Loading summary
Transcript54 lines
- [00:00]
A
Bob, you've written that today's market feels increasingly like a house of cards, ready to be blown over at the slightest gust. What does this mean?
- [00:08]
B
Oh, wow, that's a pretty good line. I didn't realize I had written that. I mean, I think the basic story we have here is we have, I'd say, an expectations mania. And what I mean by that is it's not like there is. It's not like the economy's terrible and asset prices are high. The problem we have here is in some ways little simpler than that, which is that things have been pretty good. I mean, earnings growth's been good and the economy's been fine. And at the same time, people are expecting a relatively extraordinary outcome far off into the future. And so the challenge with that is that it means that people are bidding assets, particularly stocks, and particularly the semi, AI, et cetera, names up significantly on those expectations when it's hard to fathom, you know, how the world is going to be quite as extraordinary as people are expecting. I think it's one of those things where when you start to get to a point where the extraordinary is the consensus view, that's when you want to start to be cautious and find other opportunities.
- [01:17]
A
So right now you think the market or investors, let's say, are too optimistic about AI, is that right?
- [01:25]
B
Yeah, I mean, at its core, I think the, the challenge we have right now in the market in terms of expectations. If you look at say, medium term earnings expectations, analysts are expecting something like 25% earnings growth per year for the next five years. Now think about that. What that means over a five year timeframe is we would have the best five year earnings growth by a good chunk of any period over the course of the entire post World War II era. That is certainly a possibility. It could happen, but it would be an extraordinary outcome. And as I said, that is the consensus view of getting that extraordinary outcome. It also implies something that is, from a macroeconomic standpoint, quite challenging to fathom. So take this for example. In order to get 25% earnings growth again for five years consecutively, what you have to have is you have to have some combination of margin expansion and sales growth, right? I mean, very simply, it has to solve for 25% earnings growth. And so if we look at the economy, we say, even if we're very generous, and we say, let's say we have 10% nominal earning, nominal sales growth, which would be very high in the context of an economy growing at 5 to 6% nominal. Right. So let's Say we bump it up to 10 for the next five years, we would still have to have a point or a point and a half of margin expansion every year for the next five years. And margins can't come from out of thin air. That's one of the most important things when you think about the economy from a macro perspective. Margins are just the flip side of labor in many cases, right? The flip side of either financing costs or labor costs or commodity costs, right? And so if you're going to get a margin expansion of that significant amount, you have to pay the workers less by an equivalent amount. And if you're paying the workers less by that equivalent amount, think about it. If you were to cut labor income by 5, 6, 7%, then those laborers have less capital available to spend in the economy. And so the only way that you can get margin expansion without sacrificing sales growth is if households disave a lot. Because households basically would have to say, well, they wouldn't get as much labor income, and so they'd have to spend a lot more out of their savings. And we can do that for short periods of time. In fact, I think one of the biggest stories that that's been driving the markets over the course of the last 24 months is not AI investment. I think actually the growth impact of AI investment is. Is wildly overstated. But instead, what's actually been driving the economy is that households are spending a lot less, are spending a lot more than they're earning, which is flowing through into corporate profit margins, which makes companies look strong, you know, look strong, and earnings strong. And the question is, can that continue forever? Right now, you can that continue at the same pace or more for the next five years? That would be an extraordinary outcome. You basically have to have households just saving. You know, right now the savings rate's 3%. Let's say they'd have to move their savings rate to something like negative 15% over the course of the next five years. That is a very. That would be an extraordinary thing to happen. Could it happen? I mean, yeah, anything can happen, but you'd have to believe that households would basically just spend out their savings and enormously in order to prop up the earnings of companies in order to meet these expectations.
- [04:55]
A
Okay, a couple points on that one. Is it possible that if the bulls are right about the technology and what it can bring to companies and what it means for individual workers, we will see that productivity boom, and then that could solve for some of what you're talking about.
- [05:14]
B
I already account for that. If I said, look, I'm going to give you 10% nominal earnings growth or nominal sales growth, right? Imagine 10% nominal GDP growth in the economy. The only time that that's happened over the post war era is in the 70s when we had inflation at extremely elevated levels. So I'm already saying, look, imagine if we have 2% inflation and 10% nominal growth, that's 8% real growth on a zero growing labor force, that's 8% productivity growth. To be clear, that has never happened in any economy in the history of man, back to the time of Jesus Christ. There are longitudinal studies. We've never seen productivity growth at that level in the history of man. So I'm giving you the best productivity growth in the history of man. Plus you have to have all this margin expansion in order to meet that 25% earnings growth consecutively over the next five years. And so that is, as I say, that's an extraordinary set of expectations that are, that are baked into the consensus.
