← The Compound and Friends
The Compound and Friends
Netflix Reports, Why the Bull Market Has Legs Into Year-End With Nick and Jessica, Warner Bros for Sale, Unemployment Cracks Appear
01:50:03
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- [00:01]
A
Ladies and gentlemen, welcome to the compound. And friends, I'm recording this live from Las Vegas and we had a pretty, we had a pretty packed show. There's just, so I was saying to Michael, there's just so much news happening right now, so many things going on from corporate finance to the economy to politics. It just, it just feels like a really exciting time to be in the investment markets. And we try to pack as much of that element into the show for you as possible. And I think we did it this, this, this week. So first things first. Let me, let me just say a quick shout out to Betterment Advisor Solutions. Betterment Advisor Solutions is the sponsor of the show this week. And here's the deal. If you're a financial advisor, you're listening to this and you find yourself spending, I don't know, 10, 20% of your day with paperwork, with DocuSign, with emails, back and forth, bothering clients for things, looking things up, that should be right at your fingertips. If you haven't modernized your operations by now, I mean, I don't know what to tell you. I don't know how you're going to compete, how you're going to keep up with the pace of this world that we're heading into. So I strongly suggest you do what we did. Go to betterment.com advisors and see what Betterment can do to help you run your practice in a more streamlined, more efficient way. Shout out to Betterment. All right, tonight we have the return of Nicolas and Jessica Rabe from DataTrack, two of my favorite people on Wall street, two of the smartest people I know. We take a look at current valuations for the S&P 500. Jessica does this really great thing about seasonality. There's just a whole host of information in there and I want you guys to have it. And then it's Michael Batnick and myself, all new. What are your thoughts? We react to Netflix earnings. We take a look at the unemployment, the employment or labor market and some of the issues that are happening there. We do a whole thing on Warner Brothers, which today decided to sell itself. It's just as I mentioned, it's a jam packed show. I think you're going to enjoy it and I'm going to send you in right now. What could be better? Welcome to the Compound and Friends. All opinions expressed by Josh Brown, Michael Batnik and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Compound Nation. It's the return of Nick and Jessica. I am so excited. Welcome back to what Did We Learn? Nick Kolis and Jessica Rabe are the co founders of DataTrack Research and the authors of DataTrack's Morning Briefing newsletter, which goes out daily to over 1500 institutional and retail clients. Nick and Jessica also have their own YouTube channel, which you can find a link to in the description below. Guys, it's so good to see you again. Hope all is well. Hope you're getting ready with your Halloween costumes. I guess. What are we going to be this year? The vixx. What are we thinking?
- [03:23]
B
Oh, golly, the VIXX is a great idea.
- [03:26]
A
How would you do it? How would you do it? You'd have to invent like some sort of VIX creature, I suppose. I don't know. It'd be a tough one.
- [03:34]
B
Something that's asleep for a long time and then it comes up and becomes a monster.
- [03:38]
A
Yeah, I suppose. I suppose. All right, we're gonna talk about the earnings power of The S&P 500, which very apropos to the moment that we're in. This is yet another very. This is me editorializing. You guys tell me if you agree. I believe that this is yet another very good quarter worth of earnings with the caveat that we ain't seen nothing yet. All the big technology companies are still to come very quickly, but if you adjust to judge it on what we've seen so far, it's I think, a sigh of relief and I think it justifies some of at least the rally that we've been enjoying since the summer. What do you guys think about that?
- [04:20]
B
Yeah, that seems totally fair. It's, you know, it's still early, early days though. You don't want to prejudge too much.
- [04:27]
A
Well, I agree. That's why you're here. Okay, you guys. Say the key to understanding Q3 reporting season and valuations can be found in this chart. I'm just going to let you cook. I want to hear what you think. Cool.
- [04:39]
B
Let's throw up the first chart. This chart shows. It's a fact set chart and it shows by how much The S&P 500 companies beat earnings expectations over the last five years. And on the left hand side of the chart you can see during 21 they were huge beats because nobody thought companies could make as much as they did. So like 14% beat percentages. So if a company was expected to report a buck. They reported a buck 14. Just tremendous. We went through kind of a slog in 22. It slowed down a lot and then it picks up again during the current bull market. 23, 24 and 1H25. Those 2 quarters, Q1 and Q2 actually had the best earnings beat percentages since 2021. So 8.1 and 7.9%, I think. So we are coming off of 2 quarters of extremely strong earnings beats. And right now for the through the last week we were like 5.9%. So it's pretty good. But the issue is companies, you know, basically didn't really guide down this quarter. So analysts didn't take their numbers down this quarter. So anal actually left their numbers unchanged because they had gotten beaten so bad in the first two quarters. So expectations are quite high right now.
- [05:45]
A
Can we put that chart back up? I want to ask you. So just for the listener who's not looking at the chart at this moment, we're not saying the percentage of companies that beat. That's a totally different data series. We're saying the amount that earnings were above expectations. So not the beat rate, but like literally what percentage companies were beating by. And to Nick's point, in Q1 they beat by 8.1%, which is fantastic. The following quarter, 7.6. But now with a lower beat rate, at least so far. Nick, I think what you're saying is the analysts aren't getting sandbagged anymore. They're not gonna play that game where they allow their coverage universe to come in and crush their expectations by 20 cents a share. So it's like everyone has now figured out that earnings are going to remain strong, which lowers the nominal beat rate. Nominal beat percentage.
- [06:47]
B
Correct. It's fine news. It's not anything to be too worried about. It's just I wanted to point out that the first two quarters were extremely strong and that goes to a lot of why the market's been strong. Perhaps we can just flip over to the next chart because this is Jessica's explanation of how things are going by profit margin, by quarter, by sector.
