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Excess Returns
Last Call: January 2026 | AI Capex, Private Credit Problems and the Unstable Market
01:07:24
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- [00:01]
Matt
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Jack Forehand
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Matt
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Jack Forehand
Indeed.com podcast terms and conditions apply.
- [00:29]
Matt
Oh, such a clutch off season pickup Dave.
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Brent Kachuba
I was worried we'd bring back the same team.
- [00:33]
Matt
I meant those Blackout motorized shades.
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Brent Kachuba
Blinds.com made it crazy affordable to replace our old blinds.
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Podcast Outro Announcer
Hard to install?
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Brent Kachuba
No, it's easy. I installed these and then got some from my mom.
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Ben Hunt
She talked to a design consultant for.
- [00:44]
Brent Kachuba
Free and scheduled a professional measure and.
- [00:46]
Matt
Install hall of Fame Son. They're the number one online retailer of.
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Brent Kachuba
Custom window coverings in the world.
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Ben Hunt
Blinds.com is the goat shop up to.
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Podcast Outro Announcer
40% off site wide, plus an extra 10% off every order and a free professional measure happening right now@blinds.com we are excited to announce the launch of a new podcast, Last Call. While many market rap shows can repeat the same information, we wanted to try something different. We wanted to get away from what the market did in the past month and instead bring in some of our friends who offer truly unique perspectives and data. And we wanted to have some fun along the way. Our first episode features Ben Hunt on private credit, Brent Kachuba on what he is seeing behind the scenes in market flows, and Cai Woo on how AI capex is changing the MAG7. You can subscribe to Last Call on all major podcast platforms or our YouTube channel using the links in this episode. Description thank you for listening. We hope you enjoy the new show.
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Matt
Because we're fresh off our private jets. Looking good today. This is not your grandmother's market recap show. We're doing this the excess returns way.
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Jack Forehand
I feel like when like drinking a beer on a podcast is on the upswing. You've got people like the market huddle doing it and then when it turns over on the other side, I'm going to be like I brought my beer.
- [01:42]
Brent Kachuba
You see a 2% intraday decline and then what happens? Everyone goes, well what? What happened in the market? I don't know what just happened? Was it. Was it copper? Was it this? Was it that? But if you went into this day knowing that the options market showed these dislocations, it can really help you if.
- [01:56]
Kai Woo
You were to, you know, form a company, you know, with your own hand and Draw the perfect company. Yeah, you would have drawn Google, right? Like, you know, a few years ago, maybe 10 years ago, whatever. And what they're morphing into is. Appears to be more utility.
- [02:08]
Ben Hunt
Like, over the past 10 years, you've been deluged with everything private credit. You can't escape it. And it's. It's definitely reached that sort of bubble reality. And the only question when something like this happens is, when is it going to pop?
- [02:36]
Matt
You're watching Excess Returns, the channel that takes complex investing ideas and makes them simple enough to actually use, where better questions lead to better decisions. And now, because we're fresh off our private jets, looking good today. This is not your grandmother's market recap show. We're doing this the Excess returns way. We have all these amazing conversations over the course of a month. We know nobody can keep up with this. We can barely keep up with the string of hits that we keep coming. So beyond doing a market recap, we wanted to do an idea, a person recap. Take that stuff and make it into something you can actually use, because these are the people that are helping us navigate this crazy world we're living in right now. Jack Forehand and me together, we're calling this Last Call. How you feeling, Jack?
- [03:24]
Jack Forehand
I'm feeling pretty good. I actually brought. I brought a beer. I mean, I'm not gonna actually drink it because it's noon on a weekday, but I'm told in these types of market rap shows, that's what you're. That's what you're supposed to do.
- [03:32]
Matt
Shout out the little buddies. And did you coordinate the outfit to match the little buddy it looks like you got.
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Jack Forehand
I did not.
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Matt
That's great.
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Jack Forehand
Like, I kind of. I kind of feel like when you're like, if you. We're going to talk with Ben Hud a little bit later of this whole idea of a life cycle of a narrative. And I feel like when, like drinking a beer on a podcast is on the upswing. You've got people like the market huddle doing it, and then when it turns over on the other side, I'm going to be like, I brought my beer. It's time to. It's time to do our podcast. So that's basically where I operate on the level of coolness.
- [03:57]
Matt
Well, you got to have your first third Bud Light of the day. No better time than now on this recap show.
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Jack Forehand
But I am really excited to do this because we've one. One of the cool things about Excess Returns is we have access to. To some great guests who are not your people you'd see on your standard market rap show. We have people who have unique data or unique looks at the world or unique takes on things. And we're going to have, we're going to play a couple of clips from our previous episodes. But a lot of this today is going to be new content. We've got, we've got brand new interviews with some of our favorite people in.
- [04:22]
Matt
The investing world and this idea that we can catch up with these people on the regular. I know you do it too. I take conversations like this that we have both on the podcast and in between the content, in between content we're putting out. And these are conversations that I'm having in real life anyway. So the idea that we can take this, share them, get some of these segments specially recorded to look back on the month that just was. I'm really excited for this, this idea. I think this is going to be tremendously useful to me personally. Professionally too.
- [04:52]
Jack Forehand
Yeah. Just some examples of who we got here. We've got Brick Kachuba and you know, as a, I'm not an options trader, I've never put on an options trade. I don't know if you have lots.
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Matt
Of Iron Condors, let's be honest, Iron Condored out the wazoo.
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Jack Forehand
I always have to like ask ChatGPT what an iron Condor is before I do the interviews with Brent because I really don't know but, but nonetheless, like what's cool from the perspective of long term investor is Brent is seeing all the stuff that's going on behind the scenes. So when we see these moves in the market and we don't know what's causing them, a lot of times Brent can see what's causing them. So I sat down with Brent for 10 minutes. We've got a great interview with Kai Wu we're talking about. He wrote probably the best paper I've seen on AI CapEx and the changing nature of the Mag 7. We've got that you sat down with Ben Hunt. We've got some really cool interviews plus some you a little bit of you and I interspersed I guess throughout it.
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Matt
And after Ben Hunt we also have a great clip from Azwath, Damon Duran, the Dean evaluation himself on why he's raising cash from some of these tech names at the beginning of 2026. The little financial planner in my heart loves hearing this.
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Jack Forehand
So as we throw to our first segment here, the first thing we want to do, and you mentioned this before, is we want to look back. So we're calling this segment the Rearview Mirror. Yeah. So what I wanted to do here is I don't think we want to talk about like what the S and P did last month, which is what you're going to see in a lot of shows. I, I think there's some very unique things going on behind the scenes. And we're seeing right now, today, I mean, the last couple days, the market has started to go back down and, and one of the things I think we've been seeing behind the scenes is maybe not necessarily uncertainty in the market, but more instability. And I think there's a big difference between those two things. And I think that's important maybe to talk about it as we're trying to put all this in context.
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Kai Woo
Absolutely.
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Matt
Because this idea that risk means more things can happen than will happen is a big part of this. You don't have a stability argument without an instability argument, meaning the thing that's going to actually attack the stability of a lot of the ways that the dominant narratives in markets have been framed in the last several years. And we see a clip like this, we start to get into the idea of what's challenging those dominant narratives and, and actually could cause some of this volatility and instability.
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Jack Forehand
Yeah. So let's play the clip quick. This is Liz Ann Saunders. This idea was not ours. It came from her. So this is Liz Ann Saunders talking about this idea of instability, not uncertain.
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Ben Hunt
Yeah.
