Matt Russell (1:42)

I love a good forecast season. I'm so, I'm so happy to be wrong at what's not to love about restlessly predicting the future.

Jack Forehand (1:51)

I was thinking about Wedding Crashers with that scene at the beginning. It's wedding season and I'm like that's you and me for forecast season basically. Although we don't listen to any of these things, we're still all pumped up to put them together.

Matt Russell (2:03)

I love putting them together and I love putting them together. In part we've talked about this a lot of times. I view, my view on forecasts is you want to read all the year end forecasts so that's what we're doing here today. We read how many of year end forecasts did we compile?

Jack Forehand (2:17)

I believe there were 22 year end forecasts we've read for this.

Matt Russell (2:20)

So we went through 22 forecasts. We're putting this together. The reason I love this exercise personally is I love the idea of this is how you find out what the vanilla ice cream is for the year ahead. This is what everybody tells you, this is what we're expecting. And you can kind of do this and say here's where everybody is kind of feeling the same thing and it's going to tell you where the surprises are. You might like some of the surprises, you might not like some of the others, but it's a really useful exercise to sort of level set what a bunch of also very smart people, like not idiots making these forecasts. What are a bunch of really smart people thinking? So happy to do this exercise today with you. Love to.

Jack Forehand (2:58)

Yeah. To your point, these, these things get a bad rap, which is deserved to some degree and not deserved to some degree. It's deserved from the perspective of like nobody has any idea what the S and P is going to close at. And these numbers that they throw out, like they know, even the people making these forecasts know those numbers really don't mean that much. So if you look at them from that perspective, like tell me what the S and P is going to close at. They're not that valuable. But there's so much interesting data. And to your point, like these are some of the most thoughtful market strategies in the world that are thinking about what's going on and analyzing data. And so they can be a good learning exercise even if you don't necessarily, you know, conclude, oh, here's what the S and P is going to be at the end of the year.

Matt Russell (3:33)

Yeah. And you have to look at them from the cynical. It's definitely skeptical. I don't know if it's cynical, but the skeptical phrasing of what is this person. And look, we're going to look at a bunch of people who advise on like wirehouse advisors or broker dealers or you know, sell side, buy side. You look at all these things and you take into the context of where are they paid, like not to be wrong or not to take a stance in a certain direction. There's a reason there's not a bunch of these forecasts that are also betting on declines this year. You have to weigh that into it too. People come into this with a bias. There's a business behind almost every, well, literally every single one of these forecasts and be skeptical. That's part of the exercise and part of getting this on the table too.

Jack Forehand (4:19)

Yeah, to your point, this is why you see a lot of the 8 to 12% return forecast. You know, people aren't gonna, people don't wanna lose their jobs over this. And if you, if you predict a 20% decline in the market that doesn't come, then you're probably hearing from the CEO the next year and there's a new market forecaster in there. So you also don't see like the 40% increase either. Like we know from the distribution of returns in the market that they're not almost never between 8 and 12%. Like the average might be in there, but the actual returns are never in there. So that's another reason these forecasts are usually not right, is like the distribution is very wide, but there's no incentive for anybody to predict something major on the up or the downside.

Matt Russell (4:52)

So what you're saying is I'm not going to lose my job for my predictions today?

Jack Forehand (4:56)

Probably not. Yeah, no, I don't, I don't even, I mean, you're unpaid anyway, so I don't even know if I paid for. Yeah, yeah, exactly. If I fired you, I don't know. I don't know who would agree to talk to me about this. So I think we're pretty much stuck with this.

Matt Russell (5:08)

I think we're pretty safe. The only other thing that I have to say going into this is the, the great Elroy Dimson quote, risk means more things, more things can happen than will happen. And that's the other beautiful part about this exercise. We get a bunch of the variables on the table. Fast forward 12 months or if we were to pull up all the, all these outlooks from last year, a lot of things did happen, but way more things were projected to happen and there were surprises still in the mix. So it's understanding that idea that risk, meaning more things can happen then will happen as part of it. It's one spaghetti noodle from the pot at the end of the year. And the idea that it was described perfectly along the way, it's a fantasy.

Jack Forehand (5:47)

And to your point, like tariffs this year, like, yeah, we thought, I mean, people thought tariffs could happen and Trump was talking about tariffs, but I don't think anybody thought tariffs were going to happen in the way that they did happen. And so these things, there's going to be something that's going to surprise everybody. I remember when you guys interviewed Liz Ann Saunders, and you asked her, like, the one thing she would disagree with her peers on this was her answer that these forecasts are useful. But she was also talking about this idea that if you had done this like in 1987, I don't know if you remember this, but like she said, like, if you made a forecast in 1987, you could have been pretty right about the forecast, but you're probably pretty wrong about like, how you got to the forecast. You probably didn't work calling for like Black Monday in the middle of the whole thing. So these aren't valuable from that perspective, but we can get some great information. And so we're going to try to bring them all together today and talk about the range of outcomes. These people are talking about the most important things they think might drive the economy in the market. And then you and I can maybe share some uninformed opinions as macro tourists on this.

Matt Russell (6:39)

Let's get some uninformed opinions on the table. So why don't we start with. You want to start with just kind of the variables that were common across these.

Jack Forehand (6:47)

Yeah, let's do that. And I also want to just give a hat tip to the Idea Farm because that is where I got the whole visa. This was not Jack combing the Internet forever. Like they had 20 plus forecasts on there. That's a great site. It's free. The NEB favors got like it was. I was able to pull like all these forecasts from there, plus a few that we supplement on our own. Like in terms of just what people like Warren Pies, who we respect a lot, have been saying, although their forecasts aren't public. So just a hat tip to the Idea Farm. Definitely subscribe to that. Yeah.

Matt Russell (7:11)

God bless MEB Faber and the Idea Farm this holiday season for compiling all these research reports and making it so damn handy to be able to pull these up.

Jack Forehand (7:21)

So I guess we'll start with the economy and then we'll get into the market. We'll talk about the targets and stuff like that. So, yeah, the economy's been. Been really interesting. I mean, obviously when you talk about the economy, the first thing everybody's talking about is AI and what, what the impact of AI is going to be. And I think in terms of what's going to happen in the next year, what a lot of these people think about the impact of AI is driving a lot of what they think in terms of what's going to happen for the market. So, for instance, we had the CIO of Russell Investments on OR the chief strategist of Russell Investments, Paul Eidelman, on recently and their whole theme for the year was re acceleration. And they think AI is a big driver of that. And the broadening of AI, like to your average company, the benefits was a big driver of that. And I think for a lot of people who do think we're going to get some stronger, you know, acceleration in the economy, they're thinking about AI a lot.

Matt Russell (8:06)

There's this whole thing and I know we're just. This is going to be. It's kind of funny actually. In one of the recap things that I saw of podcasts from this year, it was like, what word did you love? And it was AI. It was like me and 18 people all saying AI, AI, AI, AI. That's a little bit creepy. But I think that's indicative of what you're seeing right here. There was, and I'm probably going to hit this a couple of times in this conversation because I think it's huge for the economy this year and where we are. If this is true late cycle strain, it's probably a result of the amount of spending going in to AI. And that's going to determine whether this economy like slows down, gets hollowed out, crashes into a wall or whatever else. Because these dollars we're talking about are absolutely massive. Now within Russell, do you remember what he said in that interview about the broadening specifically?

Jack Forehand (9:01)

Yeah. Well, they expected the market to broaden out in general, which, which a lot of people have been calling, including me, have been calling for, for a long time. But they thought there was some strong evidence that might happen this year. And also the idea, like I said before, that they thought the benefits of AI were going to carry down to your average company, more so than just the hyperscalers. And so that that would be a reason, you know, if those companies actually start seeing economic benefit, if they start seeing earnings growth, that would be at least a reason to say this might broaden out some.

