kospi index in Korea is down 22%. The equal weighted index is up 2 and the XAI space within the S and P is up 5. And 71% of stocks in the S and P are above their 200 day moving average. So right now we're getting a broadening, which of course is what we always want to see. We want to see a lot of companies and stocks participate and the broadening is happening without damage to the headline index. And that to me is a win and I hope that it continues.
- [05:58]
A
It's surprising, I think to a lot of people that thought once the Mag 7 underperforms, that's going to be bad for the market. You mentioned the buyback thing. I think that's interesting that the buyback ratio has gone down so much and obviously it's driven by these big stocks. How much did buybacks matter in terms of how the stock market has performed for the past five, 10 years? Is that going to be a big headwind if they're not buying back stock going forward?
- [06:20]
B
I think it is a headwind. So again, when I look at the secular bull market over the last decade and a half or so, financial engineering, if you will, was definitely a part of that. Right? So we all know the story about the de equitization of the markets. Companies were not going public. They didn't need to. They had the private markets to do that and companies were buying a lot of shares back. And again, the payout, right, the payout ratio was north of 90%. So. So if you're a shareholder and a company earns, you know, a good profit and, and it's returning 90% of those profits back to you in the form of a dividend or a buyback, you're going to pay up for that company. So buybacks drive valuation. And again, not that buybacks are good or bad, I mean it's a contentious issue sometimes. But if a company spends the money on Capex and that Capex earns a good roi, then you could argue that's better than a buyback. But a buyback is like a bird in the hand. You know what you're getting. If a company invests it, then it needs to do so wisely so that the ROI is better than what you would have got in terms of getting that bird. In the hand. It's not a make or break dynamic, but it is definitely a change from what we've seen over the last 17 years. Companies are going public, companies are borrowing a lot of money. The demand for capital seems to be insatiable because of the AI data center build out and companies are buying back fewer shares. And for me, the most important part of that is not that it's good or bad for the S&P 500, but it puts the US market on a much more level playing field against other parts of the world. So for instance, the MSCI IFA index, so non US developed stocks, they now have a higher payout ratio than the US and that hasn't been the case for years.
- [08:26]
A
Oh yeah, When's the last time that happened?
- [08:28]
B
Yeah, I don't think it's ever happened basically. But so for us as investors, it's nice to fish from a big pond with a lot of fish in it rather than having to say I got to own these seven stocks and nothing else is working. So it's really good news because for active management and investors looking for stocks in the biggest pond possible and that's what we're getting them.
- [08:54]
A
Interesting. All right, let's, let's do another one. The next question I think is kind of expands on this a little bit. Let's do a question two guys. All right, this latest piece, I took this in your newsletter. You stated from my perspective, the two main risks remain, concentration risk and term premium risk. I just want to hear explain where that risk resides here. I've heard a lot of people in recent months, clients that we have pundits saying that we're concerned about bonds here. There's sticky high inflation, high government debt levels, high deficits. People are worried that, you know, that that's not a good. Because most people don't realize that inflation is a bigger risk for bonds than rates. Right. Rising rates aren't great for bonds. But eventually you get the higher yields. It's the inflation that is the big piece because those nominal dollars are getting paid back in. I guess my only pushback to that would be that yields are higher than at basically any point they've been at since 2008. Around there, you know, you're getting 4 to 5% in high quality bonds. Investors in 2000 and tens would have killed for that. So I'm just curious where you come at from the yield side of things. Then we can talk about more about the concentration as well.
- [09:59]
B
Yeah. So my take on interest rates is that we're in an era of fiscal dominance and fiscal policy dominates, as the name would imply. And we're no longer in the era where the main concern in a 60:40 type portfolio are growth scarce or growth shocks. Right. Think about the gfc, that was a growth shock. Covid was a growth shock. And in between those two episodes we had obviously zero interest rate policy, financial repression, quantitative easing. But whenever there was a shock to the system, it was a deflationary growth shock. Now we're on the other side and when we get a shock, and shock is a big word, but when we get a scare, it's a rate scare, not a growth scare. So 2022, of course was the initiation of that rates reset around the world. And since that time we've had a few minor little growth scares. And that would push the 10 year down slightly below 4. But like holding a beach ball underwater, it never stayed there very long because we're now in a fiscally dominant era and potentially in a structurally more inflationary era. We all know that inflation went from 2 to 9 during COVID and it's back down to 3, but it's not down to 2 and it's not going to be down to 2 unless the year over year rate goes well below 2. Because you're solving for a long term average. The five year inflation rate is at 4 and rising still. And so when you think about bonds and whether they compensate you, you make a good point in that nominal yields are a lot better than used to be. But when I look at real Yield, so the tips real yield is about 2.3%. So that's pretty generous. You know, I can live with a positive real yield.
