Individuals Outsmart the Pros, Live From Chicago With Ben and Callie, Morningstar CEO Kunal Kapoor

Summary

Podcast Summary: The Compound and Friends - "Individuals Outsmart the Pros, Live From Chicago With Ben and Callie, Morningstar CEO Kunal Kapoor"

Release Date: June 6, 2025
Hosts: Downtown Josh Brown, Michael Batnick, Callie Cox, Ben Carlson
Guest: Kunal Kapoor, CEO of Morningstar

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1. Live Event Kickoff in Chicago

Timestamp: 00:45 - 02:23

The episode begins with a vibrant live event in Chicago, one of the hosts' favorite American cities. Michael Batnick enthusiastically welcomes the audience, expressing excitement about the show's format and the opportunity to engage directly with fans. He introduces Callie Cox, Chief Strategist at Ritholtz Wealth, and Ben Carlson, Head of Institutional Asset Management and author of "A Wealth of Common Sense."

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2. Market Reflections: Surprises of 2025

Timestamp: 03:21 - 05:21

Michael Batnick opens the discussion by reflecting on the tumultuous year of 2025, characterized by a rapid bull market followed by one of the swiftest bear markets in history, with the S&P plunging nearly 20% ("03:21"). Despite this volatility, the market rebounded impressively, raising questions about underlying economic resilience.

Josh Brown shares his surprise at the enduring resilience of American households amid persistent economic challenges, pondering whether this behavior is cyclical or secular. He states, “'The resilience of households with everything, spending, investing... What if this embracing of risk is secular?'” (04:54).

Michael Batnick acknowledges the generational shift, noting that younger investors lack the historical "battle scars" of previous economic downturns, which may contribute to their risk appetite ("05:21").

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3. Generational Investor Behavior: Millennials vs. Gen Z

Timestamp: 06:07 - 08:59

Kunal Kapoor, Morningstar CEO, provides insights into how recent bear markets have influenced younger investors. He mentions that despite significant downturns in favorite stocks like Nvidia and Netflix ("06:07"), platforms like Robinhood have seen user growth, indicating sustained or even increased investment activity.

Callie Cox elaborates on the differences between Millennials and Gen Z investors. Millennials, shaped by the Great Recession, tend to hold more cash and exhibit more risk-averse behavior. In contrast, Gen Z investors, who faced market corrections early in their investing journey, appear less risk-averse and more willing to engage in active trading strategies ("07:07", "07:39").

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4. The Role of AI in Markets and Investing

Timestamp: 13:24 - 19:28

The conversation shifts to the impact of Artificial Intelligence (AI) on the financial markets. Michael Batnick anticipates AI as the defining investment theme of the decade, suggesting that corporate America’s continued investment in AI technologies has been a stabilizing force for the stock market despite recent downturns ("12:30", "13:45").

Josh Brown queries whether AI’s deflationary potential could offset concerns about government deficits and spending. Michael Batnick speculates that AI might serve as “'the mother of all disinflationary bombs'” (14:28), potentially offering solutions to inflation by enabling more cost-effective operations.

However, Kunal Kapoor highlights a hiccup with Nvidia’s stock significantly dropping due to international competition in AI technology, raising concerns about the sustainability of AI-driven market optimism ("15:25", "16:12").

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5. Private Markets and Morningstar’s Expanding Role

Timestamp: 38:37 - 56:45

Kunal Kapoor joins the discussion to delve into Morningstar’s role in democratizing access to private markets. Michael Batnick questions whether individual investors will become comfortable with private equity and credit terminologies, expressing skepticism about widespread adoption ("47:34", "48:40").

Ben Carlson responds by emphasizing Morningstar’s efforts to create a common language for public and private markets, facilitating investor understanding and access. He explains Morningstar’s expansion into private equity and credit data through acquisitions like PitchBook, positioning itself as a key player in bridging information gaps ("43:48", "44:37").

The hosts discuss the emergence of active ETFs and semi-liquid funds as innovative investment vehicles. Ben Carlson notes that Morningstar is developing methodologies to evaluate these new products, ensuring they meet performance and liquidity standards without compromising investor access ("55:23", "56:18").

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6. The Future of Financial Advice and AI Integration

Timestamp: 65:48 - 70:11

The panel explores the integration of AI in financial advising. Ben Carlson envisions AI tools automating administrative tasks, allowing financial advisors to focus on personalized, value-added services like client relationships and strategic planning. Michael Batnick speculates about the rise of B2C AI advisor applications, predicting their inevitability in the near future ("66:45", "66:47").

Ben Carlson introduces "MO," Morningstar’s AI avatar powered by ChatGPT, designed to provide instant access to Morningstar’s extensive data and research. He emphasizes the importance of maintaining data integrity and fair usage policies to protect Morningstar’s intellectual property as AI technology advances ("63:39", "64:51").

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7. Personalization and Customization in Investing

Timestamp: 57:59 - 67:26

Ben Carlson and Michael Batnick discuss the trend towards highly personalized investment portfolios. Ben Carlson highlights Morningstar’s tools that allow investors to tailor their portfolios based on unique preferences, such as excluding certain stocks or optimizing for tax efficiency. This shift towards customization aims to enhance investor satisfaction and retention, especially during market volatility ("57:59", "58:54").

Michael Batnick underscores the importance of data and research in enabling personalized investing, while Ben Carlson reiterates Morningstar’s commitment to providing the necessary data and frameworks to support this evolution.

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8. Closing Remarks and Acknowledgments

Timestamp: 69:03 - End

The episode concludes with acknowledgments of the event crew and a recap of key discussions. Michael Batnick praises the behind-the-scenes team for their efforts in delivering a seamless live event, ensuring listeners have access to high-quality content ("70:07"). Ben Carlson and Kunal Kapoor offer final thoughts on the importance of integrity and transparency in the evolving investment landscape, emphasizing Morningstar’s role in empowering individual investors with reliable data and insights.

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Notable Quotes

• Josh Brown (04:54): “What if this embracing of risk is secular?”
• Michael Batnick (05:21): “This generation doesn't have the battle scars of secular bear markets. They just haven’t seen one.”
• Kunal Kapoor (06:07): “They did get destroyed in 2022, all of their favorite stocks fell by 2/3.”
• Callie Cox (10:33): “The resilience of households, the resilience of the American consumer, the ability for Americans to just keep spending through incredible shocks has been really amazing to me.”
• Michael Batnick (14:28): “AI is like the mother of all disinflationary bombs.”
• Ben Carlson (44:37): “Morningstar is the paper of record for the mutual fund industry.”
• Ben Carlson (57:59): “We're now in the era of customized.”
• Ben Carlson (69:06): “Integrity still matters a ton.”
• Kunal Kapoor (66:45): “I think there will be a killer B2C AI advisor app in the marketplace. I think that's inevitable.”

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Key Insights and Conclusions

• Economic Resilience: Despite significant market downturns, American consumer and household resilience has maintained economic stability, raising questions about whether this is a cyclical or long-term (secular) trend.

• Generational Shifts: Younger investors, particularly Gen Z, exhibit a higher risk appetite compared to Millennials, potentially shaping future market dynamics.

• AI's Impact: AI continues to influence the investment landscape, serving both as a catalyst for growth and a tool for disinflation, while also presenting challenges such as increased competition and the need for robust data protection.

• Private Markets Expansion: Morningstar is actively bridging the gap between public and private markets, providing investors with the necessary tools and information to navigate and invest in private equity and credit opportunities.

• Personalization in Investing: The trend towards highly personalized investment portfolios is gaining momentum, driven by advancements in data analytics and AI, enabling investors to tailor their investments to individual preferences and needs.

• Future of Financial Advice: AI is set to revolutionize financial advising by automating routine tasks and enhancing personalized client interactions, although the human element remains crucial for building trust and delivering value-added services.

• Morningstar's Role: As a leading data provider, Morningstar is pivotal in democratizing investment information, creating common financial languages, and supporting the transition towards more customized and AI-integrated investing solutions.

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This episode of The Compound and Friends offers a comprehensive exploration of the current investment climate, highlighting the interplay between generational behaviors, technological advancements, and evolving market structures. The insights from industry leaders like Ben Carlson and Kunal Kapoor provide valuable perspectives for both novice and seasoned investors seeking to navigate the complexities of 2025’s financial landscape.

Transcript

[Josh Brown]

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[Ben Carlson]

Please welcome to the stage Josh Brown.

[Callie Cox]

Michael Batnik, Callie Cox, and Ben Carlson.

[Michael Batnick]

Let's go make some noise. Oh, man, I love these city Chicago. One more time for yourselves. Let's go. This guy. All right. All right. I think I got this set up, you guys. This is such a thrill for us. We are so excited to be here. We go all over the country. We do live shows. I can't believe we haven't been here yet. This is our favorite place, literally, in America. We love this city so much and this week has been so special to all of us. But we couldn't come here, do our grand opening of our office without seeing you guys, seeing the fans and seeing our friends. You guys are pounders. We love our pounders. And I gotta tell you, tonight is gonna be a really special treat. We've been working really hard to put this show together for you, and I hope everybody leaves having had a great time, learned a lot, gotten some new ideas to think on, and with a smile on your faces. So one more time, guys. All right, we've got an incredible program for you this evening. We're starting out with some of the compound favorites. I'd like to introduce you all to the chief strategist at Ritholtz Wealth. You know her, you love her. Callie Cox.

