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- [00:00]
A
Welcome back to Ask the Compound, the show where you ask and we answer. I'm your host, Ben Carlson. Everyone and their brother thinks we are now in a full fledged AI bubble. Maybe we are, maybe we aren't. We'll see if this is a bubble. It's a very bizarre one. Gold is up more than 50% this year alone, one of the yellow metal's best years ever. So what's going on here? Why is a rug like gold up so much during a technological boom? We have a great guest host on the show today to help answer this question and more. You don't want to miss this one. Stick around.
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B
Here.
- [00:32]
A
Email here is askthecompoundshowmail.com if you have a question, please feel free to ask. If you're in the live chat, ask us a question there too, and we'll answer it on the spot. On today's show, we answer questions about how does the market concentration of the S&P 500 end? Why doesn't the stock market seem to care about the labor market just yet? Why are international stocks beating the pants off of US stocks this year? Why is gold outperforming? And finally, how do you recognize an asset bubble in real time? And how do you define it? Today's show is sponsored by Rocket Money. Maybe you have a solid handle on your budget. Maybe your spreadsheet says you should have an extra thousand dollars left over each month. But if your bank account isn't reflecting that, something's off. Rocket Money can help. They track every dollar. They uncover hidden spending. They take control of your finances. I use it all the time in the app. The desktop is nice too. So Rocket Money is a personal finance app that helps you find and cancel unwanted subscriptions, of which there are many, monitors your spending and helps lower your bills so you can grow your savings. It's great because you see all your expenses in one place. You see what's coming up next. You see stuff you forgot about. I have a million subscriptions. It's easy. Rocket Money has saved users over $2.5 billion, including over 880 million in canceled subscriptions alone. Their 10 million users save up to $740 a year when they use all the app's premium features. I had Rocket Money negotiate one of my bills for me a couple months ago. It was easy. I didn't have to do anything. Cancel those unwanted subscriptions and reach your financial goals faster with Rocket Money. Go to RocketMoney.com ATC today. That's RocketMoney.com ATC to learn more or just download the mob? All right, great show today. Great guest host, Duncan. Let's get to it.
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C
I'm excited about this one. All right, up first today, we got. Investors have been concerned about stock market concentration for years. The s and P500 keeps getting more concentrated, but the biggest stocks also have the fundamentals to back it up. How does this resolve itself? Is a more concentrated market the new normal?
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A
All right, so let's bring our very special guest in to help us today, the director of Global Macro at Fidelity Investments. You're in. Timmer.
- [02:26]
C
Hey, Urine.
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B
Hi.
- [02:29]
A
All right, so the Mag 7 now makes up something like 36% of the S and P. It seems like people have been warning about concentration since, remember when it used to be just the Fang stocks, And that has graduated. Now it's Mag seven. And I'm sure it'll change it to some other name. You have a great chart that shows the weighting of the top 50 versus the bottom 450. And so the top 50 currently is like almost 2/3 of the total. And I love how you show how that there's this back and forth in yin and yang. And I think a lot of people assume, well, the way that this resolves itself is the concentration goes back down. But I think the first part of this chart that you showed in the 60s and the 70s, how long those big conglomerate stocks, the Nifty 50 stocks, controlled the market. That's a possibility today, too, that maybe this is just the new normal. What do you think?
- [03:15]
B
Yeah, it could very well be. And if you look at that middle part of the chart, you're looking at the late 90s, obviously, the tech bubble. And I believe one of the big Wall street houses did a study maybe a year or so ago saying that when you have concentration risk, which Obviously we do, seven stocks, 36%, that if it mean reverts, it's going to drag the market down. I mean, there's just really no way around it, right? If seven stocks, 36% go down, the index is going to go down. Like even if 70% of the stocks in the S and P were going up, the index itself would go down. And when you have this big indexing effect, right, in late 90s, it was the big index funds. Now it's, of course, it's ETFs, it's not going to be a happy situation. But you look at 50s, 60s, 70s, this kind of concentration can persist for decades, literally. And it was a normal feature of the market 50, 60, 70 years ago. And so we can't really bet on that mean reversion. And so like, what do you do? Right. You're not going to go down cap just because you think this is like a PE ratio that has to reset, lower, it can really persist. And these days you have this kind of phenomenon where companies that are, are like coming up, they'll just get bought by those big companies. Right. And so in a way, smaller companies don't have much of a chance to really compete with them because they just get swallowed up.