- [11:58]
A
Yeah, we had negative tipped yields for a while there, right? Yeah.
- [12:01]
B
In 2020 we were negative 2 and we swung to positive 2. And I look at the nominal yield, we're at 460. So that leaves a break even spread like an implied inflation rate of 2.3. And that to me is too low. And so I wonder, okay, well, which side is going to give? The real side is already near kind of the highest that you tend to see at 2.3. So for me, the nominal seems lowish. I mean, at 460 it's not bad. But I could see it go to 5. But the term premium is about 60. I'm looking at my screen 69 basis points, it's not terrible. But my sense is that the risk is that yields might go up from here. And the reason that's important is that the higher yields go, the more positively correlated bonds become to equities per the Fed model, which used to be Alan Greenspan's favorite indicator back when he was the Fed chair. Basically what that means is that if the risk free asset, which by most accounts Treasuries still are, if the yield on that asset competes with the equity yield. So if you take the PE upside down for the S and P, you get a yield of about four and a half. That's the same as the yield on the bond. So if the yield on the bond were to go from four and a half to five, the stock market needs to compete with that by lowering its PE or raising its yield. That doesn't mean the stock market has to go down a lot because earnings are growing 20%. And that's the other side of the equation. But it is, it is something that will, that is an important driver of equity valuation and bond valuation. And I see more upside risk than downside risk in the current fiscal era
- [13:55]
A
that we're in, I guess especially from an asset allocation perspective, you have something like 10,000 baby boomers retiring every single day. There are 70 million baby boomers. They're going to be de risking portfolios in some ways. They still take some risk, obviously, but bonds look a lot more attractive to them. So to your case, it's a higher hurdle rate for equities. I guess I'm a little surprised. And maybe this is just all AI the fact that the Fed was able to raise rates from 0 to 5%. Yes, we had the bear market in 2022, but stocks have still done okay in a higher yield environment, which I don't think a lot of people would have thought would have been possible before it happened. I think a lot of people thought we're stuck on the zero bound and we can't get off of there. And if we do get off of there, all bets are off. But the stock market has held up really well in the face of higher rates.
- [14:40]
B
Yeah, you're absolutely right. And many people back in 2022 predicted. I don't see many people, but there was definitely a school of thought that, okay, the Fed has created this bubble. We're all addicted to 1 to 0% rates, 1% bond yields like it's crack or something. And if the Fed ever takes that punch bowl away, the world's going to collapse. And that did not happen by any means. And so it's a good story. And it has to do with margins and economic resilience. And again, people think the market, the equity market is overvalued and the Cape ratio is certainly near all time highs. But the Cape ratio is going to paint a more bearish picture today. Just because earnings five years ago were weak or 10 years ago and now they're booming. Earnings growth is like 2025 and you can explain the valuation almost entirely by where profit margins are and where credit spreads are and profit margins are at all time highs and spreads are at all time lows. And that explains a lot of where the market is valued.
- [15:55]
A
Well, I think the next question kind of ties into this as well. So let's do the next question guys. All right, so we've seen a massive increase in earnings over the past 12 months. In fact, on a forward P basis, valuations have been falling this year despite a rising stock market. But I guess the question is how long can this earnings growth last? So let's do a chart on guys, if you're in has a chart here of valuations and earnings. I think this is the thing for people. So EPS growth you're showing at 21% which is the highest it's been since that kickback period from COVID which that was just really a low base effect. There was a lot of people, you can do the chart off guys, a lot of people when the Iran war started going, this doesn't make any sense. The market is detached from reality, but reality was earnings growth continued to charge way higher. And so the stock market actually was paying attention to the fundamentals and not like the macro headlines. Right. So I guess the question is a lot of people been asking like, okay, fine, we got this Sugar high earnings are higher because mainly because the capex from these max 7 is so high they're spending a ton of money. It's going to the bottom line of a lot of other companies. The question is like how long can this last? Is this just going to be a flash in the pan or is this actually a sustained thing? Like how do you think about that?