[Callie Cox]

Hey, guys. Pumped to be here.

[Michael Batnick]

Michael's boyfriend is here. They went shopping for Michael's shirt today. True story. Ben Carlson is the head of institutional asset management at Ritholtz Wealth. He is the author of A Wealth of Common Sense and several amazing investment books. Give it up for Ben Carlson, please. All right, so it is the beginning of June, 2025. We're not quite at the halfway point yet, but this has been a year of Unbelievable moments. It's like a situation where we come into the year into what we think is a huge bull market that lasts about six weeks. Then we have one of the fastest all time bear markets, the S and P at its low, you probably know better than me. Negative 19.6%.

[Callie Cox]

Yeah.

[Michael Batnick]

Almost an official.

[Callie Cox]

Right on the nose.

[Michael Batnick]

Almost an official bear market. And now we've gained it all back like nothing ever happened. And one of the things that I wanted to start with tonight is just to kind of get a sense of what the biggest surprises were so far this year. And Ben, we're gonna start with you. What was your biggest surprise year to date for the economy, the markets, whatever's on your mind?

[Josh Brown]

My biggest surprise tonight is Michael's outfit because he looks great. So I think my surprise is kind of a theme for tonight. And it's just the resilience of households with everything, spending, investing. And I think everyone has been thinking of this idea through. It's cyclical, right? But what if this is secular? So the Great Depression spawned a whole generation of people who are risk averse and frugal and that even like bled into the next generation a little bit. And what if the pandemic flipped a switch and people keep saying, just wait, just wait until sports come back and people can start betting on sports, then they'll give up on the stock market and just wait until all the excess savings from the pandemic go away. Then people are going to cut back and just wait until inflation hits and just wait until a recession hits and okay, just wait until a once in a lifetime crash hits. But what if this embracing of risk is secular? What does that mean? But I'm just, what does that mean going forward?

[Michael Batnick]

So it's so generational.

[Josh Brown]

What if it is? And what if, what if that, I don't know, leads to bubbles and I don't know what the implications are? I mean, throw this in my face in six months if we get a recession. But what if this is a total mind? We haven't had that in a very long time. Because after the Great Recession, it was the other way. It was the fetal position. And now what if we have a whole generation of people who are just, they have that switch now that says, no, I'm okay with risk. What does that mean?

[Michael Batnick]

People learn from their own experiences. And the experience so far of anyone that's ever sold anything is, oh my God, I can't believe I sold. And there's only a certain amount of times people can live through that paradigm and not get the message. And one time it'll be wrong. But so far it's been the right move every time to double down. And I sort of agree with you that there is a generational thing going on. And this generation doesn't have the battle scars of secular bear markets. They just, they haven't seen one.

[Josh Brown]

Yeah. And the once in a lifetime crash is rare by definition.

[Michael Batnick]

Right.

[Kunal Kapoor]

I think Ben's right, because these people, the younger investors that Ben's talking about, they did get.

[Michael Batnick]

What do you mean these people?

[Kunal Kapoor]

These people. You know who I'm talking about.

[Callie Cox]

Yeah. Say ages, please.

[Kunal Kapoor]

They got. They did get destroyed in 2022, all of their favorite stocks fell by 2/3. Nvidia, Netflix, like all the stocks that they were told to buy that went up and they didn't go anywhere. If you look at Robinhood's user growth, their deposit growth, it's up and to the right. Even though there was a two year bear market that we pretend didn't exist, for some reason, we just doesn't exist from 22 to 24. And then again earlier this year, Nvidia fell 35% in the first quarter. Like, they didn't stop.

[Michael Batnick]

I don't even remember it happening.

[Kunal Kapoor]

They didn't stop coming. I'm positive. I was there. So I think Ben's right. There is something to this idea that these people are not risk averse in this now. It's also like they're also young and so talk to them when they're 40 or when they're 50.

[Michael Batnick]

Do you see a distinction between I'll open this up to all you guys. Do you see a distinction between millennial investors versus Gen Z investors? Because I sort of do.

[Callie Cox]

I do.

[Michael Batnick]

You do.

[Callie Cox]

I do. So I did some research on this. So millennial investors, and I'm generalizing here, so remember, maybe you are not like this, but millennial investors started out scared. They were the type of investors that couldn't find a job during the great financial crisis. I wasn't looking for a job. I wasn't even in college. But both my parents lost their jobs during the Great Reception Recession. So I definitely felt it, even though I wasn't old enough to open a brokerage account. But millennial investors have consistently held higher levels of cash than Gen X and boomers at age adjusted.

[Michael Batnick]

Right. Still.

[Kunal Kapoor]

Wait, can I. To that point, the first thing that I bought. I'm a millennial. One of the first things that I was trading.

[Michael Batnick]

We're not going to hold that against you.

[Kunal Kapoor]

Was FAZ, which is the triple inverse bank ETF. So I was shorting banks, like, after they fell 90%, which. Whatever. I was learning. I was learning.

[Callie Cox]

And this is why Michael's on this stage right now.

[Kunal Kapoor]

I was learning. But you're right. Our introduction to the market was like, holy shit.

[Josh Brown]

Michael shorted the S and P to hedge against his wedding.

[Kunal Kapoor]

I forgot about that.

[Michael Batnick]

What's funny about you being triple short banks that people don't even understand about you?

[Kunal Kapoor]

I was working at a bank.

[Michael Batnick]

The punchline is you did that right after reading three books on Warren Buffett. That's what makes it fun.

[Kunal Kapoor]

And I did it as I was an intern at Citigroup, shorting the stocks, so.

[Michael Batnick]

Oh, wow. Warren Buffett. This is amazing. Wow.

[Kunal Kapoor]

No, I took all classes.

[Michael Batnick]

Let me do literally the exact.

[Kunal Kapoor]

Absolutely, absolutely.

[Michael Batnick]

Callie, what's your biggest surprise of 2025 so far?

[Callie Cox]

All right, before I answer that, I just want to point out that I'm the only one raw dogging this podcast right now, which is very cheap Market strategist.

[Michael Batnick]

We're very impressed.

[Callie Cox]

Oh, thank you. Thank you. So if I make a mistake, just know.

[Michael Batnick]

When did this term raw dogging, by the way, become applicable to literally everything?

[Kunal Kapoor]

And for those of you who don't.

[Michael Batnick]

Know what it means, it's highly disturbing because I'm from a prior generation, and we had a very specific definition of what that meant. I'm from the 1900s, and we didn't just casually talk about raw dogging.

[Callie Cox]

OK, well, hey, we're millennials. We're scarred in so many different ways.

[Michael Batnick]

All right, go ahead. Okay, so no computer. We're all very impressed.

[Callie Cox]

All right, so my biggest surprise of this year was, number one, Mark Zuckerberg getting a broccoli haircut, which kind of surprises me, but doesn't really, because that man is so insecure. My other surprise, which, honestly, Ben, you know, you kind of took mine, so I'll add something on. I mean, I agree. The resilience of households, the resilience of the American consumer, the ability for Americans to just keep spending through incredible shocks has been really amazing to me. And I'll say, too, the resilience of businesses to keep their profit margins afloat through four or five years of just operational turmoil. Yeah, it's amazing if you look at S&P 500 margins, and I will say that there's a difference here. Smaller companies, midsize companies, haven't had as much margin power here. But larger companies, even when you break out big tech, I mean, margins have been so healthy across.

[Michael Batnick]

So, like Visa, Home Depot, like, we don't. Not technology companies per se, but companies that are using.

[Callie Cox]

It's not the Mag 7 versus everybody else. And that's part of the reason why hiring has stayed. It's weaker now, but it's why hiring has stayed so solid. It's why income growth has been relatively good for the past four to five years. That's why we keep spending money.

[Michael Batnick]

So, you know, it's so weird. We accept that there is progress being made on so many fronts. When you think about medicine, for example, the way that, the way that we treat things now versus even 10 years ago, there's progress in every field. But we have this blind spot. We forget that there's progress in the way people run companies. They're just better at it. They have all the lessons of CEOs and CFOs from the 70s, the 80s, the 90s. They'll make mistakes, but they don't make those mistakes. And we sort of like, we look past that, like, yeah, but there's still stocks. Stocks are better. I know that sounds bubbly and toppy and blah, blah, blah, but the foundation.

[Callie Cox]

Keeps building and building and building.

[Michael Batnick]

I agree with that.

[Callie Cox]

And companies went through the biggest supply shock in history. I would argue history in 2020 and 2021. So tariffs are devastating. I'm not out here saying that tariffs are great policy, but companies are in such a good position to deal with them because we went through a dress rehearsal.

