14% for Tech. 1% for Everyone Else | The Weekly Wrap – 3/14/2026

Summary

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Excess Returns – Weekly Wrap (March 15, 2026): "14% for Tech. 1% for Everyone Else"

Main Theme & Purpose

This episode of Excess Returns serves as a "Weekly Wrap," drawing together the best insights from recent guest interviews and distilled conversations between hosts Jack Forehand and Matt Zeigler. It focuses primarily on the stark divergence between high-growth "new era" technology sectors and the rest of the economy, the challenges of investing in a rapidly changing world, the role of humility and adaptability, the valuation landscape, the implications of AI, and the importance of thoughtful long-term portfolio construction.

Guests Featured via Clips:

• Vitaliy Katsenelson (Value Investor/Author)
• Jim Paulsen (Macro Strategist)
• Joseph Shaposhnik (Long-term Compounder/PM)

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Key Discussion Points & Insights

1. The Necessity of Humility in Investing

Vitaliy Katsenelson on Uncertainty & Portfolio Management

• Rapid Change Means More Uncertainty:
  • “The range of possible outcomes at anything you look at got wider… So you need to have humility.” (05:24)
• Real-World Example:
  • Vitaliy expands his portfolio from 20 to 30 stocks due to increased unknowns. Diversification serves as a practical expression of humility.
  • “When I have less confidence, the way I express it… number of stocks I own went up.” (06:55)
• Focus on Enduring Needs:
  • Even as change accelerates, investors should think about "what's not going to change," e.g., commodities and defense. (07:55)
• Skillful Quote:
  • “You have no idea what the workplace is going to look [like] five or ten years from now.” (07:19)

Hosts’ Take:

• Humility means skepticism for bold market predictions and preparing for a wide range of futures (08:05-10:34).
• Matt: “The less confident I feel in the world, the more holdings I’m going to have in the portfolio. Diversification is the way I… hedge that confidence.” (08:13)

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2. The Fall of Software, Rise of Learning Organizations & AI Disruption

Joseph Shaposhnik on Software, AI, and Corporate Adaptability

• Early Exit from Software:
  • Joseph discusses why he started reducing software exposure months before the rout, focusing on firms with learning cultures that embrace AI, like Constellation Software (11:04-15:16).
  • “There’s no substitute for organizations that are decentralized, have appropriate incentives… and are a learning culture.” (11:04)
• Shift in Capital Allocation:
  • Constellation shifted to invest in public rather than private software cos, reflecting market distress and new opportunities.
• The Existential Risk from AI:
  • New AI-driven businesses can run with minimal humans. Some management teams underestimated the threat, failing to pivot quickly (16:54-19:06).
  • “The managers, the leadership, the people at those companies not being able to have… a really good answer for what that was going to mean and what their business would have to do…” (17:14)

Hosts’ Analysis:

• The collapse of "bulletproof" software business models underscores how fast paradigms change in tech (16:28-19:06).
• The advantage now belongs to adaptive, learning-oriented management.

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3. The Tech Economy vs. Everything Else: “The New Era”

Jim Paulsen’s 'Two Economies' Thesis – Explosive Tech Growth Amidst Stagnation

• Breakneck Growth for "New Era":
  • “In the last year, real new era spending is up 14 times faster than the rest of the economy. There’s 14% growth… and 1% in the remaining 89%.” (21:15-24:44)
  • The tail (tech) is “now wagging the whole GDP dog.” (24:28)
• Historical Context:
  • In the 1990s, new era outgrew 'old' by 2x; now it’s 14x.
• Key Quote:
  • “The small 11% new era piece is now wagging the whole GDP dog. More importantly… it’s covering up the fact that the 89% of the older economy… is basically flatlined.” (24:28)

Hosts’ Take:

• This explains why GDP prints remain healthy despite most of the economy stagnating: tech is masking underlying weakness (25:05-27:15).
• Capital markets’ deeper role in flooding money into these sectors versus the late ‘90s.

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4. Survive First, Be the "Least Wrong": Investment Mindsets for Volatility

Vitaliy Katsenelson & Joseph Shaposhnik

• Survival as Priority:
  • “My goal as an investor is… first, I want to survive.” (28:09)
• Be ‘Least Wrong’, Not Always Right:
  • “Most people want to be right. I want to be the least wrong.” (29:02, echoed 29:58)
• Quantitative Mindset:
  • Broad diversification aligns with survival; it's not about predicting the top winner, but ensuring you remain in the game (31:36-32:41).

Hosts’ Commentary:

• Adaptation and humility permit exposure to right-tail outcomes while reducing chances of ruin (30:15-32:41).

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5. Defense Supercycle & How Investors (Should) React to Macro Shocks

Joseph Shaposhnik on Global Defense Spending

• Reinforced Thesis by Global Conflict:
  • Ongoing wars have “strengthened” the case for a multi-decade boom in defense spending, especially among NATO/Western countries.
  • Estimate: “Over the next 10 years spending on defense could increase by a trillion dollars.” (34:30)
• Practical Portfolio Response:
  • Don’t attempt to time or predict geopolitical events, but ensure exposure to long-term trends with tailwinds.
  • “What we try to do is… know our businesses so well that when a piece of news comes across the wire, we already have a sense for who could be impacted.” (54:13)
• Position Sizing & Risk Assessment:
  • Prepare portfolios to withstand negative impacts if a conflict drags on; size positions accordingly.

Hosts’ Take:

• The real value is in positioning for secular trends, not chasing headlines or trying to time events (37:14-39:47, 54:13-57:51).

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6. Valuations as Tailwinds or Headwinds

Vitaliy Katsenelson on Interpreting Market Multiples

• High Valuations = Headwind:
  • “When stocks are expensive, the price-earnings becomes a headwind... returns from stocks become... like third grade math: plus five plus minus five, you get zero.” (47:59-50:03)
• Multiples are Expectations:
  • When multiples are high, expectations are high; this can be dangerous if not met (52:51-53:12).
• Not a Timing Tool:
  • Expensive markets alone are not predictive but shape expected returns.

Hosts’ Commentary:

• Emphasis on understanding both numerator (E) and denominator (P) dynamics, not just the snapshot (50:35-53:59).

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7. The Broader Economic Dynamics of AI and Tech

Jim Paulsen on AI: Job Loss, Deflation, and the Right Tail

• Dual-Edged Impact of AI:
  • AI may cut costs for consumers (e.g., legal work) and drive spending elsewhere.
  • “I might pay… $5000 for a will. Now, I can dial up an AI and do it for $100.” (40:31-43:48)
• Right Tail Scenarios:
  • Lower prices free up spending and can offset some negative impacts.
  • “There’s money to be spent elsewhere… going to create a whole lot more of new opportunities.” (43:19)
• Caution:
  • Need to account for the loss of high-income spenders (lawyers, etc.), but recognize Americans’ high propensity to spend ensures money cycles elsewhere (44:28-45:43).

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8. The "Policy Juice" Dynamic

Jim Paulsen’s Policy Support Framework

• Unusual Bull Market with Little Juice:
  • “90% of the economy is already in recession. So if we bring the policy juice finally, it probably won’t be that out of character… that’s generally the description of a brand new bull market.” (60:05)
• Implications for Broader Market Leadership:
  • A new round of stimulus ("policy juice") could broaden the rally beyond the mega-cap tech winners (63:11-66:41).
• Fiscal Policy May Soon Return:
  • “If the economy’s bad enough, we’re not going to worry about [deficits]… we’re going to extinguish the fire right in front of us first and then worry about the rest later.” (60:05-63:11)

Hosts’ Take:

• Policy support has been absent, helping explain weak breadth. If stimulus comes, the rally could broaden from “the Mag 7” to the rest (66:06-66:41).
• Uncertainty remains about how Fed and governments respond, esp. with inflation risks (66:41-67:52).

