← In Good Faith With Philip DeFranco
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Hey everyone. Welcome back to the In Good Faith podcast.
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My name is Philip DeFranco and every.
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Week I'm talking to people I think are the most important and influential people in the world. And this week I spoke with the plain bagel or as the Canadian government knows him, Richard Coffin. Richard. He's a finance creator and also a very real certified financial analyst. He makes very educational videos about economics and really aims to help people understand complex topics. The really my favorite videos from him.
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Are when he's reacting to finance influencer TikToks and trying not to crash out. But today we talked about America being.
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In a recession, the AI bubble, how corruption rots an economy, and the epidemic.
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Of finance influencers giving terrible financial advice.
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So, you know, buckle up, definitely subscribe.
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And follow if you haven't already.
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And if you enjoy this episode, give.
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It five stars on Spotify and Apple.
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And give it a like on YouTube. And hey, while you're at it, leave a comment on what you agreed with, disagreed with or who you'd like to next see as a guest.
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B
So, Richard, I mean, I don't know if it's, it's weird to ask this question because you're, because you're a Canadian and that there's already like a weight with that whenever you, whenever you kind of give an opinion or a take here, but is the United States in a recession right now?
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C
I mean, so. Well, part of it is we don't have all the data because the shutdown inhibited our ability to collect some data in the US So we don't have the full picture right now. It doesn't appear to be, it's always hard to say because, you know, there's not even really a clear public definition of a recession. Like the textbook definition is two contractions in gdp. The US has always actually done it very differently where they actually have a like group basically get together and decide based on all the variables whether we're in a recession, whether the US Is in a recession. Contraction and GDP is one variable. But you might remember that under Joe Biden there was a bit of controversy because there was two contractions of gdp, yet a recession wasn't called. And that's because they were arguing that the labor market was very strong. What we're seeing right now is because we didn't get the latest data, labor is, is showing some mixed pictures in terms of the private surveys that we have. Gdp, GDP growth. The last print was very strong. But there's sort of some noise that comes from the tariff announcements and, and the impact that has with kind of front stuff moving ahead of, of schedule to, to address that and those concerns. So it's, it's really hard to say. What does seem to be the case is that activity is strong in, in some areas and, and lacking in others. So while we might have a general print that shows that the economy is growing strong in the US it tends to be very concentrated and naturally a big part of that is AI development and the spending we have there, I mean I think roughly 40% if I'm not mistaken, of US real GDP growth has been attributed to just AI spending and capex build out. So really it's supporting a lot of the economy.
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B
Yeah, the, the AI stuff which I want to get into a little bit later has been very interesting because it feels like it's, we're kind of choosing between one of two bad options. Either mass layoffs or the economy is going to crumble. But regarding like any sort of potential indicators of a recession or where things would head up next, do we get any interesting data from spending in the holiday season? Because I've heard that more and more people talking about, I believe it's that we have a bit of a K shaped economy where those who are doing well are still continuing to spend and doing well in those kind of middle and lower class, they're, they're pulling back. Is that, is that what we're seeing from the data?
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C
Yeah, it seems to be. You know, and that's a good point to touch on is really that again, if you look at the broad figures, things seem to be pretty good. But then when you segment based on income, for example, you see that there's sort of this much lower spending in sort of the lower income brackets and those groups and a lot of it is really being carried by the larger income earners. On top of that, last I had looked into it, the consumer sentiment is at a very low point right now. So consumer confidence is very low, which tends to signal that. And those are based off of private surveys, but that tends to signal that people are either putting off bigger purchases, they're worried about the economy, they're concerned about spending too much now on the risk that they might not have that money in the near future. So definitely those are indicators that there's, you know, tension and it's easy to see why. Right. Like tariffs are one of the biggest contributors to a lot of the uncertainty we have right now even with the AI bubble. While we have this CapEx spending, there's a lot of uncertainty around whether that will be Worth it at some point in the future whether there'll be revenues to back up that, the investments people are making in that space. So, um, you know, where you look, you can always paint a different picture. There's so many data points that go into trying to forecast economic performance that really, if you focus on any individual one, you can make a strong argument for or against economic growth. But generally, we are seeing more signs that there's at least concern in the economy in terms of what growth will look like in the next 12 months.
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B
Well, so, okay, then what. What potentially fixes that concern in your mind in the next 12 months?
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C
Well, a lot of it is that a lot of that concern is again, based on law, geopolitical uncertainty. There are concerns around Trump trade policy. There are concerns with China, even in terms of. With Taiwan, and kind of heightened tensions there. And now there's. China and Japan have a dispute as well. And I think what resolves it is we see sort of a cooling of those geopolitical tensions. That's one aspect of it.
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And that's just because if you remove trade barriers or if we see, for example, the courts rule that the tariffs were illegal and they get reversed, I think that brings a boom to the economy. It supports, all of a sudden things go back to the way they were beforehand to an extent. I mean, prices tend to be sticky. Unfortunately, you know, consumer producers who are able to keep their prices higher won't, you know, suddenly just give people a break. So inflation isn't going to go away, but there would be some easing on that front. And that's kind of a key consideration as well, is when you look at the Federal Reserve and what they're trying to do with all this, because they're sort of another player in how the economy plays out. They have this balancing act between inflation on the one hand and unemployment and economic output on the other hand. And so for them, and with the recent sort of. We had a speech not too long ago from Jerome Powell, there's sort of the shifting focus to the economic output side of things, recognizing that we can focus on inflation and trying to get it to 2%, but we're going to be sacrificing a lot of economic output if we do that. And they have the dual mandate of focusing on both. So in his last kind of big speech, he effectively highlighted, look, we've been focusing on inflation a lot in the past. We need to return back to our roots of doing this balancing act. So I think if you get rid of tariffs, that helps make that balancing Act a bit easier. With tariffs in place, you have a very difficult act. And right now there's sort of the sentiment that the central bank is easing up on its inflation controls to try and bolster the economy, make sure that that still is supported, but it's going to come at that consequence of higher inflation. And I think the last official figure was 3% or a bit higher. So, you know, that's a risk that you face.
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Do you feel like once Powell's out.
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C
Everything'S just going to kind of collapse?
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B
Or do you. Or is it being overstated that he's kind of been keeping things together? Like, I don't know if you, if you have a take on Powell.
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C
Well, you know, I think when Jerome Powell was first put in place, he was almost seen as a bit controversial because of his Wall street roots. And I think he's, he's fairly well regarded in terms of how he's tackled stuff. I think he's gone through some very difficult periods with, with COVID 19 and, you know, just episodes that you wouldn't. That most people would have very much a lot of difficulty handling. And I think he. There might have been some overstretching there with quantitative easing and things like that, but to the most part, you know, he did what was needed, which was extreme action for extreme circumstances.
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And so it does make me wonder if, you know, how much of it is sort of the institution molds the person into being a responsible player. Once you get into the position, that's my hope. I would hope that you, you nominate someone who, you know, has a bit of experience and that the, the industry has standards. Sorry, the institution has standards that helps mold their actions. But it's, it's, it's really such a wild card. You know, we've unfortunately seen with, with other aspects, like when it comes to health and when it comes to other areas, sort of the nominations we've seen there and just the lack of experience that some of these people have, it can be detrimental. So it's really tricky when it comes to the economy.
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Because it's kind of the engine that's, that's running everything else. So my hope is that when Jerome Powell leaves next year, that we get a responsible pick. Obviously, Trump has made his, his nomination and he seems to have a bit of industry experience, but again.
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We'Ll have to wait and see. I mean, it's very early to call how, how aggressive he'll be one way or the other.