[Josh Brown]

We also had millions of people start working from home out of nowhere. If they would have just decided, let's all do this, it would have taken a decade's worth of McKinsey studies to figure out what the implications are going to be. But we just did that in a matter of weeks and nothing broke. Like, things kept going and corporations kept operating.

[Callie Cox]

Yeah.

[Michael Batnick]

One of the consequences of that is it's the strangest thing. If you go to a shopping mall on a Tuesday at 2 o' clock in the afternoon, it's filled with people and you're like, who the hell are these people? How would you know? How are they doing this? I have a return at forever 41. I'm allowed to. But you say to yourself, who the hell are these people? And then you see an airpod in their ear and then you hear them take a customer service call and you realize, oh, this is why everyone's shopping, because they're multitasking their job. But that's a whole other story. Michael, what was your biggest surprise of 2025 so far?

[Kunal Kapoor]

I want you to go first.

[Michael Batnick]

Okay. Mine Is that mine? Is that there was not even a hiccup in the AI theme. So arguably, I think in 2030, if we look back and we say what was the biggest investing theme of the decade? I'm pretty sure it's not going to be inflation, it's not going to be tariffs, it's not going to be us versus international or vice versa. It's going to be AI. Like, that's going to be the decade defining investment theme. And I cannot believe we had a 20% S&P haircut. And the response to that from corporate America is to come out on their conference calls and double and triple down on everything they said they were going to spend on AI. I would argue it probably saved the stock market in April, the earnings season, when Microsoft and Meta and Amazon and Alphabet and company after company came out and said, no, we're still buying GPUs, still spending 80 billion, still spending 100 billion. That's probably the reason why the S and P is back to more than any other reason, right? Because we have no trade deal. We have a trade deal with England. Somehow, against all odds, we managed to negotiate a trade deal with our closest ally.

[Josh Brown]

We can now all say wanker in the States.

[Michael Batnick]

It's incredible. We did it. But I think like, why is the S and P all the way back? The answer is the AI theme stayed in town.

[Josh Brown]

I have a question for you because I asked Michael this on Animal Spirits. And so there's all these people who for years and years are worried about.

[Michael Batnick]

What are you touching him? It's almost too. Chris is going to cry.

[Kunal Kapoor]

Oh, I keep going.

[Josh Brown]

They're worried about deficits and government spending. Isn't AI the solution? Like, you can't be worried about government spending and deficits and also worry that AI is going to be deflationary. Isn't AI just. If AI is this big force and it's going to be deflationary, if it's this big, big as everyone says it's gonna be, isn't that the solution? And aren't we gonna have to spend more money? Isn't it gonna be like a push and pull?

[Michael Batnick]

So I personally just. And this is all anecdotes, I have no data, but I think AI is like the mother of all disinflationary bombs.

[Josh Brown]

Right?

[Michael Batnick]

My personal opinion, I talk to business owners, I talk to people that are executives and they only afternoon I do at the mall.

[Josh Brown]

And your theme of buy the robots, like that's the hedge.

[Michael Batnick]

I honestly think that that's the way we get out of. That's the way we get out of inflation is not going to be because like we're, we're better at negotiating with countries than we were. I think it's because we just find ways to do things cheaper. So I kind of agree with that.

[Kunal Kapoor]

All right, a few things I have on my list. I'm surprised nobody mentioned this, but you said that there was no hiccup in the story and you're 100% right on the capex spending side. Yeah, Google, Amazon, they're not relenting. But there definitely was a hiccup because Deep Seek was a tape up. Right. That was over the weekend too, wasn't it?

[Michael Batnick]

Yeah.

[Kunal Kapoor]

On a Monday, Nvidia opened down. Nvidia opened down 11% that day. It was one of the worst days for the stock in a couple of years. And because the market is back up year to date, like we forget what just happened. Nvidia fell 37% peak to trough this year.

[Michael Batnick]

Like it just the people who weren't paying attention during Deep Seek weekend, what was like the news, what was the thing that triggered that sell off?

[Kunal Kapoor]

This Chinese company was able to replicate or even exceed the models that Nvidia and all of these companies are putting out much cheaper, faster. And it called into question, wait a minute, do all these companies need to be spending as much as they are? And it turns out that they are. So. Okay. I'm surprised that nobody mentioned international stocks.

[Callie Cox]

Oh.

[Kunal Kapoor]

Because coming into the year it was.

[Michael Batnick]

Do those things still trade?

[Kunal Kapoor]

It was as bleak as it's ever been from the point of diversified investors and I'm talking about globally diversified investors in the U.S. why do I own Europe? What are we doing? It really felt like it just might continue forever. And so the fact that international stocks are having their best quarter relative just to start a year in 25 years. Holy shit. Nobody had that on their parlay.

[Josh Brown]

If it's up 18% this year and the S and P is up to unbelievable.

[Michael Batnick]

Nobody, nobody believes that that can continue. Do you talk to anyone that thinks that that's a sustainable outperformance like developed markets versus us?

[Callie Cox]

I think it can actually.

[Michael Batnick]

No, I agree that it can, but do you think anyone thinks that? Oh no, it's like a very unpopular.

[Josh Brown]

Couldn't we also see the dollar unwind too? And that's the big tailwind. Is that the dollar? Because the dollar has been strong for years.

[Callie Cox]

Yeah, well the dollar structurally, yeah, is helping because a lot of these investments are priced in dollars. But I mean it's A bit of a tech story, because banks are a big sector for developed markets. It's a bit of a tariff story. Germany's step into, you know, more fiscal.

[Josh Brown]

That's the biggest thing, I think, is them.

[Callie Cox]

I think that was a big surprise.

[Josh Brown]

Spending money.

[Callie Cox]

It was a surprise, and it was a major pivot.

[Kunal Kapoor]

I've got three more real quick. Number one, I hope everybody's caught up. It's too late for spoilers. They really killed Joel in episode two.

[Michael Batnick]

That was a big surprise. People that played the game knew he would die, but even they didn't think that they would kill him in the second episode of the second season.

[Kunal Kapoor]

All right. I can't believe that stocks are up. Like, think about how dark it was on April 9. And the V shaped recovery has definitely caught me off guard. I am surprised. And then my fourth surprise is at the bottom in April, when bitcoin was at 74,000. I was like, am I an idiot? Why didn't I sell? And now it's at 110 or wherever it's trading today. Unbelievable.

[Michael Batnick]

Are you still 10% Bitcoin?

[Kunal Kapoor]

What?

[Michael Batnick]

Are you still 10% Bitcoin?

[Kunal Kapoor]

That was between us. No, I own words. No, I have more than 10% and it's. It's too much.

[Michael Batnick]

Okay. I mean, I agree with you. That's a huge surprise. I can't believe I didn't think of it.

[Kunal Kapoor]

And IBIT just had the largest inflow ever in May. Incredible. What a turnaround.

[Michael Batnick]

Yeah. Were you surprised by bitcoin breaking the mold of everyone thinking it's just another nasdaq, it's just another tech trade, and then all of a sudden, it literally does its own thing and outperforms gold. Be surprised by that.

[Callie Cox]

I think it's still a shape shifter.

[Michael Batnick]

Say more.

[Ben Carlson]

I.

[Callie Cox]

Depending on where interest rates are. Depending on where sentiment is. Yes. Or depending on where what headlines are coming out like. Yeah. Bitcoin can act like gold. Bitcoin can outperform gold. We can call it the safe haven. But I think that still flips if.

[Michael Batnick]

You just pick a time frame. You could say, this is Nasdaq or pick a different time frame. This is digital gold. Yeah.

[Josh Brown]

It's not.

[Michael Batnick]

And then sometimes it does nothing. Like any of them do.

[Josh Brown]

Remember three years ago when everyone said, well, bitcoin is like, that doesn't do anything. Ethereum. That's gonna be smart money and defi and all these things, and bitcoin is still the winner. Even the people in crypto were saying, bitcoin is like, it's old. It doesn't. And that's still the winner. It's like the brand name.

[Callie Cox]

Do you mean within the crypto industry? Because, I mean, I think that's pretty much settled. It's like Bitcoin or nothing. Sorry, not a recommendation, I promise.

[Michael Batnick]

I think ethereum just rallied. Eth just rallied like 50% though, in the last three weeks.

[Josh Brown]

Ish.

[Kunal Kapoor]

Wild. All right, let's do a chart. John, if you please. So, Callie, I'm sure you've seen this data series before. This was new to me. So Liz Ann Saunders tweeted personal interest income. You know about the series?

[Michael Batnick]

What's personal interest income?

[Kunal Kapoor]

Okay, yeah. So personal interest income. I'll turn it over to you. Callie hit a new high in April and there's so much worry about the deficit and not enough attention being paid to the fact that it's our asset. Like the biggest holder of US Treasuries is us and it's producing.

[Michael Batnick]

Are we using that as a crutch to just be like, so what if the debt grows? Where are the holders of the debt? We're going to be.

[Kunal Kapoor]

I'm just saying that this is also part of the story.

[Josh Brown]

So what has been the best thing to say though, for everyone who's ever said the US Is going bankrupt? So what has been the right answer? Because what has. Have we seen a crisis yet? Just wait, it's gonna happen. I've been hearing that my whole life.