Matt Russell (9:26)

Yeah. And I think what's important about that is within the AI theme is if that flows from the mag 7 to the other 493 and we actually start to see profit margin expansion, might not even accelerate revenue, but just might expand profits or earnings, then that's a pretty compelling argument for why you would see a broadening. Because if prices are going to follow earnings, we haven't seen that expansion across many of those 493 companies. That's a big theme for next year that I could, I could see the optimism here. Who else do we have in this camp for this example.

Jack Forehand (9:57)

Yeah. So we also have, I mean we have Warren Pies too. You know, he's been talking about this idea of, of Goldilocks with respect to the economy. And I think he actually, when we get down to the end, is probably the most optimistic on the market too.

Matt Russell (10:07)

But he's all bulled up on this idea.

Jack Forehand (10:09)

Yeah, yeah. And Warren is not one of these guys to be. Warren is someone who will switch back and forth. Like he, he is not the perma bull guy by any stretch. So. And he also, I think of anybody like we listen to in the space, I think he does some of the most accurate work. Like it's, it's incredibly data driven, it's incredibly deep. Like he does a really good job and so he's probably the most optimistic this year. And he thinks about this idea of Goldilocks which is that, you know, inflation is not, inflation is maybe a little above target, but it's, it's fine, it's, it's under control. Like there's some weakness in the labor market, but it's not, you know, that bad. And we're kind of going down the middle here. The Fed is cutting to some degree. We're kind of in an ideal situation. And he thinks at least like for the first, I think two, you know, half, two thirds of the year, that's where we're looking at. And so he has a pretty strong target on the S and P because of it. There's fishing and then there's fishing. Out here you're after dinner. Online hackers are after your data. They'll bait you with fake emails, look.

Matt Russell (11:02)

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Jack Forehand (11:05)

But with Cisco Duo's end to end.

Matt Russell (11:07)

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Jack Forehand (11:13)

Looks like no one's biting today. Cisco Duo fishing season is over.

Matt Russell (11:19)

Learn more@duo.com how do you understand that as far as the. So that's basically a re. Acceleration inside of the economy and a broadening of the rest of the market.

Jack Forehand (11:33)

Yeah, well, I don't think Warren has not been a huge, as big of a proponent of the broadening like as we get into the market. Like he's, he's talked a little bit about maybe broadening within the s and P500, but he has, he's been pretty negative on small caps and correctly so relative to large caps. So he has not been one. And when we get down lower, we'll talk about the broadening stuff with other people. But I think he's he's been less about the broadening than maybe some other people have been.

Matt Russell (11:54)

Yeah. Which to me makes a lot of sense. And I think this, I'm sure we'll touch on this too. This goes into the whole small cap valuation argument and we've seen this. I saw Mike Green making this the other day. I've seen a bunch of people make this point. Small caps are cheap relative to expensive by historical standard large caps, but they're not that cheap relative to themselves. And so it's a weird place to see unless you're going to see top line and bottom line growth or margin expansion with small caps. Like what's really going to get them started? That's a harder pass through of this AI trend that we're probably a ways away from still.

Jack Forehand (12:26)

Yeah, part of it is like where are we in the economic cycle? Like Bob Elliot's talked a lot about late cycle dynamics. We're kind of late cycle and some of these other people are thinking we're not as late cycle. We're going to see an accelerating economy here and AI is probably the big variable in that. And we just don't know. I don't know if you listened or read Howard Mark's latest memo, but he was trying to figure out AI relative to bubbles. And a lot of what he got into with that is just we just don't know. We could look at past, you know, cycles, we can look at past innovation cycles, we can look at railroads and airlines and you know, the airplane and whatever else we can look at but we don't really know what the impact of these things is in real time. And I think what happens with AI because as we know AI has been driving a lot of this. And by the way, an interesting data point I was listening to Jan Hatzius from Goldman was talking about is I guess, you know, there's this idea that where did it come from? The idea that like everything has been AI in the market, like the economy has been AI, that all the returns have been AI. I forget the guy's name who came up with it but the idea is the Goldman people were pushing back on at least the economy part of that and that they were saying that it really came down to like a lot of the stuff involved in AI is like intermediate goods or is imported. And so what they were saying is like GDP growth at least specifically has really not been that impacted so far by AI. So I had kind of been listening to other people thought, you know, maybe AI has been driving like our. Because we had Reason we've had reasonable GDP growth. But it turns out, I guess from what they've said in the data, like the GDP growth is really at this, at this point largely not driven by AI, although I think they thought coming into this year it might start to see some impact.

Matt Russell (13:57)

Yeah, I, I think, and granted I haven't heard the Jan Hatzia stuff yet, but what I, what I am aware of is the analysis. Ben Hunt put a lot of this in that project or World War AI piece we've seen. Cuppy's been writing about this in all sorts of ways too. Where you basically have from this Project Genesis thing from the White House, we've got a lot of money that's potentially being directed at the economy that will flow through and show up in GDP potentially starting this year. And we're not talking small amounts of money. We're talking about something like $4 trillion over the course of the next four years, potentially in this US GDP around, I think it's around like $30 trillion, something like that right now. So, you know, if we're going to take 30 trillion USP or we're basically adding a trillion and change a year, that's a big change from what we experienced in 2025 and what's coming in 2026. I don't think that comes without effects on earnings. I don't think that comes without effects on inflation. Time will tell, but that those are big dollars we're talking about here.

Jack Forehand (15:00)

Yeah. So if we talk about some of the negative things and we'll talk about a bunch of risks later in the podcast, but just thinking about some of these economic outlooks that are a little less optimistic. On Torsten Slok at Apollo, he kind of talked about the idea of brief stagflation at the beginning of the year, but he was also talking about an AI field recovery later. So that was sort of mildly pessimistic at the beginning. Man group talked about the idea that we might have a mild recession. So obviously that wouldn't be that positive for the market if we did. And the recession thing has been as you know, like a challenging thing because so many forecasters have been calling for recession, so many indicators have indicated we might have recession and we just haven't had recession. But across the board, most of these people are not calling for recession in this year, which probably is when we'll get it right.

Matt Russell (15:43)

That's real optimistic. But I think this is a common trend inside of it too. Credit to Peter Atwater and coining this K shaped economy turn, I Think that's what we're seeing as well. It's not unthinkable that we could have all this AI investment, we could have all these other things going on. And because of this K shaped experience of where some people aren't feeling economic pain and other people, especially in certain service and consumer sectors are feeling it, like we could have a lot of really violent rotation in markets and we could have recessions that exist in pockets under the survey, under the surface of our different sectors or different consumer groups have different experiences. That wouldn't surprise me. And that would probably just continue to drive this really weird social feeling we have coming out of 2025 into 2026.

Jack Forehand (16:30)

That's such an interesting thing though, because like large swaths of people, and this is kind of what Ben was getting in and the thing we did with Adam Butler, like large swaths of people are not doing that well relative to the economy. And also there's not a great feeling of what you just got into, like the vibe session thing. There's not a great feeling about the economy. And you know, part of that is a lot of people aren't doing well. Part of that is politically we all hate each other right now. So that makes us feel negative. But it's just interesting to think about how that actually relates to the economy, that people don't feel good about it. Although the overall economic numbers have been really good. Yeah.