- [04:52]
A
And it seems like that the government has shown no impetus to break these companies up. Right. I think that's one of the things people in the 2010s thought like, wait a minute, just wait till the government steps in and breaks them up. It doesn't seem like anyone wants. I don't think consumers want that. It doesn't seem the government wants that. So you're right. And they've effectively created this oligopoly where with the AI trade, they're all sort of just investing in one another and almost propping themselves up even higher. So they're becoming stronger, it seems, as time goes on.
- [05:18]
B
Yeah. And you get this sort of vendor financing thing that we're seeing now in AI, and I know we're going to talk about this a little bit later, but it makes you wonder about the late 90s when Cisco was vendor financing different companies. But yeah, these companies have giant networks, they have very big moats. I mean, if you invent the next iPhone tomorrow, good luck disrupting Apple. It's like, how is that going to happen? These companies have gigantic moats and networks. And so unless they get regulated away, it's likely that they're going to stay really big. Unless just the world changes and the AI boom maybe turns to a bubble and then it sort of disappears. But even then it's probably not going to disappear. So we may have to get used to this. But it's very important because if you're an investor, you're in a diversified portfolio and the US has dominated the rest of the world. But that really is because of the Mag 7. Right. If you take the rest of the world relative to the US, relative to the cap weighted S&P 500, it continues to underperform relative to the equal weighted index. It's actually held its own. So the fact that a small number of companies have such a big weight in the S and P really distorts a lot of other relationships that actually would be working right now if it wasn't for this phenomenon.
- [06:50]
A
If you look at the top 10. I know it changes every day depending on who's up and who's down. But when Oracle had their big comeuppance a couple of weeks ago, it was nine of the top ten names were tech. And it was like all these tech people and then, then Warren Buffett over here, still holding the ground. But it's so tech dominated these days. And technology is such a big part of everything we do. And if, if the AI trade in the AI investments work, it's not like that's going to, to slow down or reverse anytime soon. Right. So maybe it's new tech stocks that come up, but it makes sense that we could see this concentration in these big, efficient cash flow producing machines.
- [07:25]
B
Yeah. And the AI boom, of course, is enormous. Right. And it requires a lot of capital investment. It's sort of like a winner take all type of market where the big players, they feel like it's do or die. We need to own this, we need to come up with this killer app. And in order to do that, we need a lot of power, a lot of chips, a lot of boxes and this and that. And so that's why there is this race going on. And we see it in the capital spending numbers. And so it's pretty relentless. And it is different in that sense from the Internet boom. I mean, you needed like routers and Cisco routers and Dell computers and all that stuff back then as well. But the level of capital intensity of this one is pretty enormous.
- [08:16]
A
All right, Doug, let's do another one.
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C
All right. And all this AI stuff, and you still don't have your little. Her earpiece, Ben, that you've wanted.
- [08:23]
A
You know, that's what I'm waiting for. I just want Scarlett Johansson in my ear as my personal assistant. Is that too much to ask?
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C
I have a feeling you'll get it. You'll get it at some point. Okay, up next, we got. The labor market continues to slow as the stock market charges higher. Why doesn't the stock market care about the slowing labor market yet?
- [08:43]
A
All right, so we're. The numbers we're seeing is like fewer job openings. Right. Fewer jobs created. Hiring is slowing to a crawl in a lot of places. And the stock market doesn't seem to care. It's also funny, the stock market really hasn't blinked once since the government shut. Shut down and doesn't seem to care. I think the corporations. My take is the corporations are one of our last functioning institutions in this country. But I guess that's for another day. But you have this chart here about excess labor demand. And it's funny, the whole Covid labor demand was. That's the outlier. Right. It's usually the other way around. So what happened now that people are worried that job openings are less than the number of people looking for a job? That's the. The norm. Correct. That's how things have mostly always been. The COVID thing was kind of an outlier.