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B
Yeah, I've loved really seeing experts talk about once, once you have the Ability to compare Trump term and appointments 1.0 and this new term because I remember around the first term all the shit that people would talk about. Different people like Steven Mnuchin for example. And now there are a lot of people that look back and almost fondly compared to some of the appointments that we've seen. Obviously everything's moving. It's been very interesting. But I wanted to go back to what you were saying. With the stickiness of prices, do you feel like that's going to be something that impacts certain industries way harsher than, than others regarding the ability for them to go down? Because right now I think that they're, that's what it feels like as kind of the layman, because I'm seeing things like fast food prices. I think the only reason that those seem like they may be going down would be because of the introduction of more actually foreign competition. Right. I've been seeing like these Chinese chicken and Chinese coffee companies hitting the states and offering essentially what has been the competitors in the US Are offering for like half the price. Which I think is also one of the reasons we'll probably always see heavy tariffs or restrictions on things like Chinese cars. Because like once you go down that rabbit hole, it feels like they would just eat up our entire industry. But, but without anything drastic happening, do you think that the prices would stick across the board or are there certain industries that would be more impacted than others?
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C
Well, definitely more industries. There are going to be industries that feel it the most. I think apparel has been one of the hardest hit industries and that's just because the US no longer has infrastructure for that. It's long been known. And in fact, when I was in business school, sort of the business cases that we would study, a lot of them were about North American companies trying to start apparel brands and how difficult that was. You just couldn't compete with the cheap labor and the, the infrastructure that other countries had set up. So definitely you're going to see the areas where the US doesn't have those competitive advantages are going to be hit very hard. So apparel is the one brand that, that always comes up. Electronics can be one as well. Naturally with China having those, those trade barriers, I know long term and it's always tough with tariffs because it's such a messy impact. I think people hear that tariffs are going to 10 to 20% and they sort of expect a 10 to 20% increase in their, in their spending. You know, it's a very crude way to look at it. You have to remember that exports for or, sorry, imports are a fraction of what US Consumers consume. In addition to that, the imports, when you talk about inputs and the like, represent a fraction of the total cost of an item that you buy. Right. So if you buy, say, shoes, if we're talking about kind of apparel, let's say half of that cost is just the material that was imported that had the duty on it. There's other, the other half is transportation labor with, with sort of the final processes that go into manufacturing, the actual sales and the labor involved with that. So you do tend to have sort of this derivative impact on the actual price. So the, while you might have a 10 to 20% tariff, the actual impact, the Budget Lab at Yale has a, has a long term forecast of prices being up. I think it's 1 to 2% over the long term. So it doesn't sound like a meaningful impact. But when you consider that inflation is being targeted at 2%, you know, that's nearly double the inflation rate that the Federal Reserve is aiming for. And to your point, that's an average. So then when you go into specific industries like autos, where, you know, a lot of auto manufacturing in, in the U.S. is between the U.S. canada and Mexico, and we actually still have some tariffs in that, in that spot.
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You know, you're going to see higher prices when it comes to automobiles, you're going to see higher prices when it comes to apparel, probably above that 1 to 2% range. But that's the, the general impact that that's been forecasted with the tariffs.
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B
Were you, were you surprised at the news that Costco is suing the Trump administration over the tariffs and how it's impacted the business? And I think they said they're seeking a refund. Essentially.
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C
Yeah. I mean, not really. I mean, like, for a lot of these companies, it's just a good business decision. You know, if you think you have a valid argument to run the courts. And you know, one thing we're seeing in the US Is that the courts are kind of the only thing that's pressuring Trump to do things, you know, in, in line with the laws as well. That's their responsibility, I guess. So, you know, in a way it sort of makes sense for these players who are being impacted. And Costco, you know, is a massive institution. They're, they're having a very material impact from, from tariffs on their business. And I think there's a valid claim to, to, you know, argue for damages. If it can be argued in court that the, the tariffs are unjuster or don't align with the laws, which, which we're naturally seeing kind of play out. So, you know, I think we'll see more of that if Costco is successful. But whether they will be, especially when you have sort of Trump appointed justices in certain courts, you know, is questionable. And the other fact, too, is this is going to play out over a very long period of time. Likely it's not something that's going to be resolved in a few months. And we could very well see tariffs change in the short term, which is actually one aspect of what, what makes the current economy so tricky for a lot of companies is some of them just don't know if these tariffs are going to exist in two years. So it's really hard to build infrastructure, and maybe many people don't want to build infrastructure on the risk that two years from now, you know, the tariffs get removed or, you know, four years from now we have a new election. Trump, you know, is supposed to leave office regardless, and the tariffs change under, under a new administration. Right. So when a lot of infrastructure takes more than four years to build out, it makes it really tough for a business player.
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B
Yeah, I mean, that was, I've been looking at that part kind of in two ways. One, as far as the economy in general, because there are all the talks about the tariffs and there was so much lead up that it was like, okay, well how much of what we're seeing are companies that were pre buying and able to kind of stabilize things to, to try and wait out all the chaos versus, okay, the further we get down the road, we're going to start seeing it more and more. And as someone that has run several businesses, there was a time where it was like, I don't know if the products that I'm having made are going to be what they are or 20% more or 100% more. And I was like, I don't, I don't know how. And I'm glad I'm not heading most of those businesses, but I was like, I don't know how you run a business in that. So I don't know. Especially with so much uncertainty. Then it brings us to another question. I know you did a video on this, and maybe there's an updated opinion or take what's going on with gold right now.
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C
Yeah, so. So gold's interesting. It's always had this image and use as a, as a safe haven, meaning an asset that investors flock to when.
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When times are uncertain. Naturally, times are very uncertain. So you saw a bit of demand there. What's what's tricky is that a lot of what we saw recently so gold sort of surpass the four thousand dollar mark and reach this very high level. And a lot of that was actually retail based. So we had a lot of gold ETFs surging in demand. So sort of a gold investment that is packaged in this structure that you can buy on a typical brokerage app versus like physical gold bars. And it's, it's an area that fascinates me because really the only reason people buy gold is because of its history which is, is it's very unique in that regard. Where historically it's been used for money. Some people still have the view that that gold is money. And you know, money, the concept of money, it can get a very, it can be a very pretentious conversation. But like money is a social construct. So you can kind of argue till you're blue in the face. But like money is whatever society says it is.
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But because of its history people still have this view that it's the safe haven that you can put money into and hopefully retain its value during periods of uncertainty. With the recent bout part of it as well as we've had three years of central banks like China, I think Kazakhstan was one of the big ones as well. Funny enough where the central banks were buying a lot of gold as well. And that sort of drove this narrative that with all these institutions buying gold maybe we're going to be moving back towards something like a gold standard which was a period of time where US dollars were backed by gold. You could bring your dollar to the central bank and it would give you gold for that dollar to back its value. You know, I'm really skeptical of those claims. And really when you look at the countries that are buying gold, it's actually the ones that currently don't have a lot of gold reserves relative to other big players. The US actually has the largest gold reserves. So you know, it actually benefits from an increase in gold price. And you just look at the use of the US dollar because I think the gold, the stories around gold and seeing its price surge really reinforce the arguments of things like de dollarization which is a, is a true trend. You are seeing a slow erosion of the dollar's dominance. But there's sort of this view that at some point there might be an instant switch to some other dominating currency, a gold backed currency that China announces or that Russia comes out with, you know, Bitcoin even some people have argued that that could come out and replace the US dollar. But but when you look at the infrastructure, how many transactions take place in the US Dollar internationally, how much trade takes place in the US Dollar and by extension how much debt is owed in US Dollars.
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It's near impossible to have that sort of quick switch from a US dollar system to a different system because there's going to be demand for US Dollars for a very long period of time. Just with those liabilities alone. If you owe someone a trillion US Dollars, you're going to have demand for US Dollars until that money is paid back. So, you know, there is a slow switch. What we are, we're seeing this trend of central banks also build out other currencies in their reserves. So the US Dollar used to be the dominant reserve currency, still is, but we started to see even the Canadian dollar, funny enough, and the Chinese renminbi and other currencies kind of being built into some, some foreign exchange reserves. But the US Dollar remains very dominant. So the gold story kind of coalesced with this other story around de dollarization. There's this discussion that it was called the, the debasement trade. The argument that the US Dollar is being debased with inflation and things of that sort and that this is proof that, that the dollar is about to collapse. And you know, I think those narratives should really be looked at with a lot of skepticism.