- [07:05]
C
Sure, yeah. The point here is that it's not just tech improving the S P 500's overall net profitability. So as a baseline, FactSet expects the S P 500 to post a 12.8% net margin in Q3 2025, which is a 0.3-point gain from last year's third quarter. And that's also close to the all time quarterly high of 13.1%. In 2021. So this chart shows which sectors have contributed to in net profitability. And we also added our notations of each group's year over year change in net margins in green to mark a positive comp and red to note a negative comp. And I have just three quick points on this data. The S&P's year over year expected net margin improvement for this quarter is due to five out of the index's 11 sectors with financials adding the most at 1.7 points. Followed by technology and utilities at 1 1/2 points each and then industrials and materials at 0.5 and 0.8% points. And then there's two sectors that are expected to keep net margins relatively stable at negative 0.2 points for energy and negative 0.4 points for consumer staples. And lastly, four sectors are expected to see meaningful net margin contraction anywhere from down 0.6 to 1/ full point. And these are real estate, communication services, consumer discretionary and health care. So the upshot here is that while tech has led to higher expected margin improvement for U. S large caps over this quarter versus a year ago, there's still four other S, P sectors that have also helped. So this shows that this isn't just a tech phenomenon and we think helps support high valuations here since margin expansion should continue with many S and P sectors contributing.
- [08:58]
A
I want to ask you about two of these sectors, Utilities and financials. Let's, let's do financials first. Chart off for a second guys. So a net profit margin expansion year over year in this quarter of + 1.7%. That's really meaningful. This is like, I don't know, a trillion dollars worth of market cap or $2 trillion worth of market cap. JP Morgan is like 800 billion by itself. Let's just assume we're talking about really big companies that are not semiconductors or software. And I guess my question would be, I don't know if you have the data at your fingertips, it would probably be really rare to find a bear market where financial companies were expanding margins. That probably never happens now. It probably does happen coming out of recessions, okay, but that's not the situation that we're really in right now. So it kind of feels mid cycle when you just think about financials having that ability to grow profitability. And I know it's a really unique set of circumstances like longer rates holding up, shorter rates finally coming down, a lot of pent up things happening in housing, et cetera. But for me, if you ask me, when would you see Financials, expanding margins. The last answer I would give you is is in a downturn or. I don't know, it just feels like this should coincide with a continuation of a bull market. Am I extrapolating too much?
- [10:38]
C
No, we'd agree with you.
- [10:40]
A
Okay. Utilities has to be the story of the year. Has to be this. This is. I've never seen anything like this. The utilities as a group have undergone this insane rerating. They've become growth companies. I believe that they are the top performing sector on the year. They're so small they don't even move the needle for the overall S and P. And then also I think they have higher profit growth than technology as a sector. Do I have that right?
- [11:14]
B
We have to go back. That sounds aggressive. On all the facts that charts, it shows up as less, but perhaps it's a subset of that group.
- [11:22]
A
Okay, all right. I saw something like that where profit growth for the utilities was higher than something. Maybe it's not the tech sector. What do you guys think of. What do you think? What do you guys think of that story? I know it's a small category of stocks in the overall markets. I know it's not terribly important to what the S and P does, but it's gotta be something that I think is bolstering the case for a broader rally than what people would have given us credit for on the surface.
- [11:54]
B
Well, you've got a couple of things. You've got obviously the tech story and then you've got rates coming down. So you've got the two things that could really drive both secular demand and then demand for the stocks. Because the stocks are kind of dividend yield plays. Now. Interestingly, consumer staples have not done well this year. So the yield play itself has not been enough. But you're right. As an old cyclicals analyst, I mean I covered the autos in the 90s. To see a group like utilities get re rated like this really is a, as you alluded to, almost a historic event. Something that you only see once or twice in your career. And this is happening now.
- [12:26]
A
Okay. It's really hard to predict whether or not this can continue. I'm just curious when people ask you guys about the utility sector. By now most growth managers own a bunch of these in their portfolios. Probably getting questions about companies that you forgot even were publicly traded. These are not bonds anymore. They used to be. So how do you think about whether or not there are forward looking opportunities in the space? Is it just about Capex and AI? Electricity demand holding up in the short Term.
- [13:00]
B
Yes, yes. That's the story that's got to keep it together. Look, the way we tell clients is it's a better group for yield than consumer staples. It has a better growth profile. So it still fits into the yield category, but with more of a growth bent.
- [13:15]
A
Okay, all right, let's continue. What's next?
- [13:19]
B
Next chart now expanding the conversation about earnings to something about valuation. Let's go to the Shiller pe. This is the scary chart that everybody looks at every single day. And it shows the Shiller PE, which is based on 10 year average trailing historical earnings. So if you earned, if the S And P earned $100 on average over the last 10 years, trades for 1,000, it's peas, Schiller, peas. 10. Right now we're trading at 39, almost 40. And that's levels we haven't seen since the dot com bubble. That's the bump in the middle of the table or the chart. And so we're very, very high historic valuations. And this chart bothers a lot of people. So let me flip over to the next chart and kind of try to explain it away a little bit. This shows you S and P earnings by year, earnings per share by year, and the current 39 multiple on the Shiller PE is $167 a share. That's the normalized earnings from which we derive. That's 39 shill.
- [14:15]
A
However, the you're averaging the earnings per share over the last 10 years to come up with. What did you say? 167.
- [14:21]
B
Correct. And now if you look at the last five years, 21 to 25, the average S&P EPS is $232 a share. So it's 39, 40% better. So I think a problem with the Shiller PE is that we're still using earnings numbers from a long time ago, literally from the mid 2010s where earnings power for the S and P has improved materially since then. Margins are, revenue growth has been good. And so if you're looking at just the last five years of earnings, the Shiller PE is more like 28, 29, a much more reasonable number. So I don't want to overly excuse high valuations, but I did want to point out that the earnings power of the S and P, I think is closer to 230 than 160, 170, 180. And if that's the spirit of the Shiller PE, then its actual number is actually quite a bit lower. And it's not as worrisome as that first Chart would indicate.
- [15:14]
A
It's so funny because 10 years ago when you're saying companies now are materially more profitable and things have changed. Even 10 years ago and prior, like from 2012 to 2015, this Shiller cape ratio stuff really got a lot of attention in the markets. And it was one of the primary things that people used to keep other people from investing in stocks. And they pointed at the year 2000 and they said, here we go again. And Michael Batnik and I were talking about this the other day. We were writing, I don't know, dozens of blog posts just obliterating the Shiller pe. Not that we don't think there's validity in looking at long term averages, but like, oh my God, you want to compare Amazon and Apple today versus Bethlehem Steel? Is this an exercise that's helpful to anyone? It's different stocks.