- [17:04]
B
Yeah, I'll make two points here. The first one is that we tend to get anchored to price levels, right? S and P is at whatever 7,500, the Dow is at this, the NASDAQ is at that. But price is really just the residual of earnings and valuation, right? So earnings is what is a company earning. Valuation is what should we be paying for? Every dollar of earnings and valuations can be related to the financial engineering we talked about earlier. It can be related to margins, overall, economic conditions, et cetera, et cetera. And so when we saw for instance that 10% decline during the Iran conflict back in February I guess it was, or March, the PE actually went down 20%, but earnings were growing by leaps and bounds. So the price drawdown was only 10%. It was half of the earnings drawdown. And so that's the important thing to see. So if we had gone down 20% during the Iran conflict, a lot of people would say, okay, well that kind of makes sense that it feels like a 20% decline. But price is just at the intersection of earnings and valuation. And valuation is the present value of future cash flows. And it's influenced by the payout, which we discussed earlier. It's influenced by the risk free rate, the 10 year treasury yield, and it's influenced by the risk premium, which is the premium that investors want to get paid for owning risky assets. And so the markets are efficient and they all sort of make sense of that. Now. That doesn't mean it's easy. And right now we have an earnings boom and it's driven a lot by tech and by semiconductors. Semiconductor earnings have tripled over the last year and their PE is actually at 14 times the next two years of earnings, which is super low.
- [19:01]
A
Sorry to cut you off. Someone in the chat just said, aren't tech size stocks getting cheaper? If you look at the tech stocks as a whole, you're right, the forward PE is dropping.
- [19:07]
B
Yeah, yeah. And that's because earnings are exploding higher. And I think you have a chart with the Internet analog from 2000 that will make that case. But yeah, here's the S and P. So one of the questions we need to ask ourselves, and it's kind of like a leap of faith, which is that semiconductors, the pe is down 30% year over year because earnings have tripled. Semiconductors historically are a cyclical sector. And so anyone in the value space will know that buying a cyclical sector because the PE is low is the ultimate trap because it just tells you that earnings are high and if it's cyclical, they're not going to stay high. So we have to assume right now that semiconductors are not cyclical but more structural, because the AI boom is structural. And I think that's a fair assumption, but it's definitely assumption that people need to make in order to say, okay, you know, is the pe, does it really mean what we think it means? Because it's not like the max 7 is at a 14 pe, you know, I mean their PE is down as well, but so it's a nuance about what is cyclical, what is structural, and what is driving the train here for this AI. Boom. But for me, it's still a boom. And again, when we show the Internet chart, you can see the difference between then and now in terms of what happened to valuations. And bubbles ultimately are always about unsustainable valuations. And valuation is not really the issue right now at today's earnings.
- [20:51]
A
So one of the things you see in a boom is the momentum shift. And the momentum traders seem to be growing in size. The next question kind of gets to that, and we'll talk about the Internet chart as well. So let's do the question four, guys. All right, so bitcoin was the place for hot money for a number of years. Then bitcoin cooled off. A lot of that money seemingly shifted to gold last year. Then gold cooled off. The hot money this year has been chasing semiconductor stocks, as you mentioned. And a big part of that is because of the earnings. What happens if those stocks cool further? Do you even try to think about where the fast money could go next? So you've got a really good chart on gold here. Put it up, guys. And liquidity. And a lot of it is like a ton of money, I guess, pouring into gold. And it's interesting to think about the fact that bitcoin cooled off as gold was going crazy last year. Now gold, I think, is in a bear market, essentially. And the idea is, well, a lot of that money maybe has gone from bitcoin to gold, not a semiconductors. How do you think about this idea of fast money? Do you think this is a relatively. Do you think this is a new phenomenon or is it just there's more of this going on? How do you think about these momentum plays and how do you try to have fundamental views on this stuff when a lot of it is driven by just flows as opposed to the numbers?