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Notable & Memorable Quotes (w/ Timestamps)

• Vitaliy Katsenelson:

  • “Today, you need a lot of humility… the world is changing so fast… I have less confidence in my decisions today for many stocks than I ever had before… I went from a 20-stock portfolio to 30.” (05:24-07:22)
  • “My goal as an investor is… first, I want to survive.” (28:09)
  • “Most people want to be right. I want to be the least wrong.” (29:02)

• Joseph Shaposhnik:

  • “There’s no substitute for organizations that are… a learning culture.” (11:04)
  • “As I think about this conflict, I think that our thesis that defense is in a supercycle certainly is not weakened by the conflict… but strengthened.” (34:30)
  • "We try to know our businesses so well that when a piece of news comes across the wire, we already have a sense for who could be impacted..." (54:13)

• Jim Paulsen:

  • “In the last year, real new era spending is up 14 times faster than the rest of the economy.” (21:15)
  • “The small 11% new era piece is now wagging the whole GDP dog… covering up the fact that the 89%… is basically flatlined.” (24:28)
  • “If we bring the policy juice finally, it probably won’t be that out of character… that’s generally the description of a brand new bull market.” (60:05)

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Timestamps for Key Segments

• [05:24] – Humility and Diversification in Uncertain Markets (Vitaliy)
• [11:04] – Lessons from the Software Crash & Learning Organizations (Shaposhnik)
• [16:54] – Existential Threat of AI to Software; Management’s Adaptability
• [21:15] – Tech Outpaces Broader Economy by 14x (Paulsen)
• [28:09] – First Survive, Then Generate Returns (Vitaliy, Shaposhnik)
• [34:30] – Defense Spending Supercycle and Portfolio Construction (Shaposhnik)
• [47:59] – Valuations as Tailwind/Headwind Metaphor (Vitaliy)
• [54:13] – Preparing for Macro Shocks: Know Your Companies Cold (Shaposhnik)
• [60:05] – Policy Juice: What It Is and Why It Matters (Paulsen)

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Thematic Takeaways

• Embrace Humility: The world is changing faster than ever; humility and flexibility are essential for investors.
• Learning Organizations Are Better Positioned: Firms that adapt quickly and foster learning outpace those that rest on legacy “moats.”
• Two Economies Operate in Parallel: Tech is driving the "new era" of growth and masking stagnation elsewhere.
• Be the Least Wrong: Success today is rooted in survival and minimizing mistakes, not chasing hot takes.
• Top-Down & Bottom-Up: Peace of mind comes from knowing your portfolio’s businesses in depth, enabling calm responses to headlines.
• Valuations Matter, But Timing is Tough: High multiples are a headwind, but only one piece of the puzzle.
• Policy Support Still Lurking: Fiscal and monetary “juice” has been missing—its arrival could reset market leadership.
• AI’s Disruption Has Two Sides: Deflationary benefits for consumers and hidden right-tail opportunities offset some job loss fears; effects will be uneven.

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Hosts:
Jack Forehand & Matt Zeigler
(End of key content)

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This summary covers all the substantive discussions and recurring themes from the episode, omitting segment breaks, ads, intros/outros, and sponsor messages. For further insights, refer directly to the identified timestamps.

Transcript

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[Narrator/Host]

Given that we put out a lot of content, listeners have often asked us to do a weekly recap show with the best insights from all of it. Matt and Jack are now going to begin doing that via our separate podcast, Twoquants and a Financial Planner. Each week they will play the most insightful clips from our interviews and break down the biggest lessons for investors. We have included this episode in the Excess Returns feed, but if you want to keep receiving our new weekly wrap up episodes, you can subscribe to Twoquants and a financial planner on all major podcast platforms using the links in this episode. Description thank you for listening. We hope you enjoy the new recap show.

[Vitaly Katz-Nelson]

You need a lot of humility and you need a lot of humility. Because in the world that's changing so fast, the range of possible outcomes at anything you look at got wider real

[Jim Paulson]

new era spending is up 14 times faster than the rest of the economy. There's 14% growth in real new era spending and there's 1% growth in the remaining 89% of real spending.

[Joseph Shaposhnik]

One of the long term growth opportunities that, that I see, that we see is, is the growth in spending by, by NATO countries in, in the area of defense. We think that over the next 10 years spending on defense could increase by a trillion dollars.

[Jim Paulson]

I would suggest 90% of the economy is already in recession. So if, if we bring the policy juice finally, it probably won't be that out of character from other times. What makes this interesting is that's generally the description of a brand new bull market.

[Jack Forehand]

Welcome to the Excess Returns Weekly Recap. I'm Jack Forehand and I'm joined here by a man who is literally repping both Banksy and Delaw on his wall. As I found out last time, thanks

[Matt Zigler]

to the YouTube commenters who noticed. I want to give a shout out to my, my peanuts J. Dilla back there too. Just like, you know, round out the collection on top of my Wilkes Barre Scranton Red Baron's hat, vintage from the right era before the Yankees stole them, stole them from us and replaced us with their farm team.

[Jack Forehand]

Well, I was trying to figure out should I be impressed with myself that I actually know what those things are, or should I be embarrassed that I've done like a hundred episodes with you and I did not realize you were rubbing either one of those things on your wall. And I think a YouTube commenter picked it up right away.

[Matt Zigler]

Listen. From your spaceship halo behind you or whatever they show you about.

[Jack Forehand]

I got, I got to work on that.

[Matt Zigler]

When it's full pass.

[Jack Forehand]

Yeah, when it's dark days here, I got to put the lights on. It's, it's a problem because I've got like this, there's, there's no way to get away from the spaceship. But, but anyway, to get onto this, we've, we've had, we've had some awesome guests on this week on Excess Returns and we understand people can't watch every single one of the episodes. So what you and I are going to do is we picked out the best insights from our three guests this week, which are Vitaly Katzen Nelson, Jim Paulson and Joseph Shaposhnik. And we're going to talk about what we think they mean for investors. We're going to highlight the best insights we found this week.

[Matt Zigler]

Perfect excuse to do a recap because with all the content that we're putting out, I know even in our back and forth. So we're picking titles and debating descriptions and other things to promote these. It's really useful to check in on these. And hey, I didn't get to listen to the Paulson one until just the other day. And this is one of those things where you're like, I have to make time for this every single time. The Excess Returns podcast feed has taken over all my podcast feeds for the.

[Jack Forehand]

Jim is so good. Like, Jim, Jim comes up with data that nobody has. Like, really, we're so lucky to be new era data. He's incredibly good.

[Matt Zigler]

I'm excited that we're reshowing this new era data because that is like, holy crap. Especially when you feed it through the MMT lens. Go ahead, get us started.

[Jack Forehand]

So we, we've got a. We've definitely got jam and we've got a little bit of macro, but I, I think our other theme this week is probably like classical music, compounding and shell. I was thinking maybe something along those lines. We got a good mix of both this week.

[Matt Zigler]

I love mixing in the classical music and the art, and this was a great one. I've been actually waiting to have a conversation like this with Vitaly for a long, long time. So this is exciting. Let's play this first clip. This is Vitaly on the subject of humility and the investment process.

[Vitaly Katz-Nelson]

I think today you need a lot of humility and you need a lot of humility because in the world that's changing so fast, the range of possible outcomes at anything you look at got wider. And like, I don't, I know, like these software stocks declined 50, 60% over the last, I don't know, four or five months. We own this little bank that's involved in a, that's involved in transportation. The Stock was down 20, 30% because some karaoke company, which a penny stock said they wipe coded some kind of transportation algorithm. Now that's probably just the volatility. But my point is the world is risk. First of all, there's AI, but there's also geopolitically, the world is changing very fast. So you need to have humility. But what does it really mean as an investor? Well, I have less confidence in my decisions today for many stocks than I ever had before. And when I have less confidence, the way I express it, number of stocks I own went up. I basically more or less went from 20 stock portfolio to 30 stock portfolio just because the unknowns are really unknown. The world is changing so fast. And I think having this humility today is very important because you have no idea what the workplace is going to look five or ten years from now. The global economy is changing very fast. The US Dollar is a reserve currency, but is it going to be. It's probably going to be a reserve currency five years from now, but is it going to be as significant as it was today? May not.

[Matt Zigler]

Be.

[Vitaly Katz-Nelson]

So now. So now I have to think about, okay, what's going to happen if there's a weaker dollar. So this is why I think humility in my case expressed through diversification is important. Another thing I try to think about what is not going to change. And a lot of it is just like, we're still going to need commodities. So, like, you know, so you start thinking about commodity companies, think we're still gonna need defense companies.