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Liz Ann Saunders
And I think it's more than just a nuance in terms of the distinction between those two unwords, uncertain and unstable. I started thinking about that when we hear it all the time, how often you hear the line markets hate uncertainty. And I always chuckle inside my own head when I hear that because I think, is it ever certain? I've never woken up to the front page of the Wall Street Journal saying we know everything, everything is certain. So I think it's the instability piece that is unique in this backdrop. It is certainly as it relates to policy, as it relates to geopolitics, tariff related policy has been unstable. Monetary policy has been unstable. We've had sits and starts in both of those. Sometimes the messages we get, particularly from the administration, not to make this a political angle by any means, that it can kind of come on a fly. And I think there's this tendency for knee jerk reactions on the part of the investment community and it's this instability that makes this cycle a little bit different. And it's leading, it's in part leading to some of the bifurcation, some of the K shaped nature in this cycle. And I'm not sure that eases anytime soon.
- [08:20]
Jack Forehand
What's really interesting to me about this clip is like, I'm the person that's always, like on our podcast being like, there's an above average level of uncertainty in the market. Like, it seems like at all times I'm thinking there's like an above average level of uncertainty, but, like, I don't know what, I don't know how to make sense of uncertainty. Like, there's always uncertainty. And that's kind of what Liz Ann says in the clip. What we've been seeing recently is not uncertainty. What we've been seeing recently is instability.
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Matt
Do you see this concept of instability as I framed it in the setup here? Risk means more things can happen than will happen. And my take is that our awareness of how many things could happen is what drives that instability. When there's a spread of stories that people are talking about, like, well, what about. What about. What about what if, what if, what if? That's the instability thing coming into our awareness. Is that how you think it? Or is it somewhere.
- [09:05]
Jack Forehand
Yeah, well, and it's also fair to say, like, to your point about more things can happen than will, like, we've been expanding and expanding and expanding the things of. I mean, how many things have happened in the markets in the past, you know, year or so, you're like, oh, that would never happen. We're never going to do that. And it's just like there's so much. And that's not a political thing one way or the other. It's just like it is very unstable. And also these things that have been going on to some extent at least, are like market moving type things. So they are causing this unstable environment. You know, one of the most interesting things for me, and I don't know, you talk to clients a lot too, is this balance of instability. Market goes up. And it's been really interesting because when you talk to clients, they're worried about all of these things. They're worried about everything that's going on. And I'm worried about it too. But the market keeps going up. And like, on one hand you could say you got to tune all that stuff out and ignore all of it. But on the other hand, like, at some point, maybe the instability turns into something that actually does make the market unstable. So I think it's just interesting to think about as an investor when you see those two different things.
- [09:58]
Matt
Well, this is the classic Wall street climbs a wall of worry statement. Right? It's a version of that. Now you have to be aware of it. And I think reading into this and the stability versus instability thing, because that's what I take away from reading Lisanne stuff keep on rocking in the free world. Liz Ann, we're just going to, you know, praise your research report titles for a second here. But the idea of the stories that are relatively stable, that don't have the instability inserted into their questions yet a year ago, like about the AI growth initiatives, about we can build out all these data centers about, about lots and lots of places like corporate earnings are robust, resilient, and they're holding up well. We've seen all these stories without a lot of what ifs underneath them. And it feels like those what ifs are contributing to this feeling of instability now because now when somebody talks about the AI buildout, they're also asking questions about, well, what about the data cost? Well, what do we make about the corporate financing changes and how balance sheets are shifting to finance these things?
- [10:56]
Jack Forehand
What if we build more than we need?
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Matt
What if maybe the picks and shovels are a better idea? Maybe the semiconductor chips are a better idea. That laundry list of what ifs, as that grows, puts pressure on that central narrative. And I think we're seeing a real spike in that instability that's coming in where people are aware of how many other things just could happen and now starting to reweight in their minds which ones are actual fears that they want to take portfolio action on.
- [11:24]
Jack Forehand
And I think that leads perfectly to our other topic we want to look back at, which is this idea of lack of trust. And this has been something that you've been seeing more and more. And you just did an interview with Tony Greer and he probably, it was more of a light bulb moment for me is he was really tying to like all this stuff that's going on with metals and gold. I mean, at the root of that is a lack of trust. And it also ties into what you talked about with Grant Williams as well in terms of like what happened when they seized Russian assets in the wake of the Ukraine war. And like how that trust now is not just between us or to things like the Fed. It's like across countries now, there's not trust. So it seems like when you see gold going up every day and going crazy, even though it's down a little bit today, like a lot of that ties back to this lack of trust. I think across all, everything, right.
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Matt
Tony's fantastic because he's got the trader's mindset. He's been a Market maker. He sat on trading desks. He's run precious metals books on trading desks for decades of experience. So he sees everything through this lens of understanding what's on bid, what's on offer and how to make sense of that balance. He's been screaming about this for basically like a year and really pounding the table late last year on this topic, which is part of why we wanted to have him on. So Tony's really great for interpreting what are we feeling right now in markets with little structural and systemic imbalances in supply and demand for something like precious metals and gold. He's anchoring it back to every time that trust narrative gets hit, that nerve gets picked. We see another uptick in the price, what Grant does. And Grant does it like nobody else is. He's the best history teacher on this stuff anybody's ever had. Grant framing this idea of the breakdown in trust and drawing a parallel. Like I didn't see the Suez crisis thing coming into play. When's the last time you thought or learned in class about the Suez crisis?
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Jack Forehand
Yeah, I wouldn't know anything about it.
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Matt
You probably wouldn't. So Suez is 1956 and it's basically the crisis over the Suez Canal. And Grant's big point is it's the first time when England and France have to look at the canal and basically go, we can no longer defend this thing without America's support. So this is post World War II, Bretton woods, that stuff. And it's pre the US coming off the gold standard, but this is basically the pound sterling going through its evolution of being a dominant reserve currency into something lesser. And Grant said, look what's happening now post 2022 where the US froze Russian assets and now there's this question of if the US can just do that to anybody. Trust and institutions falling. Everybody has to ask that question around the world outside of the U.S. do I want to do business with them? And there was that same question of like the authority that France and the UK and Britain with the pound sterling and the emergence of the currencies at that point in European history ran into a similar spot where all of a sudden they couldn't just do it on their own anymore and they needed to reach out to somebody else. And that's an erosion. It's not a revolution, it's not a one time act that overnight boom, the currency, the reserve status changes or everything goes into gold. But it's a, it's a transition phase. Both Tony and Grant are saying we're in one of These transition phase where capital flows are determining where reserves are held and in what form. And that's a, that's a crazy story to hold in your brain as we come into 2026 here.
- [14:44]
Jack Forehand
So as we think about a lot of the pressures behind the scenes in the market, this is probably a great time to lead into my interview with Brent Kachuba. So I sat down with Brent and he talked to me about what he's seeing behind the scenes in option flows to maybe tell us about what's going.
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Kai Woo
On right now in the market.
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Jack Forehand
Frank Cachuba, welcome to Last Call.
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Brent Kachuba
Thanks so much, Jack. I'm excited to be here and congrats on the new show.
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Jack Forehand
Oh, thank you very much. You know, for our first episode here, we wanted to really take a deep, deep dive into the global macro landscape. The impact of Greenland, what went on in Venezuela. And I can't think of anybody more qualified than the two of us to do that. So I think that's where, I think that's where we want to start.
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Brent Kachuba
Yeah, people love Brent's macro corner. That being said, I do have a few macro ideas that I think are interesting here. We could talk about those today. And they're all things that are showing are reflecting in options prices. And so that's where I pause and say maybe I have some qualifications here to mention some of these things. So we can, we can.
- [15:36]
Jack Forehand
You actually do.
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Matt
Yeah.