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B
So, okay, so I mean, regarding de dollarization, I mean, is, is this something that we should be concerned over like a 10 year period, something larger? Because it does, it does feel like, and once again, this is a layman understanding, which is why I love having you on. It feels like China is replacing us in a lot of places worldwide. And they've always been a big competitor.
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In all these kind of vacuums that we've been leaving. Are they the biggest threat to the US dollar or is it, or is it actually something like Bitcoin?
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C
Well, well, the next coin after, well the next currency after the US Dollar in, in foreign exchange reserves is the euro.
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You know, frankly there, there's people who, who have discussed this idea that in the future there's going to be a reserve system where there's no dominant currency. You just have a mix of, of other currencies to make this basket of, of, of currency. So nothing replaces US dollar, It just kind of blends down to everyone else's level. Right.
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You know, but when it comes to, when you talk about China, for example, people talk about debasement of the US dollar, but if you want to talk about, you know, a state controlling its monetary system, China is a great example of a country with severe controls over its currency in terms of how much currency is able to leave its country, how it manages its banks, and the direct narratives or the direct instructions it gives to its, its institutions. So, you know, I struggle to see the Chinese currency becoming the dominant one for those reasons alone. There are concerns around the US Dollar, especially with, with the Russian invasion of Ukraine.
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Part of what, what started a lot of this discussion was the weaponization of the dollar. So the US Suddenly kicked Russia off of the SWIFT network, which was how US Dollars get sent internationally. There were a lot of moves to freeze Russian assets that were in US Dollars and things of that sort. And people saw that as, you know, hey, this is a real threat from the old system.
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Countries are going to start pushing for a new system. And that is true to an extent. You know, Russia has kind of looked for alternatives. Countries have been negotiating, doing trade in different currencies, whereas the US Dollar has been the predominant form of trade for decades. But in terms of, it's hard to say what the next up and coming thing. Bitcoin. You know, I'm always skeptical with bitcoin because we haven't really seen it used as money. I know there is that argument that it's hard money and things like that, but really, people have just been holding it as a, as an asset that, you know, they can speculate on and make money with. It's not really replacing the functions of money that the US dollar has. You're not seeing it with international trade. So could it be? Sure, you know, anything. We could be using seashells again in the near future, who knows? But it, the infrastructure that would need to be built out for that to get to a level where you're seeing it used on that international scale is just incomparable. Like, it's incomprehensible really, at this point. So in terms of your time frame, you know, I think in 10 years we're going to continue to see some trends play out. But, you know, to me, it's, it's. I don't even know if in our lifetimes if we're going to see a meaningful shift from the US Dollar as kind of the dominant currency.
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B
Hey, I'll, you know, very selfishly, I hope that's accurate, but. So not the Argentine.
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C
Me too. You know, frankly, me too. Canada is taking along for a lot of America's ride, so we do say, but.
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B
So it's not the Argentine peso. It's not the genius move from Trump regarding the $40 billion currency swap. That's not going to be the, we're going to look back and go, that was it. That was the smart play.
- [23:51]
C
Well, it's hard to go from 100% inflation to world currency over that sort of a period of a time, but who knows?
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B
Yeah, I loved, I loved looking at that. And they were like, it's not a bailout, it's a currency swap. I'm like, because we, we want the Argentine peso that bad.
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C
That's right.
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B
We just craving it. No, I mean, so with, with, with genius decisions like that, we touched on a little bit. I mean, you know, Trump, Trump is set to take control of the Fed board soon. Right. So do you think that it is going to be one of those situations where someone gets into the role and then they, you know, become the person for that moment? Kind of like you said, we sometimes see. Or are we looking at some situation where we're getting a zero percent interest rate and there's chaos or like, what do you, what do you think is going to happen? What's your gut tell you?
- [24:35]
C
I mean, it's hard. My gut tells me that maybe something in between. I don't think we're going to, and at this point this is me speculating. You know, I wish I could give some sort of evidence based answer to that.
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B
Before you even came on, you were like, I don't like speculating. And I'm like, cool, we're going to do that.
- [24:55]
C
Me, what's happening in the future. Yeah, you know, I, I think it's a bit of both where, you know, the institution plays a role. I think you can't do stuff without consequence when it comes to the US dollar. And I think you're going to have advisors, you're going to have those coming in to, to highlight that any extreme move is going to, can be detrimental to, to the US So while Trump might talk about moving interest rates to zero, might talk about this is not Federal Reserve related, but you know, cutting income tax to zero, for example, there's going to be advisors along the way who kind of nudge him to highly, hey, look, if you actually do this, here are the consequences. And I think the same would happen to a Fed chair, at least that's my hope. I think what we can see is we can certainly see policy missteps in the short term and we may very well see that if we have someone who doesn't have as much experience put into the role. But I think there are certain expectations, roles within the institution that will hopefully moderate Any missteps we do see and you know, optimistically, we may not. We may see someone stay the course, you know, wait for things to play out, for more data to inform these decisions, rather than just doing what is kind of being told of them to do.
- [26:11]
A
I'll get you right back to the pod in a minute. But first let me say, you know, starting a business sounds exciting until you actually start one and suddenly you're the CEO, tech support, marketing team, accountant, and the intern who keeps forgetting their pen. When I started my first companies, I mean every day came with a new I'm supposed to know how to do what now. And that's why today's sponsor, Shopify is great. It's basically a built in business partner that doesn't complain or quit. Shopify powers millions of businesses worldwide, including 10% of all US E commerce. So you ready to sell? I mean Shopify's got the blueprint, hundreds of ready to use templates so you can build a great looking online store without having to learn coding, aka raging or crying into a tutorial at 1am Also product descriptions, headlines, photo glow ups Shopify's tools, they handle the creative stuff so you don't have to hire a small army. And it lets you build clean, effective email and social campaigns that make you feel like you suddenly have a full department whispering we got you. Shopify handles all the complicated stuff, inventory, shipping, returns, analytics so you can focus on building the thing that you care about. I mean if you're ready to sell, you're ready for Shopify. So hey, turn your big business idea into with Shopify on your side, sign up for your $1 per month trial and start selling today at shopify.com defranco just go to shopify.com defranco shopify.com defra.
- [27:24]
B
Before we dive into anything else, I always like to try to judge people not only on their their big wins but on their their L's that they, you know, wear proudly or maybe not proudly but openly. And so I wanted to ask you what in this financial world have you, do you think was your biggest mistake or what you what were you most wrong about? Because and I'll share mine first. Which was during the the pandemic. Instead of yoloing into something like a Tesla, I looked at peloton. I said bike with an iPad. That's the win.
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And lost so much money that I then have only gone to very, very safe investments and like T bills where I was like never taking a risk ever again in my life. But.
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What was Your biggest L. Do you think?