[Michael Batnick]

My entire career has been somebody in the background saying, yeah, but the dead. And it only goes in one. Obviously it only goes in one direction. The deficit lessens or gets greater.

[Kunal Kapoor]

But yeah, but don't you think that this is the first time, at least in my memory, that the market is worried about the debt? Because I think that gold is responding to it. I think for the strength.

[Josh Brown]

You don't think gold is more responding to the chaos of the tariffs?

[Kunal Kapoor]

No, I don't.

[Josh Brown]

You think gold finally just now cares about the debt?

[Kunal Kapoor]

Yes.

[Michael Batnick]

Do you think.

[Josh Brown]

Get out of here.

[Michael Batnick]

Do you think the 30 year treasury breaking above 5% yield on the heels of something taking place in Washington is enough evidence to say the market finally cares about what we do with our fiscal policy?

[Callie Cox]

I think for now, yeah. And I agree with Michael. The market is reacting to the fact that, you know, the deficit could explode by 4 trillion or I can't remember the number for the big beautiful budget bomb, whatever we're calling it these days, but trillions of dollars being added to the deficit, finally the market is responding. That's why we're seeing the 10 year yield break away from economic fundamentals. Same thing with the 30 year. Yeah, that worries me. Even though you can't really put a finger on a worrisome number or the fact that the deficit is still expanding, I compare it to eating chocolate chip cookies, right? Like there's this bakery in Charlotte that has amazing chocolate chip cookies.

[Michael Batnick]

Shout it out.

[Callie Cox]

Salted melon, salted.

[Michael Batnick]

Okay. All right.

[Callie Cox]

Everybody's like, woo. I have no idea what that is.

[Michael Batnick]

This is the donut crowd.

[Callie Cox]

Chicago.

[Josh Brown]

Chicago. My counterpoint is the 30 year trades at a spread of 70 basis points to the 3 month T bill. Why isn't it way wider than that?

[Callie Cox]

And it's a good point. It has been way wider in history.

[Kunal Kapoor]

But rates up, dollar down, gold up. That is the market telling you that the deficit is now front and center.

[Callie Cox]

Yeah. And dollar down is also a reason to worry about this because usually the.

[Josh Brown]

Dollar down is because foreign investors are selling, they're moving money back into their countries.

[Kunal Kapoor]

Yeah. Why?

[Michael Batnick]

What do you mean why?

[Josh Brown]

Tariffs.

[Michael Batnick]

They're talking about taxing foreign capital.

[Kunal Kapoor]

Yeah, I'm saying it. So there's a lot of words, not just one thing.

[Michael Batnick]

It's not just one thing. We're on the same page. Do we want to do recession indicators really quickly? This is worth getting into.

[Kunal Kapoor]

Yeah, this is. So this is the thing that like we just keep talking about. It's, it's all about the labor market, right?

[Michael Batnick]

Yeah.

[Kunal Kapoor]

What is it going to take for us to stop our spending habits?

[Josh Brown]

Look at Michael's shoes. We're not going into recession if he knows.

[Michael Batnick]

No way. No way. So the best recession in the driver mocks.

[Kunal Kapoor]

All right. There is now, according to Kalshee, a 31% chance of a recession this year. It got as high as 70% earlier. And bank of America, who serves everyone, Brian Moynihan said, let's see.

[Michael Batnick]

So it's a live podcast.

[Kunal Kapoor]

Consumer. What? I just relax. They can wait. Consumers are spending money. That means the U.S. economy is an anchor to windward. That's a weird word, to windward that very few economies have because that's huge consumer based spends and our customer base supports that across the board. Perhaps a better quote from MasterCard. Last time that we all spoke was at our earnings call. We had the first quarter data and we had up until the 20th of April. So everybody was saying just wait, just give it like a few weeks, a few months. They're going to change. People are super bearish. They're going to stop spending. Well, he said now if you include the first three weeks of May, we see exactly the same. So spending trends have largely been the same. If you look at the headlines, if you look at the sentiment surveys, and we've just seen one yesterday, I was surprisingly positive. You look at all the rhetoric, you see a lot of the headlines and it really hasn't translated into consumer behavior. So enough about the sentiment surveys. It's all political. As long as we don't see a spike in initial jobless claims, we'll get data later this week from nfp. As long as the labor market is fine, there's nothing else to talk about. No more leading indicators.

[Michael Batnick]

So I want to add to that. There's also too much money. There's too much money to have a recession. Let's put up the cash obsession chart. So you could interpret this as a sign of people being risk averse and afraid of investing. I'm not sure that's the whole story. I just think that we are still feeling the reverberations of $14 trillion worth of COVID era stimulus. It's still sloshing around the economy. It's still got velocity and people are still holding onto tons of cash, tons of buying power. And it's hard to get them to act like they're on the verge of a recession when they're as flush as they are.

[Josh Brown]

What if, what if this is also just a baby boomer thing where they're preparing for retirement and it's going to make the fixed income money market stuff look weird for a while.

[Michael Batnick]

It could 100% be an element of that. This is money market fund assets. This is not, this is not behaving as those stocks are in a bull market.

[Kunal Kapoor]

Is this my best call ever?

[Michael Batnick]

What's that?

[Kunal Kapoor]

Is this my best call ever?

[Michael Batnick]

It's pretty great call.

[Kunal Kapoor]

I said it's going to stay.

[Josh Brown]

This is.

[Kunal Kapoor]

That's cash.

[Michael Batnick]

So here are some numbers I want to attack.

[Josh Brown]

Rates are still pretty high though. You talk to me at 3%.

[Michael Batnick]

So Michael's call is that we will not see money leave money markets like the money that's in cash stays in cash.

[Josh Brown]

You might be right.

[Kunal Kapoor]

I said this two years ago because it's just inertia like this. It's not respond to the stock market. It moved into higher yielding instruments and it's just staying put.

[Callie Cox]

So what if the rate comes down.

[Michael Batnick]

Staying as of May, $6.95 trillion in just money market funds. But when you look at the Federal Reserve Z1 financial accounts, there's even more money than that. There's about 19.44 trillion when you include total currency and deposits, inclusive of money markets. So bank accounts, savings accounts. $20 trillion is a lot. And we have a couple of charts just to illustrate this for you guys. And I think this is a really important visual. The first one is money market funds alone. So that's the 7 trillion. But then throw in all the other cash that's not in money market funds. This is total. This is total cash. This is unlike anything we've ever seen. I'm just showing you 10 years.

[Josh Brown]

See, this is the weird dichotomy to my risk thing. People are really risk taking, but they're also in other ways not.

[Michael Batnick]

They also have 20.

[Josh Brown]

It's a bizarre environment.

[Kunal Kapoor]

There's too much money. You're right. Josh, we're going to talk to Kunal later about this. But look at, like private markets. Yeah, Everyone, it's just sloshing from. It's too much.

[Michael Batnick]

Agree on the resilience of the consumer. I agree with Michael's take. I think the bottom line is if people are working, they're going to spend money. And people will absolutely change their spending habits if and when they're not working. But we're still at 240,000 initial claims, which is a very normal number. Not at all confirming.

[Josh Brown]

Let's say we have a recession, whenever that is, and unemployment goes from four and a half percent to 7% or something. Is the other 93% still going to be spending money or are they going to batten down the hatches because their neighbor lost their job?

[Callie Cox]

I think assuming that is adjacent to saying recessions only affect a small number of people. But I think people forget that recessions affect everybody in one way or another. Your family member loses their job, your favorite pizza place down the street loses. You might get a pay cut.

[Josh Brown]

Yeah. Or you don't get a raise.

[Callie Cox]

Yeah. There are these little unquantified effects that happen. Even fear. I see this happening all around me. Should I save my own money? Should I stop spending here and there? I think that happens. And that's harder to quantify.

[Kunal Kapoor]

So now that in my opinion, the tariff risk, the headline risk is behind us. The VIX is at seven.

[Callie Cox]

Yeah. You better knock on wood, buddy.

[Michael Batnick]

You think it's behind or we've gotten used to it?

[Kunal Kapoor]

No, it's behind us.

[Michael Batnick]

Okay. All right.

[Kunal Kapoor]

I'm not saying that it can't get. It can't flare up again, but the VIX is at what, 16?

[Callie Cox]

I do think you're right, though, in that we saw Something so crazy on April 2nd that I feel like it just kind of pushed the bar.

[Josh Brown]

Every Taco Tuesday, he's going to announce a new tariff. You just wait.

[Kunal Kapoor]

Think about on Friday, he said 50% tariffs on Europe. The market had every reason to give back a little bit right after just being up. It closed at the highs of the day. Yields didn't move. Like nobody cares about tariffs anymore. So my question to you, Callie, is obviously, nobody could see the future, but what are you worried about in the back half of the year?

[Callie Cox]

Well, actually, I have a chart for this, John. Can you throw up continuing claims? It'll go. It's going through.

[Michael Batnick]

It's coming. It's coming.