- [06:18]
A
Why do you think, let's say consensus view and all the analysts on Wall street, how did they come to their conclusion and why is it different than what you have arrived at?
- [06:27]
B
Well, I think one of the things that they're doing is they're starting with a CapEx story. So they're saying we're going to have $5 trillion of CapEx into AI infrastructure over the next five years and they're penciling out, okay, that's going to have an effect on growth, that's going to support growth and that's going to create a set of revenues. If we have $5 trillion of CapEx, we're going to have to have, you know, a lot more than $5 trillion of revenues cumulatively because otherwise the ROI would be quite poor. Right? And essentially the only way to get to that point is to have extraordinary margins or, and, and extraordinary growth in sales and extraordinary productivity. And so it's, in some ways we're sort of, it feels like the market is back solving for, they're taking the investment, the AI related investment for granted as fact and then back solving what set of conditions would have to, you know, would have to occur. And in many ways I think they're not really thinking carefully about the set of conditions that would have to occur. And the thing that's so interesting about it, I wrote a piece in my substack, dude, where's my productivity?
- [07:31]
A
Right?
- [07:31]
B
Where is my productivity related to AI, right? Like if you've got to deliver the most extraordinary productivity expansion in the history of man over the course of the next five years, you'd think it wouldn't be printing 1.1% annualized in the first half of this year. Right? That is actually mediocre productivity growth. So tell me, like, where is my AI driven productivity growth? Because it's not showing up in any of the statistics.
- [07:59]
A
Is it possible? And again, everything you're saying, I think it makes total sense and it's very step by step logical to push back on it though. Is it possible that the productivity gains are quote, trickling down because the early adopters of AI are seeing the productivity gains, but it's not necessarily a pervasive technology yet, so hopefully it's coming at a more broad base.
- [08:26]
B
Sure, maybe it comes at a more broad base and that could be useful over time. But the question is, how broad a base does it have to be to achieve those outcomes? Just take as a very simple example, if we're going to have $5 trillion of capex in AI names, you're going to need about $5 trillion of revenues associated with that and $5 trillion of revenues associated with that over the course of the next five years. Or we have to get to $5 trillion run rate of revenues in order to support the depreciation and the ROIs needed for that $5 trillion of CapEx. Okay, $5 trillion of revenues on a run rate basis. First of all, today, AI revenues, it's $130 billion. And that's a generous, that's a generous number. $130 billion.
- [09:13]
A
ARR.
- [09:14]
B
In terms of what the end, the frontier models and what they're earning and stuff like that, plus secondary companies that are using AI and using those models. There's various good decks that sort of summarize what the current total revenues are. So it's kind of in that order of magnitude. $150 billion, something like that. You can't count the hyperscalers because it's the end OpenAI is paying Microsoft. Microsoft is the beneficiary of the top line revenue of OpenAI. We know 70% of Microsoft's cloud computing is for OpenAI. So Microsoft is just making money from OpenAI. So what has to happen is OpenAI has to make the money from somebody else in order to pay Microsoft in order for the CAPEX to work. Right. So that's why you want to think about it as sort of the top line of the end users of the AI and how much revenue they're creating. So, right, so we need 5 trillion, we have 150, let's say generously billion run rate right now. And we need 5 trillion in 5 years. And if we get to 5 trillion in 5 years, that would mean AI related spend would represent something like what, a fifth of the economy? A sixth of the economy? I mean you tell me a sixth of the economy. Sounds like a lot is going to be spent on AI related activities. I mean, sure, it's very possible. If AI is the single greatest technology in the history of mankind, that would be possible, right? I could see that as possibility. But if it is the single greatest technology in the history of mankind, show me some productivity numbers that support anything close to that.
- [10:55]
A
What you are laying out is a very compelling reason to be skeptical about the whole AI story. And yet the earnings that are actually happening continue to frankly blow me away, blow everyone away. They're beating expectations. Everything looks great on you see these earnings headlines and they're crazy. How do you square the current actual earnings with maybe what looks like too frothy of earnings expectations?