[Jack Forehand]

They may be.

[Vitaly Katz-Nelson]

Start making different stuff in et cetera. And I still, and I still have to be nuanced there. But so, and this is. So I try to have humility and start thinking about what's not going to change.

[Jack Forehand]

It's crazy to think humility, Matt, you don't see that these days. Like, I need to have a crazy take on this, right? I have to have like an outrageous take on what's going on in the market.

[Matt Zigler]

You need to have an outrageous take if you want anybody to talk to you about it. But inside of it, the, the part that I loved is how he talks about the range of this. And basically this. I saw this. I saw this take on. Speaking of takes to try to get attention, Nick Maggiuli FRIEND OF THE SHOW PRIOR GUEST he put something up that was. It was so directionally accurate. And I felt it so deeply on the 4% rule, where he was like, the reason the 4% rule works is because when stuff sucks, people stop following it, but when stuff is good, it's like a natural limit. I'm summarizing his take, but that was the argument. I'm like, yes, this is true and learned from experience. And it's true in something like this, when Vitaly's talking about his portfolio, he's like, the more, the less confident I feel in the world, the more holdings I'm going to have in the portfolio. Diversification is the way I sort of like, hedge that confidence. That's where humility shows up. And the idea here that it's not just a range, but it plays a dynamic role. I think he just articulated this so beautifully. How do you. How do you think about humility?

[Jack Forehand]

Yeah, and also just think about what we've got going on right now. We've got AI which could potentially be the most disruptive technology of all time. We've got a war going on. And not to get in the political part, but we've certainly got a lot of uncertainty coming out of politics these days. Like, who the hell knows? Like, anybody who's giving you a take on what's going to happen and like that, they know you can't even begin to listen to them. Like, that was what I really got across from this clip is like, we all have to take a step back and say, nobody has any idea what's going to happen right now.

[Matt Zigler]

That point there, extra highlighter on it. Humility inside of yourself and then an earned skepticism. For everything else that you read, you need to have that earned skepticism across the board for the other information you take in, too, because not only do you not have the answer, they don't. This is probably a running theme through this because I think Joseph Shaposhnik stuff really echoes this well, too, where it's like, individuals, domain expertise, pay attention up to a point. Have humility, afford it to others in everything that you do.

[Jack Forehand]

And what's interesting, too is there's different ways to reflect this in a portfolio. So Vitaly is thinking about it in terms of he's holding more positions. Like, I think about it the way we do for clients. We think about those different quadrants of economic things that could happen and, you know, having something in each of those quadrants. But I think it is important to sort of think about your process and think about, is there anything I can do? Not some massive thing like sell because of the war or something like that, but is there anything I can do around the edges to reflect that this is a period I need to have more humility.

[Matt Zigler]

Yeah. In a dynamic range, let the setting move up and down because there will be times where you actually can sort of put your foot on that gas. And there are other times where you should put your foot on that brake. Vitali is an expert at doing this and communicating it clearly.

[Jack Forehand]

So this next clip, everyone's talking about software because it's down so much, but when you talk to Joseph Shaposnik, and one of the interesting things about Joseph is, is he actually sold software in the middle of last year. So it's just interesting to think about someone who saw maybe to some degree what was coming in advance and made that change. So here. Here's Joseph talking about selling software.

[Joseph Shaposhnik]

I think it's important to be invested to the extent that somebody chooses to be invested in software in. In businesses that have a learning culture. And so as we think about most software Businesses, most businesses in general are very top heavy with management, making decisions kind of at the, the top layer and then sending that down to the developers and the engineers. And so in an era of, of AI and AI disruption, I think there's no substitute for organizations that are decentralized, have appropriate incentives put in place for those decentralized businesses and are a learning culture that have a, a track record in the history of being learning cultures. And so as I think about Constellation Software, I do think about it as being a company that has a learning culture. And certainly they have been studying and deploying AI for a long period of time. And so that does give you some level of confidence and comfort. And I think that the additional piece of news is, or the other thought is who's taking advantage of this disruption today in the software space?

[Vitaly Katz-Nelson]

And

[Joseph Shaposhnik]

we've gone through now, I would call it half an earnings cycle, maybe an earnings cycle and a half of evaluating results from software businesses. It's so early, we're in the first inning of what will be significant disruption in software from, from new technology. So it's very, very early to make decisions. But I do think it's positive that we see Constellation reorienting to some extent its capital allocation strategy by investing in publicly listed software businesses and taking advantage of far lower valuations than we've seen for a long period of time, particularly in the public market. They, they, I think they, they reported a couple of days ago and they said that valuations in the private market really haven't changed much, which is, you know, that's pretty surprising given the magnitude of the decline in, in valuations in the public market. But so what, what have they done? They're, they're a learning organization, not, not just on, not just in sharing technology learnings in the area of AI, which they've done in a very plentiful way, but they've changed in terms of capital allocating capital. So they, they've decided now to make permanent investments in public companies. And who is leading that effort? It's Mark Leonard. And so he continues to be involved in the business. And while we're uncertain about where the world is going to go, I certainly like to be aligned with managers and management teams that are evolving as the opportunity set evolves and are not just wedded to the way it's always been done, because the way it's always been done may not be the right way, especially in a very, very dynamic, in a changing world. I'd also say for the longest time software was thought to be one of the highest quality business models out there in the world. And I think that there's significant uncertainty about whether that will continue to be the case. And so in the context of far greater future uncertainty, I think that we've prudently reduced our risk or we did that many months ago, which I think has proved to be reasonably, reasonably good thing to do given what's occurred in software.

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[Matt Zigler]

I need the Time Machine with Joseph and Rupert Mitchell from like starting days ago that's basically been warning about this. And then we could have been, we could have had the big short written about us. Jack. If we just went all the way in on this one.

[Jack Forehand]

Yeah. And there aren't too many people. There's a lot of people right now talking about, oh, you sell software. But there were not too many people talking about it then. Because if you think about what software was, I mean software was like the. It was the highest quality business model out there. It's like all recurring revenue. They seem to be bulletproof when the economy's going down. Like, this was the ultimate pinnacle. This is what people own to be safe. And now it's completely inverted. And it's just interesting thinking about how fast that fell and the, the role of AI in all of that.

[Matt Zigler]

Not just how fast it fell, but just the awareness of this is a concept I'm watching. I'm sure you are too in way too deep right now in like Claude Bot and all sorts of other stuff on YouTube and have you seen like Nat Eliason or some of the people are standing up These businesses that are completely AI driven. Have you seen this yet?

[Jack Forehand]

Not yet.

[Matt Zigler]

I mean, I'll send you a video later. You should look it up. If you're watching this online, look at like Natalia's crazy claudebot business where he basically like built this thing, was like run the business itself and now it's like generated a website. It's generated stuff, it's selling, it's promoting it on Twitter and it's making like a couple thousand dollars a day or something. Insane. So in one hand you're like, oh, there's free money out here or something. There's not. And the other hand is this basically like recreated like a core selling guru. So it feels very, doesn't feel real great on the other end of it. But, but at the same time it's like this is the threat, this is the existential threat to like every software business and everything that's like code driven, asset light, monthly recurring revenue generated is like, what if you didn't need any people to run this thing at the end of the day? And we should totally rethink how these businesses are and operate. It's interesting that we're having a moment of like reassessing that entire business model, but it's also interesting to like pull that back to say, and I think Joseph gets at this in the broader interview. The managers, the leadership, the people at those companies not being able to have like a really good answer for what that was going to mean and what their business would have to do, not probably even understanding the full existential threat we've arrived at at this point, but recognizing that six months a year ago that they didn't have a way to answer with this and wrestle with it. That's a really interesting human layer of this problem.

[Jack Forehand]

And it goes back to Vitality's point about humility and what Joseph was talking about, what you mentioned about management, like, you don't want management that is completely set in. Like we've got this moat, you know, nobody's going to touch us. Like, you know, we can't be beaten. Like, you don't want that management right now. You want the manager that's taking a step back and saying like he, he mentioned he called it a learning organization. And that's what you want. I mean, you want people who are completely flexible, who know what they're good at, but are also completely flexible, understanding that this is like a massive, massive change for this industry.