[Callie Cox]

Okay. So I think the job market is pretty solid right now. I think it's weakening. And I think both those things can be true. And what you said, Michael, it really does come down to, you know, if Americans are spending money, then we're good. We're the best at spending money in the world. Consumer spending is 70% of GDP. Most Americans get their primary income from their jobs. If you have a job, you're spending money. So this is continuing claims. This is jobless claims, unemployment claims. If you're in the second week or longer of unemployment claims, not in your first week, not in your initial week, you fall into this number right here. And this is claims divided by the total workforce. To put some context there, continuing claims are still quite low, but they're moving in the wrong direction. They're moving higher. And usually when you see this trend moving higher, then a recession is around the corner, probably coming soon. Based on history, we haven't quite seen that. Claims have been moving higher for a while. But I worry with all this extra pressure, the DOGE cuts the tariffs, which ultimately, somebody's going to pay that price. It's going to be consumers or it's going to be companies. Mexico, they're gonna pay it.

[Michael Batnick]

Mexico pays it. So can I counter continuing claims?

[Callie Cox]

Yeah.

[Michael Batnick]

Can you show my restaurant chart?

[Kunal Kapoor]

Show Josh at the mall chart, John.

[Michael Batnick]

Okay, that's not it. I'll give you guys a second. So this is the s and P 1500 restaurants sub industry group versus the regular equal weight. Versus the regular S&P 1500 equal weight. And then for fun, I threw in the Fidelity Select Leisure portfolio.

[Josh Brown]

Why is there an s and P 1500 restaurants index?

[Michael Batnick]

Nobody's trading. It's not an ETF, it's an index. Nobody's trading it.

[Josh Brown]

I feel like you made this up.

[Michael Batnick]

I did not make it up. It exists. Shout to. Well, so wait, so let's, let's just for one second, let's spend a second on this. The Fidelity Select Leisure portfolio is up 18% over the last year. The equal weight s and P 1500, as you can see, is effectively flat. It's done nothing. And even the restaurant group is up about 12%. So anything related to consumer spending on leisure or a quick meal out with the family, all of those things are absolutely fine.

[Kunal Kapoor]

Doordash.

[Callie Cox]

But can I counter that?

[Michael Batnick]

Do you know what's in this portfolio? We have a table. Cali, McDonald's, Booking Holdings, Starbucks, Hilton, Marriott, Chipotle, Royal Caribbean, Airbnb, Domino's. This is my gauge. People could say whatever they want to a survey. I'm telling you what the stocks are doing. They're mostly up and to the right.

[Kunal Kapoor]

I spent $23 on a smoothie today from DoorDash.

[Callie Cox]

And then he went to Marine Layer and bought a new shirt. That's a resilient consumer right there. So I completely agree. I think the goods versus services conversation is a little different because of course tariffs are in. The tariffs are a reality that we have to consider right now and we still haven't seen a lot of those costs passed on. I mean, I've seen little anecdotes here and there of like a tariff, a tariff fee on like the final bill of like a shirt that you buy online. But I do still wonder if we're waiting for the, for like the economic fall out there and if when it happens, it's like the pressure that cracks.

[Michael Batnick]

Those stocks will turn fast.

[Josh Brown]

Well, the labor market thing is weird too because people keep saying, listen, in the next recession, what if a lot of the jobs don't come back because of AI? Like, what if we see softening in the labor market because of AI? Is it too soon to worry about that where the economy is still doing okay and the unemployment rate is going up because people are losing jobs to AI, Is that like too, too much of an immaculate handoff at this point?

[Callie Cox]

I mean, it depends on who you ask. If you ask a coder in Silicon Valley who can't find a job right now because pro and business services hiring has been pretty much flat, then yeah, that's a problem. We see it here and there. But overall, I mean, white collar jobs haven't been driving the hiring anyway. So it could be this handoff that we, that we eventually hit. But I think AI is going to take five or 10 years to work its way through the economy anyway.

[Michael Batnick]

So to wrap this conversation, I want to Ask you guys, what do you think are the biggest stories to watch this summer? Aside from like the, you know, the very obvious stuff that's in the headlines every second of the day. What is the thing that you're watching for right now, Callie?

[Callie Cox]

God. I have to go first.

[Michael Batnick]

You go last.

[Callie Cox]

This is what I get for not bringing a laptop. Okay, so the job market. Michael's right. Spike in initial claims. I wonder if we see that spike in initial jobless claims. First time claims for unemployment benefits, if that's less of a leading indicator than it usually is, given this economy is so bifurcated and kind of funky. I think about that a lot. But high frequency labor market data, I think the job market is a big story. Obviously tariffs are a big story too. What actually happens there, how it affects economic data, how it ultimately affects spending. I mean, that's where I'm laser focused right now to the point where I do get a little nervous that I'm missing things on the perimeter.

[Michael Batnick]

Ben, what are you watching this summer? What do you think is going to be important?

[Josh Brown]

What if I think this was on our list? We didn't get to it, but for years people were worried about, well, the yield curve is inverted, it's over, it's doom. What if the yield curve uninverting is just the economy normalizing finally and things are just getting back to normal a little bit, whatever that means.

[Michael Batnick]

Yet we seem to like not be talking about yield curves anymore. We're now just talking about the absolute level of rates. It seems to be like a bigger deal. What are you watching this summer?

[Josh Brown]

A lot of shitty horror movies.

[Kunal Kapoor]

I do want to see the new one. What's it called? Bring Her Back. I'm very excited for that one. I am curious to see what the Fed does. How many cuts are we pricing in now too?

[Callie Cox]

I think two or three.

[Kunal Kapoor]

Despite the stock market and despite me spending $23 at DoorDash today for a smoothie, I do think financial conditions are too tight, particularly for the first time home buyer. And I think rates need to come down. I think we're ready for it. So I'm excited to see what Powell.

[Josh Brown]

Mortgage rates going from seven to five would be a huge stimulus. Right.

[Callie Cox]

There was a survey about this from John Burns how I think the question was around, you know, where would you step out and potentially look at buying a house? And 5% was the magic number.

[Josh Brown]

There's a ton of buyers on the sidelines right now just waiting.

[Callie Cox]

Yeah.

[Michael Batnick]

And $20 trillion just saying.

[Josh Brown]

Yeah.

[Michael Batnick]

Right. So. So from my perspective. I think it's the younger people who are going to bail us out of this whole thing because they're not risk averse. They do want to spend. And if you put them in a position where they can actually buy real estate, the mold, the multiplier effect of the next generation literally becoming their parents, which happens every generation, I feel like that's a really powerful economic tailwind and we're not going to be crying about deals with China. So I'm hopeful for that reason. I think we have the people in this country, they want to live a normal life and spend money and invest and go out and do things, and they're just waiting for certain things to fall into place. You guys like that idea? Yes. Can we end it on a note? All right, ladies and gentlemen, Callie Cox and Ben Carlson. All right, we're gonna take a 30 second break while they change the set and we'll come back with Kunal Kapoor. Thank you, guys. All right, are we back on? All right, guys, thanks for bearing with us. This is a really special, this is a really special conversation that we're going to have. I am so excited to introduce our next guest. Kunal Kapoor is the CEO of Morningstar. Before assuming his current role in 2017, he served as president, responsible for product development and innovation, sales and marketing, and driving strategic prioritization across the firm. Kunal is a Morningstar lifer. He has held a variety of roles at the firm. He was the director of mutual fund research. He was part of the team that launched Morningstar Investment Services before moving on to other roles. He's been a director of Business strategy for international Operations and later became President and Chief investment officer of, of Morningstar Investment Services. Ladies and gentlemen, please give it up for Chicago's own Kanal Kapoor. Welcome.

[Ben Carlson]

Thank you.

[Michael Batnick]

All right. This is, this is a home. This is a home game for you. It is pretty exciting. So I wanted to start, I wanted to start with what youth? Before we get into Morningstar stuff, what do you see as the state of the individual investor in 2025?

[Ben Carlson]

Let's not sort there. Can I do my surprise?

[Michael Batnick]

Sure. Your show.

[Ben Carlson]

So, I mean, we're in Chicago. Nobody mentioned the Cubs. I feel like that's a surprise.

[Michael Batnick]

Your chance.

[Ben Carlson]

And what are you watching this summer? Probably most people are watching the Cubs.

[Michael Batnick]

Okay. Or the Tigers, but go on.

[Josh Brown]

Who.

[Michael Batnick]

Not. Not in Chicago.

[Ben Carlson]

The Tigers are just getting lucky because they're beating up on the white salary.

[Michael Batnick]

Big Cubs fan, Big Bears fan.

[Ben Carlson]

That's good. Yeah. Bears are gonna make it too soon.

[Michael Batnick]

You're a true Chicagoan through and through. Okay. We love it. Now, what is the state of the individual investor in 2025?

[Ben Carlson]

Okay. It's pretty bright, I think, as you guys have surmised. There's. I think people are investing and most importantly, buy and hold has really taken hold. Right. If you go back and look at our data, you really see patterns where people are increasingly investing and investing for the long run, which is a great thing. And they're investing in a low cost way. I think the state of the investor is good. You showed some charts and made some points about risk seeking. And there's certainly risk seeking going on. People probably have a little bit more leverage and are investing in ETFs, even single security ETFs, and things like that. So there's a little bit of animal spirits, so to speak, I think, out there.