Matt Russell (17:02)

Because it ties back to consumption. And at the end of the day in the U.S. where 70 to 80% of, you know, this is all driven by consumption, if a portion of the consumer base isn't feeling well or doesn't have money to spend or is basically spending it all on things like rising electricity costs, that changes the experience. And it wouldn't surprise me if we start to see some arguments that we have recessions going on under the surface, all over these pockets of the lower side of the K. And there's a reason that Peter Atwater coined this a while ago and that it's being adopted as widely as it's being adopted right now.

Jack Forehand (17:37)

And we've talked to Jim Paulson about this too, because he kind of sees this as fuel, like in terms of things getting better in the future is this idea that if this would change if we start to see signs, and I think he thinks like the Fed cutting and some other things that are changing might increase this to some degree. But like if people start feeling more positive about what's going on, and again, some of the things we've talked about just aren't going to change in the short term, but that is potentially more fuel if people start feeling better about what's going on in the world.

Matt Russell (18:04)

Oh, yeah, that definitely pushes things forward. If people start to feel better, it also pushes things forward. If we see. I brought up the Genesis mission already. If we see other big policy initiatives, basically, in this case, counter policy initiatives that help support that base, they could also be stimulative in different ways. It's impossible to figure out which one of these is exactly going to play out. But it is important to put them all on the table because we could have a counter AI policy that's actually stimulative in an entirely different way to that swath of the economy. And that would still be good for net. Net for markets and gdp.

Jack Forehand (18:41)

Yeah. And I guess policy around AI is another thing we didn't have on the agenda, but it's certainly something that's going to matter. I mean, you've got Bernie Sanders now talking about banning data centers. I don't think that's going to happen. But nonetheless, like there's there how people feel, because AI is. In terms of how people feel already, AI is a potential problem. AI is something that potentially could increase wealth inequality. It could make a lot of these things worse. And so you're going to see a lot of things politically, we're like. The view of AI, I think, is getting more and more negative over time. Politically, people, the average person is starting to like it less and less because of the things they're being told it could mean. And so how that plays out and how that affects policy, I mean, all that could change could impact AI, which then could impact the economy.

Matt Russell (19:22)

Yeah. Right now we haven't seen it turn into a political punching bag yet. We have great. There are some absolutely fantastic storyboards on this. If you go to the Panoptica site or certainly if you're signed up for Persian Pro, where you can see literally tracking the sentiment data around this, people still think it's being written about, it's being discussed that AI is this existential threat that we have to win, we have to dominate at, we have to invest in almost at all costs. But the reality is, when we see a swing of that intensity in a story, we know that that means there's a counter story that's just waiting to crop up its head. Because these things aren't just going to go to the moon forever, just like anything else. Not to say they're mean reverting, but they do come back down and does open the door for A counter narrative. One thing that I think is going to happen in 2026 is this is the year where we see a non Bernie Sanders type take on the AI complex for policy and whether that comes in the form of it might be inflation starts to run really hot because of electricity and it impacts that lower leg of the K and the K shaped consumer because they're the most susceptible to those costs. That's what Mike Green. That's what Adam Butler. That's what all these people are writing about. If that's the thing that happens, some politician comes out and says, let's do, let's do caps on data center on data center power. I think Ben Hunt already said put a 10% cap on electricity consumption by the data centers in states or, you know, smaller territories. You could do something like that. We'll see policy like that hit the table at some point if these problems arise. Because right now the policy leaning is so heavy in that direction that I wouldn't be surprised to see a tilt back.

Jack Forehand (20:57)

Well, I really just wanted to get you into the US China thing because my most successful thumbnail ever was like half the US flag, half the China flag. So I want to come up with some reason I could use that here. So now I've got you to get that in there.

Matt Russell (21:08)

Call Louis, Vince Gav. Let's get it back on the line.

Jack Forehand (21:11)

Yeah, exactly. We got to do like popping as a third person right now so they can do that. Get him on the thumbnail and the flag.

Matt Russell (21:17)

And we'd be doing really well. But it's another, it's another crazy thing and it's another driver of all this stuff. Like China is living in a completely different world than we're operating in in the US Right now. We're telling completely different stories. And it's a, it's, it's a really interesting to think because a lot of these surveys and a lot of this data is like really thinking about the US Almost like on an island economically in many of these areas. Really fascinating that you bring that up.

Jack Forehand (21:43)

Yeah. And I would, I would recommend that conversation you and I had with Louis, Vince Gav, if anybody's never hasn't listened to it because it's just so good. Like I learned so much stuff about China, you know, regardless of what your opinion is, I just learned so much stuff about what's actually happening there that I had no idea about.

Matt Russell (21:56)

Yeah, let me know when we're going over to China to test drive some electric vehicles. They're pretty cool, I guess, stories. Yeah, I Want a drone to fly in front of me, like the drone?

Jack Forehand (22:04)

Yeah, no, I want a drone in front of me like telling me what's coming or something like that.

Matt Russell (22:07)

I've been thinking about that ever since. Yeah, where's.

Jack Forehand (22:09)

I was thinking about that more like mass at scale though that becomes a problem. Right. Because aren't our drones like running into each other or something?

Matt Russell (22:14)

I know, yeah.

Jack Forehand (22:15)

I'm not sure if it works out. I don't know if it works that at scale or. But we'll get. We're not getting a drone anytime soon, Matt, so we don't have to worry about it. So let's go on to inflation. Yeah. And in inflation there's not too much to say. I mean, I think a lot of these forecasts are right in the same place. You know, some people are a little more worried inflation than others, but a lot of them expect, you know, we're kind of in that 3ish percent inflation range. They expect us to stay there. And across the, across all the forecasts, it doesn't seem like there's too much deviation there in terms of. I think there's some more concern later in the year. Like for instance, Warren Pies was very optimistic. He thinks that eventually is going to be the side of the equation we need to worry about more. So he thinks as we get into the back end of the year, into the following year, like inflation concerns could rise again and that could be a problem. But it seems like for this year there aren't too many concerns about like inflation getting too much higher or, you know, too much lower than where it is.

Matt Russell (23:04)

Inflation's a problem. If unemployment's a problem, unemployment's always a problem because the way we're measuring it or not measuring it for, for many, many cases right now, there's a lot of questionable. Do we have good data on the inflation numbers? Is a question. Somebody pushed Eric Pakman to make sure he dives into that statistic. So I feel like we have something we can actually understand. I'm in the inflation is a problem camp later in the year and perhaps a meaningful one because if this Project Genesis stuff gets off the ground, if the policy push is we are going to be pushing in the economy as a combination of government stimulus and private sector spending, something like 10 to 15% of GDP into these areas, we're going to get some inflation. We're not, it's not going to be a 3% number if we have that quantity of stimulus hitting the system. That doesn't mean we're going to have double digit inflation starting to annualize by the end of the year. But it does mean that number's probably higher than 3%. And if you have unemployment starting to crop up and you have inflation as a problem, that has no policy initiative because the AI data centers aren't, you know, helping out proverbial Joe Six Pack or whatever else, that's a positive crap storm waiting to happen.

Jack Forehand (24:14)

Yeah, and AI is another big variable with inflation. Maybe not necessarily this year, but long term because, you know, some people think it's going to be like the most deflationary force we've ever seen and some people disagree. So I don't know the answer to that. But obviously as, as we get more and more into this AI boom, like its impact on inflation will probably be a bigger and bigger issue.

Matt Russell (24:31)

Yeah, we got to check in with Kevin Weir on this. And in prior years he's, he's had some great ideas on, you know, where inflation breakevens were, pricing this stuff and how much they may or may not be underpricing the risk. I want an update on in the next six to 12 months where inflation break evens are and if they're underpricing the volatility relative to where they could be.