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Jack Forehand
And unlike that previous thing was a joke about in our OPEX effect show that Brett and I do monthly, we often get into areas maybe the two of us should not be having opinions on and we get in there anyway. But I think, I think it's all in good fun. But, but what you really are an expert on is looking at the flows behind the scenes that we're seeing in the market. And one of the cool things about doing that show for me is I can now. I'm often seeing things that are happening in the market and I don't really know what's driving. But you have all kinds of data behind the scenes that tells you what's going on with these flows and how it's impacting what all of us who are longer term investors are actually seeing. And so that's what we want to get into in this segment. We want to look at why these things are important and also dig into some of the things you're seeing right now in the flows that might be interesting for investors.
- [16:17]
Brent Kachuba
Yeah. And the argument that we make is that the options volume continues to grow both on the index side, so spiders in the spx, et cetera, and then also on the single stock side. And the exchanges are incentivizing trading, more trading to happen in near term expirations, meaning there's more zero DTE not only in the S&P 500, so spiders and the Qs, but also in single stocks. They just announced that they're gonna start having Monday, Wednesday listings now for a lot of single stocks. And that should only likely increase the volume and increase the impacts of options flows, increase the impact on the underlying stocks that we're trading every day.
- [16:52]
Jack Forehand
Yeah, and I'd advise anybody to watch our OPEX effect if you want to understand in detail how all this works. But we'll throw this chart up really quick to get to Brent's point he just made, which is this options volume has been going way, way up into the right and, and as this goes on, dealers behind the scenes are having to make, having to hedge their things that are going on in terms of flows. And, and when they do that, it creates flows in the market. And that's what you're seeing here in some of your tools in terms of the impacts you're seeing from that.
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Brent Kachuba
That's exactly right. And I think one of the things that seems to be coming clear to me as well, Jack, is it's not just about sort of we always talk about market makers, Right. And how they are hedging. But there's more quantitative trading activity now I think as well with zero dte and these short dated options. And so you have these kind of quant quakes, I would call them, for example. We just had one today, Today's Thursday the 29th, where you have these spasms driven by dislocations in the options market. And so those seem to be hacking happening with more frequency now as well.
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Jack Forehand
So in terms of going behind the scenes of what we saw here, like we, we had a Fed meeting this week and I remember you tweeted after that that you were seeing some things behind the scenes that maybe could have led to some weakness in the market. And then we're sort of seeing that now. So just as an example of how these things work, like what, what are you looking at and what do you see in a situation like that?
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Brent Kachuba
Yeah, one of the great things about the options market is that the expectations of how much movement traders are pricing in, in other words, how much volatility we're going to have, that's a function of the options prices. So when you watch CNBC or if you go on Twitter, you hear people you know, opining on what they think will happen. But that's not like a tradable metric, right? Your emotions aren't necessarily a great barometer for expectations. Whereas options prices, someone is willing to trade at that price, right? They have conviction on their views. And so I find interesting about this is that you can see higher or lower options prices around specific events like an fomc, and then that allows you to not only gauge sediment, but understand how people are actually positioned. And so earlier this week we saw a zero dt straddle. So that is how much the SPX is pricing in for movement on one day. That's why we look at straddle prices. And that was pricing in about 40 bips of movement. So for FOMC day, the market was only expecting 40 bips of movement in the S and P. That was about 30 handles, 35 handles of movement in the S and P, which is incredibly light if you just zoom out and think about what a daily price is. The S P tends to move about 65 bips on any given average day. And so, you know, thinking that on an FOMC day we only get 40 bits of movement is telling you that the market is pricing in absolutely no risk at this time. And as we all know, like, market's going to open, it's going to move a little bit, right? And so when those expectations of movement are too tight, what can happen is then we get what's called jump risk. Why? Because if you're betting the market's only going to move 40 bips and suddenly it moves 50 bips, you have to scramble to cover. So you go, well, what happened? It was only 50 bis move, but well, the expectations were for 40. So then all of a sudden you have to cover. That creates this jump risk and some of these spasms that we track so often.
- [19:47]
Jack Forehand
And it's interesting thinking back to like some of the Fed meetings during COVID we had the exact opposite thing going on. Like the options market was pricing crazy moves during Fed meetings, and then often it wouldn't materialize in the way people thought it would. So it's interesting to think about that expectations versus reality on both sides of it.
- [20:01]
Brent Kachuba
That's exactly right. And not only is there, I think, information embedded in that in terms of sentiment, but there's also flow information embedded in that. Right? If you are short a option at a very, very low price and the market starts to move against you, you have to cover. Right? That invokes volatility. On a similar fashion, we see some of these memory Chip names with implied vols that are at, you know, one year highs, if not, you know, even longer all time highs for certain names like a sandisk for example, which reports tonight. So you look at the implied volatility in that space and the options are pricing in, you know, 10% daily moves. And so you think, well, how many days in a row now can this Continue? Say a 10% daily move, same thing in gold and silver for example. Same thing. So what that's telling you is that when the expectations are for 10% daily moves and maybe the stock only gives 2% daily moves, then guess what happens that invokes hedging flows, right? That can cause a mean reversion the asset or it can cause a sell off in a stock, for example. So that's another reason why we watch the options prices, not just from the sentiment perspective, but also because it can draw, draw out these flows that can, can impact or stop or halt directional trading moves or trends.
- [21:11]
Jack Forehand
And that's a perfect lead in to look at this four quadrant chart. And we do this every, every month on the OPEX effect. But this is really cool in that you're looking at a variety of stocks, a variety of asset classes and you're, you're able to see how people are betting in the options market and what that tells us about what's going on. So can you just explain what this chart shows and some of the stuff underneath it?