[Kunal Kapoor]

But your employee and my friend Jeffrey Patak recently wrote that the Vanguard Total Stock Market index fund has $1.7 trillion in net assets, which is the largest fund of all time.

[Ben Carlson]

Yeah, it's amazing. I mean, I remember when I started Morningstar, I mean, indexing had still not fully bloomed, right. And people considered what John Bogle was doing as a bit of a sideshow. So. And you kind of look at it today and wow, huge change.

[Michael Batnick]

You, you recently celebrated 20 years of Morningstar as a public company. So Morningstar went public on May 3, 2005, and you wrote a really good piece just kind of commemorating the moment. And I want to quote you and have you react. You said our business has grown 10x from a revenue and operating income perspective over that period, we have grown from a team of 1,000 to a team of more than 10,000. Shareholders have been rewarded with the stock compounding at approximately 15% on an annualized basis, which, by the way, is incredible. You say while we did not pay a dividend at the time of going public, if you bought shares at the $18.50 IPO price, your yield on that original price based on the 2025 dividend payout is approximately 10%. And we looked this up. There were 662 firms classified as a financial. Since you guys came public, you were the 25th best performer overall with a total return of 1,615%. Give that a round for Morningstar show. That's amazing. Did you know those numbers?

[Ben Carlson]

I did not. But I want to know who the other 24 are.

[Michael Batnick]

All insurance. All insurance.

[Kunal Kapoor]

So Morningstar is like the paper of record for the mutual fund industry. For people that advise on 401ks. There are plenty of providers and services where if you are not have a certain Morningstar rating, you cannot be like, it is legit. It is a very big deal. But Morningstar is so much bigger than just the rating business. What else does Morningstar do that people in this audience, myself included, just might not be aware of?

[Ben Carlson]

Yeah, so if you think about it, Morningstar actually was founded here in town. Our founder is Joe Mansueto. Founded the company in his Lincoln park apartment in 1984. And you're right, we started with mutual funds.

[Kunal Kapoor]

And.

[Ben Carlson]

And Joe was an analyst. And what he found was that there was no easy way to actually figure out what various mutual funds were doing. And he wanted to compile that, and he sort of saw this growth trend, and obviously Morningstar benefited greatly from that. And to this day, we are the record when it comes to managed products. And by the way, there's tons of managed products now over and above mutual funds, even active ETFs, managed portfolios, all those have been helpful. But the investor portfolio has changed quite a bit since I started. So used to be pretty simple. When I started stocks, bonds, cash, like, we kind of went in there, and that's kind of what your portfolio looks like, what mine look like, and it was relatively simple. The investor portfolio has changed. And today the investor portfolio is a lot more people own private equity, some people own vc, some people take lenses such as ESG Investing and put it to work. They have preferences.

[Michael Batnick]

That's illegal now.

[Ben Carlson]

Well, preferences that they're trying to put into a portfolio. And you also are looking at things from a data perspective where there's so much more data collect. And so Morningstar, over time, has essentially tried to be where we can serve the investor. And so if you look at PE and VC markets, we own PitchBook, which is the largest provider of data in that space. We're now the fourth largest credit rating agency in the world. And by the way, among the four you referenced, that the three have already changed their rating on US Debt. We have not. So we're the only.

[Michael Batnick]

You don't make that decision, though. You got a team that makes that decision.

[Ben Carlson]

Our analysts make that decision. Yeah. So that's sort of interesting. Right. And so we kind of evolved our business in that way as well.

[Kunal Kapoor]

I didn't realize that you were the fourth largest. And no offense, when I think of the rating agencies, I don't think of Morningstar. I think of the big three.

[Ben Carlson]

We're going to change that.

[Kunal Kapoor]

Okay.

[Michael Batnick]

You're the. You're the lone bull on the US Treasurer, treasury, as, as an issuer, as a.

[Ben Carlson]

Well, we certainly, we certainly stuck by a rating. Yeah.

[Michael Batnick]

Okay. All right. You have talked about this idea that there is a crucial need for a common language of investing. One of the ways that I think about Morningstar is that Wall street traditionally has made a lot of its money from information asymmetry. They know things that the customers can't know, wouldn't know. Even if they knew, they wouldn't know what to do with that information. I see you guys as a force for equalizing that information asymmetry and arming people who are making decisions with their own money with way more information than anyone else has a vested interest in giving them. Do you see yourselves that way? And what do you mean by a common language of investing?

[Ben Carlson]

Yeah, absolutely. So let me start on the first point, which is when I first came into the business, and I think to this day, people often say retail investors are sort of the dumb money. This is like a trope that you sort of always here. And when we looked at the data across Morningstar, one of the things we found is actually retail investors, particularly in their retirement accounts and longer term investments, tend to stick with things. And so we have this really interesting thing where we look at published returns versus what we call investor returns or dollar weighted returns. Exactly. So it's actually, if you're putting a dollar in, how has it performed? And generally speaking, over time, retail investors, you see, kind of buy and hold and stick with things. And yet there's sort of been this narrative that they don't. And so one thing we've tried to sort of point out is actually that a lot of the market movements are not coming from retail investors. And so it's kind of been unfair that that has happened. But one thing Morningstar has done over time is at least when it comes to mutual fund investing, stock investing, we've created this common language. See, when you think about moats, Buffett popularized IT companies and moats. And we took it a step further and kind of developed it beyond there. When it comes to mutual funds and ETFs, we have STAR ratings style boxes. What has been lacking as more and more people have gotten into PE and VC is there's no common language. So how do you think about liquidity? How do you think about leverage? How do you think about the fact that suddenly in your portfolio you might have something that's very liquid that you can get out of today, this minute, and something that you may not be able to get out for seven years. There's not a common framework and language to look at that and assess it. And so when we think about the future, we think public and private convergence is real. I mean, there's only 6,000 public companies in the US today, more than 12,000 PE backed and even more VC companies. And so you need language for people to be able to assess what that means in their portfolios.

[Michael Batnick]

Do you think we're going to go to a place where the ordinary investor. First of all, I hate the dumb money paradigm. I think the industry benefits greatly from this idea that people underperform their own investments famously, and therefore they can't do any sort of investing without an adult holding their hand. I've always hated that. We don't use that in our marketing as intermediaries. We don't believe in that concept. We talk to really savvy, accomplished individual investors who have never been advised, and we talk to people who hand up, I need help. I'm not good at this. We talk to everyone. But do you think we'll get to the point in this public private convergence where the ordinary investor is comfortable with terminology like IRR and can even begin to vet a private credit opportunity or a private equity opportunity and understand the underlying holdings and what risks they're taking? Because I'm a little bit skeptical that we'll ever quite be able to get there.

[Ben Carlson]

I think you don't necessarily need to have terminology like irr. We were talking back there about what the future looks like if you're an analyst and what kinds of things you should be studying. Right. And I would say it's the job of a firm like Morningstar to tell that story and create the language that's accessible to everybody. So when we talk about common language, it's just that, right. Like jargon sucks. Let's just be honest about that. And it doesn't need to be as complicated as needing to say it's irr. There are other things that we can certainly help with to kind of demystify that. Do I think every aspect, though, of private markets and VC investing is going to be fully accessible? I don't think so.

[Kunal Kapoor]

Just the bad stuff.

[Ben Carlson]

No, I think there will be good stuff. And look, if you look at credit, for example, what was one of the big sort of changes post GFC global financial crisis? It's that banks have become limited in terms of their ability to lend, Right. And so what happens, you do have newer firms emerging and you have firms like Apollo and Blackstone and others kind of getting into the business And I think reputationally they do care, and it is going to be important. And over time, you're going to see a normalization, for example, between what's called private credit and high yield. And you already sort of see that in portfolios. So I think that that can work.

[Kunal Kapoor]

I agree with you. It is coming. There is no doubt about it.

[Ben Carlson]

There's going to be a lot of crap, and you always have to watch out. And again, that's our job to help people sift through that.

[Kunal Kapoor]

So blackrock is all in. Larry Fink, in his annual letter, spent the first six pages talking about the explosion of private markets. But the problem as I see it is how do advisors and investors really, and maybe this is where Morningstar comes in, really diligence these companies. Are we looking at terms, are we looking at term sheets?

[Ben Carlson]

I think there will be products similar to mutual funds and ETFs that will own these. And some of that will come about by regulatory change and some of that will come about by new structures. Already you see State street and Apollo testing the limits with private credit etf.

[Kunal Kapoor]

And nobody wanted it.

[Ben Carlson]

And you see interval funds are also taking off. Right. So here in the US in the last year, if you look at the number of ETFs, I'm sorry, number of interval funds that have launched, it's remarkable. And so what's an interval fund? It's basically, you don't get daily liquidity. You get to come in, let's say, once a quarter and exit once a quarter or some such thing. So people are starting to experiment in a way that'll make it accessible. And there's some really good managers starting to pay attention to it.