Jack Forehand (24:52)

Yeah, and I know you're going to bring him on and talk to him on excess returns I think sometime early next year. So we're going to get him where he is. Now.

Matt Russell (24:57)

This is going on my list. So.

Jack Forehand (24:59)

And I guess the next thing with inflation that leads into that is the cuts in the Fed. And you know, there weren't. I mean, I think the consensus probably across these is we may get less cuts than we think. I mean, Schwab was talking about this and this is, you're gonna have Liz Ann, you're gonna talk to Liz Ann Saunders pretty soon. But this was the fixed income side of. Schwab was talking about 2 to 3 cuts in 2026. But a lot of the others were saying, you know what the Fed is probably. And it seems like I think the chances of a cut are like 20% in January right now. So that that's kind of backed down. So I think a lot of people think we're probably in for a pause here and maybe less cuts than, you know, many of us think next year.

Matt Russell (25:33)

Where, where are you on this? What's the Jack Forehand gut say?

Jack Forehand (25:38)

Jack Forehand has no idea about the cut. Yeah, it's, it's just hard to say and I don't know that it has, it's hard to even Predict, you know, even if you know what the cuts are going to be, it's hard to predict what's going to happen. Like, I remember with that Liz Ann Saunders, last interview you did, I use this idea that, like, the fact that we haven't had cuts is a good thing because she had said that at that time last year. So it's not necessarily like, the cuts are a good thing. Like, it depends on what the cuts are being caused by. If the cuts are being caused by, like, significant economic weakness, maybe it's not a good thing. So I just think it's a variable. Like, even if I told you what the number of cuts was going to be, I don't know that you could tell me too much about, like, what's going to happen with the economy and what's going to happen with the market.

Matt Russell (26:14)

I am also in that camp of what does it even mean if we're cutting? I do think, and I'll, I'll go with Schwab on this one. And just what my instinct is, is that there's only so many cuts you can do so long as you still have some baseline inflation and you don't have a growing unemployment issue. If the Fed's mandate is still to look at inflation and the unemployment situation, maybe they can do a few more cuts to get into the year. We obviously see what the data says at that point, but it's, I'm hard pressed to see a scenario where they're cutting like five times in the next few months unless there's a crisis. Right.

Jack Forehand (26:48)

Well, the other thing you got to think about is the independence thing. And that's, that's going to be the interesting thing this year. We're getting a new Fed chair. Obviously that's going to be installed by Trump. We had more, you know, dissension in the Fed in the last meeting than we've had in the past. Just thinking about, it's just really interesting to me. I don't have a strong opinion on it, but thinking about how that's going to play out, like, I was actually asking ChatGPT about this. I'm like, is a Fed chair ever dissented before? And the answer was, I guess, in the modern era, since 1951. No, it, like, maybe might have happened in like 1931 or something. But could you see a situation here where if, if a Trump appointee wants to cut and the board doesn't, like, could the, could the chairman dissent? I don't know. I mean, I obviously know nothing about this stuff, but it is interesting we're getting more dissents. You know, the more of the Trump appointed people are going to want cuts. There's some other Fed governors who are feeling stronger and stronger against them. So I think we're probably going to get more dissent this year than we've seen in a while.

Matt Russell (27:38)

I would bet on dissent too. And I would bet on dissent because I think data integrity, the way they're asking these questions and what even the questions are that they're going to pose to ask all get called into under more and more pressure. And that's, I don't know if that changes the way we read these Fed meeting minutes or not, or what the dot plot looks like or how this plays out. But that's a concerning, that's a concerning trend because that probably actually contributes a different type of noise to markets than we've historically experienced. To your point, this isn't a normal type of thing we usually see with, with increasing dissent amongst the Fed and the board.

Jack Forehand (28:12)

So the last thing on the, on the macro stuff is fiscal policy. You know what's going to be the impact there? When we were talking to Paul Idleman from Russell, like they think the big beautiful bill will be somewhat stimulative this year, they had a nice chart of like all the different factors which I can put in the podcast of like all the different factors and what they mean like immigration and you know, fiscal stimulus and all that stuff. And fiscal was something they thought would be slightly positive for this year. So that could, and Schwab talked about that too in their outlook that it could add meaningful boosts to growth this year. So that's definitely something. And then the other thing you've got sitting in the background on government policy is the deficit. And that's one that's just so hard. Like we've talked to so many people and so many people call for debt crises and it's just, it's something that certainly is going to have negative implications at some point, but the degree to those and the timing of those, I think even the smartest economists in the world just have no idea.

Matt Russell (29:01)

I think post, post gfc, post Covid like fiscal as the new monetary is a known thing. We've now moved beyond response to crisis with both fiscal and monetary stimulus. We've realized the power of fiscal policymakers know the power of fiscal and now we've moved into an era of trying to look at other ways to do fiscal. That feels, that feels different than necessarily like direct. I mean I know we're paying dividends to veterans and Things like that right now. But they're pushing the parameters of what fiscal stimulus can look like. It's hard for me to imagine we don't see more of that next year, including in the AI build out, including into push into some of these areas. And stimulus makes things go up. Stimulus doesn't hurt too much. Stimulus eventually gets us into trouble, that gets us into AI or into bubble concerns and bubble territories. But if we have stimulus, and I think this is one of the things Warren Pies is probably looking at when he's coming up with his numbers. If you have a bunch of stimulus measures, it's hard to bet against that stuff.

Jack Forehand (30:09)

Yeah. And as we switch to I just want to cover AI a little bit more at the end here because a lot of the AI we've talked about sort of the AI in the economy, but then you've also got just the nuts and bolts of what's going on. And that was a theme across these is like the idea of what does this Capex build out mean? The idea of the limitations of power. Can the power grid handle this? Like BlackRock talked about, the physical constraints of the AI build out due to energy. So a lot of those nuts and bolts of AI are something these market strategists are thinking a lot about this year. I don't know if it's very hard for anybody to necessarily figure out how it's all going to play out, but we definitely are dealing with. It's interesting like this started as coming from the cash of these companies. Now we're starting to get debt mixed in. Now we're starting to get power constraints mixed in. So we're kind of at a new stage of this in terms of how it'll look going forward.

Matt Russell (30:52)

If you haven't. For people who haven't looked at like the IEA reports on this, it's, it's very valuable to look at the various energy consumption outlooks on what they see here because these numbers are pretty staggering. I'm trying to look. I have it. So IEA energy, they basically said we'll have more than a double in energy consumption by data centers by 2030. We move from a few hundred terawatt hours to around a thousand. And depending on who you look at, it's a climb from 2% of electricity in the US to 10 to 12% by 2030 and zero at the global level or just over zero up to about 3% of total electricity consumption. So when you tie that back to consumer, when you start to look at this, if, if we don't have a cap on this data center electricity consumption. We are going to see massive price increases in these places. And if we don't see direct investment into bringing new power sources online, those price increases are coming as fast as they build these data centers out. That is a very, very real concern and risk. Who knows what that's, that's going to do. Oh, and actually, I got one other crazy thing on AI besides the data center thing. The, the argument of revenue versus depreciation. Do you know what I'm talking about? This is another one that I think C nailed months ago. Do you remember this argument? Did you run into this?

Jack Forehand (32:10)

I've heard a little bit about it, but you'll definitely know more than me.

Matt Russell (32:13)

So it's basically like you have. You're hyperscalers are going to spend a trillion dollars. So for $400 billion a year in data, spend over 15 to $20 billion in revenue. So there's basically no business model here yet. Surprise, surprise. Especially when you factor in you've got $40 billion. That's two times revenue in depreciation charged every year. So it's like you got this massive P and L problem that's building an AI where basically depreciation is running at two times revenue. And there's some point in this future where the rubber meets the road here where we've either depreciated everything to zero and there's nothing more we can do because we don't have the revenue to do it, or we've reversed course. There's almost no sustainable path for this to work out unless we see a giant S curve in adoption, revenues and everything else. And that's running in the face of this electricity problem.