- [22:04]
B
Yeah, it's a great question. And I think one thing to remember is that the fast money is not loyal to anything. Or, you know, they fast money just wants price to go up and when and when liquidity is ample. For instance, during the meme stock days of 2021, right, there was basically free money and stuff was moving, and they'll jump on any train that that's moving. And so a few years ago, when, when bitcoin was mooning and the ETF story was a big one for bitcoin, there was a lot of fast money just playing along. And of course, the bitcoin maxis will say, well, this is adoption, this and that. And it was, and it is. But part of it is just people want stuff to move and they'll jump on that train. And then bitcoin peaked. It had a four year cycle peak at 126,000 just at the time that gold had really been on the move. So 2025, Gold was the star player, was up over 30%, even though it's completely uncorrelated to both stock bonds. So that's what you want in a portfolio, Right? You want uncorrelated assets with high sharpe ratios. And so bitcoin gold was going up because central banks were buying. But then the trend became visible and the fast money was not making any money on bitcoin. So they moved over to gold and that was the time when silver was mooning to $150. And so you had all those flows. Then we had the Iran conflict and gold had overshot its upside. Maybe if we can pull that chart back up, you can see that the global money supply, which is the red line or this is the fitted version of it to explain gold's price. Gold went way above that because of the fast money and the yellow bars inflows into the gold ETFs. And so gold went too far up. And then the Iran conflict happened. And all of a sudden gold and Treasuries were for sale because now all of a sudden they are reserve assets that are potentially a source of funding for Gulf states who can't sell their oil. And that at that same time, the semis were moving and so the fast money just jumped ships. And now it's in the semiconductors, both in Korea and the US Double, triple levered single name.
- [24:27]
A
Guys. Put the chart of semiconductors up here, guys. Because the flows here. Yes, it's really incredible.
- [24:32]
B
And the funny thing is in three months. Yeah.
- [24:35]
A
And this flow chart though kind of looks like the earnings of some of these companies. You put like Micron or something up here. The flows look like a lot like the earnings. So it's not just momentum, it's also trying to chase the fundamentals. But you're right, this happened. This is one of the fastest momentum trades that we've ever seen, possibly.
- [24:52]
B
Yeah. And it makes sense that it relates to earnings because earnings revisions are a powerful driver of stock performance. I mean, we know this better, maybe better than anyone because we are kicking the tires of thousands of companies. And you want to look for the second derivative in their fundamental story. And so those are the stocks that move and then those are the stocks that become visible to the fast money. Right. You get the slow money, which is like Fidelity is the slow money. And then you Got the fast money. So it makes sense that they're related to each other because things don't move out of nowhere, except for maybe 2021 with the meme stocks. But so clearly there's now a shift and gold has now become, in my view, inexpensive relative to the global liquidity situation. But it needs a catalyst, right? The global money supply is still growing, but it's growing at half the rate that it was six months ago because central banks are now in a tightening mode. And you had the Iran story, and so there'll be a catalyst for it at some point, but it's not today. Right now AI is sort of eating up all the bandwidth.
- [26:03]
A
Well, it's interesting because you're right, every one of these moves, the fast money, you think it's just price they're following. But everyone started with a catalyst, right? Bitcoin had the etf, gold had all the central bank buying semiconductors had this huge earnings boom. And it seems like in both directions, the fast money just takes it a little higher or lower than it should, right? They go too high and it just swings too far in both directions and then it probably goes too low.
- [26:26]
B
Yeah, the fast money will amplify any move. And so right now, AI is in a correction, the semis are in a correction. And you saw that flowchart. And my guess is that that stuff needs to cool off for a while as the fast money either looks elsewhere or gets margin called or whatever. And again, that doesn't mean that, that it's a bubble or that it's the end of a boom. It just tells you that it's a little crowded. And as long as the fundamentals are good, a crowded trade doesn't have to mark the end of a boom. And earning season, which is now underway, will tell us about the CapEx plans and how far downstream the AI story is working into other sectors and whether there's more demand there. So we'll see. But at some point that booming earnings growth will start to decelerate. It always does. It always has. And that kind of tells you, I forget if it was Warren Buffett who said it, but you know, who's swimming naked when the tide goes out, right? And so at that point, you'll kind of see whether the baby gets thrown out with the bathwater. And so I think this thing is still good. The fundamentals are still there, the build out is still insatiable. You've got some challenges from the cheaper Chinese models, but people are asking critical questions and that's good, right? Because Bubbles, no one asks critical questions. And that's why bubbles are bubbles. And the fact that we are constantly hand wringing over this, to me is a very good sign.