- [09:28]
B
Yeah. So if you look at the top panel of this chart, it shows just like where the labor market is relative to normal conditions. So you got the jolts number in the orange. So job openings versus job seekers. The gray line is the unemployment rate relative to what we call Nehru. The kind of the. The steady state rate of unemployment. And so the outlier, like you said, is that bump up in the orange line during COVID Because what happened, of course, it was Covid. The world shut down, basically. People got fired. And then the US actually reopened fairly quickly, much quicker than for instance, China and Europe and other places. And the labor wasn't there when the economy reopened. I remember very clearly I was jetting to the West Coast a lot during the lockdowns and I would fly JetBlue Boston to LAX and they just did not have the people. But everybody was hungry to travel. It was like revenge travel or whatever you want to call it. And they had to hire the people back onboard them, retrain them, all this stuff. And so you had this very tight labor market where you had two job openings for every job seeker. People had left the labor force, a couple of million baby boomers left. Of course, the borders were closed. And so you had this tight labor market and that needed to moderate, which is one of the reasons the Fed was raising rates. It was trying to take the steam out of that. And as the chart shows, that's exactly what has happened. So the line is now completely imbalanced. Both of those lines are at zero, basically. So the job market is in balance and so there is no looming recession, at least not at this point. From what we can see, people are generally employed, their wages are keeping up with inflation, there's not that much debt. So the jobs market is pretty good, the consumer is pretty good. And so the stock market is ignoring the soft jobs numbers because the economy is fine and labor market statistics generally are backward looking. But again, you look at that chart and you see that this is always a pendulum that is swinging right. The number doesn't go to zero and stay there for very long. And so the fact that this is coming from above zero is now at zero. Every other time that that's happened, it's eventually gotten below zero. And so this is getting the attention, of course, of policymakers. I think it's probably the main reason why Jay Powell at the Fed cut rates a few weeks ago, because you wonder, like, what is the next step? But so far, the market is running on accelerating earnings revisions. The AI boom is, of course, a very big part of that. The capex cycle that comes from the one big beautiful bill is a part of that. So for the stock market, you've got the bond yield at 410, you got the Fed easing, you got earnings estimates accelerating, you got a big AI boom story on top of that. And it's just looking at those things which are all glass half full. And then it's sort of ignoring the soft jobs market because it hasn't gotten to a point where it's alarming. And it may not get there, but it's certainly one of the things we're looking at.
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A
I think the hard part for this, for me to wrap my head around, is the fact that to your point, the job market was so strong in 2020 and 2022 and 2021, and you see these signs at McDonald's for $20 an hour in Taco Bell. Right. And they couldn't find enough people. And so how do you differentiate between a job market that is normalizing? Because the unemployment rate is still 4.3%, the labor force participation ratio for the prime age is still higher than it was at any time in the 2010s. So if you look at those backward numbers, it still seems pretty decent. So it's hard to tell to your point, the pendulum, how far it'll swing, because it could just be a normalization from what I think is probably the hottest job market we're ever going to see in our careers, potentially. Right?
- [13:39]
B
Yeah. And again, not to go back to the chart again, but the only other time we've seen this phenomenon was actually right after World War II or during World War II, where there was such a demand for labor, obviously to mobilize the economy. And then you had the after effect where people, the GIs were coming back, they were getting regular jobs, and there wasn't always a job there. So the numbers came down, but from excessively high levels. And that is different than a normal business cycle where companies are laying off from lower levels. So, like, the drawdown in that line is consistent with a typical downturn, but because it started at such a high level, it hasn't produced kind of the negative spiral that you normally see. So maybe we avoid that. And certainly right now there aren't really any indications that it's going to get worse. Like jobless claims are well behaved. We didn't have a non farm payroll report last week, but the states produced their own data and so far the economy appears to be in balance and hopefully it stays that way.
- [14:47]
A
Well, we've seemed to have threaded every needle since the pandemic almost, right? We didn't have a recession from 9% inflation and we didn't have a recession because the Fed took rates from 0 to 5 and maybe a slowing labor market we can thread that needle to.
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B
Yeah, absolutely.
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C
You have to knock on wood now.
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A
All right, all right, don't want to.