Jack Forehand (33:06)

Yeah, there's, there's like so much in the accounting on this stuff too, like beyond my pay grade. But Jim Chanos has been out talking about a lot of this stuff and it's just, it's very interesting to think about. It's just such a massive thing and there's just so many different implications and depreciation, there's just so much going on. It'll be interesting to see how it plays out. I mean, I don't think any, even these market strategists we read, like a lot of them did not have definitive takes on this. I think a lot of people recognize this is such a tough thing to forecast based on where we are.

Matt Russell (33:32)

You can't have a definitive take when you're talking about a level of spend. Again, that's relative to the size of the spend. In World War II and in Covid, these are giant numbers that you couldn't predict the outcomes coming out of, of how this reallocation of capital inside the economy was going to impact the economy, let alone earnings. So it's humbling to see people flagging this stuff and going, this math makes my brain hurt. If Chanos and Cuppy, it's making their earlobes itch. I'm at least interested in what's going on.

Jack Forehand (34:00)

But before we get out of this, too, Matt, data centers in space. I think the people want the definitive answer from you. When are we getting those?

Matt Russell (34:06)

We don't already have them. I think, I think the, the chemtrails are a sign of the data center. I. I don't know. Are, are we going to push for stuff like that? Absolutely. But that's just one step closer than Mars, I guess. I don't know.

Jack Forehand (34:20)

It's so cool. It's so cool to think about, like, because first of all, like, being the value investor that I am, I'm like, data. There's not gonna be data centers in space. That's ridiculous. But, like, you listen to people like Gavin Baker, like, there are going to be data centers in space.

Matt Russell (34:31)

There's gonna be data centers in space. SpaceX is gonna launch them. And it's coming. It's coming in some form or another.

Jack Forehand (34:39)

And when you think about it from first principles, I mean, the sun is there and there's like, lots of power from the sun. And then you think about it, although there's this problem of, like, I think transmitting cold in a vacuum. It's very cold there, and the data centers need to be cooled. So that's a thing. And like, we know through SpaceX we can get the loads up there. So obviously whether it can be done economically is a different question. But I saw something the other day that they did train, like an LLM, like, in space. That's, like, already been done. So I think clearly we can have data centers in space. The question is, can we do it economically? And also can we do it at the scale that needs to be done to actually impact, like, our energy problem here on the ground?

Matt Russell (35:12)

And if people are trying to solve problems by putting things in space with economic proof potentially at some point on how this actually fixes a problem here that just tells you the range of potential outcomes that we have in front of us right now.

Jack Forehand (35:26)

Yeah. And for anybody who hasn't listened to it, like Gavin Baker's interview with Patrick o', Shaughnessy, which was, what, a few weeks back or something like that. Just outstanding on this. Like, for someone like me who's trying to learn about what's going on here with, with the whole thing with AI, but the data centers and space was covered as well. It's just, it's an outstanding interview.

Matt Russell (35:41)

And Matt Russell's the, the episode that they did on SpaceX, like, like just some of the things that people with a value bias were default inclined to be skeptical of. But it's really interesting to hear what these business models are and how they're actually thinking through these things. Agreed.

Jack Forehand (35:58)

Yeah. And you need that stuff. Like when you're like, one of the things I've learned over my career is like, I'm like, oh, this is this valuation, this PE ratio and stuff. Like for people like me, I need to be listening to more of that than I need to be listening to people who agree with me that like, value will have its day again. Like, it's much more important that I listen to that. And even if I get a little bit too far with my data centers in space or whatever, it's still, it's still beneficial for me to understand this stuff.

Matt Russell (36:18)

Hey, if nothing else, that kind of stuff got us Star wars and that ultimately got us Spaceballs. So I look forward to the comedy franchises 30 years down the road ridiculing all this.

Jack Forehand (36:28)

And so another common thing about this was this idea of AI diffusion, which is we talked about a little bit earlier, but this idea of when will the benefit come down to these? Like, when will the economic benefits start carrying down to a lot of different companies? And you know, you and I use AI a ton of. But it's hard to take our use of AI and translate that to like what it means for economic growth. So it's a challenging thing. But a lot of these forecasts, like, I know Russell was talking about it, a lot of these forecasts do think we're going to see this diffusion now and we're going to start to see this economic benefit carry down beyond the hyperscalers.

Matt Russell (36:59)

Yeah. And it's. How many, how many AIs are you paying for at this point?

Jack Forehand (37:04)

Five.

Matt Russell (37:05)

You're on five right now.

Jack Forehand (37:06)

I don't have the $200 a month plan. Like I have the cheaper plan, but like, yeah, I use five of them. All of them.

Matt Russell (37:11)

Okay. I think I'm, I'm either three or four paid right now, and I'll probably be at five by the end of the year. Like within hours of us recording this, I'll probably lock down one or two Others and inside of that I think the crazy reality, because what we're looking for, back to the argument of how these, the, the AI companies are effectively like their revenue is really short. So we're doing our part to have to help push the revenue up. But the other thing is it's like I don't have a job at Google and Microsoft where I wrote two chatbots to like do both of my jobs so I can sit on the beach or play video games all day. I know you have the same experience as I, as I do where it's like, oh no. It's like AI has enabled me to work six jobs at once like a crazy person. And I don't know what the impacts of that is. I don't think there's a way for us to measure that. But I do think the diffusion will start to happen. It's just going to take some time yet. If we're early on the earlier side of this curve for adopting this for not tech programming uses, for ways that we improve our experience with our day to day work and our day jobs, it's really interesting to think of how does that spread through the adoption lifecycle? How do more people start figuring it out and how does you know, the contractors doing a roof go? This is what improves my process and unlock some profitability. That's going to take some time for us to get there.

Jack Forehand (38:27)

And it's interesting to see the balance between like the tech optimists and sort of the economic realists. So like I was listening to this. Do you know the Dwarkesh podcast?

Matt Russell (38:35)

Oh yeah, yeah, he's great.

Jack Forehand (38:36)

Yeah, he had that Andrej Karpathy who was like a very early guy in this. I think he also ran self driving for Tesla for a long time and like they were having a debate about this and they're two tech guys, but Dwarkesh was talking about it. I won't, I won't explain it as well as he did, but like this idea, if you think about I've got Matt right now, but as AI gets better and better, let's say Matt has an additional 20 mats that operate at like 90% of the capacity of Matt. Like doesn't that as you carry that across an economy lead to maybe levels of economic growth we haven't thought about before because you think about it as like labor supply and productivity being the two things here? Well, if I'm like creating this extra labor supply of these things, like I'm probably gonna, I'm probably gonna boost productivity. I'm probably gonna Boost economic growth. And then Andre, who's like in the deep in this was kind of like saying like, we always end back in this 2% and change economic growth thing. Like we're probably, with all these other innovations we, we got there, we're probably gonna get back there. But it, and it's just interesting to think about that, like that separation. I don't have any answers. I mean, I know the people that are predicting like 20% GDP growth are likely to be wrong, but that doesn't mean that somewhere in between the, you know, the 2% and the 20%, there's not a, like a level of growth that you or I might not think is possible that maybe gets unlocked by this.

Matt Russell (39:44)

Sure, why not? Right?

Jack Forehand (39:47)

I don't really know. I mean, it's so hard to figure it out. Right.