- [16:09]
B
Yeah.
- [16:12]
A
Forget about systematically higher profitability. It's just different companies. If it were like companies and we were saying today's IBM versus IBM in 1985, all right, I'll pay attention somewhat. But I kind of find like this whole exercise, it's like thinking about an NBA player in the 1970s and dropping them into the NBA of 2025. Like, what is the likelihood that that player would even be able to function in the middle of the court? So I don't know, maybe that's overly dismissive or overly generalizing, but I just think companies are better today at being companies than they were 50 years ago. What do you think about that?
- [16:58]
B
Well, I'd also say that the top seven companies that are a third of the S and P are really, really good companies with amazing cash flows. And we'll get to this in the third section, video. But these are amazing companies that are at the top of the stack and they dominate the top of the stack. They're a third of the entire index, those seven names. So it's not just they're great companies, it's that they're great companies with a lot of weight in the index.
- [17:20]
A
If you guys had to worry about one or the other. I think I know the answer. But which would it be? Worry about valuation on earnings or worry about whether or not earnings growth will continue? I sort of think the latter is the thing that's going to decide whether or not stocks can go up and not the former. Like all of a sudden everyone's going to decide, oh, these are too expensive. I think they won't do that until earnings growth goes away.
- [17:47]
C
Yeah, as long as earnings growth supports.
- [17:49]
A
Valuations, it can continue even Elevated. I'd rather buy. I guess the way I would phrase it is I'd rather buy an expensive stock market with earnings growth than a cheap stock market without.
- [18:01]
B
And the lesson from 2000 is you want to buy a market where the Fed's not raising rates because that's what really tipped over the Apple card in April and May and June and really cracked the dot com bubble. The first big crack in the NASDAQ was right after March and it was because of the fact that the Fed was beginning to raise rates again and no one knew how high they would have to go. And so that was really the catalyst. So I just want to layer on the macro side to the argument, but I think you're right.
- [18:29]
A
Okay, what are we saying here? The 24 times consensus estimate for 2026 of 304 a share is 9% upside from here. Why is that important for people to keep in mind?
- [18:42]
B
It's important because the S and P valuations over the last call it decade have run from 14 to 22 times. 14 at the trough, 22 at the peak. That's been the formula. In order to get a reasonable buy target like 9% up for the S and P, you've got to go out to 26. You've got to believe in 304A, which is about 14% growth from this year. That's the fact set consensus number. So it's fine, it's the Wall street consensus number, but you got to put a 24 multiple on that. You got to be comfortable putting a 24 multiple on this market to generate a reasonable S and P upside from here, 9%. If you can't get there, it's probably a tough market to rationalize. We personally think it merits 24 times, but it's a big number, it's a chunky number.
- [19:26]
A
What are the mental gymnastics for us to all be comfortable at? 24 times? What did you guys have to. I assume we're baking in easier monetary policy, continued deregulation, I don't know. What else do we have to throw into the mix? Global economic growth?
- [19:44]
B
No, this is a little bit facile, but I really believe it's true. You have to absorb the concept of a third of the S and p having a 50 to 60% ROE. And that's the big tech names. You have to absorb the fact that is materially different from any market we've had before. And these companies not only dominate on ROE and return on capital, but on the next phase of tech growth, which is obviously AI. So I think it's the realization that these are truly unique times. This time actually may be a little bit different for a while. Not forever, but for a while.
- [20:16]
A
Dr. Rabe, do you concur?
- [20:18]
C
Yes.
- [20:19]
A
Okay, I assumed you did. All right, let's. Let's talk seasonality.
- [20:25]
C
Sure. So back when we were on in June, the peak for the S P for the year was in February. And we said that was unlikely to be this year's high despite the trade shock because it's only happened one other time since 1980, and that was that one time was in 1994 when the Fed aggressively hiked rates throughout the year. No transparency had ahead of that hike hiking cycle. And our upshot was that the odds are much higher for a Q4 peak, barring an exogenous shock when annual returns are usually up by double digits. So fast forward to now. And that turned out to be correct with now the S P's current peak for the year being October 8th. So the table you just had up shows you back in June, shows you the number of times the S P has reached its high for. We showed you this back in June. This. It shows the number of times the S and P has reached its high for the year and each month back to 1980, along with the average annual returns for each of those 12 instances. So I have just four quick points here. And the first is that the S P has peaked for the year almost 3/4 71% of the time in Q4 over the last four and a half decades. So this year's October 8th high so far is in keeping with those historical norms. And the reasons is because US equities usually post annual gains doing so 82% of the time from 1980 through 2024. And the highs for the year tend to come in Q4 because the S P has been rallying through the year. And then the second is just that the S P has always had a positive annual return, total annual return when it has peaked for the year in Q4 and typically by strong double digits, up an average of anywhere from 19 to 22%. And when the S P's high for the year was in Q4, it had positive total double digit returns, annual returns of 88% of the time, 28 out of 32 years. In the remaining four years there it was up anywhere from 5 to 8%. So the S&P is currently up 13.3%. So again, that is in keeping with historical norms.
- [22:44]
A
And then are you saying it's, it's a typical year then yeah, it is.
- [22:48]
C
Actually is a pretty typical.
- [22:50]
A
We never think it's typical when we're in it. Like we never. Nobody would say, yeah, this feels normal, but like it's fairly normal what's going on.