[Michael Batnick]

Do you think that, do you think that private assets belong in vehicles with minute by minute liquidity?

[Ben Carlson]

No.

[Michael Batnick]

You agree that that's probably not the best wrapper.

[Ben Carlson]

I'm generally not a fan of assets that people want to trade minute by minute. I think generally speaking, you want to have longer time horizons with things. And I think investors generally do better when they buy and hold public or private.

[Michael Batnick]

Okay, do you think that we will see? So I don't know what the size of private assets could be in a traditional asset allocation, but when they have the private credit conferences and the private equity conferences, I don't know how much of this is just firing up the troops or how much of this they actually believe. But you hear them say things like, we think it's 50, 30, what does that equal? 20. We think that's the asset allocation of the future. This is where it's going, it's going to be 50% public stocks, me, 30% public debt, and then the other 20 will be some amalgam of private credit and private equity solutions funds, whatever. That seems really far fetched to me. Just because people have a liquidity need that institutions don't. So just with that as a starting point, where do you fall on that debate?

[Ben Carlson]

So I think you're exactly right. I think in their retirement assets, it's more likely that you could see people do that. In fact, some of the biggest investors around the world in private assets tend to be pensions and endowments and all.

[Michael Batnick]

Sort of the Yale, they have unlimited time horizon.

[Ben Carlson]

That's right. That's right. And so I think that's how we have to think about it in the context of individual investors as well. Its asset location.

[Michael Batnick]

What do you think is the driving force behind the private equity sponsors all of a sudden like for 40 years, ignoring the millionaire next door, ignoring traditional wealth, all of a sudden in the last two years it's like, oh my God, guys, you're so horny. Why are you chasing me down the street with private equity opportunities? What do you think is behind that?

[Kunal Kapoor]

I think he has to give a diplomatic answer.

[Ben Carlson]

No, no, no, I don't need to. Well, first of all, I don't think it's private equity. Like private equity gets all the headlines.

[Michael Batnick]

It's really, it's more of a private credit phenomenon.

[Ben Carlson]

Private equity is, I think, way harder to kind of put into that format. And what you see is sort of traditional mutual funds beginning to own a little bit of private equity because those are sort of the companies that they might have owned early stage IPO 10 years ago that are staying private longer. And so you're seeing some of the larger managers take stakes and in those. And I think that that's a reasonable way. It's really private credit where it's changing. And I think it's just partly because they need the capital.

[Michael Batnick]

So that's what Michael, Michael's theory is like. They ran, they ran out of institutions to tap. So they need a new pot. This is a big pot.

[Kunal Kapoor]

It is that.

[Ben Carlson]

It is clearly partly that, but I think it's also at the end of the day the reality that there's demand.

[Kunal Kapoor]

So, okay, I don't want to give the impression that it's all bullshit because it's not. It's definitely not. What is it?

[Ben Carlson]

I mean, every financial innovation has some degree of precautions, of course, but the.

[Kunal Kapoor]

Fact is that something like 90% of all companies in the United States that do over $100 million in revenue are privately held. And so they obviously can't tap the public markets and the banks aren't doing it. And so enter Blackstone, KKR areas, et cetera.

[Ben Carlson]

Exactly.

[Kunal Kapoor]

And they do generate higher yields. And so there is great opportunities. And the track record of a cliff water, for example, goes back. This is not a fly by night company. They've been around for a long time. But the thing that worries me a little bit more than a little bit is the end investor and their ability to know what they're buying and to due diligence other than, yeah, it's Blackstone.

[Ben Carlson]

But again, I think it comes down to firms like Morningstar doing that job for them. That's our business. Right. So it's to help demystify what's happening in those markets.

[Michael Batnick]

Kunal, let's be specific about how you're doing that. So you've got a Morningstar medalist waiting for semi liquid funds that's going to.

[Ben Carlson]

Come out this year. Yeah.

[Michael Batnick]

So tell us why that's necessary now and how investors should think about that.

[Ben Carlson]

So. Well, I talked earlier about the launch of more and more interval funds.

[Michael Batnick]

Is that a semi liquid fund?

[Ben Carlson]

Is it an interval because it's semi liquid? In many instances and it's because you don't have instant liquidity. Right. And so the methodologies we've had have largely been focused on on vehicles that provide immediate liquidity. And so we're extending it. One of the interesting things that we're trying to do though, is we're trying to place liquid next to semi liquid, because all of us, when we're building portfolios, we don't want to necessarily say, well, I'm willing to give up something to have the semi liquid. Well, why should you? If you can own a semi liquid, it has to justify doing better than.

[Michael Batnick]

Right. So you're trading liquidity, you're trading instant liquidity. What are you getting in return? It better be higher or something.

[Ben Carlson]

And so our methodology seeks to answer that question.

[Kunal Kapoor]

Can you talk about the methodology? Because a lot of people, they just look at the star rating, what goes into it other than just backward looking returns? Because I know you guys have professional analysts.

[Ben Carlson]

Well, the medalist in particular is largely driven by analysts. And it's not backward looking, is not the primary driver of it. So the medalist ratings in particular are driven by analyst star rating obviously has a little bit more of a dependency on past risk and return for where.

[Michael Batnick]

It kind of the medalist is like gold, silver, bronze.

[Ben Carlson]

Correct.

[Michael Batnick]

Okay. The star rating.

[Ben Carlson]

You guys are all gold stars, though.

[Michael Batnick]

Okay. The star rating is more backward looking on performance. That's right. Okay. You guys seem to be de emphasizing the star rating in recent years. Am I making that up or no?

[Ben Carlson]

No, we're not. Star rating is incredibly important, and it's still our calling card. Our analysts will always tell you it's the starting point that we always say you should use for your research and then go deeper.

[Michael Batnick]

Okay. I want to ask you about the personalization trend and like, kind of the evolving needs and wants of the investor class. I very much agree with you here. Personalization is the frontier, and I think it's the single best way. So as wealth managers, if we can highly personalize a client's portfolio and really imbue them with a sense that this has been built just for you, based on unique attributes that we discussed in your life, your risk tolerance, the things that you worry about, et cetera, I think people are less likely to abandon that type of personalized portfolio, especially when times are tough. It's not the kind of thing you throw out the window, like, here's seven ETFs everybody else owns.

[Ben Carlson]

Yeah. Yeah.

[Michael Batnick]

So it seems like you and I are very much on the same page.

[Ben Carlson]

Yeah. I remember a conversation going back 15 years with a local asset manager who has a big business in what are called separate accounts. And so they had a mutual fund and then they had these separate accounts which were for high net worth individuals. And I remember asking like, you know, what's the catch here? Like, are you guys personalizing? And the answer at that time was not really just a great marketing tool. We basically do the same thing in separate accounts as we.

[Michael Batnick]

Everyone's a special snowflake, right? Right.

[Ben Carlson]

Today. Today that's not true anymore. Like, you actually can personalize. And so you might walk in, for example, you might be working at company A and your friend might be working in company B. And, you know, you might say, give me your best ideas, but I want to exclude company A and any other company in the sector because I've already got my human capital tied up so heavily here, so I don't want my stock portfolio to reflect that as well. And you can get the Morningstar US Market Index, not the other indexes you've been mentioning.

[Michael Batnick]

Fair.

[Ben Carlson]

And you can get that taken out of there right away. So that's a simple thing. Or you have a tax situation and you can harvest tax losses without maybe changing the profile of your portfolio.

[Michael Batnick]

So what is the Morningstar role in the era of Customized portfolios.

[Ben Carlson]

I think we're in the era of customized.

[Michael Batnick]

We're not saying direct indexing, but I think we're all sort of saying that it's data.

[Ben Carlson]

The core of our business is data and research. And honestly, even going back to AI theme like, that's what sort of is fueling a lot of the discovery in that sense.

[Kunal Kapoor]

Another big theme this year, on top of the personalization and customization, are active ETFs. All of the. Not all. A lot of the biggest new launches are active strategies, whether it's the buffered ETFs, the call option strategies. Now it's the 130, 30, which are not in the ETF wrapper. But Active is having its moment alongside, of course, the commission.

[Michael Batnick]

Are you surprised by that? Because it took a really long time.

[Ben Carlson]

I'm not. Because the reality is like, there's this active passive debate that takes place. And what our analysts have been saying for a long time, that's actually the wrong debate. The debate is high cost versus low cost, because low cost is winning in every space. And active ETFs ultimately are a good way for active managers to suddenly be available at low cost.

[Michael Batnick]

Low cost, 75 basis points is sort of like the standard that a lot of them have landed on or even going lower.

[Kunal Kapoor]

You know what's interesting, like thematic was the active ETFs back, not back four years ago. And now like, that's. That's over. And now it's the, the options, the targeted duration, fixed even. There's innovation in fixed income ETFs now.

[Ben Carlson]

Yes. I don't like some of the ETFs that are.

[Kunal Kapoor]

What do you hate?

[Ben Carlson]

Very, very narrow in particular and have a huge amount of leverage. But you know, when I think of active ETFs, I actually think of some of the larger asset managers that are basically taking clones of their mutual fund portfolios and launching them, like dimensional, dimensional to your price American funds. And they're doing it much lower cost.