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C
Well, I mean, like, if I had bought Bitcoin at $400, you know, that would have been a fantastic decision. But you know, like, I always bring up bitcoin. It's funny because I'm, I'm often seen as a skeptic of the space, but hey, I would love to, to buy bitcoin and buy $400 and sell at, at, you know, nearly 100,000. But in terms of money loss, you know, like wanting. So I actually don't talk a lot about my own positions, but one I would highlight. And I think it's, it's, you know, to me it's kind of an easy one because they're being bought out now. So it's kind of, or there's discussions of buying them out is Walgreens was actually a company that I had bought. And this was actually very early on in my analyst career. And funny enough, I had a partner at my company. So a lot of my, my, my experiences from my current employer were these. The partners of the company are still sharing their experience and teach me a lot, quite a bit every day. And they basically told me it was a mistake very early on. But to me it was. I was very stuck on the history of this company. Walgreens, the pharmacy retailer, was a dividend aristocrat, meaning that it had consistently paid dividends, had consistently raised dividends over time at this very strong track record. And then there was this headwind around the pricing of its, of its drugs and the impact of margins. And to me it was, well, it has this long trajectory that's surely to continue into the future. And it was just devastatingly wrong. I don't know how much the position fell, but certainly over half the money was, was lost in that position alone. And mind you, I'm not a, I'm not very much. I don't really chase a lot of the high growth positions. I will buy growth year companies. But, you know, that was definitely a lesson that just because something is cheap, for example, on a valuation basis, doesn't mean it's a good investment. And that was also an example that the history, history isn't a guarantee of future performance. And I think it was a very strong lesson because even though I would tell you that, I would tell you that the history is no guarantee of future results, there is part of you that when you see a company's historical track record and it's, and it's solid when they run into a headwind, part of you just assumes, well, they're probably going to manage through this. And I think what's important is you have to look through and objectively analyze, you know, what are the risks this company faces with this big change. And for them it was, well, this permanently impairs margins. And that was something that, you know, very painful lesson. But part of the reason the partners let me go with it was they knew there'd be some value. Some value.
- [30:54]
B
The investment space is, I would say has been a very interesting place to watch, I think, since retail investment has, has grown so much. But it also freaks me out because it feels like it has created this growth community of people that kind of pray and prey on just regular people. And I think that was why this morning. I really appreciate it. I went back and watched you reacting to financial TikToks and I could just. And you weren't playing it up. If anything, it felt like you were trying to calm your face down from just being like, what are you talking about? For all these people? And do you think that how much of the financial space, this might be a loaded question. How much of this financial space that you see on like TikTok and stuff.
- [31:39]
A
Like that is, well meaning ignorance versus.
- [31:44]
B
Like people that are just preying on people and trying to sell a course or to like better their own investments in like nano cap stocks?
- [31:53]
C
Yeah, I mean, I think if you look at the whole space, I think there's actually a lot of good content in terms of quantity. And I think most people go into it with good intentions. Even the people who, who might sell courses and do so.
- [32:08]
Aggressively with, with what they're promising. There's actually been a bit of research in the space and there's a study I love to cite called the Finfluencer Appeal by the CFA Research Institute where they looked at different influencer trends and things of that sort. And what they found was that a good chunk of Gen Z investors actually attribute starting investing to finfluencer content, which is a, which is a good update, you know, to see that creators are helping people get started investing. So I do think there's a lot of good content out there. I think the trouble is that the algorithms really incentivize the get rich quick stuff when it comes to what gets views on TikTok, what gets views on YouTube, especially YouTube. It's either this talk's about to blow up and make you millionaire or conversely, here's why the global economy is about to collapse and why we're all doomed. That kind of extreme hyperbole content is really what gets eyeballs it's what gets views. And so you see that stuff kind of rise to the top of the algorithms and you get a lot of visibility on that type of content. And I think even some of that might be, well meaning where people have this belief that they are a superior investor or something like that, which is especially what we saw with early Covid. When we had the pandemic. We sort of saw this surge in retail investor interest and social media presence. And that's actually when I started doing the TikTok review series, was when we saw the surge of, at times, high schoolers telling you which stocks to buy and trade. You know, I think, I think it's great. You know, it's. It's weird because I try to encourage people to, to pursue their interest in finance if they have that interest, but you just have to do so in responsible manner. And I actually think it's great if someone goes online as an amateur and shares their experience, their, their sort of path they followed. If they do so honestly. Right. If they highlight, hey, I'm, you know, someone who just started investing, but here's a stock I like, here's my research on it. Let me know what you think about it. I've actually encouraged individuals to, to not on social media per se, but to, to make amateur research, to get feedback on it and sort of share it that way. But it's about that honesty and how it's marketed. And I think the issue is that you often have amateur content marketed as sort of expert content. And another piece from that, that CFA research paper was that the vast majority of content shares, no disclosure about someone's background, experience, or even at times, their payment incentives. When it comes to sponsorships and affiliate links, you don't often see that being disclosed to viewers of the video, which can be quite bad. So there's, there's degrees to it. Some. Some stuff is. Is great, some stuff is sort of gray area. And then there is very nefarious stuff where, you know, I even did like this deep dive into YouTube. YouTube videos that are paid to promote stocks that don't disclose that they were paid to promote that stock. So. So you do have some pretty shady stuff.
- [35:10]
B
Yeah. And that's the thing is it ends up happening at like, even the highest levels. And then you see like maybe a year and a half later it's like, oh, so and so paid a fine. It's like, okay, so the cost of doing business. That's cool. Yeah. I, When I look at, I, When I, like, look at the stuff that I don't like because I do agree that there is, there is a, there's also a lot of good content and there's a lot of good advice out there. I don't know what's more troubling though from the two kind of bigger things are this is a sure thing or the embracing of it's just another casino where it's like, and I mean even in your reaction video, you kind of jokingly, while not promoting it was gambling. And that's also a thing that bugs me is, and I'd love to know your interest on it. How much do you value historical data? Obviously when you think about a casino and people are like, well if I keep betting red, it's eventually going to hit. But I mean, how much do you care about historical data especially? And this will, this will kind of bring us into the AI conversation because a lot of people have talked about like the dot com boom and you had a whole video about why it's not a one to one. But how much do you care about historical data?
- [36:21]
C
I mean, quite a bit. I mean like really when you think about it, it's kind of all we have to go off of invest not just vibes, but yeah, just vibe your way through. But what's interesting is there's a term for that, it's called financial nihilism. Is that view that the system's rigged.
- [36:40]
The average person doesn't have a way out and you know, so you might as well just gamble on meme coins and you know, fart coin or whatever to try and make your retirement because you're not going to make it in the, in the standard system.
- [36:54]
And that's a, you know, I think that movement is based on very real frustrations. And so I try not to discredit it too much because you know, it's true that, that younger generations aren't able to buy homes like their parents could. It's true that, you know, we're seeing income be stagnant while, you know, prices are increasing at a faster clip and over many periods of time. So it's based. And you know, you talk about Wall street in 2008 like we're still seeing frustrations about 2008 really.
- [37:23]
Sort of demand people or command people's view of the industry.
- [37:29]
The problem that I have with it, or I guess what I always try to highlight is that you don't need these sort of remarkable returns for investing to be a solid choice for most people. And this is going to come from my biased view as someone who works in the industry and who naturally encourages people to invest. But you know, if you take this is a very crude example, but if you take someone who's able to save $500 a month, which is, can be a lot of money for some people, but just for the sake of this example, if you take someone who can put away 500, $500 a month over 40 years, good amount of time as well, and if you can earn a return of even just 6%, that $500 a month crudely turns into about a million dollars. And only about a quarter of that million dollars, about 250,000 is actually your savings, like from the money you've put aside. The other 3/4 of that amount is just from that 6% compounding over time. So I always try to highlight that as an example of, look, the system can suck. The system does suck for a lot of people. That doesn't mean that we should throw everything away and, you know, focus on unproductive activities or risky gambling activities, because if you follow a prudent method, it's not going to fix all your problems. You know, I'm a financial advisor, I'm not a life coach. I can't fix most people's, all the problems most people have. But with this one area, there are steps you can take to, to improve it. And so that's always a message I try to put forward is if you focus on just that consistency, that approach, even sort of mediocre results with consistency can, can put you in a much better spot. Now in terms of what returns will likely experience, there's a lot of research to highl that in the future the US Might not have returns like we've had. I mean, the last few years have just been phenomenal in terms of US Stock performance.
- [39:24]
So, you know, maybe we don't expect that, but like I said, with a 6% return, you can still see a solid result. Now, you know, you might see more than that, you might see less than that, but just as an example, you can see the impact that it has.