- [21:28]
Brent Kachuba
Yeah, exactly. So we update this every night and what this does is it looks at one month options prices and it compares call prices versus puts for each individual stock. So I just mentioned SanDisk, for example and when you see a name towards the right of this chart, it means that calls are very expensive relative to puts, right? So Jack, there's a lot of call demand in Deere, JP Morgan, Oracle, et cetera and Nvidia and Target. There's actually a lot of put demand. It's the opposite. And what we're doing again is we're comparing just call versus put prices. So we can statistically state this if we hover over SanDisk, for example, SanDisk reports tonight it's risk reversal, which is the difference between the call and put price is 82%. So that means calls are now more expensive than they've been versus puts for the last year more than 82% of previous data points. Not only that, you see that IV rank, IV rank is the expectation of volatility. So the traders are expecting more volatility now today than they are for the previous, for 85% of previous data points. Now, why does that matter? It's because that IV rank is telling us that the options are extremely expensive. And so for those options to have their prices be justified, we need to have ever increasing levels of volatility, right? The stock has to move even more than what we've been seeing. So what I actually find when you dig into this a little bit more is that not only from those flows perspective, is that a flag that maybe sandisk has moved enough. And just to put this in context, for those of you who haven't been tracking SanDisk, I wanted to show a chart of this stock. It's up, well, Jack, 120% this year. Today is only January 29th. So this is what I'm saying, right? When you say can this be sustained? And if you buy a call option at these levels, you are betting on this type of movement continuing. Now, a stock could always double again once it's doubled in 30 days, but the odds of that start to sort of dwindle, right? So the call prices are very expensive. From a sentiment perspective, that suggests topping, but also again, from a flows perspective, because if you're an options market maker, you would love to sell a very fat, very expensive call option, right? And then if the stock sort of just trends sideways or reverses, you can make a lot of money on that. And so that's kind of the idea. The second one is from the sentiment perspective, you see the clustering of positions right? Now, in this case, what we see is that there's a lot of very bullish positioning. Costco, Palantir, MicroStrategy, Home Depot, all of these names are clustering towards the right of this chart, which tells us that traders are pretty bold up across the board, right? We see this kind of that single stock correlation is kind of high in terms of those expectations. Now, there are a couple names that are a little bit lower here, or put skewed, I would call them on the chart. So this clustering to me is a signal of maybe a little bit too bullish as we head into earnings season here. You could also view Jack as maybe the bulls have already sort of piled into the trade. The trade has already worked to the upside and now it's starting to get stretched or overbought is another way to think about this. So that's one thing. The other thing is look at how low the implied volatility rank is for spiders. Right now it's 7%. What does that mean? Implied vol, or options in the spiders are cheaper than they've been, basically. At any point in the, in the last year. So that's telling us that the options and spiders in IWMS are very, very cheap. There's a lot of complacency on the index side of things, right? So you can buy spider options, they're very, very cheap. But if you want to go and buy Meta, Microsoft, Oracle, SanDisk, those options are very, very expensive. So there's a big dispersion right, between those two. And this dispersion can be driven by sentiment, but it can also be driven by very popular quantitative type trades that we talk about a lot now, Jack. Dispersion and correlation trades, right? Those are popular hedge fund strategies that can help to drive the difference in these options prices. And so when you look at this and you see these groupings or these clusters move around the map, it's giving you a lot of information about how traders are positioned. And again, that matters not only from a sentiment perspective, but also from a flows perspective. I just wanted to point one, one thing out to you, right? And, and we talk about this a lot. So one free thing. Not, not everyone's going to be a spot game, a subscriber, and so shame on you if you're not. But if you're not, go and look at this index here called Core1M. What Core1M does is actually is an index that the CBO created that measures these single stock prices, single stock options prices, a basket of them versus the S&P 500. And what happens is when this gets too low, we see these spasms in the market. And what happens is then like we had one today and we were flagging this for everyone and putting this on X saying, hey, everyone should be careful because like we're due for a spasm. And so what ends up happening then is when these single stocks are too expensive relative to the index, that trade has to kind of unwind, right? And it creates a lot of movement or declines in the S&P 500. So if we just look at that, what happened today, Jack, out of nowhere, right? We were up after FOMC at 7,000. That's very near all time highs. And then what you see here, just to put this into context, and you didn't set me up for this, Jack, this just happened today. So it wasn't like I came on because I got this right, but you see a 2% intraday decline and then what happens? Everyone goes, well, what, what happened in the market? I don't know what just happened was it was a copper, was it this, was it that but if you went into this day knowing that the options market showed these dislocations, it can really help you maybe buy that dip with a little bit more ease or sort of have a better understanding of what's happening.
- [26:44]
Jack Forehand
Yeah, it's just so interesting for someone like me who's a long term investor to see all this stuff behind the scenes and to explain these movements. So hopefully we can do this again next month. Brent, love to have you on again.
- [26:52]
Brent Kachuba
We'd love to be here. Jack, thanks so much.
- [26:53]
Jack Forehand
So our next segment, you sit down with Ben Hunt. And Ben is also doing something that's incredibly unique in terms of he's taking narrative data and he's making it into a usable form where we can actually see like a narrative on a chart. So what did you talk to Ben about?
- [27:06]
Matt
So if you haven't seen what Ben and Rusty and the Epsilon Theory crew are doing over at Perseant, that's P E R S C I e n T. You gotta see it. Perseant Pro, especially if you are in markets, has a wealth of data where they are tracking literally every story in legacy media, in social media, in media, full stop across the board and they're basically ranking the density of how stories, arguments, positions are framed when everybody talks about them. One of the places that this has been most interesting because it's so tied in to every single market is in private credit. So Ben had a fascinating piece late last year on First Brands and Tricolor that's been followed up with the news from Apollo and most recently BlackRock Private Credit, just like credit and lending touches all these markets and the difference is it touches them in a far less transparent way. So he's got a series of charts that I saw in Persian Pro and I said we gotta do a segment on this. This is fascinating. Right now let's dive into my conversation with Ben. You know him from Epsilon Theory and now Persian Ben Hunt. Welcome back to Access Returns.
- [28:17]
Ben Hunt
Great to be here, Matt. Thanks for having me.
- [28:19]
Matt
Okay, you've brought storyboards along from Persian Pro. We're going to get into those. And these are from the subscriber section where you're tracking private credit. So we're going to get those up in a minute. But between First Brands and Tricolor late last year you had a wonderful note on those two events. And now with the BlackRock TCP write downs in early 2026, private credit risk, top of investors, top of advisors, mind is a major story. First off, why care at all about private credit?
- [28:48]
Ben Hunt
Well, because it's everywhere. You know, it's the new mortgage backed securities. I mean, I think your audience, Matt, is a lot of financial advisors, a lot of independent managers of their own accounts. And you know, if you've been in this business for more than a nanosecond over the past 10 years, you've been deluged with everything private credit to either put in your own account or your clients accounts. You can't escape it. I mean, I know advisors who get four or five entreaties from their broker, from the, from the home office maybe if you're in a wirehouse for another private credit offering. So you can't escape it. And it's, it's definitely reached that sort of bubble reality. And the only question when something like this happens is when is it going to pop?
- [29:52]
Matt
So I'm going to pull the first chart up on the screen here. I think what's really interesting, A, explain what we're looking at but B interval fund exposure to private credit is a concern. We picked the interval fund chart. But this isn't just about interval funds. And let's leverage on what concern means here in this storyboard.
- [30:10]
Ben Hunt
Sure. So first off, what are we looking at here? So what we do at Perseant is we read the world's news. And I really mean the world's news. Any language, every country, we read it all. Everything that's publicly available. Every blog, every transcript, every newspaper, every tv, we read it all. And then what we're, what we're doing is we're trying to identify elements of narrative, of story, of theme within all of that. So what, what we really want to try to do is show you, visualize for you when is a narrative growing or when it's declining. But we want to track, we want to see what's different, what's different in the world of narrative. And that's what you're looking at here right now the axis is in little $10 words here, Z scores on. All that means is standard deviation. All that means is how unusual is the activity. So when something is hits a level of two there, that's two standard deviations over what's normal over the past 10 years. I guess 11 years here now on this chart for you know, concern over exposure to private credit in interval funds. Now for most of this, this time period, let's go through 2024, there's basically no media coverage of interval funds and private credit exposure. What we're seeing, and this again is not just for interval funds, but it's for BDCs. It's for insurance companies, life insurers who write annuities, their exposure to private credit, any sort of alternative asset manager, any sort of vehicle that holds private credit. The concern, the worry about those exposures has absolutely exploded in all our financial media. That's what you're looking at here. So if you're not aware of this, and you probably are, you've got inklings of this. Again, if you're an advisor or you're managing your portfolio, what we want to show you here is that however loud you think those concerns are getting, you're underestimating it now. Yeah, basically we're saying is, we're saying there's a little thing where there's smoke, there's fire. We're picking up the smoke, there's a lot of smoke right now. And so the question is, where's the fire? Is it a fire that just goes crazy or is it a fire that is limited to a couple of bad apples? That's a mixed metaphor, but you get what I mean. And so that's coming back to the first brands and the Tricolor. So these were firms that had some private credit. I think these were mostly syndicated loans, but the exposures were in instruments and funds that advisors could have exposure to. Ditto with what's going on with some of the write downs that Apollo is taking on. One of their funds that was had exposure to the Victory funds that was a year ago, these Amazon resellers and the like. Point being is that we're seeing a lot of examples of this. It's exploding across financial media. It's a warning sign. It doesn't mean that there's a raging fire, but it's absolutely a warning sign that we all need to pay attention to.
- [33:59]
Matt
Taking us into the second chart here and I think this is important too because this is where the work you're doing at Perseant differentiates from pure sentiment analysis. The normal ways people will Z score out stuff to understand what the feel of the market is. This is about should retail have alternatives in retirement accounts? Because we know from the mortgage crisis this is what feeds bubbles is as it generally works itself down, down the pike from institutional to the bottom of retail. So we have two data points here and they're both elevated that retail investors should get access and that retirement accounts should not get access. Explain what's going on here.