[Matt Zigler]

And this is the worst part when you go down the rabbit hole on these cloudbot businesses because they're alerting businesses and they either just created like Skynet and it started by selling PDFs to other, other cloud bots and this is the way we slowly get to toasters in Battlestar Galactica, or this is just the idea of even the AI businesses figured out right away they had to be these learning enterprises and they're going to fork, pivot, do all sorts of other stuff along the way. It's a mind bend to think about. It's just, it's really fascinating through the leadership and the strategy lens that that's part of where somebody like, you know, Rupert arrived it at it from like valuation multiples and assumed what could happen in the future. Joseph is a writing arriving at it by basically saying like the management teams don't have a way to handle this next like pothole in the road in front of me. So maybe it's best to just get away from this until they have a more articulate way to say they will learn their way through this without cannibalizing or destroying their own businesses.

[Jack Forehand]

I hope we don't have to do an episode on like the winners in the claudebot economy or something. That seems like where we're headed, but. But I hope that's not where we're headed.

[Matt Zigler]

I think we're safe for now. So long as they're selling like PDFs to other Cloudbots to use as props for $29 or something, I think we're gonna be okay. But I am generally my favorite part about all this stuff is seeing people train a bunch of bots to debate with each other, arrive at a consensus and then do the next step forward.

[Jack Forehand]

There was some message board thing where it was just like AI is talking to AI. I forget what it was called, but it made big news. Like where it was just basically AIs operating with other AIs. Although people said like in retrospect, it was really just people who were in there pretending to be AI talking to each other or something.

[Matt Zigler]

There's a bunch of this stuff happening now. We're only going to see more of it. And before Soul in the game turns into me talking about the Soul markdown files inside of a bunch of these AI agents. I think you should take me on to this next clip. So this is Paulson, right? We got Paulson up again next.

[Jack Forehand]

Yeah, well, Paulson, what Paulson has done a really good job of like on the podcast is, is talking about this idea that there really are two different economies about. You'd have people talked about the K shaped economy, but Paulson's really been talking about tech versus everything else. So here's Paulson talking about that.

[Jim Paulson]

The new era comprises currently 11% of, of of private GDP and the red comprises 89% of the. Now this just looks at the annual growth rates. You can see that New Era growth has always been pretty much stronger than the rest of the growth in real spending in the economy. Most of the time it's, it's quite a bit bigger. But there's never been anything like we witnessed just this last year. In the last year, real newer era spending is up 14 times faster than the rest of the economy. There's 14% growth in real new era spending and there's 1% growth in the remaining 89% of real spending. Now there are some pretty big ones you can see there. In the 1990s, we had a 16% growth rate in New Era back here at a time when the rest of the economy was growing about, I guess that number's about 6%. And so you could see it at that point. You know, it's, it's, it's a little over two times, but this is 16 times the differential in growth just in the last 12 months as a whole. And two things have occurred. One is the growth differential is dramatic. We got one small part of the economy just exploding in growth and then the great bigger part of the economy, which is flatlined. Okay, that's sort of the state of what we're dealing with here. And if you go on to the next chart and just look how this has crashed out into the open here just this last year. The blue line here is just private sector real gdp. The annual growth in blue is the annual growth in real spending by consumers and investment. And you go back historically, the red line is the 89% of the economy. Currently that's not new era, the old era part. And its growth rate now until really just the last, probably until 2010 and beyond, you barely see red. The reason you don't see any red is because it's so infinitesimally small. It just hardly makes any difference. It, it comprises, you know, 1% of the economy or 2%. And its growth rate differential isn't, isn't enough with that small of an amount of the economy to show up. But you know, it started to show up at the, during the dot com part here in the late 1990s a little bit. Not much, but a little bit a differential in growth between new era and old. And it certainly started to show up a little bit more in the 2010 up to the pandemic. But look at what's happened here in the last year. In the last year now year for 2025, overall real private sector GDP is reportedly growing at 2.3%, but the old era part is only growing at 1% in the last 12 months. So I think what's happened here is the new era part has finally gotten big enough, even though it's still only 11% of the total. Given how much it grows, how much faster you take a big enough with a rapid growth rate, it's now having meaningful influence on the overall economy as a whole. That is the tail. The small 11% new era piece is now wagging the whole GDP dog. And more importantly than that, it's covering up the fact that the 89% of the older economy, most of our economy, is basically flatlined.

[Jack Forehand]

But this idea, and I want to keep following this as he does more, charts this idea of sort of new era against everything else. And you know, the 89% of the economy talked about being everything else and 11% being new era and new era kind of holding everything up. And the, the deviation we've seen in those economies is so, so interesting. And I've never seen anybody putting it the way Paulson's putting it.

[Matt Zigler]

So my question on this one, and maybe, you know, maybe not, maybe we just got to go straight to him on, on this is what's jarring about the image is how the differential between like the late 80s and then certainly in the late 90s or we see that gap widen versus where we are right now. And is it, is it literally like the infrastructure spend, some of the other stuff in the late 90s, what's the reason that this gap is so different? And maybe it's only in the future we find out if it's in hindsight, it's because AI is that much more trans. Transformative than the Internet actually even was. Or maybe there's something else to it. Do you have anything else?

[Jack Forehand]

I think that's it though. And I think this, this spending is so large relative to what happened then. And obviously there was massive spending then. But a. I think this is like, this is a very different ballgame than that. And I think that's. We'll have to ask Jim because he's obviously much more intelligent than I am on this, but I think that's what's going on.

[Matt Zigler]

Yeah, I'd love to ask him on this because I'd want to peer further into how much can you read into the magnitude now? How much can you read into like the magnitude of the funding availability for something like this now and I think this ties into some of the other clips later as well. But it's, it's sort of the concept of hey, if private equity and private credit and all these things are here to feed into this, you didn't exactly have the same mechanism in 1999. When you're doing the infrastructure build out. You had a lot more capital, light industries, you had a lot more other companies who are already more embedded making some of the physical infrastructure and doing stuff like that. And I wonder what role capital markets play inside of this too. It's just, it is a fascinating framing the way he's putting this out there.

[Jack Forehand]

And what's interesting too, and this, this is not exactly in the clip, but Jim's point all along has been, you know, new era is less economically sensitive than old era. Like if you think about a lot of the things like Apple's iPhone and stuff, they're not as sensitive to the economy as maybe some of these other things are. And so when you think about everything that's going on, it helps to explain certain things. It explains why maybe the economy's held up in certain times when people thought it wouldn't. It explains why maybe things like Fed policy are less influential than they used to be because they impact new era less than they impact these other things. So it's just, it's just an interesting dynamic. You know, I don't have all the answers, but it's an interesting dynamic when you start to think about the world in this way.

[Matt Zigler]

Well, on that point too, an extra, extra potholes in my lawn for the one person who gets this. I think about this where it's the, the jobs and the other things created by it because we have this cap, but we also don't have people going out and filling the potholes in my road outside my street. Here I am sitting inside the home office, you know, with, with a Claude membership paid subscription, with a perplexity paid subscription with all this crap. I know you're in the same boat as me and it's like nobody's fixing the potholes outside in the street. All these other things aren't happening. Is it less economically sensitive in the new era spend just because there's not that many tangible real world jobs outside of standing up another, you know, another data center.

[Jack Forehand]

We've got a good balance this time because we're going to be kind of switching between the macro and the compounding a lot. And like the, the long term thinking type thing. And this, this next one is, is Vitaly Katz and Nelson again. And I think it's something important to think about in the world we're in right now, which is maybe think about first survive and then think about generating returns. So here's, here's Vitaly on that.

[Vitaly Katz-Nelson]

My goal as an investor is to making money is great, but first I want to survive. And, and I think. And that's, and that's what, and that's what I'm, you know, and that's, that's what I'm focusing on. I don't know. Matt, was it, was it, you know, if, if, if I raise more questions that I give you answers for?

[Matt Zigler]

No, I think those are effective questions to raise both in what's going to change and what's not going to change? Because I think that's, that's uncertainty and humility as an active investor and expand on this more if you want that. Part of being an active investor is being proactive in the way that you're looking at the future in front of you that you ultimately can't know. More humility, less certainty, more positions, more focusing on just the general principles. Like that's where your brain is extra focused right now, right?