- [39:34]
B
So are you still of the mindset? I mean, because to your point regarding the historical data, there is this belief of, okay, well, if I can just put my money into something that's diversified like S and P ETF or I think a Vanguard account or something like that, and you just consistently do that when the market's going up and down, and over the long term it'll be a win. But it does work off of the mindset that the American market will always be king. And so that could be the one asterisk of why that would be concerned. Because would your advice otherwise be just stay consistent and diversified? And obviously, you know, this is, we're talking about a hypothetical situation where someone's not getting sick or fired or, you know, like.
- [40:18]
C
Well, yeah, yeah, that's an important consideration. Like the number one bank cause of bankruptcy in the US Is medical expenses. So I mean, like, talk about just a lottery in terms of who has financial success and who doesn't to an extent. But when it comes to.
- [40:35]
Investing in the US Specifically, you know, it's a really tough discussion. But the view I typically share is when we talk about diversification, that should include some geographical diversification as well.
- [40:51]
And frankly, you know, I think people view the S&P 500 as a passive investment. And it really isn't, you know, passive being sort of this idea that, well, if I just invest in a bit of everything, I'll do well over time. And there, you know, there's been a lot of healthy debate over whether passive versus active investing is better. And passive investing has a lot of edge of an edge because of it. It's typically lower fee and things of that sort. But The S&P 500 isn't necessarily a passive investment because yes, it can be. You can invest in it low cost. But what you're doing is you're betting on large cap U.S. stocks. And right now we have a period where large cap US stocks have done very well and have very high valuations. And again historically, so you have to take that with a grain of salt. But historically we have seen periods of high valuation followed by subpar returns. And that's simply because valuation is sort of the, to an extent, the opposite of the return. You see, right. The more you pay for something on a valuation basis, the less return you'll see from that investment over time, typically even if it grows really, really well. So it's not to say that the US Won't perform well, it's not even to say that large cap stocks won't perform well. But you really have to be aware that when you buy The S&P 500 specifically, you know, about 40% of the, the index now is about 10 companies. So you're really making a more active bet than you might have initially expected. And you know, I don't really like to advise the Internet which, where to put their money, but there are alternatives like equal weighted index funds where instead of just having the biggest players be the biggest part of the pie, where you have those 10 companies being about 40%. You can better diversify and sort of split that pie among the smaller players more where you have better valuations. You can look into international ETFs if you want sort of passive exposure to a more global stock market. But yeah, you know, it's. So when it comes to consistency and diversification, you have to make sure that you are diversified. And I think the s and P500, while it's, it's done phenomenally in the past, you do have to ask yourself, are you okay making that active bet on large cap US Stocks or are you truly interested in being more diversified?
- [43:01]
B
Yeah, just even before I go to the next thing I have to say, there's nothing that makes me feel more like as an American I have like my pants down and I'm actually from a third world country than someone talking about bankruptcy because of health care. And they're talking from a place where they have universal health care. And I'm just like, oh, yeah, that's right. Yeah, it's like just realizing like, oh shit, there's, there's bodies behind me as I'm, as I'm talking to you. Okay, so regarding kind of the lack of diversification and kind of the, the solidifying of a bet, it does feel like a lot of the US economy right now is a big bet on AI And a lot of the money that moving feels very incestuous of like, oh, this company that's an AI is now investing in this company that's an AI and they're providing this. And so, and I know that you recently did a video where you highlighted this, this chart that's been going around. You also didn't co sign with everything that sweet baby angel Hank Green said. So I don't know how the audience is going to take that.
- [44:01]
A
But with what?
- [44:02]
C
He's great. He's great. To be clear. And I largely agree with a lot.
- [44:05]
B
Of he hates him.
- [44:07]
That's right. But do you feel like right now the concern is too big, that it's a bubble? Because you're kind of takeaway from that video and obviously opinions change from post now is that it is a concern, but maybe not as big as some have been making out to be. Is that accurate?
- [44:25]
C
Yeah, to an extent. I think it's more the argument that, look, we're probably in a bubble. Most fund managers believe we're in a bubble. Sam Altman believes we're in a bubble. You know, when you ask most of the people involved, it seems like we're maybe in a bubble to an extent. Except for the Nvidia CEO. The issue that I highlight is what to do with that information. Because even if you are in a bubble, what does that mean you do with that data? Does it mean you, you sell everything and wait for it to pop? Does it mean you switch to a different country? And what's tough is we just don't know what sort of inning we are in when it comes to a bubble. And it can be very dangerous to sit on the sidelines while things play out, especially when it comes to a revolutionary technology. And I think that's where the biggest comparison with the dot com bubble is, is the fact that we, we are seeing this technology that might prove to be revolutionary. The Internet did prove to be a revolutionary technology.
- [45:30]
But it's just a matter of timing. You know, the federal chair at the time of the dot com bubble highlighted the irrational exuberance of dotcom companies three to four years before the top of the bubble.
- [45:44]
B
Right.
- [45:44]
C
So that's really what I, what I try to highlight. The other aspect I try to highlight is that there are differences. So yes, valuations are stretched, but a lot of the kind of charts that go around are using a smoothed earnings estimate as part of the valuation. Without getting into too much detail, a more simplified measure shows that the PE ratio for The S&P 500 is around that 30 times level, which is very high to be clear, but just not quite as high as.com bubble got.
- [46:13]
When it comes to the leverage in the space, we don't yet have the, we're not yet at a point where leverage is as meaningful of a concern.
- [46:23]
B
Right.
- [46:24]
C
Especially when you compare it to like 2008 for example. I've seen some people compare this to the 2008 financial crisis. That was really an example of a system systemic like correction where you had sort of leverage on top of leverage that when you had the one factor collapse, there's this domino effect into other areas. Right now we're not quite seeing that when it comes to AI.
- [46:47]
And a lot of the players who are funding the AI revolution have tremendous amounts of cash on hand to fund these initiatives. We are seeing a bit of leverage creep up. We've seen bond issuances from some of the big AI players.
- [47:03]
But right now we're just not at a point where leverage plays as important of where leverage is as significant as it used to be. And there are some areas where, you know, it, it varies. But really the big point is that we have some of the largest companies in the world, the largest companies in the world funding this out of their own bank account. And so the question is, when do they stop and how long does it take for them to realize, hey, maybe we don't do this? And I always like to highlight Meta's sort of horizon, well, the Metaverse idea, as an example of something that can last a very long time as long as the company is willing to fund it. You know, I think most people thought for a very long time that was kind of a silly initiative, yet Meta spent the billions of dollars to, to fund that for quite some time. It didn't lead to this collapse of, of the space, but just didn't work out much for the company. So. And you know, I think that initiative is still kind of pushing in the background a little bit, but, you know, there's so many. I guess my point is always that you have to take a nuanced view on things. It's too simplistic to argue that we're in for a repeat of the dot com bubble where we saw the NASDAQ drop 80%. There are parallels, but there's also many differences in terms of what's funding this, the leverage involved and things like that. So it makes for an interesting discussion. And you know, my take is, yeah, we're probably in a bubble to an extent. It's just, again, what you do with that information.
- [48:24]
B
Well, I think it's also, yeah. I mean, looking back, even with it not being a one to one is like, we remember kind of the drop as a whole. But then I think it's very easy to kind of like lose what happened afterwards because there were, there were crazy things. Like What? I think Pets.com had like a $400 million valuation at its peak. But you also had Amazon. Right. And so it's like, Amazon's stronger than ever. So it's like in my head I'm like, okay, how many of these are losers? And then how many of these are like, here for the long haul? Also, is there a pivot? And that's, I don't know, that's. That's been very interesting to watch. But then, yeah, I get on the, the other end of, okay, if it's not a bubble, what do we do about the crisis? It's going to mean for jobs. You know, we're already seeing it take jobs. Is it overstated right now? Maybe. But with where it feels like it's going, it feels like it's no matter what, it's going to take more and more. Is that your thought there too?
- [49:20]
C
Yeah. I mean, the tough thing with technological Revolutions is that they aren't always beneficial to the working class. You know, you think of things like automation and how it took away the line worker to an extent in North America.