- [34:36]
Ben Hunt
They're two sides of the same coin. These are two separate narratives, but they're talking about the same thing. But one's arguing for retail investors, retirement accounts having access easy Access to illiquid securities. This is the Mark Rowan of Apollo argument that, hey, you know, your 401k should be able to put money into illiquid stuff and private equity and private credit, just like a pension fund. On the other side, you've got now a lot of media messaging that no, you know, there's a reason why retail accounts, retirement accounts should be limited or have, let's call it at least, speed bumps and their ability to put everything into illiquid stuff. So one of the things we're able to track, and I love this, this thing that we do track, where we're able to track both sides of a coin because we're only human and if we have an idea in our head like, yes, I should be able to put my clients into whatever Apollo or Ares or whatever vehicles I want to, well, you're going to be looking for stories and media coverage that supports what you think and vice versa. If you think, oh, my God, no, we've got to keep these all liquid. You're going to be looking for the stories that support what you're saying. What we're able to do is to try to get people out of whatever. I don't want to call it echo chamber, that's too harsh. But whatever predisposition they have to look for a certain kind of messaging, we're standing outside and saying both sides of this issue are getting heavy rotation in terms of messaging. What's interesting to me is that a lot of the in blue here is that retail investors should get access. Both of these arguments are declining a little bit more recently just here as we kind of kick off the year. But the should get access is declining more rapidly than the should not get access. So if you had to think with, you know, which side is winning right now? Well, it goes with the increased concern over private credit in general. What seems to be winning right now, and this would be bad news for the Apollos of the world, what seems that the story that seems to be winning right now, even though it's still a battle of titans, the story that seems to be winning is they should not get access.
- [37:25]
Matt
One more chart. Let's land it on this one here. When does it really matter? Because hard to call the top of a bubble. Hard to call exactly when it's bursting. This chart shows what happens if the music stops against private credit. Valuations are only marks to myth. They're both elevated. How do we know when reality hits?
- [37:45]
Ben Hunt
Well, it's interesting to me which one is more elevated. So what happens to private Credit if the music stops is a. And again, we're not doing word search here. So what you mean by this sort of title for a narrative, this is bubble talk, right? So this is what you ask when you think something's a bubble. You say, all right, well, when the music stops, when the bubble pops, what happens? That's the concern, right? That's the one that has skyrocketed in prevalence in financial media. It's that. I don't even know what you'd call that color. Kind of tan, pinkish, orange, whatever that color is. That's the one that's at new heights that it's never seen before. Now the other one about credit. Credit valuations being, you know, not mark to market and that the. The marks are wrong. Yes, that's elevated. Yes, that's a concern. But that's been a concern before. You can see that blue line. That's been a concern of people before around private credit. What's new today is not just that, oh, they're concerns about are the marks accurate. But what's really new today is the, I think, very apt concern that this is what you see when a bubble starts to pop.
- [39:08]
Matt
These are all charts from Persian Pro. Ben, if people want to learn more, check this stuff out. Where do you want to send them?
- [39:15]
Ben Hunt
So go to perseant persiant.com. that's where you'll see the. That's where you'll see it. All of our products for this first pros. I call it the entry level. It's the one for. It's the one for advisors. It's the one for people who are managing their own portfolio. Perseant Pro, that's what you want to look for.
- [39:34]
Matt
Ben, thanks for joining us.
- [39:36]
Ben Hunt
Thank you, Matt.
- [39:37]
Jack Forehand
So I don't know if you know this, Matt, but access returns is the podcast people go on if they want to make wildly controversial statements. Like, it's pretty much no one in the podcast guest community. This is where you gotta come.
- [39:45]
Matt
Well, I mean, that's. That's why you're on it, right? You started this channel. Controversial.
- [39:50]
Jack Forehand
I'm the wildly controversial host. So we had to, like, why, like.
- [39:54]
Matt
Who drinks Bud Light on this show? Do you know what? Kevin Moir just threw up on his computer. He was like, you know, me and Patrick Margaret huddle are always bringing out these fun beers. Here comes Jack with his bud Light, which my wife is going to love. Just for the record. She's a big guy.
- [40:08]
Jack Forehand
I could not drink an IPA to save my life. Like, I just can't do it like, if I'm drinking beer, it's gotta be like the lightest beer of all time.
- [40:14]
Matt
All right, well, we'll shift to scotches or something. I don't even know. We'll figure it out.
- [40:20]
Jack Forehand
Given the controversial nature of this, we obviously had to call our clip segment. They said what? So, Matt, today we've got a clip from Oswald to Bodhin. And this is very interesting because first of all, Oswald's one of our favorite guests. You know, we're very lucky to get him on. But second of all, Aswath has probably been the people, if you think about people who got the Mag 7 right, who've owned them throughout this whole run. Like, Aswath has been a big tech guy. He's been a big AS, he's been a big Mag 7 supporter, although he owns a bunch of other stuff in his portfolio. So the idea that he's kind of thinking about raising cash right now, which is very interesting. Interesting to me. So here. Here's Aswath talking about why.
- [40:54]
Aswath Damodaran
Matt, we talked about selling things when they get overvalued. I've always done that. Historically, when I've sold things for overvalued, I put them back into things that were undervalued. And the last year or two, that's the part of the process that's changed a little. I feel less willing to load into something that's undervalued because I don't. First, I'm not finding enough that is undervalued to jump in. The second is I'm wary. I'm not a market timer, but I'm wary about where we are at the market in terms of pricing, in terms of what we're building in. It seems while there's a pathway we can justify where we are today, there are also multiple pathways where things can go bad. So from that perspective, I want to move my money into things that are not correlated with equities, and that is getting tougher and tougher to find, Right? I can go to cash. That's. That's always a choice. But, you know, 30 years ago, I could go into another geography and be okay, right? So if I were primarily in US equities, that's not working anymore, because in crises, equities across the world move together. You know, I could look for. Real estate used to be uncorrelated with equities. That's no longer the case. Real estate is starting to behave more and more like an. In our zeal to securitize things, I think we've also created a nightmare, which is we've created asset classes that used to be separate asset classes that are now starting to behave like equities. You're saying, what about bitcoin or cryptos? The problem is bitcoin behaves like very risky equity. If I think stocks are overpriced, the last place I want to be is bitcoin because there's a correction to tech stocks. It's going to be double that correction in Bitcoin. So there's no easy place for me to go. And I said, I've historically not looked at collectibles. You know, I include gold as a collectible because even though it's a commodity, that's basically its role. But I think that this might be a time where if you cash out on a stock, some of that money should find its way into things that are. And that remains one of the few spaces which is relatively encore with equities. So I think that that's what, that's what I was talking about. So I wasn't talking about selling off of my stocks and buying gold with it, because that's not something that I think will work for me in the long term. But holding something in an asset class that's not going to do as badly as stocks of stocks have a bad year is something that I think about more actively.
- [43:30]
Jack Forehand
What struck me about this is this is a very. This is a discussion you have all the time as an advisor with clients. And it's, it's something that. It's a very different discussion for a client a lot of times than it is for someone like Aswath. But it's just, you know, it gets back to what we were talking about before with Liz Ann Saunders. Instability. The market is expensive right now. We've had a big run. There's lots of instability. People want to talk about the idea, should I raise cash? But it's much, much harder to do in the real world than it is in theory.