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B
But to your point, it is pretty remarkable, right that the Fed went from 0 to 5 and 3 8, inflation went from 1 and a half to 9 and the Fed really, really hit the brakes and there's been no recession. I mean it's a remarkable thing that a soft landing, at least so far could be achieved after such a severe cycle. That was not a tweaking of policy, that was slam on the brakes. And so you know, it, it shows you how resilient the economy has been and also how, how less interest rate sensitive the economy has become.
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A
Yeah, yeah, it is crazy. And obviously some people say, well it's just the AI boom, but I guess we shall see. All right, let's do another question.
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C
Okay, next we got international stocks are finally outperforming this year. How much of this is a US dollar story? What else is causing the outperformance in 2025?
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A
So it is interesting, I was looking this morning, I think emerging markets now are up 30% this year. Right? The developed foreign stocks are up 27, 28%. So even in what people think is this AI boom, international stocks and emerging stocks are outperforming the US now I think the dollar is down, I don't know, 9 or 10%. Guys, maybe we can throw up his chart on the dollar here. So how much do you attribute this to the dollar falling versus other fundamental issues for foreign stocks?
- [16:33]
B
The dollar is certainly part of it. But if you look at for instance the MSCI EFA index, which is the non US Developed Market Index or the EM index, and if you measure them in local currency terms rather than dollar terms, the charts are pretty similar. So there's something more going on than just the currency translation aspect. What I think is happening is that the fundamentals actually have become much more competitive, especially for developed Stocks. And I'll explain why. When we look at equity valuation, we look at a discounted cash flow model. So you've got earnings growth in the numerator times what we call the payout. So the percentage of earnings.
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A
Throw the payout chart up there.
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B
Yeah. So the percentage of earnings that get. That get shared, if you will, with shareholders by the company. So dividends and buybacks, and then you discount that whole chain with a discount rate. Of course, in the past, the US Completely dominated. It had a better earnings growth story. It had a higher payout ratio of about 90%. And the rest of the world just couldn't compete with that, even though the rest of the world was very cheap. Cheap doesn't buy you anything if there's not a catalyst. But in the last even year, but really the last couple of years, that has changed. And what has changed is that even though growth is still sluggish in Europe and Japan, companies have become much more savvy at unlocking shareholder value. So they're doing more buybacks and they're getting smarter about rewarding shareholders for buying their stock. So when you look at the growth in the payout. Right, so dividends and buybacks in ifa, so developed markets, the payout has grown more in the last five years than it has in the U.S. and the payout ratio for IFA is 75%, just like it is in the U.S. so now you have two regions that are producing about the same growth rates and the same ratios of payouts to earnings. But one group is trading at 16 times earnings, and the other one is trading at 25 times earnings. Now you have a real catalyst for mean reversion after 10 years of total US dominance. So this is a really great story because for investors, you want to fish from the biggest pond possible. You want to have as many things on the menu as you can get. And if you know the Max 7, of course it's great. The US is exceptional. But you want to be able to spread your. Your assets around because if that rotation risk in the max 7 does ever start to show itself, you want to be able to be in other places and right now, especially developed, but also emerging to some degree are proving to be viable competitors.
- [19:45]
A
Let me put it, you do a lot of traveling. I know you said you just got back from Europe. Do you get the sense that US Corporations have essentially pulled the rest of the world kicking and screaming to be more shareholder friendly? Because I've seen a lot of the. Japan has talked a lot about this, how they really want to set some standards in place for their companies to be more shareholder friendly. Is it just that they've seen, hey, listen, the US is now 65, 70% of global stock markets. We need to be more like them. Is that what's going on here?