- [23:00]
C
It is. And, but I would just say for the peeping in October that that's a good segue. To the third point here, it's that the S P has actually only peaked though for the year. And this is good news for investors. It's really only peaked for the year in October four times since 1980, or less than 10% of the times. And those were mostly in the 1980s, 1983, 88, 89 and 2007, with an average annual total return of positive 19% ranging from 31.5% and 89 to 2007's five and a half percent just before the great the Great Recession. And then the S and P has also only peaked in November and four times since 1980 as well, also just 9% of the time. And those were also mostly in the 1980s, probably from mutual fund year ends, from tax law selling. So that was in 1980, 82, 84 and lastly 1996. And these four years also had an average annual total return of 20% ranging from 6.1% in 84 to 31%, 31.7% in 1980. But really the, the point here is that the S and P has peaked for the year in December 53% of the time. Back to 1980, the average total return was positive 22%. So given that the first nine months of the year are over, the odds that the S and P peaks in this month or next is 12 and a half percent each. While the chances of the index topping out in December of are 75%. So the takeaway here is that with just three months left to finish this year, the S and P has much higher chances of topping out in December. 75% odds rather than this month or next. And the index would still have to nearly double to meet the average performance of when the S and P does peak in December, again an average of 22%, a 22% total annual return. So as plenty of Runway left. So overall we remain bullish on US large cap equities through year end and see any near term incremental weakness as buying opportunities before that year end melt up.
- [25:22]
A
So if, if the, if the, if this, the typicalness of this year holds up, there could be a lot more gas in the tank to get us into the end of the year. Just to do like an average, you know, December high. Why do you think. Why do you think the market makes its high for the year, 53% of the time in the month of December? Is there like an anthropological reason for that? Is it people that have earned money all year, that's like when they want to get it fully invested before they go away for Christmas. Is it structural, is it mechanical? What do you think is behind that?
- [26:02]
C
Yeah, it's just that the, Those, the S P500 is usually up most of the time and, and it rallies throughout the year, so it tends to melt up into, into throughout December.
- [26:15]
A
Okay, Nick, what do you think about that?
- [26:17]
B
Yeah, no, I think it's fair. I think that's, you know, that's statistically how, how it works out. You know, I also think that, you know, come the end of the year, if it's been an up year, you get a little juice at the end of the year from two effects. The first is just people putting money to work at the very end of the year, just for year end, showing people that they were invested. And secondly, there's always this big drop involved end of the year, as options desks take off positions in the final week to not show a lot of, a lot of exposure on the balance sheet of banks or brokerage firms. And you get a bit of all melt up too.
- [26:47]
A
I think there's some career risk stuff going on and just people that maybe are trailing in the index, they get a little bit more aggressive into year end, try to make something happen for themselves. As far as, like window dressing. Like, look, I did own Broadcom. I was in these stocks. I think there's always some of that, which we call it a performance chase or whatever, but I know from talking to people that it's real. I also think buybacks, which no one's talking about anymore, so we're in this blackout period with earnings, but when we come out of this period of earnings, you're going to see the buybacks resume again. And I do think that there's, you know, corporations want to get a lot of that done so that when they're reporting Q4 earnings in January and February, it's helping their earnings per share. You know, I do think they want to shrink the share count going into year end and this year, like many years before it. There are a lot of resources at the disposal of these companies. They've made tons of money all year. And I think this is, I think the buybacks are the thing that like, get us going in November once we get through the big Tech earnings? I don't know. Do you think there's something to that effect at the end of the year?
- [28:01]
B
It feels right, yeah. At least this year for sure. I mean it all depends on how strong earnings are, but yes.
- [28:08]
A
Okay, what's the third thing that we want to do today? Financial analysis on big tech.
- [28:14]
B
Yeah, this is a little bit grimy, but I thought it's really important because this is ultimately the conversation that the market is having right now and it breaks down into two questions. The first is how much money does big tech actually make and where does it go? Like how much is going into capex and then what's the actual required return on that investment? So the first table, and apologies, it's going to be a bit of an eye chart, but the first table shows you the cash flow from operations for the big five companies. The big five hyperscalers, Microsoft, Nvidia, Amazon, Alphabet, Meta. So it shows you cash flow from operations last year and the first half of this year. It shows you capex, which is the money going into hyperscaling and then buybacks and dividends. And it basically breaks down how much of the cash flow from each company goes to those end uses. Investing in the company capex or handing money back to shareholders by buybacks and dividends. And a couple of big points on this. First, we're not including Apple in this by the way, because they're not really an AI hyperscaler, but just these five companies, Microsoft, Nvidia, Amazon, Alphabet, Meta are generating about $570 billion in cash flow this year operating.
- [29:24]
A
Oh, is that all?
- [29:25]
B
Yeah, exactly, exactly. It's like most of the way to a capitalization of JP Morgan. I mean it's just a mammoth number and people forget that sometimes of that 570.
- [29:36]
A
Wait, Nick, is that, I'm sorry, is that versus 38 billion a year ago? Can that be true?
- [29:41]
B
No, it is. Versus 532 the year ago.
- [29:47]
A
What's the 38 then?
- [29:48]
B
The change from last year?
- [29:50]
A
The change, okay, all right, so it's.
- [29:52]
B
570 up from up 38 billion from the prior year. So perfect, over half a trillion dollars of operating cash flow. This is just straight off the cash flow statement from the financial statements. Of that 570, about 325 is going into Capex. So they have more than enough money to cover the CapEx budget. And they're still buying back in aggregate about 170 billion in stock and paying 40, 41 billion in dividends. So it's a big misconception that they're plowing all their money into capex. There's still money going back to shareholders and more importantly, the companies have tremendous operating cash flow. If you were going to add Apple to this, it would add another hundred billion dollars of operating cash flow.
- [30:35]
A
I was going to say you might have to include Oracle next time you do this.
- [30:40]
B
Yes, yes, it's a late arrival to the story. The one last thing I'd point out is just the way companies spend their money is very different. So NV Nvidia for example, spends almost nothing on CapEx 5 to 7% and it buys back with its cash flow roughly from half its cash flow. Amazon is the only big tech company left with no dividend and no buyback. So it all goes to capex, which is kind of nuts. It's the last pure play, old school tech name with no buybacks and no dividends.
- [31:11]
A
That really isn't, look how it sticks out. That really is amazing. I've never seen this stuff laid out this way. With Amazon compared to the others, there is zero attempt to return capital. They just, I guess they see the investing opportunity as so much bigger than the opportunity to shrink the share count.