- [43:59]
Matt
You know, you already know that the financial planner in my soul was just, you know, smiling when he said this. And, and rightfully so, because try to tell people all the time, the easiest time to sleep is at night. You know, the, the best time to pick the piece of fruit off the tree is when it's ripe. The easiest day, do you know to fix the hole in the roof is when it's sunny and moderate and it's not raining or anything else is going on. If you're trying to, like, sleep in the middle of the afternoon with all the Shades open. If you're trying to like pick the piece of fruit, like as soon as it shows up on the vine, or if you're trying to pick it when it's all moldy and gross, or it's already fallen on the ground, if you're trying to fix the damn roof in the middle of a blizzard, like, you're just making it hard on yourself. So for Oswald to say, like, look, these things have gone up, the valuations are stretched. I'm not saying they're going to stop running, but I think it's a good time to raise some cash. Yes, this is the environment, it's easiest to do it. Why would you not do it at the easy time? It's so obvious. But this is one of those cases where it's like, this is stretched on every way I measure it. So I think this is ripe. I'm going to take some. I might be wrong, but I'm going to take some off. And I think that is such simple and obvious advice. I love it. On December 12, Disney invites you to go behind the scenes with Taylor Swift in an exclusive six episode docu series.
- [45:19]
Jack Forehand
I wanted to give something to the fans that they didn't expect. The only thing left is to close the book.
- [45:25]
Matt
The end of an era and don't miss Taylor Swift. The Eras Tour, the final show featuring for the first time the tortured poets department. Streaming December 12th only on Disney.
- [45:41]
Jack Forehand
And I think the idea is also like small booths is very important. Like you guys talked about to him about that in the interview. Like, he's not sitting here liquidating his portfolio. He's when he's selling position, he didn't go short off.
- [45:52]
Matt
This is not what he said. He didn't say like, oh, now I'm short this stock. I was like, no, no, no, I'm trimming.
- [45:58]
Jack Forehand
Yeah, like he always sells positions. And the difference is now instead of saying I'm going to put them in the new positions, now he's saying, you know what, maybe I'll leave something in something that's not a stock, you know, maybe I'll put it in something like gold. Maybe I'll put it in cash, you know. And I think he's struggling trying to figure out what to put it in, which a lot of people are now. But like, if you're going to do that kind of stuff, that's the way to do it. And the other point is, Aswath is obviously a very different person than your average person. I mean, Oswald has a much larger portfolio and so like for Other people the thought process is probably a little bit different. Like if I'm depending on every dollar of my retirement to retire, I probably think a little bit differently about this than someone who has a major, you know, huge portfolio like Aswath.
- [46:36]
Matt
Yeah, let's be clear. He also points out like this is basically his kids and maybe grandkids money at this point that he's thinking of this with. So he's thinking about this cross generationally. He's also not managing money for other people. So this is not somebody saying here's what I'm doing for my clients to put this hedge on or something else. It's a very personal decision that he's making that he's reconciling against this point in his life and he's weighing those decisions. So it was surprising to hear him say this because I think we've been trained on him for all these years to hear him, you know, what's he buying next? If he's leaving one thing, what's he buying next? Is the first time he started to.
- [47:12]
Jack Forehand
Say like yeah, I think I'm good.
- [47:14]
Ben Hunt
With all this stuff.
- [47:16]
Jack Forehand
Yeah. On the point of what what you buying next? Like his point about it's hard to find stuff to buy right now is an interesting point too. The permanent portfolio which is bonds, you know, long term bonds, short term bonds, gold and stock. I think it had its third best year. I actually thought it was going to be the best year of all time but it had its third best year ever last year. And everything is going up at once. And so as Oswald kind of thinks about like he also made the point like a lot, a lot of things are becoming more correlated with U.S. stocks than they were in the past. So as you think about this idea of what to put the money in it like it becomes very, very challenging if you're freeing up cash because everything.
- [47:50]
Matt
Is up everything except for like what real estate last year like there's a couple of sector or that didn't go up very much. And that makes for a really interesting problem because you have to think about and what role do those play? This would be where you know, you plug in like Jared Dillian's awesome portfolio or some of the other rhyming variations of these models to basically say maybe it is holding that cash allocation, maybe it is holding that short term T bill or whatever else allocation. Because it's so weird to me that we could be. It's de globalization. So the world's separating but everything's moving even more in the same direction. Than ever before. It's a very bizarre feeling.
- [48:33]
Jack Forehand
And what's crazy, by the way, just because I researched it for this is the permanent portfolio's best year was 1979. It was up 40%. And the reason was because gold was up 120% in that year. So when I was thinking like this stable portfolio that covers all economic environments couldn't be up that much. I guess in weird situations like that.
- [48:50]
Matt
It can be lever your arm up and go for it. Right. What could go wrong?
- [48:55]
Jack Forehand
As you could tell, Matt, I'm not exactly the leverage kind of guy.
- [48:59]
Matt
Well, when you're getting off your private jet, sometimes you think about what's one more churn of leverage for old Jack and his Bud Light.
- [49:05]
Jack Forehand
So, yeah, something that's been, we alluded this at the beginning, it's been on everybody's mind is the, the idea of the Mag 7 and they're changing nature. You know, I don't know if you, we've talked about this in other podcasts, you probably do this, know this, but only 2 of the mag 7 actually outperformed last year. So this idea of, you know, this, the MAG7 leads the market higher has kind of changed. And I think part of that is because their businesses are changing. They went from asset light companies that weren't spending that much money to pouring tons and tons of money into Capex. And so the question is, is that going to be worth it? And Kai did probably the best research I've seen on that. So here's my conversation with kai about the Mag 7 and AI CapEx. Kai Woo, welcome to our last call.
- [49:43]
Kai Woo
It's nice to be here. Thank you.
- [49:45]
Jack Forehand
I was really excited to have you on because we're going to talk about probably one of the biggest issues that's going on in the market right now, which is the companies that have led the market for a really, really long time have been the Mag 7 and they are at, they have been historically at least asset light companies, high free cash flow companies. Basically like if you were drawing up a company on a sheet of paper, you probably could have done much better than these companies. And now that is changing and so, so many people are thinking about what does that mean? Will these continue to be the greatest companies in the world? All this Capex spending, how is it going to influence them? And you've done probably the best paper I've seen on this. And so we're going to dig into that today and we're going to talk about the changing nature of the mag 7 and what that Means for investors.
- [50:26]
Kai Woo
Sounds great.
- [50:28]
Jack Forehand
So I want to start with this idea of capex in general because you looked at a lot of companies and a lot of data historically and when companies typically spend a lot of money on capex, it typically doesn't go that well, I don't think. So we're going to put up this chart which is looking at the different quintiles of companies that have rising capex. And so when you looked at that historically, what did you find in terms of the companies that have the CapEx that is rising the most versus the least?
- [50:54]
Kai Woo
Yeah, look, this is a pretty interesting exhibit here and you know, just to step back, I think one of the advantages of being a quant is, you know, the ability to kind of look through decades of data and across thousands of companies to understand what are the common patterns that we observe.
- [51:08]
Ben Hunt
Right.
- [51:08]
Kai Woo
With an objective lens because I think it's easy at any point in time to, to say look, this time it's different. This is a historical platform shift in technology. So therefore these things don't matter. But it turns out that at least if you play the odds, the base rates are pretty well established by the data. So what this exhibit shows Jack, is a quintile run, which means we take all the companies and based on their trailing one year capital spend, capex spend rank them into buckets. So quintile means five buckets from low to high. What you find is that the companies that have the highest capex spend underperform the most in a monotonic fashion. So then the second highest quintile underperforms by a little bit less. And then actually the more conservative companies, the firms who are kind of abstaining from the aggressive capital spending have tended to outperform. And what's really interesting, and it's not shown in this chart, but worth mentioning, is that this effect exists both in the macro sense across sectors. When telecoms go crazy in spending in the late 90s on building out the Internet or in the shale boom, it exists in that case, but it also exists within sectors. So within the telecom sector for example, the firms that are kind of most abstaining from the spend tend to outperform. Conversely, the companies that are the most aggressive in trying to capture whatever opportunity they see in the market by investing heavily in capex are the ones that tend to do the worst. And again, this is just the just averages but, but it is a, I think a pretty, you know, significant warning for us as we kind of move forward into this capital spending cycle to think a little bit about how this has worked out in the past, and.