- [11:25]
B
Yeah, so I think there's two things. First of all, of course the first dollar of investment is going to have the highest IRR relative to the 5 trillionth dollar of investment. It makes sense that the first spenders on AI are going to be the most beneficiaries. The first, essentially the first set of CapEx that supports those businesses are going to be the beneficiaries. The second thing I'd say is part of what's fueling this is loss making enterprises. Is OpenAI covering all of their CAPEX and all their projected CAPEX or all of their, sorry, are they covering all of their compute spend with their revenues right now? The answer is not really or anthropic. It was a great story. Well, at least I don't know, some people said maybe they possibly one month were possibly cash flow neutral or something like that. Also what's going into this is that those companies are losing money. If they're losing money, that's one of the ways everyone's losing money. The frontier models are losing money. The hyperscalers are losing money in the sense that they're investing a ton. They're basically taking all their money and dumping it into this. From a cash flow perspective, they've invested hundreds of billions of dollars, 500, $750 trillion of assets. What are their revenues? Not even close to what they've spent. They're losing money on the trade. So what's happened is all the folks are losing money on hopes that this will be the greatest, the greatest technology enhancement in the history of mankind by a Factor of four or five and you could keep up that party for a quarter, 2 quarters, 3 quarters, 4 quarters. But at some point people are going to say, how are we all going to pay for this? And I think one of the challenges, one of the risks. Saw this a lot. My career has been long enough that I was active in the financial crisis. And in the financial crisis, one of the things that really brought down the whole banking system was that everyone was connected with everyone else. For instance, when Lehman got hit, it created a wave through other parties or when AIG had their problems, that created a wave through other parties who were exposed to it. The problem is we've basically recreated a similar type circumstance where I love that story. Microsoft, everyone loves their earnings on their cloud computing. And it's like 70% is OpenAI. Okay, well OpenAI better deliver their revenue targets, better grow that revenue. Because if Microsoft is totally reliant on OpenAI then it's not Microsoft. That revenue or that spending that you're seeing in the capex is not. Or in the cloud computing, the revenue that they're getting in cloud computing. It's not Microsoft's money, so to speak, it's OpenAI's money and the same thing. I mean, I'm sure the folks who are listening to this podcast are sophisticated enough to understand all the Nvidia everything under the sun that they financed in one way, shape or form, or the Ford contracts, or all of these different interrelationships that essentially make everyone on the upswing look great in terms of what's going on. But then when the chickens come home to roost and somebody disappoints in the revenue, and to be clear, the revenue has to come from the real economy. Ultimately there has to be Kellogg's. Kellogg's needs to spend money on AI. Right? You can't just have OpenAI talking to Microsoft, talking to Nvidia, talking to Google talking to. Those are all service providers to the real economy. In order for this to actually pay out, what has to happen is Kellogg's needs to sell cereal to, to US consumers at a pace that justifies all of the AI that's going on or the equivalent of dialogues across the economy.
- [15:33]
A
Okay, Bob, can you explain that a bit more? Because I think the connection between real economy to, let's say the AI economy, a lot of people don't connect them because they don't think it's the same thing. But my sense is, sounds like you're implying they have to be the same thing at some point.
- [15:51]
B
Well, when it Comes down an economy. Ultimately there are only two buyers in an economy, kind of maybe say three, the government as an end buyer, the consumer or foreigners. That's basically it. Because if companies are selling to companies, the way that they pay for that is to sell to the government, to households or to foreigners. And so ultimately I like to call it AI's real economy problem. Ultimately what has to happen is that there has to be a meaningful real economy effect. A real economy good or service that someone's paying for that is creating sufficient revenue to then justify spending it on AI in order for it to actually, you know, for the AI to then those revenues to then flow through the actual capex and infrastructure that's being done related to it.
- [16:52]
A
What odds would you put on that actualizing in the next couple years? 50% odds, 80%, 20%.
- [16:58]
B
I mean what are the odds that we have the greatest productivity boom in the history of man and on top of it have US households erase 25% of their wealth in order to support company profits, you know, low.
- [17:18]
A
See, when you put it like that, I almost feel dumb even trying to take the other side of it, even just in a conversation.
- [17:27]
B
Okay, so, but here's the thing, here's the thing really the thing I'm describing. Part of the reason why I'm talking about over five years is because I think one of the challenges in this environment is that everyone's talking over the next five minutes, little joke, this is coming out in a few days. So I said I can't tell you my 24 hour trades that I've got on. That's a joke to me. A joke to you a little bit. But how many people are like, no, no, but what are the 24 hour trades? Who cares about five years from now, tell me what the 24 hour trades are.