- [31:33]
B
Yes. I've often thought if I had to cover one of these companies as a single stock analyst, the last one I want to cover is Amazon because there is nothing that leaves that shop. The money just stays in that machine and just keep circulating back and forth. So it is amazing, it is amazing that that company of that size with, you know, that kind of cash flow, roughly $100 billion of cash flow, is still reinvesting all of it. The last chart of last table, I'll just show you. This is even a little bit grimier, but I'll try to summarize it for you. This is an attempt to understand how much these companies have to make an incremental cash flow based on the capex that they're putting to work. So if you put in, and this is a very simple corporate finance calculation, so if you put $100 billion of cash flow to work in a project, you're going to want to see at least a 15% return because that's going to be what your return for your shareholders is. That's being a good steward of capital. And so what I've done is just take the capex budgets, figure out a 15% return on investment and then work out how much incremental cash flow the companies have to generate to justify the CapEx that we talked about in the priority in the prior table. And the answers vary but they're not very high. Amazon, because it reinvests so much, has to generate a 30% return on its capex, but the rest are between 2 and 12 and 15 and 15%. So these companies are so big and generate so much cash flow that they actually could justify their capex investments in Genai just with the growth of their organic businesses. So people are saying, oh, when's the so and so going to hit the fan from all this investment? And the short answer is they're so profitable and generate so much cash flow that we're not going to know for a couple of years at least if this capex and Gen AI actually quote paid off because the underlying cash flows are so strong.
- [33:22]
A
I think there are journalists out there who are on the hunt for evidence from internal documents and memos about concerns within these companies about the levels of spending and the lack of ROI on the spending. And it's almost become like a subgenre of technology journalism is Microsoft is worried that Blank or Oracle executives privately are concerned with. I understand the impulse. It's a really hot story. If and when one of the hyperscalers decides they're pulling back the reins, it has massive ramifications for everyone and everything. So I understand why the reporters want to be the ones that break that story. I think there's also like a degree of schadenfreude because a lot of people that have missed out on the AI trade, a lot of investors, they want to believe that it's not true and that they couldn't have been mistaken by not owning Nvidia because it's all fake anyway. So there's that component of the disbelief of these capex numbers. So I do think that there are a lot of people rooting for this to end. But to your point, most of this spending coming out of cash flow and like most of this capex spending, it doesn't appear to be the type that's unsustainable. The numbers are huge, but the cash flows are there to back it. Is that what your table is proving?
- [34:58]
B
Yes. And more than anything, this is an analytical point. When you're trying to identify marginal returns on capital for a company, you ultimately only can use the baseline numbers from the entire cash flow statement. So we don't have the internal ROIs on these new projects. All we can do is judge the aggregate numbers. And by the aggregate numbers, you don't have to generate that much more cash flow to justify these investments because the underlying cash flows are so strong. So it's going to be Hard as a financial analyst to say, aha. Microsoft's ROI went from 15 to 2% in a year because the CapEx for AI didn't pay off. It's not going to happen that way.
- [35:38]
A
Yeah. And because Amazon's a great example, but all of them to some extent, it's a little bit of a black box. The money is fungible. You don't actually know which dollars are being allocated to what. To your point, you have the aggregate numbers, but you don't know individual projects, which one is very profitable, which one's not profitable at all. Nobody really has visibility into that other than people inside of the company in the CFO's office. So it's really hard to, I guess you could look at the aggregate and make a judgment on the overall company's spending and what did it return. But you don't know which specific AI projects are quote, unquote, good versus bad. There's some element to that. Right, right.
- [36:20]
B
Look, I mean, if you wanted to tell a really negative story about this entire environment. I touched on this last week for clients and I don't want to make too much of it, but I want to bring it up. We know a lot about where all this money is coming from and where it's going. Right? But here's a simple question. Who audits OpenAI? Who's the auditor?
- [36:40]
A
Twitter?
- [36:41]
B
No one knows. Now the people who invested money, Microsoft probably knows, the big VCs probably know. But even the public auditor for the most important linchpin name in this entire story, we don't know who the auditor is because it's a private company, it's a not for profit. And that's totally understandable. But if you want to pick on a part of this story, to me it's a lack of transparency in that one company because we're relying on that company for a lot of reasons.
- [37:09]
A
OpenAI. Right. So OpenAI being a $500 billion valuation in the private market, not filing financials publicly, but they do routinely do stock offerings. There's gotta be a deck with financials in those. It's under NDA, it's not for public consumption. But somebody is seeing something.
- [37:32]
B
They are. And that's a nice point of clarity. But we know SpaceX's auditor, I think it's E and Y. We know the auditor of some other large press private companies. Why not at least know who the auditor is for OpenAI?
- [37:46]
A
Yeah. Interestingly, I remember reading a Bloomberg story about Jane street, the trading firm, and Jane Street's got publicly traded debt so as a result, we do have, it's not a public company, but they've got publicly traded bonds or debt. So that we're able to see on a somewhat regular basis the financials of Jane street, which they're not advertising, they're not interested in people seeing it. But it does come out. In the case of OpenAI, I think it's an interesting point. If only the most important company in AI were publicly traded and there was, I guess, a heavier degree of scrutiny on things like spending and capex and profitability. But again, we're in uncharted territory in so many ways. And this is just one more, I guess, would be the way I would think about it. Guys, it's so great to have you back. Thank you so much for joining us. I want to make sure people know where they can follow so they can watch your stuff and subscribe and get your research. So first things first, we want to tell people to go to datatrekresearch.com Yep. Okay. And you guys are publishing every day and just a unbelievable quantity of information. I also want to tell people your YouTube channel is YouTube.com what is the full URL? It's long. Do you know, you know your URL? Nick Cola. All right. YouTube.com Nicolas and Jessica Rabe. And of course there's a link to that in the description if you are watching the video below. Thank you guys so much for joining us. Thanks to Nick and Jessica. We'll talk to you soon.
- [39:27]
C
Thank you.
- [39:48]
A
It's all gangsters here today. I could tell her about. I could tell already. I'm just looking at the names in the chats, in the, in the live chat. It's gangsters only. As it should be, right?