- [20:10]
B
Yes, I think so. So it's just the U.S. of course, has been doing this for a long time. And if you add up kind of the supply and demand of shares in the US so IPOs and secondary since 2009, which is, I think, which I believe is the secular bull market, is when it started, IPOs and secondaries are about two and a half trillion cumulative since that 16 years ago. If you add up M and A and buybacks, which are again, it's companies buying shares, retiring shares, either by buying their own shares or buying shares of other companies, that's about 25 trillion. So you have an almost 10 to 1 ratio of demand versus supply that has produced this incredible bull market where we've had 16% CAGRs now for the last 16 years or so. The rest of the world has not been able to compete with that. And of course in Japan, where things have been very slow for a very long time, I think companies were finally forced to just play the game. And so we have portfolio managers who are kind of out there kicking the tires. And the story I always hear is that they would be talking to a big Japanese company and 10 years ago, if the portfolio manager would ask the CEO, here you have this unprofitable division, why don't you just close it or sell it? And then the answer was, oh my God, we could never do that. That's against the culture. You just don't do that. And now it's like, yeah, we're that. So I think it's out of necessity because if the dollars or yen or euros are not flowing in, you're going to just be trading at chronically depressed valuations. And it forces you to take some action. Especially if this behemoth in the U.S. 65% of global market cap is stealing the show, then eventually you got to pay attention. So even regional banks in Europe and Japan, who have always sort of been under the radar, are buying back shares now. And it's not that they're super profitable, but they traded at such low valuations, like half times book value, whatever, that even if you go from half to full book value, that's a double, right? So that's what's happening right now.
- [22:39]
A
It's funny because I talk to a lot of financial advisor groups, so I've done a few talks in Europe. I was in Canada a couple weeks ago. And they always say, listen, as advisors, we're probably three to seven years behind you guys too, in terms of trying to get lower costs and more diversification because they had most of them invested just in their home countries. Right. They had a worse home country bias than us in a lot of ways. And it kind of seems like the same story where they've figured out we have to play catch up and we have to have more money in US Stocks, we have to be more diversified. And it seems like a similar story where they're realizing we have to get on the same plane here as them.
- [23:12]
B
Yeah. To me, a barbell approach is you own the cap weighted S and P, which is essentially owning the Mag 7, and then you own non US developed stocks or just non US stocks. That I think is a clever way of having your cake and eating it too. And if you're bearish on the dollar, that trade is woven in there as well, as opposed to having Mag 7 and Russell 2000 where it's really kind of a binary thing. So anyway, I'm glad that the world has broadened out because we don't like narrow markets. It's a tough game to play.
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C
Something I find amazing is I've looked at multiple international stocks recently and they've gone straight up and the PE is like 15.
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B
Yeah.
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C
It's kind of funny compared to the.
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A
US and they're higher dividend yields and their buybacks aren't as big over there. I think if you did a shareholder yield, but on a dividend yield basis, they're much higher overseas.
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B
Yeah, but it's interesting. So the payout ratio is 75% for both sides of the pond. In the US that 75% is 2/3 buybacks, 1/3 dividends. Overseas, it's 2/3 dividends, 1/3 buyback. So it's a different split.
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A
Yeah. And those dividends a lot of times just get written in stones. In some ways, it's hard to back out of those.
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B
They're sacred.
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A
All right, let's do another question.
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C
Okay. If we're in a tech bubble, why is a relic like gold making new all time highs on a regular basis?
- [24:51]
A
Okay, this question is for me, I got to be honest. This to me is one of the most bizarre aspects of the current boom. And I know there's good explanations for it. So gold is up 50% this year alone. So guys, put the chart on here. Chart on this is gold is outperforming the NASDAQ 100 since the advent of ChatGPT, which was November 2022. You're in. Take a look at this next chart I made this morning. So this is gold versus the S and P by decade. And you can see maybe some of these decade starting ending points are cherry picked. But most of the time when gold does well, the stock market struggles. When the stock market does well, gold struggles. It's kind of been a back and forth there. And then you have the 2020s where gold is booming up almost 18% per year and the S and P is booming up more than 15% per year. So you guys can do a chart off here. So we've really never had a decade like this in the modern times. Right. Since we broke that gold peg or whatever where gold and the stock market boom at the same time. So first of all, I'd like to know if you're surprised at all by this. And second of all, I just want to hear a good explanation for it because it does seem odd that I know not every gold bug thinks the world is going to end. But there's some people who think like, hey, I hate the Fed, the financial system is going to implode, so I'm going to own gold. And it's bizarre to see that you could have that mentality working alongside the whole buy and hold long term stuff goes up forever. That dichotomy is really interesting to me.