[Vitaly Katz-Nelson]

Absolutely. Yeah.

[Joseph Shaposhnik]

You know, I share sometimes that I want to be the least wrong. People going to investing, they want to be right.

[Jack Forehand]

I just want to be the least wrong. And these days I feel the same way you do.

[Joseph Shaposhnik]

I feel like there are many more ways and I can, I can be wrong and I can sooner.

[Vitaly Katz-Nelson]

No, I think you're absolutely right. Like, you know, let's say this was a CNBC and you asked me this question and I said, you need humility. Like, that's boring.

[Matt Zigler]

Like we would have asked you about Nvidia if this was cnbc.

[Vitaly Katz-Nelson]

That's very true. That's very true. But you see what I mean, right? It's like, it's boring. But I think that in reality, think the understanding that you don't know what the world is going to look like. So it comes to try to figure out and change your mind when the facts change. I think that's what you need to be doing today. I mean, this is what's so exciting about the world today because there is so much to learn. And this is probably why I'm so excited about investing today, because despite my humility and everything, just because there's so much to learn.

[Jack Forehand]

So I really liked. He had a great quote in here, which is most people want to be right. I want to be the Least wrong. And that kind of plays back into his original clip here, which is like, in this world we're in, in a world with this kind of volatility around everything, maybe thinking about it from the perspective of being the least wrong is the right way to think about it.

[Matt Zigler]

And shout out to Bogamil, shout out to Bogomil on being the least wrong. And shout out to my complete lack of accent game in this conversation. When I hear these clips back, it's like I just, yeah, I just sound like an idiot from northeastern Pennsylvania compared to these, these two waxing, waxing philosophical on this. I love that as the starting point. I love the be the least wrong. I love the idea of part of being the least wrong. And this is where like, this can't work for a hot take. You can't have a hot take that you approach from be the less, the least wrong. The only way a hot take works if you're the most engaging. And that usually means you have to tick somebody off or you have to say something flamboyantly like blowing up the tails. But being the least wrong just means, like, I've reduced as much of that left tail risk as I possibly can. I've taken how many of those mistakes off the table or the damage I could take from those mistakes to an absolute minimum. And the beauty of this, in both, the way that Bogomil and Vitaly explain this is it's. It leaves that right tail open. It leaves the idea of I can have a good outcome or I can have an amazing outcome, but the only way I'm going to get there is if I survive first. And that's, that's a good financial plan. That's a portfolio. That's anything with. You're trying to stay at the table and keep playing the game. This is the only way to do it. How do you think about this? Like, what's the quant interpretation of this?

[Jack Forehand]

What's interesting about quants like me is, you know, we tend to have, we can be somewhat focused, but we tend to equal weight our positions. We tend to have fairly diversified portfolios. So part of it is that survival is, you know, systems like that don't tell you, they, they might tell you, here are the best 30 stocks to own. They typically will not tell you what the top one is like. If you look at your, like, descending score of all your stocks, you won't end up with like, the one that was number one ended up being the best performer. You'll end up with like, I want a bunch of stocks with similar characteristics. And then I want to own a diversified portfolio of all that stuff. So, like, that is it also the survive first also works in the quant world, and we're kind of built for that anyway. But also, to go back to your other point, what I thought was really great about this was at the end, the Vitaly talks about being so excited to be in investing today. And I think that gets back to your right tail idea you just mentioned, which is like, everybody wants to think about uncertainty, terrible, bad, all these things that could go wrong. But, like, you think about AI, you think about all the stuff that's going on. Like, there's scenarios on both sides of the equation right now. And I think that's really, really cool to think about it from the perspective of, like, here's all the things that could go right. Here's all the things that are improving, like in my investing process because of this. I think that's a great way to look at this.

[Matt Zigler]

It's a great holistic way to look at it. And it reminds me what the opportunity is. Those opportunities only really show up when people start to bake in all the left tail, all the downside, all the dark scenarios. And so if you see a bunch of those things that everybody is suddenly talking about, that's your first shot that says there's opportunity out here because nobody can make quite sense of the future. And they're disagreeing on it in lots of different ways. The risk of this. And there was a great Kevin Weir post about this over the course of the week, which was basically concerned with, like, the dip that we saw in the markets. The dip in the. The dip getting bought. And he was like, normally when a war starts, everybody starts blowing the left tail out of proportion and we start getting into all these variations, people buying this dip, it's like everybody is racing to, I don't want to be wrong about which facet of the recovery. And he was flagging that as a concern. And I think that's. That's real too. But, yeah, chaos creates opportunity. That's what we got right going on.

[Ad Voice]

Right.

[Jack Forehand]

I think that buy the dip thing is one of the most interesting things in investing right now, because every single dip is getting bought these days, like, across the board. And what does that mean? I don't know what that means, but, like, the question is, does that mean that when the. When the dip comes that you finally can't buy, we're going to have a much bigger catastrophe? Or. I don't know what it means, but it's really, really interesting because we could have talked about a lot of things we've seen since we've been doing the podcast and say the exact same thing Kevin said about which is like, typically people would sell a lot more, but they're buying the dip and like, I don't know what it means, but I think it's a really, really interesting dynamic.

[Matt Zigler]

This next clip is coming from Joseph Shaposhnik again and I think it really connects back to this because he talked about being already in defense with all the AI stuff that's going on, then the war breaks out and how he swirls all of that stuff together and through the lens of the exposure. That's the defense allocation in his fund. I think this is fascinating. Let's roll the clip.

[Joseph Shaposhnik]

As I think about this conflict, I think that our thesis that defense is in a, a super cycle certainly is, is not weakened by the conflict in, in the Middle east, but I, I think it is strengthened. And so one of the long term growth opportunities that, that I see, that we see is, is the growth in spending by, by NATO countries in the area of defense. We think that over the next 10 years spending on defense could increase by a trillion dollars just from those companies, just from, just from those countries as they get up to, to the NATO targets that have been set. And so as I think about how that can impact the businesses, I certainly like to be invested in companies that have tailwinds that'll benefit from what I think will be very, very strong structural growth in that end market. And this conflict will certainly not be a negative to those, to those companies that will benefit and could certainly be a tailwind. And so it does give you some further confidence that growth will be solid in that end market. And then on the flip side of that, certainly companies that could see negative outcomes from this conflict, you have to think about how long will this conflict go on for and can those businesses sustain themselves as the conflict carries on and certainly build in a large buffer for how long it could go. You know, the conflict could be wrapped up in, in a week or it could drag on for a couple more months or, or a longer period of time. So as I think about companies that will be negatively impacted, certainly you have to build that in. And as you think about position sizing, certainly, hopefully you've sized investments in businesses that could be negatively impacted by conflicts in a way that gives you the ability to endure whatever short term impacts the business could receive. And certainly that'll translate into the stock price as well. So that's that's the way we're thinking about this, this conflict. We certainly see beneficiaries from it or thesis theses or theses that are supported by what's going on. And obviously there'll be short term impacts both ways. For companies that, that are impacted by

[Jack Forehand]

what's going on, this is great because this is how these compounding people think about these exogenous events, whether it's war or whatever it is, they don't think about like let me predict the event they think about. I own a portfolio of businesses, let's dig into these businesses and figure out what it means. And that, that's really important because there, there's two wrong ways to look at these wars and anything that goes on, I think one is like I need to make, I need to react to this. I need to predict what's going to happen in the war. You know, I need to know what's going to happen and make changes in my portfolio. The other is to say I'm going to do nothing. And I think for some long term investors, like people owning index funds, doing nothing is the right thing. But for somebody who owns a portfolio of businesses, that's not the right thing. I mean you need to at least look at what's going on and say, all right, the world might be different in light of this war. Let's dig into the businesses and let's figure out how it impacts them.