- [40:01]
D
Amen. Amen, sister.
- [40:04]
A
Thank you for that endorsement. Hey, everybody. It's an all new edition of what are your thoughts? If you're wondering where I am, I am in, I'm in Las Vegas. I'm at the encore. It's pretty sweet. And I, I was here the same time last year for the same event and it's kind of becoming a thing. So I, I, I'm excited to be, I'm not a huge Vegas person because I don't gamble. No, but I, because I don't play. But we'll see some friends tonight. We'll see jc, we'll see Joe Fami.
- [40:34]
D
Where you guys go for dinner? I will not say, don't say, don't say.
- [40:39]
A
Until tomorrow.
- [40:40]
D
Yeah.
- [40:41]
A
All right. I was gonna tell you. Oh, the chat is all the way live. Cliff is here. Chris Hayes C note is going absolutely nuts. East Bay elitist Chase is here. Georgie. John Tognachi asks when is Nicole going to have her own podcast? I don't know. What would it be about though?
- [41:02]
D
That's what I was just thinking. I don't know. She's. She has many interests, John.
- [41:06]
A
She has a. She has a tick tock. She crushes it on the top. So if you're looking for more Nicole flavored content, that's where you want to be. Anyway, all the gangsters are here. Shane. I see you. Matt, Oliver. Thanks for coming, guys. Great to check in with everybody. There's a lot happening this week. I can't really remember a time like this where there's just breaking news every five seconds. For the last two or three weeks, it's been.
- [41:31]
D
It's about time. It was boring.
- [41:33]
A
It feels relentless though, right?
- [41:35]
D
Yeah. But the end of the summer was boring. Nothing happened. Nothing happened.
- [41:38]
A
Well, we are good.
- [41:40]
D
Oh, back good.
- [41:42]
A
We're so. All right, guys, we have a lot to do tonight. I want to shout out the sponsor. We. We love all our sponsors. We truly love Betterment Advisor Solutions. Ritholts wealth is a customer of Betterment Advisor Solutions. Today's show is brought to you by our sponsors at Betterment Advisor Solutions. If you happen to be thinking, there's gotta be a better way to grow my Ria, you're not alone.
- [42:05]
D
With Betterment Solutions, we do the heavy lifting so you can focus on what matters most to your clients. From improved service that makes asset transition smoother to fast paper free onboarding that delights clients.
- [42:15]
A
On day one, we've built a digital first platform designed to streamline your operations and make life easier. Now, if you're thinking, wow, they take the paper out of paperwork, you'd be right.
- [42:27]
D
That's right, Josh. Grow your ira, your Ria. Excuse me. Your way with Betterment Advisor Solutions. Learn more@betterment.com advisors. Investing involves risk.
- [42:36]
A
Involves risk.
- [42:37]
D
Performance not guaranteed.
- [42:41]
A
All right, shout out to Betterment. So let's just get right to Netflix. They reported, I don't know, an hour ago. Right. And the conference call started 15 minutes ago, which we're obviously not listening to. To. This is the. Before we even get into the numbers, this is the first thing that I want to say. I feel like this is an example of where individual investors have an edge over the algorithms that dominate so much the trading volume. Because this knee jerk reaction to a one time tax related issue in Brazil is so stupid. I almost can't believe that I have to read the words and explain to people what's going on. And I feel like the first sellers on that headline number were undoubtedly algorithms. I don't think a human being looked at that and swung around that much stock. But the name is off about between four and five and a half percent so far in the after hours. And I think the majority of the selling that happened like immediately, of course, is computers selling to other computers. Do you have a, you have a strong opinion one way or the other on that?
- [43:53]
D
I am inclined to agree. I would also point out that we never do know why a stock moves the way it did. I mean, sometimes you do, sometimes you do. This could merely be the stocks up 40% in the last year and it was going to sell off anyway, unless it was a blockbuster report, which it wasn't. So I mostly agree with you. My, my, my take on the Netflix earnings. And I've been listening to them for a long time. They've gotten probably deliberately, and this is not a bad thing, more boring over time. So they no longer, they no longer report their subscriber numbers.
- [44:25]
A
They know net ads.
- [44:26]
D
Yeah. And why would.
- [44:27]
A
There's no more net ads.
- [44:28]
D
And, and they no longer report their arpu, their average revenue per user or average revenue met. I think they call it arm. Whatever, doesn't matter. And so in addition to that, and they've been doing this, I think for a couple of quarters now. The, the, the questions are prescreened, so it's like an internal Q and A. And it's fine. It's a mature business, healthy as shit, nothing wrong. They're still killing the game there. They, they won. And it was a, it was a boring, boring report.
- [44:54]
A
My hot take on Netflix is don't listen to a thing they say because they change their mind all the time. They say things like, we're not interested in live now. It's all about live. Live is driving all, like live is driving all the excitement around the stock. They said for 12 years, 10 years we're not going to do ads. And now it's all about, like, all about how profitable the ad business is relative to, relative to the premium tier. So like, whatever they, the, the way to think about Netflix. And I was, I was actually listening to Matt Bellamy this morning talking about this and Lucas Shaw. They do these like, trial things in a very small way. They gauge the reaction from their users and it either disappears forever, they never do it again. Like they tried this thing, interactive shows and like people were just not into it and you never saw it again that, you know. So now they're gonna get into podcasting.
- [45:54]
D
Yeah. Yeah. How about doing the refresh with the. With the home screen like they did? They don't just do wide rollouts. Right to your point.
- [46:00]
A
Right, right. And that's like. That's business. Like, that's what you're supposed to be doing. I don't think that a Netflix needs to do these, like, these grand pronouncements. So from now on, we're all about podcasts. But the reality is podcasts are cheaper than traditional TV show. Believe you could trust me on this. Cheaper to produce than traditional television. But this is where the culture is. People enjoy listening to the insights or the hilarity or the dirty talk of their favorite people. They will leave it on for four hours in the background. They want to hear Bill Simmons. They want to hear Call Her Daddy.