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B
Yeah, so a couple of points here. I don't think the gold rally has anything to do with the AI boom. I think there are just two separate trains that happen to be going in the same direction. So gold to me are like the anti bonds. So if you look at a long history, like 100 years, bonds generally do better than gold. But when bonds do poorly, gold does extremely well. And of course, when bonds do poorly, usually they have an impact on equities as well. Right. Because bonds are the safe asset and if their yield goes up or if their value, if their yield goes up, the PE in the stock market has to go down in order to compete with, with the safe asset. So that's how they're kind of related. So gold does well when bonds do not, and equities generally don't do well when bonds are not doing well, unless bonds are being financially repressed by QE and things like that. So gold I think is moving for several reasons. One is geopolitics. I mean, we saw Russia invading Ukraine a few years ago. Dollar reserved. They'll claim we're weaponized because Assets were frozen. If you're China and you see that and you know that Taiwan is in the crosshairs, are you going to want to have a lot of your reserves in dollars or are you going to.
- [27:45]
A
A lot of this is central bank buying, right? Not just retail individuals.
- [27:48]
B
A lot of it is. A lot of it is central bank buying. And so I think the gold trade. So gold used to trade in lockstep with real yields. So if real yields went down or became negative, gold would go up, which makes perfect sense, right? If real yields are negative and you own bonds or cash, you're losing purchasing power. And of course gold is a hard asset, so it's there to preserve purchasing power. But that's not what's been happening in the last few years. So gold is going up because the dollar's share of global reserves is going down. So that's one reason. And then the other reason, I think is this notion of the US going into a mode of fiscal dominance. Fiscal dominance means that fiscal policy dominates monetary policy.
- [28:37]
A
Hank, let's throw your chart up here because actually someone in the chat, Michael, said my take is that everything has to catch up with all the money that was printed. So everything has to go up to meet the inflation. Is this just a story of there's so much money floating around that it eventually ended up in gold as well?
- [28:53]
B
Yes. So there's a long. We don't have the chart. We don't have that chart up. But there's a good history that shows that when soft money, like the money supply grows faster than the average because money is being printed, or there's inflation or what have you, that the share of hard money, gold, and some people would argue bitcoin these days will gain market share from the fiat money. So in other words, gold's above ground valuation, which is around 22 trillion or so now, will grow in share against the money supply, which actually is around 23 trillion right now. So if you add gold and bitcoin, you got about 24 trillion and that's about equal the US M2 money supply. Of course, the global money supply is much greater than that. And so it's sort of. So when you have excessive money or excessive inflation, hard money will take share from soft money. And that's basically what we've been seeing since COVID And Covid produced a $5 trillion fiscal impulse. And now the one big beautiful bill is another $5 trillion fiscal impulse. And that 5 trillion has to be financed, which means more Treasuries and normally, or not Normally, but during COVID the Fed was buying those Treasuries, but it's not doing that anymore. If anything, it's shrinking its balance sheet. I think what gold is sensing, other than the geopolitical shift with central bank buying, is that in this regime, which could last for many years, you have large deficits, chronically large deficits that need to be funded, which means that rates have to go down. And we see the political debate around the Fed maybe becoming less independent. And now you have the Steven Mehran speech about where is the neutral rate? This and that. I think gold is just reading the tea leaf saying that, okay, in order for this fiscal dominance to take place, you need financial repression. You need lower rates than are warranted by economic conditions, maybe yield curve control by capping long rates by doing qe. And if that's the case, real yields will come down and hard assets will steal the show. And I think that's what both gold and bitcoin are saying here, that they're basically saying we're heading into fiscal dominance. And so equities are okay because it means that the economy will grow. But it shows you why hard assets are doing well. And just one other aside, of course, you and I can buy GLD or some other, another gold ETF or gold bullion, but I think in terms of among institutions, there's generally a distaste for gold because it gets dismissed as not a real asset. It doesn't produce a cash flow. Like Warren Buffett famously said, an Olympic pool.
- [32:03]
A
Right. Is that what he said?
- [32:04]
B
Exactly. I think that it allows this thing to run before it becomes a crowded trade for a long time, as opposed to everyone piling into AI stocks. They can do that tomorrow. So I kind of like the charts in that sense, but I think that's the phenomenon.