Matt Russell (39:49)

That's how it feels. And I think part of the question there though becomes can you have. Because like otherwise the only way you get to this historically is you have population growth to increase consumption. When I have 20, you know, Jack GPT is running around running at 90% of Jack Forehand. Those 20 Jack GPTs are not consumers in the economy. So are they, are they pure profit and pure growth? Is there any consumption thing where there's the give and take back and forth to the economy? Cause like we make goods and services and put them out into the real economy, but then we also consume goods and services and that's how this thing levels out. And that's part of why we always revert back down to that like 2% growth. If you invent a bunch of, you know, it's, it's, it's like a kid with an Instagram profile with like, you know, 200,000 bots in Bangladesh as followers. It's like these just inflated, meaningless numbers. Are we consuming or creating anything from this? Or is it just a big technical. I'm out of my league, Shut me up. Take me to the.

Jack Forehand (40:49)

Yeah, no, I am too. But I remember like when we had Bob Elliott on, I used the thumbnail something about like unemployed people don't spend money. And like that was his whole point is like, if you're going to argue what we're going to have, all this efficiency and it's going to get rid of all these jobs. Well, what about the money? Those people like that don't have jobs now are spending. Like, where's that coming from? So, yeah, there's no answer to it. I mean, but it's just interesting to think about and I can see arguments on both sides And I think when you see these forecasts we all read, you see that, too. You see probably optimism, like leaning towards optimism. But you also see both sides of this, that these people really don't know what's going to happen.

Matt Russell (41:21)

I mean, we'll have more blogs and podcasts. I think that's one thing we can bet on.

Jack Forehand (41:25)

So we'll shift to the part that people like the most. But as we, as we mentioned earlier, it's probably not the greatest, the most valuable part, which is the actual price targets for the S and P and sort of the outlooks for the market. And they ranged anywhere from 7,100 to, I think, you know, close to 8,000 or I think, I think Warren Pies was the highest in the 7,800 range. You know, his, his actual forecast is behind the paywall, but he talked about this on a podcast. So Tom Lee, as you can expect, is up there near Warren Pies being optimistic as well. But, like, I'll ask you how you think about this. Well, first of all, let me ask you, like, you did work at one of these big banks a long time ago. Like, what happens with these things? Like, you've got the person at the top of the big bank writing this outlook. Like, when you're an advisor there, like, what do you do? Do you do anything with this?

Matt Russell (42:06)

No. I mean, they inform your capital market assumptions. That's the most important and the most valuable part of this is. And granted, there's a million frameworks for deciding on these things, but what you're really doing is driving. You're deriving your capital market assumptions from these types of exercises. And ideally, what you're doing to get your capital market assumptions is you're looking at like, okay, what's the best way that our analysis can show what we should expect for GDP growth? Where interest rates likely are the ranges they could move in. Where valuations likely are. Where earnings and revenue and profit margins likely are the ranges they could move in. What should we expect for not just the year ahead, but then also some type of dynamic assumption over the next handful of years and then some type of strategic assumption over the next 10 or 15 or 20 years? All that together inside of a correlation matrix. You start to do the math and crunch numbers and go, this backs up why we think it is prudent to have an asset allocation and invest in a way that rhymes with these models. That's the ultimate actual point of the exercise. Now to go on CNBC and talk up your firm and try to drum up new business and get clients in the door. That's another part of it that we can't ignore. The storytelling of this is really important. What's fascinating to me this year is that we see a lot of targets that are basically calling for low teens earning growth and basically the market's going to go up in a low teens amount. Now the historical average is 10 and an above average return would be 20. I am rounding numbers very generically, but then a lot of them are basically just splitting the difference, which is really, really common here. We don't want to bet on average and we don't want to bet on a standard deviation above average. So we'll split the difference, we'll land in the middle. It is that technical, I assure you. What's interesting about this one though is we see price appreciation tracking with basically earnings growth. And what that is assuming or presuming, I guess I should say in this case is that the markets are going to go up as much as earnings. The valuation multiple is going to stay about the same. And the concerning thread in all of these that you start to dig deeper on is revenue growth almost across the board is coming in around half of what earnings growth is. Which means these analysts are basically saying the profit margin is going to increase Again to preserve the multiple where it is feels a little weird. But again to the beginning, this is what vanilla ice cream is right now. More profit margin expansion, presumably AI, presumably other things helping to drive that. And that's going to carry markets through the year end as we continue to get that profit margin expansion and we don't doubt those multiples. I don't know if I did a good job of answering your question.

Jack Forehand (44:42)

You did, but it's interesting too because like profit margins are traditionally a mean reverting series. Also valuations over time, eventually, typically over time have like reverted around some sort of average. But neither one of those has been happening. And that's interesting. Like we, we talked about this in our podcast with Jim Paulson. Like the average valuation of the market, like, you've got the range like before 1980 and you've got the range after 1980. But one of the important points he made is even within that range after 1980, the average keeps going up. Like, so are there reasons that we continue because of, you know, technology and everything's improving to expect? Like, at least the, that doesn't mean we can't be expensive now, but it means, like, are there reasons to believe that average will keep going up? And it's the same thing with margins like, are there reasons to believe? Because people like me are constantly, like, these margins have to be revert, like, this is valuation, like this has to value investor in me. But like, they haven't been. And so that's just an interesting question. It's an interesting question. How does AI play into that? Because it could AI, at least for the foreseeable future, continue that margin expansion.

Matt Russell (45:41)

To me, that's the biggest concern in these, is that we have another year, because same thing is looks like is going to be the case in 2025. We don't have the last quarters of earnings yet here, but it basically looks like we're getting margin expansion off of revenue coming in around half ballpark, around half of earnings growth. And to say that we're going to do the same thing again, not that it can't happen, but there's only so many times you can expand those margins and preserve that multiple. What this calls into question is that eventually when we get some type of a reset in these numbers, some type of mean reversion, however you want to frame it, you have that double risk of contracting margins and contracting multiples at the same time. And that, that actually genuinely concerns me for some time in the next handful of years, could we have a really sharp and steep contraction that hurts really, maybe worse than normal, especially depending if we have an economic event tied to it or not. I don't know. But I'm really going to be watching for that rotation theme inside of markets this year to see if we start to see profit margins and valuations start to correlate a little bit more, where when those profit margins disappoint, those valuations get the air sucked out of them real fast.

Jack Forehand (46:52)

Yeah, one of the interesting things on margins too, and I interviewed Graham Forster from Orbis on the podcast and he made this point, and I think it's a really interesting point, is like, whenever you think about this trend, all right, margins are going to grow forever or whatever trend it is, it's great to carry it far out in the future and then say, like, what does that actually mean? So, like, they carried forward the margin expansion and they're like, this is what margins would look like in 15 years. And you're like, holy crap. Like, that's not happening. Margins aren't going to be that. So at some point this is going to slow down. I think that's an interesting way to like, look at it to say, all right, I think it might continue. But I've also got to think about if that, what that actually means going.

Matt Russell (47:24)

Forward, what does that do? And I will say this, Savita at Bank of America Merrill lynch is at the low end of the estimates this year. They have a really interesting quantitative model that they've built out that measures all these things and that's part of the assumptions. They have these dynamic capital market assumptions in particular that weight all these things and go, what if each of these is mean reverting over the next three to five year period? And how should we think about that? Tempers a lot of optimism against the strategic longer term assumptions. And at least they have a framework for putting that into scope. My guess is that's why she's on the lower end of the estimates this year because of how stretched in so many categories they are to the high ends of those averages. And going, we're not going to bet against them. We're still going to say we're optimistic on what happens going forward. But this does constrain the amount of potential growth we should be expecting. That's a valuable part of this analysis.