- [46:44]
D
They want to see them, and they want to.
- [46:46]
A
Sometimes they want to see them.
- [46:47]
D
Not always. I thought it was hard to believe in the early days when people were asking us to put our podcast on YouTube. I was like, like, but why?
- [46:55]
A
Who's the hell's gonna watch that?
- [46:56]
D
And obviously YouTube crushed. And Netflix is better late than never. And if it stops working, they will pull it back. But it is gonna work. It's not gonna not work, because it does work. I, for example, Patrick o', Shaughnessy, friend of ours. It's a relatively. It's not a boring show by any stretch of the imagination, but it's one dude interviewing, usually another dude. And why would you want to watch it? Guess what? I. I don't watch it on my tv, but it's on Spotify. It is the video. And so if I see the person, if I only look at them for two minutes of the entire show, just to get a sense of who am I looking at? What is their body language? Are they smug? Are they sincere? Are they smiling? It adds another dimension that is critical to developing our opinions about who we want to listen to.
- [47:41]
A
That's a good point. The other thing is, we had a lot of people who listen to us on Spotify, and they were always at a disadvantage because we put a lot of charts up when we do the Compound and Friends or their show, for that matter. And now if we're talking about a chart, somebody can grab the phone, press that button, go from audio to video, and for two seconds, they can glance at the chart and then go back to, you know, whatever they were doing, making lasagna or beating their wife. So it's like you. You have the option of like, when you want video, when you want audio, toggle back and forth in between and you can have your hands free and your eyes free. When it's just two dudes talking to each other, you don't have to watch it.
- [48:23]
D
Was that like a Sopranos reference that you just threw in there?
- [48:25]
A
I don't know. But no, I'm just saying, like, people have other things that they're up to while they listen to us. I can't even imagine the depths of depravity of the typical podcast listener. What I would say that's weird is Spotify obviously owns the ringer and has been pushing that video. And now you'll be able to get that video still on Spotify, but also on Netflix. And they're removing the full episodes, ringer episodes for these specific shows from YouTube. So I know that part. So here, here are my hottest takes. We're finally here. Everything has been leading up to this. This is the heavyweight championship of the world on the line. 2026 is going to be about Netflix versus YouTube. And that is the battle. And YouTube started it. YouTube spent so much time and energy and political capital to get YouTube TV and get regular YouTube app on every OEM TV manufacturer. It's an app on every TV you can buy. I don't care if you buy a TV at Costco, like a, like a Kirkland, or if you buy the highest end TV. It's not just YouTube TV. There's regular YouTube as a standalone app. And that has been a huge push. And as a result, the amount of viewing of YouTube content that takes place in people's living rooms now is alarming for Netflix. They. They can't do, they can't just let YouTube run away with the, with the podcast thing. So, so some of this looks like they're on offense, but some of it really feels like they're defending their turf. Netflix's turf is the television set in your living room and the TV set in your bedroom. And YouTube is encroaching.
- [50:19]
D
Oh yeah, they're there, they're there. They're actually most of the viewing of YouTube podcasts is done on a television.
- [50:28]
A
Right? So this is like. So I think in 26 we used to have the stream streaming wars and then the narrative early this year, the reason why Netflix has been such a home run stock. The narrative is Netflix won. The streaming wars are over. They were the first to profitability. They demonstrated substantially more profitability than their competitors. We used to think their competitors were Disney plus.
- [50:50]
D
It was so they beat they beat Peacock, they beat Disney, they beat Max. Like that. That war is over.
- [50:56]
A
Hulu is now a channel on Disney.
- [50:58]
D
That war is over.
- [50:59]
A
Right? That war is over. And now HBO is going to be owned by Paramount within six months. And the real war, the real war for 2026. And this is why. This leads to my last hot take. I think Netflix is going to buy Spotify.
- [51:15]
D
I like that a lot. But they're not.
- [51:17]
A
I think they're going to merge. Historically, they have not been, but times change. I think the combination of Spotify stranglehold on the music business and how great they are, even versus Apple, as well as the podcast business, many of the top podcasts they actually own, own the rights and the ability to distribute. I think that's too tantalizing for Netflix not to seriously consider doing it.
- [51:46]
D
Spotify's $140 billion. Just. Just the equity. It's a lot.
- [51:49]
A
It's a merger. It's a merger. It's a merger.
- [51:51]
D
I love. I love the take. I. I love the take. I think that the. The war will never. They could both win the war. There doesn't need to be a loser. They're both the winners.
- [52:01]
A
Yeah, no, I. I agree. There's Miller, there's Miller Light, and there's Bud Light. I'm not. I'm not saying, like, one goes away. I'm saying if you thought Netflix's competition was Hulu, you have no idea what's coming.
- [52:13]
D
You're like, you're Google's the final boss.
- [52:17]
A
Right? So Netflix is subscale to compete with an Alphabet. They can compete with YouTube, but, like, head to head against Alphabet, they need more firepower. They need more content, more views, more subscribers, more cash flow, more everything. I'm telling you, I think this is like, greater than, let's say greater than 10% chance, whereas it would have been unthinkable a year or two ago and growing. Let's do the numbers. Yeah, let's do the numbers. Netflix reported revenue of 11.5 billion, up 17.2% year over year. And that is actually their guidance for the year. 17%. That's like the Netflix number for the. For the full year earnings, $6.97 of 29%. Point. 29.1% year over year was the expectation. What they actually reported was $5.87, which was only up 9% year over year. And that's what the algorithms responded to, and that's why the stock went red immediately. But there is a massive caveat in that quote, unquote. Ms. And I just want to share that with you. There's a long running dispute between Netflix and the Brazilian. I'm not even making this up. Tax authorities. That was not in the guidance. However Netflix has disclosed this previously in their risk risk disclosures. This is like three years worth of fighting and it ended up being like a Bloomberg actually. Bloomberg actually has a two sentence explainer on what, what ended up happening. Netflix had to pay $619 million to settle a multi year tax dispute with Brazilian authorities. Gomez 2022. The company had identified the potential risk in previous filings not in its earnings guidance and said it would have beaten forecasts if not for the expense. Future payments will be smaller. And Netflix has also already said they do not see this being a lingering issue or anything that's going to go past this quarter. So if you sold the stock down 6% on that news paper hands. I don't really know what to say. Well I am a shareholder. I'm not selling.