[Michael Batnick]

I've given Cathie Wood credit for kicking the door down to active ETFs and making them a category. Even if you disagree with her investing style, which I'm sure a lot of people do, she is the first active manager to launch an active ETF and have it get to $50 billion. That was just absolutely unheard of. And now we're not surprised at all when somebody like Tom Lee comes along, raises a billion dollars into an active ETF in the first week. Now it's like a standard thing that people can do if they have a great idea. Good marketing, good timing. I think it's good for the active industry completely.

[Ben Carlson]

Cost don't matter though.

[Michael Batnick]

Cost don't matter.

[Ben Carlson]

Yeah.

[Michael Batnick]

Okay. You think costs are going lower for active ETFs?

[Ben Carlson]

They need to.

[Michael Batnick]

Okay. And you think we'll continue to see asset managers cannibalize their own AUM from mutual funds by building copycat versions as ETFs? That'll.

[Ben Carlson]

I think it's another channel for them. Right. And so I don't even think it's cannibalization. The reality is most mutual funds, the death of the mutual fund has been greatly exaggerated. The reality is like it's very sticky assets. And in the retirement space, that continues to be a lot of assets flowing there. And I think what you see is that asset managers are able basically to take a strategy and put into many vehicles today and so you can get it in the vehicle that you want.

[Michael Batnick]

So you see it more as additive as opposed to replacing investment dollars from one to the other. Let's talk about AI. So you're a data company. This seems like it's going to be an amazing moment. You have the data that everyone that's going to build AI solutions for the investment business wants to buy. Who are you talking to? What are people thinking? What do you think we're going to see in terms of real world impact from the age of AI investing?

[Ben Carlson]

Yeah, I think it's super real. And actually one of my surprises for this year has been that there aren't still further progresses when it comes to AI and consumer apps. I would have expected further kind of leaps and bounds and that has not quite happened yet. I think the tipping point with AI and use of AI really comes through consumer apps first and foremost, as opposed to kind of professional or enterprise tools. So we'll kind of see how that plays out. But it's clearly a big deal. And you just look at all the data we collect, for example, and if today you're trying to go through our database, you either are using a screener or you're doing some kind of querying or you have to be a really good programmer. And when we started to tool around with AI and we developed something called mo, it's sort of our AI avatar.

[Michael Batnick]

Your AI avatar is called mo, short for Morning Star. Very clever.

[Ben Carlson]

But the thing about mo, you just go to ask a question and within seconds go through our database and any research that was ever written.

[Michael Batnick]

Two weeks ago, the New York Times struck a deal with Amazon for the use of New York Times what they consider to be their intellectual property inside of Amazon's AI environment. This struck me as very notable because during the first go round of the Internet, the search engines told all of the journalism entities and all of the data entities, no, no, no, just let us have it for free. It's great for you. Turned out to be the end of journalism as we knew. Seems this time everybody's being a lot more circumspect. Are you having conversations or meetings about who is able to take Morningstar data and suck it into their engine? How much you guys think you should be paid for it? What are you going to provide to different players? What does that look like for you?

[Ben Carlson]

Yeah, and I think it's the problem every content provider has is sometimes you go online and you're like, huh, how did they find that data and where did they pull it from from? And so we absolutely.

[Michael Batnick]

And can we sue them? Fair.

[Ben Carlson]

That's one way of framing it. Okay, we haven't quite gone there, but I do think there need to be fair use cases. And what's interesting, like the Internet analogy is interesting because a lot of those companies, let's be real, were broke back then and they couldn't pay for the content and one or two broke through and it was fine. These days a lot of the AI companies are flush. So I totally reject the argument that they can't pay. They can pay, they can pay. And so I think that's what you're seeing.

[Kunal Kapoor]

Kunal, where are you on. On AI as it relates to the advisor industry? Maybe 10 years ago there was this huge push into robos. There was the threat that they were going to replace or displace financial advisors and that was a. That just did not come true. UBS just closed their robo. They're one of the less holds outs. It just, it did not work to the extent that some investors, like VC investors, thought that it would. So where does AI fit into financial advice on the advisor side and maybe even on the end client side?

[Ben Carlson]

What's interesting, just even with the robos, though, what the robos did do is that it forced advisors to think about the parts of the investment process that they could automate and whether they call them a robo or not. Advisors have generally automated investment processes more heavily.

[Michael Batnick]

I agree with that.

[Ben Carlson]

A decade ago or two decades ago, and I think that's going to be the same thing here. Advisors push a heck of a lot of paperwork and they spend a ton of time filling out forms, complying with regulations, doing those kinds of things. And I think AI changes a lot of that and puts the focus probably on value additive activities, such as talking to clients, figuring out what they really need, and sort of being concierge. Right. Like the world is changing in that sense. And I fully expect that AI will mean that the advisor will have to kind of keep upping her his game.

[Michael Batnick]

Do you think there will be a killer B2C AI advisor app in the marketplace?

[Ben Carlson]

I think so. It feels inevitable.

[Michael Batnick]

Is that a 2025 thing or 2027 thing?

[Ben Carlson]

Always easy to predict? In retrospect, yes. I think we're not that far off from it. And I actually think it does not have to be a new app. I think some of the most interesting things that are happening are at firms that already are large and are putting a lot of money to work in this space.

[Michael Batnick]

You mentioned a CFP Board survey. Where can this be true? One in three investors said they would act on financial planning advice from AI without verifying it. Yes, that's real.

[Kunal Kapoor]

Who sponsored that survey?

[Ben Carlson]

OpenAI CFP board, CFP board sponsored. And here's another interesting thing. So with mole, why don't we. But one of the things we find is when people first approach mo, they're highly transactional, right? Give me the methodology for the star rating, tell me where I can go, find some information on X or Y. And then when they come back, they start to ask more personal questions about their financial situation. When I talk to advisors, I always say my learning from that has been that as people get more comfort, they're willing to push the envelope on what they're going to ask. And we live in a world where it's like, hey, Siri. Hey, Alexa. Hey, Mo. And so it's inevitable that you're going to get that to some degree.

[Michael Batnick]

What large language model is Mo built on?

[Ben Carlson]

We have worked primarily with ChatGPT on it.

[Michael Batnick]

Okay, can I give you some advice to make the Morningstar stock go up?

[Ben Carlson]

I have a feeling you're going to give it to me.

[Michael Batnick]

What if we rename the company Morningstar AI? That's gotta be worth like another 4 or 5 billion on the market.

[Ben Carlson]

Cap.

[Kunal Kapoor]

Cap.

[Ben Carlson]

Yeah, maybe for a little while.

[Michael Batnick]

Okay.

[Kunal Kapoor]

Kunal, what advice would you give to a young person? You have a young person in your family who's entering our industry. What advice would you give them? Given the rise of automation and compute power and maybe a diminishing respect. Respect. I don't know if that's the right word. But for the human part of the work that we all do, I think.

[Ben Carlson]

Integrity still matters a ton. And for the human part, people don't talk enough about integrity these days and the importance of doing the work for your client in a trust.

[Kunal Kapoor]

What's your son's integrity? Star rating?

[Ben Carlson]

You'll have to ask him. But I think that's a really important point, and it's been at the core of Morningstar is this notion of independence and transparency. I think those things matter for anyone who's entering the industry. You can still fight the good fight for investors. When I came in, expenses were high, disclosure was poor in the public markets, and I feel like we won that fight. But all these new things that are coming along, we've talked about private markets and all. Part of the reason you're asking those questions, and rightly asking them, is transparency is poor, fees are too high, there's lots of good fights to be fought. And so I think being on the right side of the investor is where people should be.

[Michael Batnick]

Well, Kunal, you've been on the right side of everything so far, and I think Morningstar has fought the good fight. And I think.

[Ben Carlson]

Except my sports fan.

[Michael Batnick]

Fair, fair. But I do think investors, armed with insights, data, information from Morningstar, all in all, are equipped to make better decisions than investors who are just flying blind. And so for that, I'd like to give you a round.

[Ben Carlson]

Thanks for having me. Yeah.

[Michael Batnick]

Before we. Before we fully sign off, I want to acknowledge some of the people who have helped us put this show on for you guys, this live event, but also who put on the show that you shows that you love every week, almost every day. It feels like sometimes. We have an incredible crew. They have been working for months planning this event, making sure everything went perfectly, and I just want to make sure that they get their due because this has been an incredible experience for us. Hope you guys have had fun as well. Ladies and gentlemen, round of applause for Nicole. Don't cry. Don't Cry Queen. Rob Passarella. Daniel, John, Travis, you guys, give it up for Duncan. Where's Duncan? Duncan. They worked. They work so hard on all of the YouTube and all of the podcasts and all the live events we do, and they love you guys so much. They think about how you're going to take everything that we do. So much effort is being made all the time to make sure that what we deliver into your AirPods or your car stereo is as perfect as it could possibly be. They kill themselves in that effort, and they made tonight possible. Guys, thank you so much. Once again.

[Ben Carlson]

Sa.