[Matt Zigler]

One of the things that put Joseph and his work on my radar when we started having him on the channel and having him on for some of these conversations was the way that he thinks about these super cycles, the ways that he looks at. Here's a, here's a shift, paradigm shift or otherwise inside of a space that sets up why it's likely interesting to watch how this sector or this industry or this company handles the next set of problems that are thrown at, thrown at them. And in defense it's like you have the public sector spending, you have the need in the post globalization, if not the deglobalization world to retool a lot of these defense forces, companies, whatever else. And that sets up all these interesting questions where to your point. I don't have to predict the exact events, I just have to make sure that these decisions still have a tailwind behind them that are driving both future profits and future potential. So it's really interesting to hear him breaking down what these companies are doing in the wake of AI, a war and these other factors in the context of he sees this massive tailwind behind them that's such a different way to approach the manager lens in investing.

[Jack Forehand]

And this ties to Rupert by the way too, from, from last week because he was talking about how all these foreign governments are spending tons of money and you want to follow the money. Well, what are they spending the money on? They're spending a lot of the money on defense. And so it's great when you, someone like Joseph is not going to sit here and say like here's some trend in the next year. I want to play like the word super cycle is so important because he's looking at the big picture. He's looking at these shifting tides that are going to extend for a very long period of time. You know, multiple years, a decade, something like that. And then trying to get his portfolio behind those trends.

[Matt Zigler]

Finding people who can get the portfolio behind the trends in advance is obviously if you could do that we'd have better jobs than podcast hosts. But at the same time people who are trying to think that way and actually laying out a process and then can navigate you through like being right about software, being right about defense, and now understanding both of those things in the current context. Rupert and Joseph are both fantastically gifted at explaining these thoughts.

[Jack Forehand]

Whenever we have something that's like a long term trend like AI, like I love talking to Jim Paulson because Jim's really good about putting it in context and it was interesting. Like Jim had actually not read this treaty article and I think he was probably one of the few people like when I said in the outline, I'm like we're going to talk about this treaty article. He's like, I haven't even read this thing but, but he read it then. So, so here was Jim's take overall

[Jim Paulson]

and let me take off my, my military hat a moment and put on my high tech hat.

[Jack Forehand]

We should have gotten some different hats.

[Jim Paulson]

Moving hat. I will see. I'm also not an AI expert by any means but again if I look at how that's come out, we've certainly in my career I've been through a number of innovative periods. Maybe you could argue that a lot of my career since the start of the 80s has been one big innovative cycle continuing and seeing how those reacting and the things that stick out to me with AI, I can get myself just as scared as that article. When I think about, I'm reading one of my dive store novels that I'm currently reading at night. It's called the Tin man and it's all about AI robots being created for and military is testing them to see how they fight in arms. You got live military going against these robots. AI generated robots and they, they lose every time they, they go up against the robots. And, and it kind of plays well into today's fear that there's just no way, you know, we can, we can compete with these, with these things. They're unemotional, but they're better at everything than we could ever hope to be. Better and quicker. That's kind of been the story. I just feel like it's pretty much overdone and very, it's really become horrific scenario very quickly. And anything that's bad in the economy is now tied to AI. The fact, you know, I don't buy that the job market is as weak as it is because AI is suddenly here. I think that the unemployment rate in this country bottomed out at 3.4% in April of 2023 and rose about a full percentage point. Probably most of that occurred long before AI was really out there in a, in a big, big way. Centrist. And I could be wrong in this, but I, I think the other side of the story with AI that doesn't get near enough attention is the other side of story of all innovations. And that is just take an example like I don't know what, but just take, take, let's say I'm going to do a will, new will and, or maybe I'm buying a house, you know, and I need a lawyer or whatever. And I might pay, you know, whatever, $5,000 for will or whatever. Now I can dial up an AI and do it for a hundred bucks, same thing. I don't, you know, I want to sell my house. Maybe I don't need anybody. I just dial up AI what I need to do and I save, you know, 2 or 3% the value of my house. Well, that might be bad for lawyers. They, they have, they're going to lose out on parts of business, there's no doubt about that. But everyone that buys that service, I, I now just save thousands and thousands of dollars. And guess what? I'm going to go spend that stuff, I'm going to go spend it elsewhere. Whether, you know, a new boat, new trip or a new car, housing renovation, whatever, which is going to create a whole lot more of new opportunities for other people growing business elsewhere.

[Jack Forehand]

I want to put this in because I think people, when they focus on the job loss, and obviously people focus on long term growth too, but I think a lot of people miss this deflationary aspect of AI and the fact that if prices are Driven down. And Jim kind of talked about it. There's money to be spent elsewhere. Are also like. And we, we talked a little bit. I didn't put the whole thing in there, but we talked a little bit about lawyers in that clip and the idea that if the price of a lawyer goes way, way down, sure, that's bad. And we're going to, we might fire people in the legal industry, but guess what that's also going to do. It's going to get people like me who are too cheap to spend $600 on a lawyer an hour and we're going to go and we're going to use more lawyers. And so this is a two sided thing and I think it's important to think about it that way.

[Matt Zigler]

This whole idea of like in financial planning land, just reminding people that every dollar you saved is either going to be gifted or consumed, that pulls all the way forward into regular life. If I spend less dollars on the price at the pump in gas, because I know we're touching on that today too. If I spend less right now, Matt, if I spend more yesterday, if I spend more money now, I'm spending less elsewhere. If I spend less money now, I'm spending more elsewhere. Most people like that. That marginal dollar, our propensity to spend is really strong. We Americans especially are really good at spending money. And if you take stuff like a reduced legal fee or whatever else, you're probably going to recycle it somewhere else into the economy. It's a really powerful point. I think it has really weird nuanced parts that go up because. And back to the, to, to the lawyer piece and extra citrini on this thing. It's what happens to the lawyers when all of a sudden they're the ones who have less income. So now they're consuming less. And what are the items that they have preferences for that now they're not buying that. You know, how does that trickle through the rest of the economy? However that key point stands, there's still a spending decision that's the result of this. You spend in one case by spending more in another. It's so obvious. But it's such an important thing to zoom out and look at.

[Jack Forehand]

Yeah. And I think it's important to look at both sides. Like this is how you get to the tech guy's world of abundance is what Jim is talking about. But then on the other side, you know, we talked to Bob Elliott, he was saying he had the quote that like unemployed people don't spend money. And so that, that is the other part of this, which is you've got to think about how it flows through to the other side of this. So I think it's interesting. I don't have the answer, but I do think it's important, like when we get, when everybody gets wrapped up in this job loss and all this other stuff to think about. There is another side to this. There is a right tail to this.

[Matt Zigler]

There's a right tail. And this is where Peter Atwater's work on the K shaped economy, I think gets really, really important. And I think this is also in Eric Pakman stuff in Adam Butler writing about like the precarity line and thinking about the different parts of the economy that that can hold things differently inside of the recession conversation. If AI truly slows down some of the bonuses, compensation and consumption for the white collar, proverbial white collar workers, maybe they weather that transition in a way that's not like a normal recession because they're working off savings or whatever else. Likewise, if people are seeing the benefits of AI and spending money in the real economy, maybe that helps out the other side of the K for a minute. Maybe that helps out people where like that precarity line means that swing in price at the pump might be the thing that makes them have to make a choice about groceries or these really, really real economic impacts and hard decisions that that can be felt. So the richness and the nuance of this is really important to take at that value. And all these metaphors that we've been highlighting on the show in the last, you know, several years are all kind of coming full circle around this stuff.

[Vitaly Katz-Nelson]

This is your fix.

[Ad Voice]

I am your host, Stassi Schroeder. Welcome to Tell Me Lies, the official podcast. What's the most unhinged thing of season three? Steven.

[Jack Forehand]

Because he's so evil, I do think he is misunderstood.

[Matt Zigler]

You see everyone face consequences. It's intoxicating.

[Ad Voice]

The writers just know how to trick. Yeah, there's always a twist in this show. Tell Me Lies, the official podcast, January 6th. And stream the new season of Tell Me Lies January 13th on Hulu and Hulu on Disney Plus.

[Jack Forehand]

So our next clips from Vitaly again. And we obviously got an expensive market here. We all know we've got an expensive market, but I think what you get, maybe some of the most misused information in the world, is valuation. And so what does it mean that we have an expensive market? So here's Vitali talking about that when

[Vitaly Katz-Nelson]

the stocks are cheap, which usually happens when they like when you had A long term bear market or market declined or for a long period of time, then the economy, let's say economy economy is growing 4, 5 or 6% and then price turnings are going up. That price, that price tronics expansion creates the stalewind for stocks. And that creates kind of what we call a bull market, right? Because you have a returns that are above average.