- [49:35]
And I agree. I think we're going to see a meaningful impact. If AI sticks around and really ends up being as prominent as these sort of big companies are hoping for, there is going to be a big impact and a big shakeup in terms of what areas people need to focus on. And I think part of it is what people are going to have to consider is where do you compete with AI? You know, AI is effectively. The AI we have right now is effectively a prediction model, but it's not a very good judgment model. And I think we're going to see more emphasis on hiring people in those judgment roles versus when it comes to prediction. So when I say a prediction model, you take a autonomous car, for example, what it's doing is it's digesting all this driving information, these data points, and then when it gets to a red light, the model is asking itself, based on all this history, what is a driver likely to do in this situation? That's why it's a prediction model. But it's not really judging what the best move to do is. It's trying to predict what the average person would do. It's why when it comes to, you know, early on, there were people who were like, hey, look, I got this AI chatbot to make a stock portfolio. For me, it's like, holy crap. Like, you know, there's so many issues with that because it's not making a judgment call on these stocks. It's effectively. It's very crude, to put it this way, but it's effectively summarizing what the Internet thinks are the best stocks. And, you know, the Internet's not always the most trustworthy source for that information.
- [51:04]
So will it replace jobs? You know, if. If it sees success, probably we're going to see people have to adapt to that. I think it's going to take a lot longer to get to a point where you see that meaningful impact right now. It's hard to say because it's so early. And I think the caveat I highlight with any post I put about AI is that it's such an early revolutionary technology. We just don't know. We don't know how things are going to play out, how much adoption we'll see. Right now, what we're seeing is that the vast majority of companies are using AI to some extent, and very, very few are paying for their use. Of AI we have, last I saw it was about 5 to 6% of companies are actually paying for their use of AI and many are still in the pilot process with, with their AI systems and the majority report no impact on their earnings before interest and tax. Meaning that the majority of companies who are currently trying out AI don't see an impact on their profits. Now that might change. Even that percentage has increased sort of over the months a little bit in terms of the people who have seen a benefit impact.
- [52:13]
But you know, it goes to highlight that we're not going to see a flip of the switch where all of a sudden, you know, everyone loses their job to, to robots. And you know, to an extent there's also areas where people are realizing, hey, AI can't really replace this function that I thought it could. It's not as reliable. And what's interesting is kind of speaking from personal experience, we just had.
- [52:35]
Regulators reach out about our use of AI and making sure that companies like ours aren't replacing our human activity with robots effectively. So there's actually some, and this is in Canada, mind you, so it's obviously a bit different. But in Canada we're seeing that concern that hey, we don't actually want AI to replace some human components of stuff because of the risks around it, because we don't have the quality controls in place yet. So it's going to take some time before we see a meaningful shift, but it's certainly a risk. You know, and I, like I said, when it, when it comes to, to your point earlier about, you know, seeing all the companies in Amazon, for example, just going back to our previous point, you know, again I think we, we do have aspects of being in a bubble and part of that is we have about 500.
- [53:25]
AI unicorns right now, which are companies with valuations of over a billion dollars and about 1400 AI companies and startups with valuations over $100 million. And we just aren't going to have space for that many competitors like, and that's kind of what we saw with the dot com bubble is we saw, like you said, pets.com, we saw all these companies. Globe.com was a social media platform. We had Netscape which was an Internet Explorer. We had all these companies come up and there just wasn't demand to sustain all these companies. So I think we are going to see a shakeout where value is lost from those players and the attrition that just comes from fighting for the top position. But you know, it's hard to know what the technology itself, how it'll be adopted over time.
- [54:12]
B
It's interesting hearing you even talk about, like in Canada, like trying to be careful and thoughtful about it because here it feels like, let fuck regulations, we.
- [54:22]
A
Have to beat China.
- [54:24]
B
And really the only potential bottleneck is, I mean, it's not, it feels like it's energy. It feels like, okay, what, let's, where can we get the energy yesterday? And do you feel like that the energy constraint is something that could actually kneecap the growth, or is that already kind of baked into the path moving forward? I think for a lot of these.
- [54:47]
C
Companies, I mean, it's definitely, definitely an important consideration. Like a nuclear power plant takes an average of 10 years to be built for 1 gigawatt of power. So that's a lot of time. Needless to say, when you're in a rush, that's supposed to take years to try and make this superior model. What we are seeing is companies like Nvidia who have increased their product cycle release are trying to make more and more efficient chips that use less energy to get around that bottleneck. But then that poses the question and kind of a, you know, there's that big short seller, Michael Burry, a very famous short seller from the 2008 housing crisis who made this huge bet. He's portrayed by Christian Bale in the big short movie, made this big bet against housing during 2008 financial crisis and he's come out against AI highlighting that one of the big issues is the depreciation around these chips and how quickly companies are likely to cycle through chips. And just the fact that they're not accounting for the cost of that properly. Where you have all these companies who are saying, hey, you know, we're profitable, we're, we're making this big investment, it's going to be X, it's going to make us X profits over time. But then in three years time, you find your chips are obsolete because of new chips released by Nvidia. So it does lead to that problem as well because you have this constraint of energy, the very severe constraint. I don't believe there's actually currently any.
- [56:14]
Nuclear power plants. Maybe this has changed actually because it's been a few months since that data point, but there wasn't any under construction in the US in terms of nuclear power plants, which is sort of the favored form of electricity.
- [56:27]
And when it comes to gas turbines and things of that sort, it's, it takes time to, to put that on the grid, to get that power to these utilities, to these data centers. Properly. So definitely a big constraint. I think Nvidia is trying to work around it with newer releases, but then that just adds to the problems faced by AI companies, which is that now they have to basically replace all the infrastructure they bought. About 40% of the cost of a new data center is just the chips alone. So that's a big cost to have to suddenly replace over just a few years.
- [56:57]
B
So I mean, does that affect your, your thoughts regarding the, the United States taking like a stake in, was it Intel?
- [57:04]
C
Yeah, I mean, so. And you know what's funny is, is after that we also had this sort of uproar about OpenAI asking the government for a bit what people thought of them asking the government for a bailout, which they had to kind of walk back their terminology around that or backstop rather. But you know, it's tough because it's not inherently strange for. Intel's a strange choice, I guess I would say, because they're not really seen as a meaningful competitor, although that could change. But they, they do have US operations, which is probably one of the reasons they took that approach. It's not necessarily strange for governments to take a stake in what they view as an important industry, an important company for competitive reasons. And in fact, you'll sometimes see countries, governments give things like tax incentives to individual projects and companies based on what they promise to develop in their country. So if Volkswagen, for example, goes to build a car plant in a different state or a city, those states or those countries might promise different incentives to get them to build in their state, knowing that they're going to bring employment, they're going to bring these tax dollars and benefits. So it's not inherently strange. I think the choice is interesting because intel has long been viewed as a laggard in the space. But you know, it does muddy the waters when it comes to, you know, the view that maybe we're in a bubble, maybe it's not a good idea for the government to suddenly get a stake in there and, and you know, put its own financial.
- [58:35]
State on, you know, have that impact as well. You know, I don't think it's, it's a meaningful impact on, on the bubble situation we have. I think the concern is that we see more of that and, and more of this propping up because that's just more likely to contribute to inflation and this sort of, it'll challenge the efficient development of AI if you suddenly just have government contracts coming in and sort of flooding the space with dollars, whether you'll have a sustainable build out Versus a bubble build out. You know, it kind of leans in more towards the latter.
- [59:09]
A
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B
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A
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- [60:21]
B
So right now, would you be someone that you're like, I'm going to get. I'm going to follow Michael Bur's lead like. Like that as far as where you think things are headed or you're still more hesitant. It's kind of more of like a. I'll keep it arm's length away.
- [60:37]
C
Yeah, it's, you know, so I'm not someone who. Short position. That's right.
- [60:43]
A
Thank you.