- [18:03]
A
Right?
- [18:04]
B
And I think that speaks to a market that's myopic on what's going to happen in the next day, week, month. Very focused on that. And frankly, how do you make money in the next day or week or month? Or how do you sell a substack telling people how to make money in the next day or week or month and less focused on, you know, what's going to happen over the next five years. Because the reality is, the reality is if you think about most investors, most investors time frame, we're talking about real investors who are putting money to work. The dollar weighted average real estate is probably closer to 10 to 15 years. So we sit around and we talk about, you know, what's going to Happen this earnings, this earnings report or that earnings report, things like that. But what's going to determine their return over the time frame that they actually care about in terms of their spending is going to be questions of what's priced in for the next five years and what's likely to transpire.
- [19:02]
A
Okay, so let me ask you about the rotation we've been seeing in the stock market. Equal weight is outperforming The S&P 500 market cap weighted index. And a lot of investors have been pointing to that and saying that is a sign of broadening out rotation, participation, whatever buzzword you want to use. And we've seen that sort of reflected in earnings as well. We're seeing a lot of these different sectors that are not technology show pretty strong strength in the moment. I know you're looking at five years, but in the moment, does that give you any reassurance that maybe, hey, we're starting to see some pickup outside of just tech?
- [19:44]
B
Well, I think what it speaks to is that the economy in general right now is running fine. Right. And so you're seeing pretty good earnings growth broadly across the economy and outside of the Mag 7 was reasonably depressed for a while and now it's improving. And so that combined with what are. I think some of that rotation is driven by levered players who basically were really into the momo trade and the semis and they're cutting those positions and closing shorts. And that's creating rotation in the market which could last for a week, weeks or a few number of months. But that's not, it's not really telling you a fundamental change. It's more telling you how people were positioned and how, you know, essentially when, when the, when the high beta names start to get hit, how you get a rotation back, that's kind of more how I see it from a fundamental perspective. But, but earnings are not, are not, you know, speculative flows. Earnings are real. And it speaks the fact that the economy in general is doing okay. The challenge is that okay economy, if anything a bit better than okay in the second quarter is predicated on household to saving. So I think if you were to ask, if you were to poll all of your followers, your hundreds of thousands of followers, I think probably the majority of them would say the thing that is driving growth today is, is AI CapEx. I think that's what most people would say. Now just for context, let's just say you put an AI capex number on the hyperscalers of 600 billion this year or 700 billion. How much of that as a percent of GDP, that's 2% of GDP, let me just be very clear. And it's up a few hundred billion. So its contribution to growth is maybe in the tenths of basis points. And then of course remember that all the high value components of that are actually imported. So actually the gdp, GDP growth is really in Korea and Taiwan and it's not really in the US and so now we're talking about something where you say AI AI is not the driver of US growth. The driver of US growth, to be clear, has always been household spending. Part of what I think people like to talk about all sorts of ancillary things, but at its core what drives US growth is household spending. And what's been going on with household spending is households income growth has been growing at about 3.5% and household spending growth is growing at 6% or 7% nominal. The only way they can do that is by desaving. And so that's really what's going on is we have a reasonably good economy overall. If you looked at the GDP numbers, final sales demand, stuff like that, reasonably good. But what's driving it is a fragility of the savings of households. And the reason why that matters is because if the asset markets don't continue to be surging all the time, if you get hiccups in the asset markets and there's a pressure for households to bring their spending in line with their income, that creates a lot of fragility under the surface it looks like a very strong economy. You look at retail sales, it looks strong, you look at this, you look at that, it all looks strong. But it's based upon a continued set of savings by households that becomes increasingly challenging unless you consistently prop up the asset markets.
- [23:18]
A
I must be hanging out with the wrong people because one, the investors I'm speaking with don't bring this up right, the household savings or even the consumer angle to this. And two, this seems extremely key when you put it into context of capex being 2%, let's say of GDP. Again we talked about this, but why do you think people are missing this ingredient in the broader calculus?