- [28:02]
A
Yeah, I think if we're looking for places with a lot of nude beaches, it might be South Korea right now, as the tide comes up. All right, we got one more. Speaking of investing in booms, we got one more that kind of ties into this. Investing during the boom times seems like it should be easy, but investors are dealing with the opposing forces of FOMO and loss aversion. On the one hand, no one wants to leave the party too early. On the other hand, most booms are followed by a bust. So I'm curious how you balance this idea of staying invested during a bull market with the understanding that trees don't grow to the sky. And I want to read you something from your latest piece that I thought was really interesting in this. So you said the first topic regarding the paradox of profiting from a boom while protecting from a bubble is of course an existential one and reflects the duality of profit seeking polarity juxtaposed against loss aversion. And I really like this idea because these are the kind of conversations we're having with clients right now. It's I don't want to miss the train, but also, boy, I don't want to take too much risk and then get slapped on the wrist when something goes wrong. And I think every investor has that thing in the back of their mind that they don't know, like which, which one to listen to more. Is it the FOMO piece? And so I'm curious how you think about this, and I know you talked about this with some other sectors of the market that you're thinking of in terms of diversification. Like, what do you think is, is the way to invest during a boom time like this?
- [29:15]
B
Yeah, so it's always important to be diversified, can't get greedy. It's always important to rebalance. Right. Like a 6040 could turn into a 9010 if one side is booming and the other is not, and you never rebalance. And of course that would be a luxury problem because it tells you something is working well. But then if you have a 30% decline and you're 9010 instead of 60 40, it's going to produce a bigger drawdown. And so for me, the good news these days is that, you know, for the last 15 years, until two years ago or so, you know, mega cap growth like MAG7 was the only game in town anywhere in the World, if you went down cap, you went value, you went ifa, you went em, you were like losing a significant amount of beta or alpha as the case may be. And we don't have that anymore, right? If like, if you, if I look at around the world, one of the most boring sectors you can possibly think of, European banks, okay, they are like one of the best assets right now. They are only 11% correlated to the MAG7. They have a payout ratio of 88% which means you get almost every euro of earnings back to you. They have a yield of 7% and their payout is growing faster than the MAG7. And so again that's not an endorsement, it's not investment advised. But you can find places to invest that are very compelling and are not like utilities where you just don't lose any money, but they don't do anything to the upside. So there are those stocks and they're in em, they're in developed markets just looking in the S and P at financials they have an 84% payout ratio and a 5% yield. And they are potentially one of the biggest beneficiaries of the AI buildout. Because if you think about it, right, what do you need to build AI? You need data. And who has better data or more data than the big banks? They have millions and millions of pieces of customers and data points and they are like oftentimes over regulated and inefficient. They work on old legacy rails. So there's a lot of room for efficiencies there. And for me the transition could well be underway. That the Mag 7 was yesterday's leader and tomorrow's leader will be the actually the downstream companies that benefit from this. And again, one other point on this is that we are in a secular bull market that by my account is getting long in the tooth at 17 years. Again, other people will disagree that it's not 17, it's fewer. But we've been over earning.
- [32:07]
A
I'm on your team on that one.
- [32:08]
B
Okay, we're over earning beta, right? So if you look at the 10 year price return for the S&P, it's 14%. The income part is about 4% so that gets you to 18%. Normally the market goes up 10%, 11%. Half of that is price, half of that is dividend or cash. And so we are over earning and we've been over earning for a lot of years and maybe we'll continue to do it until we all retire and that'll be great. But we can't Count on that. Right. So we do want to have, have a diversified portfolio where we draw on the income part. Companies that have yields and that pass through their earnings with a high payout ratio. And to me, that is the antidote to concentration risk and to an overcrowded boom where all of a sudden you have earnings that cannot be sustained.