- [60:44]
C
Thank you very much for that, for the legal disclaimer. My lawyers will be very happy with that.
- [60:48]
When it comes to Michael Burry. I think so. So for me, personally, I don't short positions. I. I'd rather just sit and wait on the sidelines versus shorting a position. The way I view it is, is I, I'm assessing the area on a one by one basis. So I'm looking for companies that I believe in the quality of and I'm really not getting excessive exposure to the space right now. Again, people can view differently. People have done very well with Nvidia for example, but to me it's, it's, I'd rather not touch a space that has the risk of collapsing, especially when you have a lot of the demand. So front, not front loaded but in this environment where you have a lot of demand coming from zero profit companies and companies that are basically surviving off of investor dollars right now, like the amount of.
- [61:45]
The burn rate of companies like OpenAI is astronomical. And at the same time these companies are making promises for trillions of dollars of build out over the next five to 10 years. A lot of that just doesn't make sense. So I'm not as aggressive as Michael Burry. I think his opinion should be taken into consideration. He's been wrong before, he's had some bad calls before. So I also take that into consideration. But, but in terms of me, it's, it's to your point, I'm, I'm more someone who will take a balanced approach of maybe not selling everything and sitting on the sidelines, but just being more selective with the companies I invest in. And you know, one point on the broader topic of whether we're in a bubble or how long this can go rather is you have to consider that some of the biggest companies driving this, you know, we have the hundreds of AI startups that are surviving off of, of investor dollars, but the biggest companies driving this are companies like Microsoft, Nvidia, Meta, Amazon and these companies have diversified revenue streams from other businesses. So again, it brings to the question of this or it brings us to the point that this kind of goes as long as these companies are willing to lose money on the space. So, you know, it's all stuff to consider.
- [62:59]
B
Yeah, I think, I don't know, it's hard for me not to look at so many of, so many of the things that we're seeing in the stock market as you know, it being treated like a casino just because, I don't know, I sometimes look at, okay, like I have some stock in it. Sometimes I look at things like Alphabet even earlier in the year and I'm like, I don't understand how this has such a low evaluation compared to other things based off of like obviously there's the concerns around like AI eating Google's lunch regarding ad delivery.
- [63:31]
A
Right.
- [63:31]
B
So I Understand that. But I'm like, I don't know. Based off of their track record, I'm like, they're going to be ahead of that. In my head, cut to 10 years is like that. And that's when everything started going down.
- [63:40]
C
But that was a moment.
- [63:42]
B
But do you, do you look at, do you think we're in this place more and more we're seeing companies that might have traditionally not been seen as AI or data companies becoming that. I think this is going to be a no brainer for you, but maybe for more of the normies out there. I would like to, I've talked about for the longest time that even before it's part of the conversation now that Tesla really isn't a car company. It feels like it's an AI and data company. That probably the thing that's most valuable about them would be all the data that they're getting from their cars being on the road in hopes that the robo taxi thing actually becomes a reality. Is that, I mean when you look at Tesla, is it, is that really the only reason, other than Elon Musk and his like cult of fandom there, that that that stock is priced at what it's at? Because it doesn't seem like outside of that it should be anywhere near where it's at now?
- [64:35]
C
Yeah, it's definitely one of those long shot bets on the future of their technologies. And Tesla's always been like that, you know, for the past five to 10 years it's had a very strong retail base sort of supporting that valuation. Palantir is another sort of AI company that has a very stretched valuation.
- [64:55]
Based on its, its current earnings that we see. So you, what you're seeing is these investors are pricing it to your point, on the future promise on, on the future activities that it might undergo at some point. What we have seen over kind of the last little bit is stocks do sort of command a community premium, which sounds silly to say, but you look at companies like Gamestop, you look at companies like, you know, I don't want to call everything a meme stock, but you do get these companies that have a very strong following that sort of command evaluation premium because of that. And part of that is that through thick and thin you do have these investors who are sort of willing to hold it and invest in it regardless of what happens. And to an extent that does give the company a bit of financial stability, which is a bit bizarre. That feeds into the loop. Share prices don't inherently impact a company's financial situation. But it makes it so that they can raise funds a lot easier and get better terms for their debt if. Or equity that they issue.
- [65:56]
So, you know, when it, like when it comes to those companies, it's really tough because over the last few years we've seen sort of the traditional analyst model challenged by these groups. And you know, you talk about Bitcoin, for example, and the demand you see around that and how it's really surpassed what a lot of traditional analysis would tell you it was going to do. So it's hard to say, I think, in terms of why these companies are trading. And to your point, when it comes to AI, there are companies that are now trading at discounts because suddenly they're viewed as facing competition in the AI space, even if they're AI companies themselves. So Google's an example, Adobe is an example of a stock that has seen its valuation compressed because it now its creative suite of tools has this competition from AI companies, even though they actually have AI offerings themselves. So it is a bit of a strange dichotomy, I guess, that you have, where you have sort of the old players, some of their valuations are being challenged. The new players have very stretch valuations to some extent. And, and a lot of it just comes down to what investors hope of the company in the future. But, you know, it's, you just don't know how things are going to play out and, and valuation is a risk point you need to consider as an investor. The higher the valuation, like I mentioned, the better the company has to perform for you to get your money back or even make a return. So it's, it's something that, not that some people, especially early on, don't pay a whole lot of attention to. Someone might say, you know what? I like Elon Musk. I like the Model 3. I, I think Optimus might someday be a good robot. You know, I'm going to buy the stock. And they don't really look at valuation, but it's, it's a really important consideration because it's effectively dictating no matter how the company performs, what you bought it at can dictate how you, how you see your money grow.
- [67:53]
B
Yeah, sorry, when you said the, the Optimus thing, I, I don't know why.
- [67:56]
A
So many people are just stuck on this idea that robots have to look like us.
- [68:01]
B
Like, I don't, I don't like to.
- [68:03]
A
To accomplish the things.
- [68:04]
B
It feels very like we want that fucking. Well, it's not even a Jetsons future because Rosie didn't even like, necessarily look, super, super.
- [68:11]
C
That's right. Humanoid.
- [68:13]
B
And so I'm just like. I'm like. It feels like if you. I don't know that it would just look like the thing that is gonna do most. I don't know. When I saw that, I forget what company it was that they released a video where they're like, you can have a robot in your house for $20,000 or $500 a month.
- [68:27]
C
I think it was Neo or something.
- [68:29]
B
Neo, yeah. And like, what it looked like. One of the only things I could actually do at this moment was open a door very awkwardly, unless someone takes it over. I'm just like, why. Why are we trying to jam this, like, this circle peg through a square hole?
- [68:44]
Drives me. It drives me crazy.
- [68:46]
A
Okay.
- [68:46]
B
But, Richard, one of the last things that I want to hit on is we talked. We talked about it briefly earlier on, but let's talk about corruption. How much do you think that it's hurting the economy right now or just. I mean, I know that this has been very US focused, but I don't know where your. Where your head's at is like, is that where we're seeing it the most? Is that. What's the impact? Just kind of go.
- [69:07]
A
Go for it?
- [69:08]
C
Well, you know, I think the US Matters on that front because I think the US Was the model for the rest of the developed world when it comes to political systems in terms of the independent branches of. Of executive power.
- [69:20]
So it matters when you see someone come to power and those institutions challenged. Right. So, you know, I think that's where the most eyeballs are on. Is it the country seen the biggest degradation of its. Of its, you know, political system? Maybe not. You know, I'm sure there's countries elsewhere that are feeling it worse, but it's definitely the. The biggest. The one with the most eyeballs on it, I would.
- [69:45]
B
I would say.
- [69:47]
C
But it's interesting because it's a topic that there's actually a good amount of research on the impact of corruption on economic output. And what's funny is there's two opposing views on the impact of corruption. There's one that there's actually. The view is called. The hypothesis is called grease the wheels. And it's this idea that corruption can actually help economic output. And the reason being that it views. It takes this very conservative view that regulation tends to inhibit economic output. And so if you allow players to navigate regulation or perhaps even a corrupt system that already exists, it's going to help economic output. And what's strange is you do see Some research points to a benefit for individual players for.