- [32:24]
A
Are you surprised at all that bitcoin hasn't really put a dent into the bid on gold?
- [32:28]
C
That's what I was about to ask.
- [32:29]
A
I wondered if when bitcoin really started growing and it became a multi trillion dollar asset, is the millennial gold thing going to cause people to not have the bid? But it doesn't seem like it's dented the case at all.
- [32:41]
B
I see gold and bitcoin as different players on the same team. A central bank like the Chinese central bank is more likely to buy gold than bitcoin, at least right now. And bitcoin had a huge, huge run, of course, and it left gold behind. And now gold is having its moment. And so I don't think one is Better than the other. But this notion that a lot of bitcoin maxis have, were talking about, I don't hear them so much anymore, was that, you know, bitcoin was just going to eat everything and it was just going to replace gold. And I think that that's silly. Like they're, they're both viable assets in my, in my mind. And in a way, bitcoin actually, you know, there's always a lot of talk about bitcoin adoption by institutions and this and that. I think bitcoin was adopted very quickly by many because it was easy to do, especially ones that ETFs were launched. And like I said earlier, gold, I think there is resistance to own it. People think it's a fad. They don't understand it. There's no way to measure it. And so maybe this is just mean reversion of gold catching up to bitcoin rather than bitcoin catching up to gold.
- [33:55]
A
Yeah, that makes sense. All right, we got one more question here.
- [33:58]
C
Okay, last but not least, there's been a ton of AI bubble talk in recent weeks. That drumbeat grows louder and louder the more these companies spend and the higher the stock prices go. How do you define an asset bubble?
- [34:13]
A
Do you really care if this is a bubble or not? Is that something that investors should spend their time worrying about?
- [34:21]
B
I've been studying bubbles my whole career. I did a big deep dive on these expensive meme stocks, if you want to call them that, back in 1999 during the Tech bubble. And you know, it's a hard thing to define because like the Internet bubble was a bubble, but the promises about the Internet all came true. It's just they got ahead of itself and it's hard to measure like to properly value something that is new. And so back then we were like looking at eyeball counts and things like that.
- [35:00]
A
Yeah. So many of those companies were unprofitable. Hang on, throw your, throw the chart up here. We got one more chart of yours and you show the MAG7 along with their trailing EPS and their, their payout. And this is the hard part I have wrapping my head around is the fact that the fundamentals are matching these, these companies. Right. That's the hard part, is that these companies are cash flow producing machines. And it's not like they're, they're getting so far ahead of themselves. And maybe they can or they will if they over borrow and continue to overspend. But that's the hard part to me to handicap is these are the biggest, best companies in the world. And they've been using their cash flow for much of this investment. So how do you square that with the bubble talk?
- [35:40]
B
Yeah, no, Exactly. So the Mag 7, as you can see in the chart, their earnings are there to support the price. So most of the performance has come from earnings. They trade at about a 35 pence, which of course is higher than the market which is trading at 25. But it's not at crazy levels. The 1990s, the late 90s, the top 50 companies, because I looked at it as the nifty 50 reborn were trading at 2x the multiple as the rest of the market. And what happened from 98 to 2000 the bottom 450 stocks just kind of traded sideways and the top 50 went to the moon and their PE doubled to 40 relative to the 20 that the rest of the market was trading in. And then you had the pets.com and all of that stuff. And so that in hindsight, but even in real time was a bubble. But again I wrote about that in 1999 and these bubbles always go much longer than people think. And so now like I don't think we're in a bubble yet. We may go there, maybe we won't. I look at the Goldman Sachs non profitable tech index or basket and that thing is really springing to life. Like those were the meme stocks back in 21 and so those are getting the animal spirits. But at the top of the house, the Mag 7, it's still a very solid thing but you get into these things that are harder to define. So like the vendor financing, it becomes circular. Right? So Nvidia is financing whatever, OpenAI and again, unlike the Internet boom, this is a very capital intensive thing, right? I mean all the data centers, all the power by some estimates, once this thing is up and running and it's at fully functional, just the cost of maintaining the data centers and all this stuff, it's going to be like a trillion dollars a year. You better come up with some killer app that is going to be multiples of that. I think that's where it becomes harder to know where this is going to land. If this is going to be free software that everyone's going to use to increase their productivity, then who's paying the trillion dollars in overhead? We don't know how this thing is going to end. It's hard to identify a bubble. The fact that everyone is talking about a bubble tells me that probably is very early, if at all. But the nonprofitable tech is my exhibit A right now to See, not what the Mag 7 are doing, but what the rest is doing in terms of companies promising to be the next killer app. But even though we don't even know if they're even doing anything, it gets, it always becomes very fuzzy like that. And so the fact that that's happening is justifiably making people take note and wondering whether it is a bubble or not.