[Matt Zigler]

Okay.

[Vitaly Katz-Nelson]

Now when stocks are expensive, the price earnings becomes a headwind because as price turnings declines, whatever gain you get from earnings growth gets subtracted by decline of price to earnings. Now today, if you look at the stock market overall, we are probably one of the highest valuation in the last 100 years or close to it. So therefore it's very likely that over the next many years the price sharings will be not a tailwind but a headwind. And if it's a headwind, that means it's going to be whatever. Now we can have a separate conversation about earnings growth because I would argue that the economic growth going forward is probably going to be less than it was in the past. But even that if, but even if that what economic growth we had over the last 20, 30, 50 years continues at the same rate because stocks are expensive. And price earnings historically has been a pendulum went from one extreme to another, went from cheap to expensive. So if the price turning declines, then returns from stocks become basically like, it's kind of, it becomes like, I don't know, third grade math minus plus five plus minus five, you get zero. And that's basically what's going to happen. Stock to stack. That's how I'm thinking about this was

[Jack Forehand]

kind of a light bulb for me because it's hard to frame valuations for people. And the fact that the market's expensive, it's hard to put it in context. Like people want to react and sell and buy. And we know it's not useful at all as a timing indicator, but like how do you think about it? And I thought the idea of a tailwind or a headwind is a good way to think about it. It's like something when valuations are really expensive. It's something we're fighting through, but it's something sometimes we can fight through and we keep going anyway. And so I just thought about like thinking about it as like this slow pressure, like in the opposite direction. Either way was an interesting way to think about valuations.

[Matt Zigler]

So I have a modest math phobia that I've mostly overcome. But it links back to fourth grade when I had a teacher with almost my same name but not quite my same last name. She would show us Shirley Temple movies on like snow days or you know, randomly. You know what a teacher would randomly throw in a glass? She'd throw on Shirley Temple. And once I made some type of like snarky or sarcastic comment to one of my classmates in my glorious upbringing, as I was wont to do, and she heard it and decided, I'm reading this as a fourth grader now with hindsight as a 40 something, she basically decided she didn't like me. And so that year of math was not a good experience. And fractions in particular, which was the main focal point of that year, were not my friend. I say this because when I see those earnings multiples and I think about how there's the numerator and the denominator after I push through the terror instilled in me by Shirley Temple and this awful teacher, I re. I remember the idea of this is that the fraction is just this snapshot in time. And when we look at it through the terms of earnings multiples, what we're really looking at, to Vitaly's point here, is that it's a result. It's a snapshot of how we got here. A high valuation multiple is literally just telling you that the price has gone up farther and faster than earnings in the recent past. If it's a 12 month trailing, trailing 12 pe, or even on the forward ones, let's focus on trailing for a second. Like that's a snapshot of where we are. It's just telling you that price has gone up this much more than earnings in this period of time. There's two ways for that to resolve over the next year or whatever period you want to look. If the price just doesn't go up as much as earnings, but earnings still keep going up, it can normalize, the multiple can come down. It'll look as a better snapshot in some period of time or earnings go off a cliff, prices could go faster. That's the way we get cheaper. In all these scenarios though, it's just a snapshot. And if you're not talking about what the denominator and numerator are going to do in your expected next period, you're missing that point. The headwind and tailwind metaphor is a, dare I say, poetic way to put it to level set your expectations.

[Jack Forehand]

I think the way to think about it is that word you just used, which is expectations. When multiples are high, expectations are also high. So that if those high expectations are not met, that's just a Harder headwind to fight through when you're at the bottom. In 2009, expectations are basically nothing. And so you have a big tailwind with those expectations. I think that that word expectations is a great way to think about multiples.

[Vitaly Katz-Nelson]

Yeah.

[Matt Zigler]

Especially off of the lows. In a bear market we haven't seen cheap in a minute. But when you're cheap, the expectation is price has barely kept up with the earnings growth. Or in, you know, in the case of like an 09 where you have negative earnings, you have a whole different scenario unfolding. But that sets up the opportunity for the surprise factor to be that much more. And if earnings are experiencing a robust recovery off that point, maybe price is going to move just as much or more. That sets up a more exciting forward returns profile. However, as we also learned from like the Shiller data that everybody loves to show you and tell you like how many standard deviations above the Cape you are over and over and over again and then good returns come. Just because you're elevated doesn't preclude you from still having healthy returns. It's a real thing and it can't be the only way you're looking at the world.

[Jack Forehand]

So this next one is also from Joseph and it plays into this idea of what's going on with the Iran war. But and we talked earlier about like someone who has a portfolio of companies, he's thinking about how does it impact his portfolio of companies. But to be able to do that you have to be prepared. So here's Joseph talking about that.

[Joseph Shaposhnik]

Well, look, I think that what we try to do is we try to know our businesses so well that when a piece of news comes across the wire, we already have a sense for who could be impacted by that particular news event. So as you think about the, the conflict in the Middle east, certainly we're thinking about the defense companies and how they'll be positively impacted. And maybe you know, we own a little bit of, of Hilton and we think a little bit about how Hilton could be negatively impacted. But we think about the headlines, we certainly dig into the, into what's going on and then we dig into the companies and we just want to understand how will the long term free cash flow, compounding power of our businesses be impacted and whether, whether it'll be impacted at all because it's very possible that the conflict that is currently going on really will have no meaningful long term impact on, on businesses that we own and in most businesses. So we're trying to understand as we look at The P&LS how much exposure do these companies have to whatever event is happening and will this event, if it drags on for a long period of time, will that event have a meaningful impact on the future prospects for this particular company or a group of companies? In the case of the current conflict, I certainly think it makes the world and countries feel more compelled to become more defensive and to invest in their industrial base, to invest in their defense or defensive positions. And so that's the process. We really are bottoms up, very company focused. So if we see a headline, we will go into our, our, our models and look at how our businesses are oriented and, and understand whether that will have an impact on the companies that we own. But generally speaking, most headlines don't have meaningful long term impacts on companies because most headlines by their very definition are relatively short term in nature and they go away. It all comes back to the strength of the businesses, the durability of the franchises and their ability to keep compounding. In my experience, less activity during headline, during aggressive headlines or many, many headlines coming out, less activity generally has yielded better performance or good performance from my portfolio. So I'm always cognizant of that, not overreacting to the headlines, just going back to the companies, going back to our investment theses on these businesses and trying to understand whether anything has meaningfully changed. That's our process.

[Jack Forehand]

I just think this idea of doing the work upfront is so important and you see this with all these guys that are owning these compounding businesses that are really in the details of those businesses is that Joseph had no idea a war was going to come. I mean it was possible obviously based on what was going on. But these things come out of left field. Covid wars, they come out of left field all the time. And if you've done the work on the businesses, if you know the businesses in and out, even though you don't know the variable that's going to get introduced, you have a much better chance to figure out how that variable is going to impact your businesses because you know everything about them.

[Matt Zigler]

If you know all the ins and outs of what's going on, you can deal with any new piece of information that comes in is you have to build the model, you have to build the plan, you have to have stuff so that you have all the context on the table already before the question comes in. When I'm doing financial planning work, I'm always trying to take people back to this. I'm like all this document is, is not predicting the future. Yes, there's a Slide of Monte Carlo. Carlo analysis. And we can stretch it out for your lifetime or three generations beyond your lifetime, if you want. For what happens to the balance sheet. It will be wrong. But the idea here is the purpose of the plan, the purpose of this document, the purpose of what Joe's doing when he's looking at a company and building a financial model about what they are, is to say, I now have all the context on the table. So when the new question comes in, I have a way of thinking through that. Do that homework. It's that easy.

[Jack Forehand]

Yeah. And I think this idea, it applies to life, too. This idea of, like, whatever you're doing, know the thing so exceptionally well that whenever you're thrown a curveball, like you're in, you're in a position to react. Like, I even think about, like, what I do, you know, because we go up and down in terms of, like, on YouTube. Sometimes we have a lot of views on our videos, sometimes we have less. But, like, we're really trying to understand what's going on behind the scenes. And this so. So well, that when something's not working, we can really. We're much more capable of addressing it because we've really put in the work. We've put the thought through.