Jack Forehand (48:18)

And that gets you one of the best ways I like to use these. So I always like to find the lowest estimate and the highest one for the S and P. And then I like to look in behind the scenes as to how they're getting there. And so to your point, most people are saying earnings are going to go up this amount, the S and P is going to go up the same amount as the S as that there's not that much to learn in that. But her, she's calling for earnings to actually grow up, go up just as much as people expect. But significant multiple contraction in there. And Warren Pies on the other end I think is talking about some degree like a Goldilocks economic standpoint scenario, but also multiple expansion. So it's good to go into the depth on those and figure out like if I want to think about the different cases in the range, look at the low one, look at the high one and say what are the differences there? And that that kind of gives me some ideas of maybe some of the significant things to think about as we head into the year.

Matt Russell (49:01)

Yeah, I think it's massively important because you want to look at top line and bottom line and then the profit margin in between. And then you also want to ask the questions. And I think this is an interesting part of the dialogue going into this. Here is the changing of the balance sheet at so many of these companies and the changing of the balance sheet as we look at the s and P500 writ large as we're seeing a shift of more capital light industries to more capital intensive industries in various ways and the different types of financing that get them to that point. These all have an impact on the profit margin. In between that top and the bottom line. It's worth spending some time to understand what a good scenario looks like, what a medium scenario looks like and maybe even what a bad scenario looks like. Not that you'll see that one of these year ahead projections.

Jack Forehand (49:44)

Yeah, I mean eventually we're going to see a scenario, we're going to see a bad scenario or fortunately yes, and it will one of these years. I mean I'm certainly not predicting it for this year and if I was, you shouldn't listen to me anyway. But it is possible. But the next thought thing I thought was interesting is this idea of earnings with the MAG7 versus the 493. And there were some divergent opinions on this. I know Goldman noted that I think the top seven companies in the S&P are 36% of market cap and 26% of earnings. So yes, they are overvalued relative to their earnings, but they also are producing a huge portion of the earnings. And when you look back over the past three to five years and you look at earnings growth of the MAG7 or the top 10 or however you look at it against everyone else, it's amazing the difference that earnings growth has just been massively higher in the bigger companies. And the question is, is that going to continue? And I think you've got a lot of divergence among these companies or among these different people who issued forecasts. In thinking about that, we are seeing some improvement in the smaller companies. But whether that will happen and how AI plays into it, I think that's an important thing as we look into the new year.

Matt Russell (50:43)

Absolutely. And the reality is the types of margins that have been afforded to the Mag 7 names certainly in the past decade, perhaps even more concentrated in the last few years, those types of margins are not replicable at scale across the other 493 companies. They're just not going to have 70, 80, 90% margins. It's not going to happen for your oil and gas company per se, or for your utility or your bank or your consumer staples company. So which in what's interesting is if we are going to see more earnings growth picked up by other sectors of the economy, it has to definitionally be at a much lower margin. And that's going to rely on something else happening in the economy. Probably a strengthening, probably a healthier consumer, probably less inflation in some way, shape or form, if we can get there, that says we can start to spread this out. Very disappointing for returns probably for those Mag 7 stocks, if we're in that scenario too.

Jack Forehand (51:39)

Yeah. And one of the things people like value investors like me have to be careful about asking about is this idea that we all want 2000 again. And we're like, all right, our value companies will rise again and the Mag 7 will tank. But that's not good for the market given the size of the Mag 7. Like our value companies aren't going to go up enough to offset the decline. I mean, we might do well. Well, relatively. But you're, you're in a bad. If these companies tank, these, you know, these mag 7 type companies, you're in for a bad market.

Matt Russell (52:02)

Yeah, there was a great. Actually Kevin Weir, and this is one of the ones I flagged for when I talked to him early next year about this. He actually looked at rotations and market declines and he looked at the 99 bubble and like what you were just talking about coming out of the tech bubble, how basically your value, your small cap value outperforms. You can actually do pretty well avoiding the indexes, avoiding the dominant sectors and being in these counter sectors where the rotation wins. That worked relatively well in the early 2000s in that cycle. That did not happen in the great financial crisis. In the global financial crisis. Like there wasn't anywhere to hide in the global financial crisis. You might have been down 10 or 20 instead of down 40 or 50, but you still got your, you know, you still got your butt handed to you. And there is something very, very real in looking at this. What are the rotation opportunities? Where are you going to be able to hide? And also what are the risks about betting against some of this stuff? Because you might still continue to be wrong for a continued period of time. Part of what makes it so hard, part of what makes it about having exposure and having the things you believe in for the long term as a key factor, literal quantitative factor or otherwise, that you tilt back to over and over again and go, I'm at least comfortable with this risk I'm taking.

Jack Forehand (53:16)

And just to get at the divergence I was talking about before, like Goldman does expect the S&P493 to, to experience accelerated earnings. But places like Apollo we're talking about, they expect margins to keep going up to the leaders and down for everybody else, you know. And HSBC talked about expecting mega cap earnings acceleration. So this is really, this is one of the ones that there was more disagreement, I think than anywhere else. But this is, that's not to. I mean that's been a disagreement for a long time here. I mean a lot of people have been talking about broadening of earnings growth for a long time and it hasn't happened. And so who knows? I mean at some point it's going to happen and these companies just can't keep growing, I don't think relative to everyone else for that much. And also their business has changed this year. It's an important point to keep in mind. I mean these are not the capital light businesses they always were. They're spending a bunch of money now and that money may be worth it, it may not. But you have to at least argue that their, their businesses have changed going forward and that changes how you analyze.

Matt Russell (54:03)

Changes what you call earnings, all these things. It's a very, very messy piece of calculus at all times, but it feels like now more than ever.

Jack Forehand (54:10)

And so there was disagreement too on the broadening of the actual rally, you know, which you would expect tied to the earnings growth as well. Like Goldman did talk about the idea that they're expecting a broadening bull market and obviously someone like me who's investing more in your average stock than the Mag 7 would love that. But I mean we all have to take into account the fact that we've been talking about that for a long time and also people were talking about International. I mean we, we haven't covered it yet, but International's had a great bounce back year this year. There were a lot of reasons for that. Is it the start of the international run all of us have been hoping for or is it just a blip? We don't know. But there are certainly tailwinds to International now that weren't there for a long time.

Matt Russell (54:46)

Do you feel like with. So I'm in the camp, we're in the camp that a, an international allocation is important. We're not betting on continued above average growth or anything super exciting or, or whatnot there. But it feels like this has been a reminder of why you have the international allocation. But it doesn't feel, don't feel great about International. And I am still in the, despite Louis Vincent G. Yeah. Of making me feel very good about places like China. I don't feel great about being an investor in China just the same way I don't feel like being good about being an investor in a lot of places, at least not with other people's money where we have to answer that question of hey, there's a chance this could just get turned off here. So where do you come down on, I guess the international outlook? Looking at this stuff?

Jack Forehand (55:33)

This comes down to if you think about it long term, at least it comes down to the math versus the way people actually act in the real world. And so people like me have been talking about the math for a very, very long time. I mean the math is irrefutable that if you want to have a long term portfolio, you want to be diversified in international stocks. It's just that you can't refute the math. But you also can't refute the 20 year period where it didn't work. And you know, if you're going back to your investors every year and saying you need to have this because it works long term, you need to have this because it works long term. Just eventually they just tune you out. So I mean, I think it was good that we got a bounce back in international. And it's interesting to me, like if you look at one of the things I've learned on the Jim Paulson show is like if you just look at what the dollar's doing, that will tell you a lot about the US versus international performance. And like he thinks a lot of that is just the dollar's weakened this year, so international stocks are doing better. So maybe you need to know what if you're thinking about it shorter term, maybe you need to know more about what's going to happen with the dollar before you think about it. But I think long term there's definitely a very strong case for it. But we also have to live in the real world that people, if something's just not working and not working and not working, people aren't going to keep doing it.