- [70:39]
Taking that, that approach of, of corruption in very specific situations. So one of the, the biggest examples is in war torn countries where the rule of law has suddenly disappeared. And the reason being is that you can effectively protect your assets and your business through things like bribery and things of that sort and be able to exist in this economy that's now been flooded with violence or what have you. However, most of the research points to it being a negative and even in those circumstances the long term impact tends to be negative of corruption. So the alternative is, I think it's sand the wheels or something of that sort. I'm getting the term wrong, but it's kind of the exact opposite of grease the wheels. And it's this. The arguments and what the evidence shows is that there's actually one paper. It showed for each standard deviation decrease in an index that measured the political kind of stability of a country.
- [71:41]
There is a 17% long term impact on GDP per capita. So there's a meaningful impact on just output alone. And that's not the only gauge that matters for an economy. But it goes to show that even just on that pure measure of performance, corruption can have a negative impact. And the reason for that is, well, there's a number of reasons. Some of it is that it can lead to inefficient output. So when it comes to governments having favoritism with the companies they select, what that means is you move away from merit based decisions to suddenly, you know, whoever you're in favor with. And that means you can have sub, sub optimal outcomes. You might have a infrastructure project that fails and all this money wasted because you hired someone that wasn't qualified to do so based on corruption and things like that. So you have a lot of wasted tax dollars that come from that as well. And part of it too is, is the research report that showed that the impact of the standard deviation change in that index level. It also showed that the reason you typically see that impact on economic output is because it feeds into a decrease in foreign direct investment. Which makes sense because suddenly foreigners who have money to invest in your economy will second guess whether to invest in your system. If they don't have faith that the rule of law will be upheld, if they don't believe there's an even playing field, if they believe their money will be taken or perhaps beat out by some industry incumbent that has a solidified position with the government. So it discourages foreign direct investment and it also increases inflation. And that can be because of the wasteful projects, the inefficient production, you see, and things of that sort. So, and you know, finally, and you can see this in some countries is it can lead to just less competition overall and you can get this oligarchy of companies and insiders and the like that end up commanding most business activity. So it's all those reasons that from an economic standpoint there tends to be this view that corruption is bad. You know, it's funny to argue that, but.
- [73:47]
B
No, I mean, I was going to ask, I was like, I mean, so is part of the argument, you know, Trump pardoning scammers, fraudsters, con artists, the founder of Binance, that there is an argument that that could be good because it says America's here to play and so to bring, bring your game over, bring your money. Is that, is that kind of the argument of how it could be good?
- [74:13]
C
Yeah, I mean that's again, that leans into the grease the wheels argument. And it's the idea that, you know, if you build in the US and you circumvent laws to do so, you'll be protected if so long as you do it big enough is I guess, kind of the, the view. But you have to consider that there are those who are impacted by those people who lose faith in that system when they see those, those actions happen. So again, competitors, depositors themselves, investors who lost money or victims of. So with Binance, it was anti money laundering rules that were basically non existent within the company. So the victims of those are impacted as well when those crimes basically get dropped. And you know, just even on a human level, another what a lot of research points to as well is just rising inequality. And you kind of see that when you have the people with the most money benefiting the most and being able to navigate the rules, it really can lead to the sort of disenfranchising of other classes of people below that who might have lower income or things of that sort. When you see that system play out and that tends to lead to instability when you have, you can't have over half your population be entirely disenfranchised with your country and expect that things will operate normally into the future.
- [75:34]
So, you know, those are all risks to consider. There can be that short term distorted impact that can even be viewed as a, as a positive in the near term. But long term, the research has shown pretty, pretty consistently that tends to. Corruption tends to be bad.
- [75:49]
B
Yeah, I mean, when you're talking about the wealth inequality and the problem with affordability and how in that, I don't know, that's where I go crazy. Anytime I go online and I start seeing what I think are people, but could be bots. And it's like people that are throwing themselves in front of exploitative billionaires, like, because they imagine that the systems that allow them to take from everyone else, like maybe they could, they could be a part of it at some point. It, it drives me crazy. But would you see kind of like what's happening there, as I think some people have put it as like the third worldification of America as far as the, the corruption that we've. I think it's always been there, but that we're kind of more seeing.
- [76:31]
Plainly in public.
- [76:32]
C
I mean that, that's. Yeah, it's a tough question. I think what we're currently seeing is those pressures building up in terms of the, the challenges to the institutions that have been, have long maintained the rule of law in the U.S. and people are kind of holding their breath to see what happens. You see that with tariffs and the lawsuits playing out there. You see that with Trump threatening to fire people and then the courts pushing back and preventing that. So you do still see a bit of that, that institution hold institutional hold on, on the system.
- [77:06]
So it's tough to say because I think everyone's watching with kind of abated breath, I guess, to see what happens, including here in Canada. The U.S. is still a big part of our news cycle here because we, it matters quite a bit to us in the rest of the world. So in terms of, you know, I don't think I could give a very good answer in terms of whether the world thinks the US Is falling apart. So in terms of my own view, and again, my speculation to your point, I think people are very anxious. I think we're seeing things hold out in the near term. And I think what we're seeing is the Trump administration is taking advantage of very quick actions to circumvent very slow systems. But over time, the test of things will be how those things play out over the long term and whether we see those challenges brought forward and how those cases play out. So that's going to be what really determines how, however things, how everything ends up.
- [78:00]
B
Yeah, I'm very interested to see how it moves forward. Like, are we migrating more towards a world of give Melania Trump an eight figure deal for a documentary because we want to play nice with the White House, or do we see more of like JP Morgan, you know, saying that they're kind of staying out of putting, what was it, money into the Ballroom because they're worried that being a part of that could hurt their business. And, and that makes me then wonder, like, are there certain industries and certain companies that are so big that they feel comfortable? Because it does feel like Trump has kind of gone after everyone, but maybe he does. Maybe, maybe doesn't have as the political capital he had when he first got in that JP Morgan is doing something like that.
- [78:41]
C
Yeah, I mean, it'd be amazing to, to be behind the closed doors of the discussions that happened between a Mark Zuckerberg and Trump and what kind of promises are made, what discussions are had. I think certainly. And really, Meta, you saw sort of a big pivot as a, as a key example of that, with their, their framing of, of their political kind of view. I guess right when Trump came to office, you kind of saw this almost 180 in terms of how they managed their systems, how they moderated content to appease, sort of that, that system. And for companies like Meta, it's very clearly just the cost of doing business is, is to, to make that appeasement. Whether that constitutes corruption is, is a harder discussion. It's certainly, if it is, it's certainly sort of to the lesser degree. But the issue is, is, you know, how far does that influence go? Does it go beyond just content moderation policies to, to other areas? And, you know, that's just an area that, that above my pay grade, I guess.
- [79:42]
B
No, Richard, in a year I need to have you come back on so we can see the speculation that I forced out of you, how it has come to fruition or not. And we'll do a.
- [79:53]
C
You can clip all the claims and just cut out the disclosures around them and.
- [79:56]
B
No, we'll do, we'll do, we'll do like the Billie Eilish thing where it's like every single year we come back.
- [80:00]
C
And we see that's right.
- [80:02]
B
How right. How right or wrong things were. But thank you so much for the time. I really appreciate it. And yeah, we have to have you on again soon.
- [80:09]
C
Great. Yeah, thank you for having me. It was really cool and fun to chat.
- [80:13]
A
And that, dear listener, is the end of today's podcast. And if you're listening to me here at the end and you're somehow not subscribed, what are you doing? Definitely subscribe. I've got weekly conversations that come out, usually Tuesday or Thursday. If you like this one, I definitely recommend you check out one of our last two. No matter what, let me say thank you for watching I love yo Faces and I'll see you right back here next week.