[Vitaly Katz-Nelson]

Yeah.

[Matt Zigler]

Troubleshoot the variables. You have to do the homework so that you have a pretty good awareness of all the variables are. Including when one is broken. Because sometimes that happens too, where you have to step back and realize like, oh, this variable doesn't matter anymore, or, oh, this is totally misfiring and giving me a faulty signal. But, yeah, be it why the subscribers do or don't come back, how YouTube presents stuff to other people, why the weird things? When I go down a rabbit hole, like the Clodbot thing from the beginning of this, and then it completely takes over my feed and I'm going, what? What happened? All of a sudden I'm like a Bay Area tech nerd or something. And it's just. It's weird, man. It's weird. So the more, you know, the more context you have, the better you are with the questions. That's all I got.

[Jack Forehand]

So this last one is a Jim Paulson patented term, I think, which is the policy juice. We talk. We talk about this all the time. And he actually has, like, indexes of policy juice he can do on his graphs. So. So here's Jim talking about policy juice.

[Jim Paulson]

I could argue, though, Justin, that as I showed that in reality, I would suggest 90% of the economy is already in recession. So if. If we Bring the policy juice finally. It probably won't be that out of character from other times. What makes this interesting is that's generally the description of a brand new bull market. Bulls begin usually because we're the policy officials are trying to get out of a recession or avoid one and, and they're easing aggressively for to try to do that. And that juice runs through the stock market and through the economy and picks up the economy but it runs through the stocks first. That's how bulls begin usually. And we never got that in the, in the October 22nd forward bull really ever full on policy support. Maybe we do get that and fortunately maybe it's going to take a full on recession panic to get that. Or maybe we, maybe we just, maybe Tex holds us out of the water just enough that we get a, a easing light version this time. I don't know. But we're already getting an easing light version a little bit. The question is whether that becomes more broad based and intentional. I guess I kind of think it's gonna, I just think the lagged impact. The other thing is it's not just the Fed. I mean the, you know, the fiscal juice is 2%. Fiscal deficit spending to GDP now is 2% less than it was 12 months ago. It's gone from 7.2 to about 5.2. And so I think fiscal policy probably also needs to get in the game, if you will. Probably. And a lot of people I know just from other comments, oh heck, we can't be blown in the deficit up again or all this. But I think if the economy's bad enough, we're not going to worry about that. It'll be like with COVID or any other crisis that brings easing. We're going to extinguish the fire right in front of us first and then worry about the rest later. I think we'll probably do that again now. Maybe to your point, we won't get a full blown recession. I kind of think we won't by the numbers. But I do think that there's many parts of this economy that need help policy wise. And it could feel a little like the start of a new bull where all these new parts of the market that haven't done much are suddenly leading the market higher, at least for a period. The question's going to be if tech collapses enough then it could take down the whole thing, you know, and that's going to be the problem. I, I think if we talked about in the past if we can pass the baton successfully to these new leaders that aren't up as much in price, that got better back or that got earnings that haven't been stimulated yet, but maybe are just starting to, then they could, they could handle some pullback in technology without a complete collapse and continue this bull market on for a period.

[Jack Forehand]

What's interesting to me about this is a couple things. First of all, Jim pointed out, and I think it's true, which is this has been a bull market that's been it has had less policy juice than probably any other one. Like the Fed hasn't been cutting dramatically during this bull market. Like a lot of the other variables he looks looks at in terms of like policy support for it haven't been there. And part of what Jim talks about a lot is he thinks that's the reason this has been a lot less broad than it otherwise would have been, is like those other companies are much more impacted by this policy juice than the Mag 7 and so therefore they've trailed. And I think that's just an interesting way to think about this whole thing.

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[Jack Forehand]

Shop [e-mail] ever spend all day fishing and catch nothing?

[Matt Zigler]

That's what happens to hackers when Cisco Duo's on watch. Every login, every device, every user protected. Cisco Duo fishing season is over. Learn [e-mail] Is Jim just doing MMT? Is that like what my takeaway is? Every time he talks about this, I think this is tremendously useful. I don't understand why people don't think about this, whatever words you want to put onto it. I don't understand why people don't think about these in these terms. You're either adding net adding liquidity to the system, or you're net removing liquidity from the system in all these different areas. And so whether it's policy juice or, you know, stimulus or whatever, whatever ways you want to frame this out, it's such a useful backdrop. And it also tells you like the where we are now piece and him framing. We didn't get quite the response in 2022 that you would have expected to help drive this bull market, like, well, where are we now? What are the implications if you change that? If the Fed did ease more, if there was another fiscal act, if all of a sudden clod bots are running our lives and now we have all this other money to spend, how do these things play into the system? Because those patterns can actually move whole markets for extended periods of time.

[Jack Forehand]

And what's interesting is we are near all time highs and that's typically not when you see this addition of policy juice. So on one hand it's interesting to think about what that dynamic is and how it's going to play out. But on the other hand, like a lot of The S&P493 are, are not doing nearly as well. And so does that mean if this juice comes. And obviously we're at a point now where who knows if the Fed's going to keep cutting. But you know, Jim thinks that the economy is a lot weaker than people think and he thinks this juice is going to have to come and that could, that could supplement the case which also Joseph made in the interview for this idea that the 493 might do better than the Mag 7 and we might see a broadening of the rally.

[Matt Zigler]

It's hard, it's hard to look at it and not wonder if it's coming, especially when on a policy front administration probably wants to run it hot. The war is a great cover. You got all these narratives overlapping that basically say even if we're at high, even if the valuation multiples don't make sense. And by the way, that 493 point is very, very real, it doesn't mean the policy juice is going to float through directly to the other winners. It might just be the thing that helps keep what's an arguably weak consumer economy afloat. And that's, that's a big highlight.

[Jack Forehand]

And just as an aside, as we wrap up, it's going to be really interesting to see like what the Fed does in light of what's going on because obviously you can make. Jim's argument is very strong for the policy juice. But also we're going to see some higher inflation prints here because of what's going on with the war. So like how are they going to react like to these higher inflation prints? It's just going to be a really interesting balance to try to strike right now.

[Matt Zigler]

The World bank, there was a World bank study I was looking for, for some data the other day and it was a 10%. Every 10% shock in the global price of oil is a third of a to like 0.35 or something like that percent within the first year of the oil shock and 0.55% in the calendar year for every 10% shock in the price of oil. And this is one of those things. Inflation's probably going up. Rates are probably elevated on the inflation risk if you have unemployment going on at the same time. Because suddenly, basically, per Eric Pakman's data over at Data for the People, all of a sudden the healthcare industry hasn't been the, the off ramp to keeping the employment numbers looking relatively healthy in the US Economy. There's a big case that potentially made for stimulus here. I don't expect the politicians to miss it once they decide it's on their side.

[Jack Forehand]

Yeah. And it's, I mean, obviously you, I don't know what's going to happen here, but it is, it is a very interesting world we live in. And you know what was great about this episode is we were able to kind of take a step back and have more of these long term takes on this whole thing versus like what's going on right now. And that's what we try to do with the podcast. We try to, we want to talk about the current issues, we want to talk about what's going on, but we want to talk about what we can learn from them as investors who think about the long term and aren't necessarily reacting to all this stuff.

[Matt Zigler]

Yeah. In conversation with us, there's a reason that these are circling around the conversations we're having. And even if Joseph Shaposhnik doesn't get to talk to Vitaly, doesn't get to talk to Jim Paulson, it's interesting that they're all kind of in conversation with each other. It's really cool to pull these together.

[Jack Forehand]

So I'll let you bring it home because you are, you are the master of bringing it home.

[Matt Zigler]

You're watching Excess Returns. That's Jack Forehand. I'm Matt Zigler. Like, subscribe, comment all the things below. And we are out.

[Narrator/Host]

Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns [e-mail]. if you have any feedback or questions, you can contact us at@excess returnspodmail.com no

[Matt Zigler]

information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.