Matt Russell (56:31)

Agreed. Big munger stamp on. Yes. Nothing more to add to that.

Jack Forehand (56:38)

So yeah, there's not too much of the factors and styles. We're going to cover this quickly. Like as a factor investor I had to, I mean obviously this was what was interesting about this year is that how bad factor investing was in general. Like value didn't have a great year, it had an amazing year internationally. But in the US Value didn't have a great year. I think quality had one of its worst years on record.

Matt Russell (56:57)

Quality was terrible. It hurt to be something I can emotionally go back to and feel like I can talk to clients about and feel like I can tell myself is a belief in quality. And just like the durability of profits in companies as, as compounding machines because we want to own them for a long time, we want that build that ability to compound this year owning anything with quality tied to it, whether it's literally through a factor focus strategy or just as a core belief, it sucked to be a quality investor this year.

Jack Forehand (57:29)

It was really like momentum was the one factor that was decent this year. Like outside of that, if you were using factors, like it didn't go that well for you. So that is what it is. But we know as factor investors that's just part of the deal. Like they're going to have their off years. You've got to have a long term timeframe if you're going to use them. So we understand that. But it's.

Matt Russell (57:45)

And also why you balance. Like I know of my quality bias, much like you know of your value bias. And what do we both pair that with? Wherever we can. We pair it with momentum for a reason. Because it makes no logical sense in the way that it's not tied to our DNA and our normal behavior. But that's why it's complimentary.

Jack Forehand (58:06)

It's why when you are a factor investor, you become a multifactor investor very quickly in your career because you're just like, you think, I could bet on this one or I could bet on that one or this one's about to come back and you just quickly realize that's not going to happen. Like, you also realize, like your clients are not going to stick with it during its 10 year underperforming period. So if you're going to, and you still have your struggling periods no matter how many factors you use, but at least if you minimize it and you use multiple factors, you end up in a better situation. So, so yeah, as we wrap up here, I just wanted to maybe cover some of the risks because we've talked about a pretty, I mean people are pretty optimistic. There's nobody who had a Civita was, had a 4 to 5% increase in the market, but nobody had a negative return in the market. So it's good to at least think about like what are the risks? And when I was writing these down, the first thing I thought about was AI because that was the main theme across this. Like, obviously how AI plays out is going to have a big impact on the market. And if it doesn't play out the way people expect, if we start to see more and more when we've seen some signs that maybe this Capex spending wasn't worth it, we had some bad periods in the market. So if we see that again, we're probably, that's probably going to drive the market lower.

Matt Russell (59:06)

I'm with you, I think AI is the dominant story in markets right now. I think AI will spill over into how we talk about inflation. I think AI will spill over in how we talk about revenue, profit margins and earnings across the rest of the market because the Mag 7 are still such a dominant portion. And I think if we see anything that pushes back on policy in any of these ways and shifts basically the landscape for how money is flowing and how earnings are happening, that's the biggest risk to this market. If inflation rears its head and we get a policy that goes against AI data centers, it's going to hit earnings. There's too many levels of this to say if everybody's talking about this story. The risk to blow this up is buried somewhere in here. We might not be able to guess it right now, but that's the thing to watch because the risk is going to emerge from the thing we're most optimistic about. It always does. It sucks every time, but it's in there somewhere.

Jack Forehand (60:00)

And one of the things Savita had pointed out in hers is deteriorating liquidity. So that's certainly a risk as well. We could think about some of her metrics behind the scenes are seeing deteriorating liquidity. So that's definitely a risk. We have to think about fewer Fed cuts. We talked about that before, although it's, we don't know for sure. Fed cuts actually what, what the actual impact on the market is. But that, that's certainly a risk. So there's definitely things. And then obviously you get into things like geopolitical risk that we just can't, we can't gauge. I mean, obviously we're in a. Regardless of how you feel about the current administration or the current administrations across the world, you have to admit it's probably more volatile situation than it's been in the past. So you certainly could have something on those fronts. I mean, it's tough to do anything about that, but that's certainly something to think about going forward.

Matt Russell (60:39)

Yeah. At least Louis Vincent Gov made me feel better about the China Taiwan scenario. Everybody's favorite, you know, black swan. And he was at least like, that's not a black swan. And for a moment I was like, okay, good. Like I don't have to worry about that one. The way that I always sort of in the back of my head worry about that at 2 o' clock in the morning.

Jack Forehand (60:57)

And the last one, which I would push back on a little bit that you, you heard in these, is this idea of concentration risk. And that's something I've talked about. A lot about in my career, but I think I've been proven wrong too many times to think the concentration in and of itself is necessarily a risk to the market. These companies are doing very, very well. They have lots of earnings. It can be a risk to the market, but it also cannot be a risk to the market. And so this idea that this, this concentrated rally can't continue, I mean, how many years have we been thinking like this concentrated rally can't continue and it's continued. So I do think it's a risk out there. But we also also have to account for the fact that this is not 1999. Like we, we don't have like bubble level stocks driving the index. We have good quality companies.

Matt Russell (61:37)

This is risk in terms of variance. And variance means risk cuts in both directions. Back to the beginning, Elroy Jemson. Risk means more things can happen than will happen. And this is one of those scenarios where concentration might very well be the thing that carries us higher yet again, defying odds. And I would happily sit here a year from now and go, holy crap, can't believe that happened again. But not all that surprised in hindsight given these starting conditions.

Jack Forehand (62:05)

So I don't think, Matt, you and I are going to do our own targets here as we wrap up, but because I think we've been proven wrong, we actually did a separate show where we've done those in previous years just to prove that we don't know how to do it. And I don't even know who won last year between me, you and Justin. But. So I don't think we'll do that. But I will say that I am in the optimistic camp. I don't do anything with our portfolios based on what I think about the market. But I still remain like Warren Pies is probably the person I trust most in markets. And I still remain, at least in the short term, in the optimistic camp.

Matt Russell (62:30)

I am short term in the optimistic camp and I am just perpetually skeptical of all things that people are excited about because I have learned well in life and otherwise and I am an optimist. But it's the hope that kills you, right? Like I'm just gonna keep, like that's, that's embedded in my head, that it is the hope that kills you with these things. And if everybody's all excited, I'm gonna be the skeptical little person who's like, yeah, but what if? What if?

Jack Forehand (62:57)

Well, as you know, as the value investor, I'm going to be right there with you in my skepticism of everything and that's part of what I've been trying to learn more and more about these innovative technologies and trying to maybe look at the other side of this. But. But hopefully people found this valuable.

Matt Russell (63:09)

This.

Jack Forehand (63:09)

I think it's really interesting just to go through all of these and you know, we read these, AI helped us, we listened to podcasts. We just have so much technology now that allows us to go through all these things and look at them. So hopefully this is a good summary and maybe gives people at least the landscape as we head into the new year.

Matt Russell (63:23)

I like the way this is shaping up. Thanks again, Meb Faber, for putting all this stuff together. It's really, really cool to have somebody gathering all these reports in one place for us to go through and scrub. This is fun.

Jack Forehand (63:32)

Thank you to meb. Check out the Idea Farm. Thank you everybody for joining us. We'll see you next time. Thank you for tuning into 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 @XS returns. If you have any feedback or questions, you can contact us@excess returnspodmail.com no information.

Matt Russell (63:56)

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.