- [23:46]
B
Well, I think part of it is people look at the stock market and a lot of the focus in terms of the earnings growth has been in AI related activities. Of course not only have the earnings been delivered, but then the expectations are very high in the future and the expectations for growth. If you look at 12 month forward earnings or something like that, a lot of the 12 month forward earnings is coming from AI related names. And so of course, that's what people are confusing earnings growth expectations and earnings growth to some extent, and earnings growth expectations and the sources of those with GDP growth, those are two different concepts. And I think part of what they're missing, and this is where the macro perspective, I think, can give an edge, is understanding how it all ties together. Because they see a lot of folks see the earnings growth and they say, or the margin growth, and they say the margin growth is great. And they act as if it's mana from up high, oh, they got great earnings growth, great margin growth, without recognizing that margins are just the flip side of spending. And so if you have good margins, you have to be paying people less. That's just literally, functionally how the world works. There's an equation, it's called the Kalecki equation, which folks, if they're interested in thinking about the accounting of how sector savings, net savings adds up to corporate profits, it's a very useful frame. So I highly recommend going out there and reading about it. You just go on Wikipedia or I'm sure your favorite AI tool will allow you to educate yourself about the Klecky equation. And. But it's really helpful because it consistently reinforces this idea of one person's surplus or margins, or a surplus is another sector's deficit. What we've seen in the last couple of years is all those people saying how great corporate margins are. They literally should be saying, and household savings rates are plunging. It's just they don't know that side of the equation.
- [25:59]
A
I mean, even for me, I live and breathe markets and I rarely bring that up in my own head. It's an amazing variable to be paying attention to. So speaking of supply and demand, we just saw Taiwan Semiconductor report earnings and they saw a 40% jump in revenue compared to a year ago. They have been banging the table like other chip and memory companies saying the demand is impossible for us to meet and. And we are working our asses off just to try to keep up on the supply side. Is that, let's say, bullet point reassuring to you in any way that, okay, maybe the hyperscalers are spending on something that is real and there's fundamentals there, and the AI boom is not, maybe not a house of cards because there's, let's say, real supply and demand at work here?
- [26:52]
B
Sure. I mean, I believe what they're saying in the sense of there is a lot of demand for chips, but there's a demand for the chips that's coming from the hyperscalers. The Hyperscalers are then delivering the compute to the models, the model producers, or have their own models, depending on exactly who you're talking about. Then the question is, okay, so is the real economy delivering revenue that meets all of that activity? As a simple example, you're telling me that there's a lot of demand for chips and obviously from the hyperscalers. And it's not just what you mentioned, but it's across the board. But what is driving the spending on those chips? It's like the companies that have become the single greatest cash flow engines in the history of corporations of the world have decided to blow all of their money, all of their income, all of their cash flow on chips. Is there a shortage of chips? Yeah, of course there's a shortage of chips. The question is not today, is there a shortage of chips? The question is, will those hyperscalers blow all of their earnings, all of their cash flow on an activity that is not going to necessarily deliver the ROI on the from the real economy that they need in order for it to make any sense?
- [28:20]
A
Man, this makes me want to sell everything I own right now. You're making me nervous here.
- [28:25]
B
There's things. There's things to buy.
- [28:27]
A
So. So, Bob, let's talk about that in the market right now. What do you see as attractive corners?
- [28:34]
B
Yeah, well, first of all, if we talk in the equity space, I think part of this, part of the story here is I think a lot of people sort of thought it was easy money to get levered up on the high beta names and the semis and stuff like that. I had a tweet a few months ago where I was at the Wawa getting a drink, and I overheard two of the sandwich makers at the Wawa discussing their semis positions and how they were making so much money on them. And some people question whether that was a real story. I do go to the Wah Wah and get. They have a nice Coke Freestyle machine, which I enjoy getting a flavor Coke Zero out of. So it was a real story. And when the two guys making sandwiches at Wawa are talking about semis, it's probably crowded. And interestingly, we've seen the most sophisticated investors blow up on it as well as some of the least sophisticated investors recently. And so that's been the name. If you go and look at a bunch of most equity managers, it's like, were you in the AI names or not? And you did well and then did badly. Then the question was just how much leverage you had about whether or not you blew yourself up along the way. But as you mentioned, there's lots of companies that are doing well, particularly lots of companies broadly in the economy that are doing well in other corners of the market. Europe. Here's a simple example. European earnings are surprising to the upside meaningfully. Nobody's talking about that. That's like at the bottom of your scrolling on the Bloomberg page when you look, it's like, oh, European earnings are surprising wildly to the side. It's like no one knows that that's going on. Or Japan is a great story in terms of the corporate restructuring that's going on there and the increase of cash flows that are coming out of those companies. Japan has had a heck of a run and still looks well positioned to be able to run. There's stories biotechs are coming back. There's just all sorts of things that are like that that are outside the mania that you can come into. Keep some equity exposure but also deliver value on top of it. That's what we've been able to do with our equity products.