- [52:45]
Jack Forehand
Correct me if I'm wrong about this, but this is the opposite of research and development. Right. Typically high R and D firms do outperform and in the past that's what these companies have been spending money on is R&D versus CapEx.
- [52:55]
Kai Woo
Right. And this goes back to the point you were making around the transition from asset asset light to asset heavy. Right. I think you described it beautifully. If you were to form a company with your own hand and draw the perfect company.
- [53:07]
Jack Forehand
Yeah.
- [53:07]
Kai Woo
You would have drawn Google a few years ago, maybe 10 years ago, whatever. And what they're morphing into is, appears to be more utility like so very capex heavy, so. That's exactly right. Companies that have conversely invested in intangible assets, whether it's R and D, sales and marketing, employee development, these kind of intangible assets have tended to generate really high ROIC or return on invested capital, whereas you know, capital expenditures trying to maintain physical factories that depreciate over time. In this case, you know, GPUs, which are over half the spend for most data centers in AI depreciate very quickly. Right. In a matter of a few years. So yeah, I think we, this is definitely a stark shift that we're seeing, you know, with this transition from asset light to asset heavy.
- [53:56]
Jack Forehand
And I'm going to throw up exhibit 15 from your paper, which by the way is called surviving the AI capex boom. You can find it on sparklinecapital.com, we'll also put a link in the episode description of it. But this, this exhibit 15 really shows how extreme this has been. This is the CAPEX to revenue for the Mag 7 and you can just see it's going way, way up.
- [54:13]
Kai Woo
Yeah, that's right. So I think the start charts, the chart starts in 2012 and it shows the capex divided by sales for the MAG7. So in other words like for each dollar of sales they generate, how much are they then spending on CapEx that generate that? And that's 4% in the beginning of the sample. And you fast forward to today and it's around 15% with a pretty steady increase over most of the period and then a kind of exponential surge in the past year as these companies have kind of engaged in this arms race type dynamic to build out, to be the first to achieve in their mind this kind of advantage within the AI space.
- [54:48]
Jack Forehand
This next chart is really eye opening because some of these companies now are exceeding utilities in terms of their capex to revenue. And if you thought about that, you know, five years ago, you never would have considered that even a possibility.
- [54:59]
Kai Woo
Right. And so I think what this chart shows is two things. So first is it shows the dispersion within the Mag 7. So in one extreme you have companies like Nvidia which design chips but don't actually manufacture them. They outsource that to TSMC and then Apple, which as we know, has been largely kind of on the sidelines waiting to see how the AI stuff plays out. On the other hand, you have Meta as the most aggressive spender with 35% of their sales being spent on CapEx. And this was as of a couple quarters ago, they just announced their quarter a few days ago. And continuing to guide higher, continuing to guide higher, continuing to more aggressively invest in, kind of go all in on this AI CapEx trade Microsoft as well. And so Microsoft's at 28%. So you look at the 28, 35% extreme and they're higher than the average utility company, which is kind of wild. Right? And then if you kind of add historical context by looking at AT&T at the height of the dot com boom, or AT&T is one of the companies building out the Internet, the fiber optic cable, they were only at 21%. So you know, when, when looked at that way, the companies building out the AI platform today, the infrastructure today, are kind of extremes, even higher than many of the top companies back in the last cycle in the dot com boom.
- [56:19]
Jack Forehand
It's just interesting as an aside, Meta is interesting to me because Meta's spending the most money here. But you could also argue, you know, if you think about like capex for your own purposes versus capex for other people. Meta, you could also argue, might be getting the most benefit from this in terms of actually using this in their own advertising business. I don't know if you think that's right, but it's interesting to think about that on both sides.
- [56:37]
Kai Woo
Yeah, I mean, I think the jury's still out. Obviously they are unique because they don't have a public cloud. So when they are aggressively building out AI data centers, it's for their own internal usage to make their ad conversion rates a bit more efficient. And up until this point they have seen the roi, which is why Zuckerberg believes it makes sense that they need to reinvest aggressively. Whereas Microsoft, they've actually been relatively more conservative when it comes to, after the big OpenAI deal, they've actually been somewhat more measured in terms of diversification across vintages and things in terms of trying to manage this. And I think that's because they are an intermediary. They are mainly just a reseller of compute to the end user, which half of that's OpenAI, but also other companies who then have end users who might be consumers or enterprise customers. But yeah, that's a really important distinction. And I think it remains to be seen whether or not Meta will be able to fully utilize what they're building. But look, if not, they can always build a public cloud.
- [57:45]
Jack Forehand
So to summarize what you did in the paper, like Lou, you looked at a bunch of historical spending booms like this and I think it's fair to say that the companies building the infrastructure typically are not. Typically doesn't go that well for them. They're not the biggest beneficiaries of it. Is that right?
- [57:58]
Kai Woo
Yeah, that's kind of the big irony. You think about the railroad boom in the 1860s in the US right when these hundreds of railroads were going to launch to create this technology that would connect people across the country. It was kind of a beautiful technological marvel which definitely transformed our economy. Well, it turns out that most of those companies went bankrupt and that the vast share, if not all of the profits that were captured and created by these guys was not actually captured by the, the builders of the railroads. The value actually accrued to the customers. And the early adopters of technology of this technology, like retail companies using it to ship freight across the country, they were the ones who won. The same thing happened in the dot com boom. The telecoms, they spent, you know, inordinate amount of money building out, laying, you know, miles and miles of fiber of which I think 85% went unused in the dot com bust with which led then with prices to collapse, I think 90%. And that, you know, was obviously bad for the telecom companies. Most of them went bankrupt. Those that didn't like the AT&TS, took them years and years to kind of get out of the hole from a profit standpoint, while their customers like Netflix and Meta and Google, they actually benefited tremendously from this subsidy, which is the bandwidth prices kind of haven't fallen so significantly because the builders overbuilt. And I do think that, you know, where we are currently looks to be shaping up in a similar fashion where there's this kind of like treasurer's dilemma whereby all the big tech companies view AI as existential and they are making a bid to be the winner. And as a result, if everyone does that, then, you know, it creates this kind of suboptimal equilibrium where now it's almost a done deal that they over invest. And if they over invest, what does that happen? Well, we know from the prior examples when there's an overinvestment that leads to, you know, excess capacity, falling prices, which is at the end good for consumers, for the application layer, but not so good for the builders of the infrastructure.
- [59:55]
Jack Forehand
So I tend to be to agree with you on this. This probably doesn't end well for them. But I always also want to think about the other side. And the best argument I can come up with is we're not building railroad tracks here. We're not building like fiber optic cable. We're building actual intelligence. And maybe that makes this time different than those times. Do you think there's some validity to that?