- [33:07]
A
Guys, let's show his AI versus XAI chart here. This is interesting. You talked about the European banks. I was shocked when I saw this. So you have the S&P 500 AI index, then you have the S&P then XAI and you show that since, you know, 2024, start of 2025, European banks have essentially kept up with the AI trade, which is, which is kind of mind boggling. And I guess the point here is that if you're looking, if you're really concerned about the Mag 7 or the AI trade and you say, oh my gosh, everything is the AI trade, there's plenty of places that have been left behind for the last 10 years, years that you could look to that say these are way more reasonable. X Tech or xai. That kind of makes sense. And eventually the, the that we talked about, the money is going to find them.
- [33:47]
B
Yeah. By the way, and those Eurozone banks are trading at a 10 PE.
- [33:53]
A
It's CR performance. I was really shocked at that. Very interesting. You talked about the, the kind of analogy to the dot com bubble. Guys, let's pull up the chart here. This is kind of crazy that, that. So you started this in what, 1998. So you're saying the tariff change was kind of the 1998 level. If we're thinking about the 90s, it is kind of crazy because we had the down year in 2022, but we've had essentially now going on three or four years of 20% returns, kind of like we had in the 90s. It is kind of eerily similar. I guess the one piece that's different is probably the valuations. Is that the biggest change?
- [34:29]
B
Yep. Yeah. So if we think back to the Internet boom, right. It really became recognized in 95 when Netscape went public and the AI boom really, I guess got really recognized when ChatGPT got launched in late 2022. Right. So those are two similar points. And by the way, they're similar for more reasons because 2022 was the big rate reset and 1994 was a big rate reset as well when Alan Greenspan raised rates out of nowhere. And so there is a L there. And then 98 when long term Capital had their Liquidity crisis. The market fell 22% and then it just roared back. The Fed eased three times and that was sort of the melt up. That's when the melt up began and that's when the Internet boom became a bubble that burst. Then in March of 2000, the tariff tantrum in April of 2025. It's obviously a different episode, but that was a 21% decline and the market came roaring back. The Fed eased three times and that's when the AI sort of, I don't want to call it a melt up, it sounds too flamboyant. But that's kind of when the market really started to go vertical in terms of the AI story. So there are parallels there. But again, going back to 98 to 2000, the PE on the tech sector went from like 36 to 70. It doubled, basically. This time it's gone from 22 to 21. Right. So it's a totally different story. That last episode of the Internet bubble was entirely valuation unsupported by anything else. And this one, the earnings are so big that the valuations are actually going down instead of going up. So you can't, I can't really call it a bubble cyclical under those circumstances. Unless you can argue that the quality of the earnings are poor because of the circularity of vendor financing or that we are placing a low PE on earnings that we think are secular but are actually cyclical. You can poke holes into the story, but that's where you have to go to do that, I think.
- [36:45]
A
Yeah, that's by far the biggest difference. And the fact that the companies leading the charge are some of the biggest, best companies in the the world. Right. Just way more well run than they were in the dot com bubble. Let's plug your newsletter, your weekly asset allocation review. This is only on LinkedIn, is that correct?
- [37:00]
B
So I publish every Sunday internally and then by Tuesday the full. The long form gets published on LinkedIn with a link to X, my profile on X, which is immerafidelity and then snippets of it will land on X just because. Because X tends to be a little bit more short form and LinkedIn we think of more of long form. But I also do podcasts. I do a webinar every Monday that gets put turned into a podcast that you can get on YouTube during the week. So I'm on a variety of outlets.
- [37:37]
A
Perfect. I'm signed up for it. I read it every week. Love your charts, love your analysis. Thanks for coming on the show as always. We appreciate it. Everyone in the live chat appreciate it it. If you have a question for us, come in the live chat, shoot us a question or email us. Askthecompoundshowmail.com thanks to urine for helping out. We appreciate that and we'll see you next week. Thanks everyone.
- [37:58]
B
Thanks for listening to Ask the Compound. All opinions expressed by Ben Carlson, Duncan Hill, and any of their guests are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes, is 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.