- [30:50]
A
Do you have a favorite, let's say sector right now,
- [30:58]
B
a smattering of those things that I just talked about rather than any particular sector? Because I think it's one of these times where, where it's almost like staying away from the concentrated hype and diversifying away from the concentrated hype is actually where your alpha is rather than going headlong into that. And that's been very productive for our equity strategies.
- [31:22]
A
Okay, so let's say you and I want to build me a brand new portfolio today. I'm 29. I have, let's say a 25 year time horizon. What are some of the things that you would put in? I assume you're not putting Nvidia in. How would you round out that pie right now?
- [31:43]
B
Well, I think probably, I mean, look, you're going to go buy some stocks and you're going to buy mostly stocks is mostly what people are inclined to do. I think there's a couple of interesting, more strategic investment opportunities that are out there. One is 3% real yielding tips. Now the eyes are going to glaze over. So you're talking about bonds. You went on this podcast. This is an equity newsletter. This is an equity podcast. We want to talk about bonds. And not only bonds, weird bonds.
- [32:16]
A
Tell me more.
- [32:16]
B
Yeah, so treasury inflation protected securities. They're designed to, what they do is they pay you a real yield and then they pay you whatever inflation comes in above that. And at a 3% real yield, if you hold those to maturity, you receive 3% real returns over time, which if you look back at periods where equity markets are at the sort of current valuations, in most cases, actually over the subsequent 10 or 20 years, a fixed 3% real yield is going to outperform what equities perform at the current sort of PE levels. Right. And so that's, you know, a compelling opportunity. And the nice thing is it's diverse. You know, it's a. It's a value play that's diversifying to your equity portfolio because those tips will do well if we get an equity downturn. And of course, the other thing that comes to mind is gold. They're actually. These two things are related in part because one of the ways, one of the questions about tips is they pay reported inflation. People ask, well, is reported inflation actual inflation, which in general, it has been. But anyway, we could get into the bowels of that about whether the government's going to conceptually default on inflation. One of the ways you could protect yourself on that is by holding gold. Because if the government starts to default on their inflation payments, it's part of a broader story of debasement that they're doing and gold should outperform. And I think gold has been a great performer for a long time. If you look in the last 25 years, gold has delivered the same returns as stocks and has been meaningfully diversifying the stocks, and yet nobody holds gold in their portfolio. And I talk about the last 25 years because that's when gold became available in an ETF. So before that, you had to go to some sketchy guy and buy some gold bars. And then how were we gonna store anyway? It was very complicated. It's very useless to get gold now. We've got ETFs. You can do it in your brokerage account. And I think we've sort of washed out gold had a bit of a mania in the beginning of the year. We've kind of gold and silver, we've washed that out. And the structural supply demand for gold looks quite good. And so buying tips and gold feels like a very defensive strategy. But in a lot of ways they're very compelling from a value perspective and from a fundamentals perspective, complements to a traditional equity portfolio.
- [34:45]
A
Sounds like I got some changes to make tonight. I appreciate you sharing that, Bob. Let me ask you about sentiment right now. The latest AAII Investor Sentiment survey still shows more bears than bulls, which I think is pretty interesting considering what we're talking about. But then you also shared a Bank of America chart the other day that Showed their proprietary bull bear indicator is near record highs. So we take those two sentiment gauges, let's say. What's your read on these?
- [35:15]
B
Well, part of sentiment gauges.
- [35:18]
A
And do you believe them?
- [35:19]
B
Yeah, sentiment gauges always have the problem of who are you asking? I guess the AAII people ask some very sullen folks or maybe value managers that are hopeful bears. Look, the market's at highs. Earnings growth expectations in the medium term basis are at the highest level. In the post war era. Returns have been continue to be extraordinary. And I'd emphasize and there's an incredible amount of leverage being used, kind of diffuse leverage being used to buy into these positions. Levered ETFs and securities borrowing through wealth managers and options and all these different things. And so you put that all together, it's hard to make the case that there is a meaningfully bearish view in the market. Not only are people long, but people are levered long. Many are levered long to drive prices to these levels. And I think the challenge is, I think even if you have a pretty positive story about, about earnings, you could have a pretty positive outlook on earnings. The challenge is how do you get when so much of the market that are the marginal buyers are already levered long, how are you going to get the next price bid and the next price bid and the next price bid? I think that's very challenging. The more sanguine case is that we meander here for a while and eventually we earn into the price levels that we have right now. And that's a little bit of what's happened recently. Stocks are close to highs, but at the same time they've also been chopping flat for a while now. Maybe that's the path. Not a crisis, that could be the path. But it's not a great, from a medium term perspective, it's not a great environment for equity returns.