- [60:14]
Kai Woo
Yeah, absolutely. Look, I'm a power user of AI. I've been doing large language models since 2020, kind of long been excited about technology, and in particular natural language processing and large language models. I do agree. I mean, look, I think that there's a chance that in 10, 20 years we're sitting here and laughing at the fact that we were kind of squabbling over a few billion dollars of capex when these companies invented God. Right? Like to the extent that these firms do truly invent a super intelligence, then yeah, none of this actually matters. Right? So it's totally possible that we'll look like children in a decade from now. But again, I think you have to just play the odds as an investor and kind of see how things have played out in the past and also recognize that yes, intelligence is probably a more transformative technology than railroads and the Internet, but everything kind of builds on itself. We wouldn't be where we are without the Internet and without being able to connect people together via rail and other technologies like that. So these things all build on each other. But yeah, I think that there is a non zero chance. I think we have to be humble enough to recognize that while it's important to play the base rates and kind of the probabilities, that there is a chance that, you know, this ends up being, you know, far bigger than, you know, anyone in the kind of financial industry can comprehend.
- [61:41]
Jack Forehand
Well, it's possible the AI versions of us will be sitting here in 10 years talking about what idiots the real versions of us were 10 years ago.
- [61:47]
Kai Woo
That's right, yeah.
- [61:48]
Jack Forehand
So we might not be on this thing anymore. Well, Kai, thank you for, thank you for coming on. We appreciate it.
- [61:52]
Kai Woo
Thanks so much.
- [61:53]
Jack Forehand
So, as we wrap up here, our final segment is the forward view and we're going to take a look here at what we're thinking as we go forward. The biggest thing I'm thinking about here as we go forward is. Small caps are back, Matt.
- [62:05]
Matt
Small caps are back, baby. How you feeling? Small cap value.
- [62:08]
Jack Forehand
I've been trying to say this for, for many, many years and obviously every time I do say it, it lasts for like a month and then it's over. But I had to say it because this was a, you know, if you look at what actually happened in the first month, you know, we don't read too much into a month but if you look at what happened in the first month, small caps, international value. We've had basically the opposite of what we've been seeing for many years here in the market.
- [62:28]
Matt
The saddest style boxes of them all are having their potentially brief, potentially long term and long awaited days in the sun. How do you think about this? Just quant brain for a second. You've been teased by this before. Is your, is your heart on your sleeve and you're just like, don't hurt me again or are you like, no, this is the one time I've been. Salvation is upon us.
- [62:50]
Jack Forehand
Yeah, well, the quant side of you says the data is on your side long term, but it also says to you we have no idea what's going to happen in the short term. And that's kind of been the problem with this whole thing with all of us who've been saying, you know, value investing is back or value investing is going to work again, is that it probably will over the long term but we have no way to predict, you know, what's going to happen this year or next year or this month. And so every time we see it, we get excited. And what I always do is I try to look for, this is not me actually doing anything with a portfolio, but I try to think about like what are the drivers of it and is there something permanent there that actually could lead this to be back? And so for instance, like with, with international investing, like I think some of the stuff that's going on in the US right now, the falling dollar, you know, those could be the types of things that could lead to an international like rally that might be lasting. So I try to think about like what's going on behind the scenes to say like, is this thing lasting or not? Yeah.
- [63:40]
Matt
And the durability of that too because I think I might get this wrong.
- [63:44]
Ben Hunt
There.
- [63:44]
Matt
There was a great stat that I saw the other day where it was you didn't have as Much earnings growth internationally, you had a good chunk of earnings growth, I want to say in China, but in the rest of developed international, you didn't have as much earnings growth last year, but you had a ton of FX help. And it's interesting to think like, what are these things can actually help drag things forward. Rupert Mitchell made this in the conversation that I just had with him. He was like, at some point these things have to stand up on their own and put up the earnings. They have to put up the profits. And heaven forbid they have to put up those profits without the main drivers of profits, the US tech stocks falling off a cliff. If they fall off a cliff right now, they take everybody else with them and maybe even everything else with them. But if they can, if this rotation is going to happen, the tech stocks maybe slow down a little bit on the earnings ascent. But we actually see some of these profits and the feasibility of this continuing really start to take hold. The crazy thing is we see signs of it. The signs are there across emerging markets, across Latin America, even in certain pockets of Europe. We're seeing this start to actually wake up. But are we actually going to see it continue without the other stuff falling out of bed? That's got to be my biggest question for the year.
- [64:59]
Jack Forehand
Yeah, and it's interesting, Jim Paulson was talking about this when we interviewed him. Like, it's, it's amazing how much of international performance is dollar down. Like if you look at the chart and you look at like when the dollar starts going down, international starts outperforming. Like it's not that simple in the real world. But it is amazing if you look at the chart, like how much those two things are tied together.
- [65:16]
Matt
And that's what drove it predominantly last year. There was multiple expansion and there was currency driving the bulk of developed international for US investors. And it's going to be interesting to see that is only sustainable if the earnings can become a major contributing factor this year that justifies not only the increase in valuations but the direction that these things are going in 2026 has got a lot to answer for still on where those expectations are going to go as the year continues.
- [65:44]
Jack Forehand
And just a couple quick charts I'll throw up before we get off here because this was interesting to me. Would you have thought in the trailing 12 months that the Russell 2000 is ahead of the S&P 500?
- [65:52]
Matt
No, I would have not thought that because all we do is make fun of the Russell 2000. So to have it leading this charge is.
- [65:59]
Jack Forehand
And by the way we should absolutely be making fun of the Russell 2000 because the Russell 2000 is a complete bunch of garbage. It basically is financials and money losing companies these days. So like the Russell 2000 is a terrible index. It's not like you really should look at something like the S and P small cap 600 if you want to understand what's actually going on with small caps. Because the Russell 2000 is just a very different index. Like Hagstrom, I think mentioned this, Robert Hagstrom, in your interview with him. Like the idea is like used to innovation, used to come out of the Russell 2000, used to be able to find like the innovative companies that would be the next big companies. Like a lot of that is not going on anymore.
- [66:29]
Matt
No, this is where innovation goes to die. And to that point, like when we do benchmarking like in, in the day job with Sunpoint, it's literally S and p. Like the 600 is what we use because we want at least some quality factor inside of that. Otherwise you just get bogged down by all sorts of stuff that can't climb out of that hole. And it's useful to look in and understand who counts in that space. But it's also you. You are bottom fishing with a lot of problems.
- [66:57]
Jack Forehand
So, Matt, I don't know if this show, episode two of the show will ever see the light of day, but I guess, guess for now I got to get back on my private jet and I got to head off into the sunset here, load up the Bud.
- [67:06]
Matt
Lights, get on the private jet. Don't get behind that, that cockpit jack. I don't want to find out. You know, you were all, you're all tanked up on little buddies. Make sure your butler is doing the one doing the flying.
- [67:19]
Jack Forehand
And I do know for the benefit of all of us, because I do have my pilot's license from back in the day that the rules are much, much more strict on on pilots in terms of you can I believe it is like you can't have had touched a beer within 24 hours before you get behind a plane. So that's. All of us should feel good about that that are flying on airlines.
- [67:34]
Matt
All of us can feel good about that part even if the weather has our travel plans delayed multiple times over, which seems to be the Trend of early 2026 too. So this is last call. We're going to do this again. I mean, I know it's. We'll see how people like this. If you like this comment, subscribe, do all the things tell us. If you got a chart that you want us to see, we're going to go back to a bunch of our friends and prior guests and we're going to pull some clips. And I want to do this again, Jack. Commit to me right now.
- [68:04]
Jack Forehand
Assuming the assuming the people will let us do it, we're going to do it.
- [68:07]
Matt
All right, people, these are your marching artists. This is last call. This is a different kind of market rap. Tell a friend, tell an enemy, waste some of their time. And if you found it useful, you got to let us know. All the things are below. Access Returns on Substack. I'm sure we're going to have a summary post on this thing, too, along with a transcript. Jack, I'll see you next month.
- [68:25]
Podcast Outro Announcer
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 network@excess returnspod.com if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on this.
- [68:45]
Matt
Podcast should be construed as investment advice.
- [68:48]
Kai Woo
Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.