- [38:52]
A
I always go back to the Tom Cruise quote from Cocktail Brian Flanagan. He says everything ends badly, otherwise it wouldn't end. But you know, and a lot of people look at the dot com bubble and see like that's the obvious parallel here. But I think you talked about this in one of your pieces. Like the 50s and 60s bull market kind of ended with a whimper than a, rather than a thud. It didn't really have this earth shattering crash to end it. So. And that was a much different scenario obviously. But you can come up with a potential outcome where this thing doesn't end in some earth shattering crash. Right? And because these companies are so big and profitable and strong and have these, these wide moats. So you know, if it comes a full fledged bubble and things go crazy, of course in haywire. But there's certainly a way out of this without seeing some crazy crash, right?
- [39:39]
B
Yes, no, Agreed. The secular bull market that ended in the late 60s ended with a whimper and it was inflation that essentially killed the excessive valuations, if they were even excessive. Inflation is the valuation killer for any asset. But right now inflation is at 3%. So it's not an issue right now. And we just don't have the valuations to say, oh my God, this is crazy. Right? Like if the MAG7 or the TOP50 stocks were trading at a 50 PE or more, then you really start to wonder. But the spread, the PE spread between the top 50 and the bottom 450, it's like 25%. Previous secular bull markets ended when that premium was more like 100%. And so we're nowhere near those kinds of valuation excesses.
- [40:34]
A
Okay, one more question for me. Are you having fun in the current market environment? Because I'm enjoying this. Just the whole dichotomy of what's going on and people trying to explain it and people trying to predict it. And I think if you can step back from it a little bit, I think it's a lot of fun.
- [40:48]
B
No, I agree, it is fun. And markets are always a four dimensional puzzle that can never be solved. We can never solve the puzzle. And if we think we did, there'll be a new angle that needs to be explored or solved. But it's always fun. It's a great challenge to find the interplay between interest rates, monetary policy, the next big thing like AI, geopolitics, what we're now seeing, basically state capitalism and trying to make sense of that and to cut through signal to noise ratio and to really come down to, okay, these are the three or four things that we really need to know and focus on. It's always a great intellectual challenge to be able to do that. And the markets are so dynamic that there's always a puzzle to be solved, even if it's unsolvable.
- [41:49]
C
Something I was going to throw in on that last topic real quick. When people call this a bubble and talk about, you know, routers and modems from the previous bubble and, and weighing fiber optic cable. It's like fiber optic cable doesn't have to be replaced every year to, you know, it's. To me, it's quite different when you're talking about GPUs and all the kind of the stuff that AI is using. But.
- [42:10]
A
Yeah, yeah. So they better get a return on it, right?
- [42:13]
B
Yeah, well, that's true too.
- [42:14]
A
Yeah, yeah, yeah. So you're in Telebrun, where they can sign up for your weekly newsletters, the Weekly Asset Allocation Review, which I'm a subscriber. Where do they, where do they find that?
- [42:22]
B
Yes, every Sunday I publish and it ends up usually by Monday afternoon on LinkedIn with a link to X. So whether you're on X or LinkedIn, that's where you can find me.
- [42:35]
A
Perfect. And you follow urine on Twitter. He's got to be the best chef in the whole Wall street game, right? Your pictures of your food always look amazing. Remember, if you have a question for us, email us. Askthecompoundshowmail.com thanks everyone in the live chat for following along and we'll see everyone next week.
- [42:49]
C
Thanks everyone.
- [42:52]
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.
- [43:02]
C
This podcast is for informational purposes only and should not be relied upon for any investment decisions.
- [43:07]
B
Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.