- [37:27]
A
Returns, not a great environment for equity returns based on historical, let's say four 12 month returns on current levels. Is that what you're looking at?
- [37:40]
B
I'm just saying when you see a composition which is people are levered, people have high expectations, the market's up a fair amount, the economy is being driven by large amounts of savings. You know, job growth is zero. Like you see that constellation of things. This is, you know, macro. People were not like equity analysts. We're not like adding up the cash flows of, you know, the earnings and then discounting them. You know, macro in some ways is like a little bit more of a vibe thing which is like there's a bunch of different things going on in an economy and you kind of have to weigh them off, trade them off to each other. And when you net it out, like, you know, you kind of say to yourself, is this a good time? You know, relative to what's priced into the market, Is this a good time or is this not such a good time? And we're in the not such a good time kind of perspective.
- [38:28]
A
Okay, so if we look at leverage for a moment, do you see leverage in the markets? I see it all the time. You have these new products coming out by the day on single stock names. Do you see leverage right now as amplifying the existing bull market, or do you think it's actually the thing now that's moving asset prices higher?
- [38:50]
B
Well, I think it's basically the. It is the marginal price setter of prices today, meaning like people getting incremental leverage or to be clear, being forced to delever is what's setting the marginal price. And I think that's important because, I mean, we saw at some point, it was just a few weeks ago, everyone was sort of looking and saying like, what exactly is going on when the semi names are unwinding so aggressively? Because there wasn't that much information about. There was not meaningful incremental information that caused a 20% drawdown. Right. And the answer was there was one and a few highly levered folks, you know, in the market at the time. And so I think that's, that's kind of the challenge is the leverage looks comfortable and enjoyable on the way up. And then, you know, when, when things start to turn, it doesn't take much to create the sort of things like the Korean market drawdowns we've seen recently, you know, that were previously fueled by leveraged borrowing.
- [39:59]
A
Well, when I started seeing headlines about Korean investors taking out their life savings and then borrowing even more on top of that just to buy stocks, that's pretty troubling times because they also had one of the best stock markets in the last couple of years. So that's been unbelievable. All right, Bob, can you share a bit more about the strategies that you're using across your various ETFs at unlimited that maybe differentiate you from the market?
- [40:27]
B
Yeah, the sort of day job, my sort of morning job is writing non consensus, my substack where I poke the consensus bulls in the eye every day. So people should. A lot of the macro stuff we talked about comes from those pages, so people should definitely check that out. My day job is running what I call alpha indexing on hedge fund strategies, taking the wisdom of the hedge fund community and packaging that into ETFs that people can go out and buy and doing it at a much lower cost. Better liquidity, obviously, in an ETF wrapper than traditional hedge fund investments. The thing that's been interesting is this has actually been a great time, a great, really 18 months for hedge funds. There's been a lot of volatility. A lot of hedge funds were able to position well for things like the war, things like the debasement trade, as I said, things like the broadening out of the market over the last couple of months. And so they were not nearly as troubled as those who were all in on the AI and semis mania. And so they've navigated these circumstances quite well, which has been, which has been great to follow. And one of the nice things is it's hard for every day, even investors, to have less than hundreds of millions of dollars to get access to hedge fund strategies. We're happy to do that in an ETF wrapper.
- [42:08]
A
I think you guys do a great job. Certainly your newsletter is excellent. Everyone should go subscribe to that. What is your Twitter handle?
- [42:15]
B
Bobby Unlimited is my Twitter. And on Bluesky and LinkedIn and Substack and all the different, you can find me.
- [42:23]
A
You're very easy to find online, I must say. Well, Bob, you are making me think a lot today. I'm reevaluating a lot. I might sell things, I might buy things tonight, who knows? But I really appreciate your time and you're welcome on the show anytime.
- [42:38]
B
Thanks so much for having me. It was great.