- [54:35]
D
People didn't sell to your point. We'll find out tomorrow. Because if this thing, if this thing falls 5% tomorrow, then it wasn't just the Brazilian thing because everybody is looking past it. Like everybody, everybody understands what you just said. That this is a one time thing. This is, it's not immaterial. But it won't matter going forward now. John throw up charts the stock charts 1 year and 3 year. It could just be profit taking. I mean this thing's up 62% over the last year over the last five.
- [54:59]
A
Years versus the triple Qs.
- [55:00]
D
Yeah.
- [55:01]
A
Triple the performance of the NASDAQ over.
- [55:03]
D
The last three years. It's up up 363% now. The shares were depressed but even still if anybody wants to take profits, you know, I'm not gonna, I'm not gonna. I'm not gonna blame him.
- [55:14]
A
I sort of agree with that take. Except for the fact that it's up a lot. But it's. It got so murdered in 2022.
- [55:24]
D
Yes.
- [55:25]
A
That that starting point. I know you're not cherry picking but to start from there feels cherry pickish. I just said that because the stock was cut in half and then it went up 300 something percent. I bought that dip. I know because I bought it in real time.
- [55:41]
D
So did I.
- [55:41]
A
Could we put this on Netflix share of TV time and then I sold.
- [55:44]
D
It way too early. So I mean stupid.
- [55:46]
A
What is this?
- [55:46]
D
Bald idiot. It's just showing. Well, all right. What two things in here worth noting. Number one, record record share of TV time at 8.6%. This is in the US but it's also a record in the UK, its second biggest market. It interesting that they put all other streaming into one bucket when we know that it is in fact trailing YouTube.
- [56:08]
A
Yes. And then linear, I mean linear is just shrinks.
- [56:13]
D
Yeah.
- [56:13]
A
Many are at the start, at the start of this which is Q4, 2022. Linear. Linear is like cable subscribers. Right. Or just like broadcast TV. And that was 57 and a half percent of all TV time. And that is now 42. And we know that's going to 32.
- [56:31]
D
Yeah.
- [56:31]
A
And then 25. It's, it's not a. The only question is how fast.
- [56:36]
D
So Netflix, Netflix is one of those, I guess compounder stocks people talk about. I mean the business is going up to the right for a long time. Who knows what the stock price is going to do. That's maybe a separate conversation. But they are confident that they will double their ads in 2025, albeit off of a small base. But that is tremendous Runway. They continued to just kill it on the content. K Pop Demon Hunters, their biggest watched movie ever like of all time. Top five Halloween costume this year. Happy Gilmore 2 was huge. The Canelo Alvarez fight was big. They've got doubleheader for NFL Christmas. The stock, I mean the business is on fire.
- [57:10]
A
Do they have basketball now too?
- [57:11]
D
I don't think so.
- [57:12]
A
Oh, they have, they have the NFL game on the double header.
- [57:16]
D
So the, the business is incredibly healthy and you can't, I mean that's it. There's no, there's no buts.
- [57:23]
A
K Pop Demon Hunters is going to go into the theaters for Halloween. They made up. There was a long running dispute between AMC and Netflix. AMC does not want to put things in theaters that are airing on Netflix day and date because they're like wasting a theater. But they actually are going to collaborate on this because it's such a huge cultural phenomenon.
- [57:47]
D
Oh yeah. And also because AMC's market cap is one and a half billion dollars so they should do whatever they can.
- [57:54]
A
All right. Warner Brothers put itself up for sale today. This was not surprising. This had to happen eventually. They were pursuing this convoluted thing where they were going to spin off the non growing business and separate it from the growing business. The growing business.
- [58:15]
D
Yeah. We'll take the piece of. Give it to us.
- [58:17]
A
Well, you'd be surprised. There are different types of investors that, that more highly prized cash flows even if there's no growth and it's a melting ice cube and for like political reasons or something. No for just like it's a higher, it's a, it's a lower investment intensive business. You buy something that's got high cash flows even if you know it's going to disappear.
- [58:41]
D
So what's the crown jewel?
- [58:42]
A
Those cash flows?
- [58:42]
D
What's the crown jewel of the non growing? Is it CNN? What? Or is it Turner?
- [58:46]
A
What is CNN's a disaster? The last I heard CNN has 50,000 viewers in primetime. It's like, it's like almost or something or 500, I forgot what the number is. But it's whatever it is relative to like, relative to the millions of viewers it used to have, it's it almost. We have more viewers than some of these shows on cnn. And the amount of money that it costs to keep that running. And the other problem with CNN is it's just a perennial headache for whoever owns it. If they off Trump, it's problematic for the whole corporation. This is why Apple got rid of Jon Stewart. Because Jon Stewart decided to do a whole episode trashing China. Not great for Apple's corporate aims. Nobody wants to be in this business. So there's two versions of what can be done. You can sell one of these news operations to a private buyer. Like Bezos bought the Washington Post. Bezos wants to use the news business to be influential. That was the idea. All right, that's one version. The other version is you can tame your news business or Trumpify it. And that's what Ellison did with cbs. So CBS News is one of the most storied news franchises in the history of America. But it had to pay a lawsuit in order for Shari Redstone to be able to sell the company. Larry Ellison's very tight with Trump. It was like pay me my fine and I'll let this deal go through. It happened. And then the next thing they do is bring in Bari Weiss, who is center right. I wouldn't call her a Trumpist, but her, her positions and her vibe are way more right leaning than left leaning. And she is not going to allow the type of like persecution of the Trump family that 60 Minutes and these other CBS News properties were doing. So that's the other version. The thing is, if you're David Zaslav, you don't give a shit about any of that. All you want is the ability to do big deals. And so, so having something like CNN at Warner, it's just this politically toxic asset that you already know is a melting ice cube doesn't make that much money, isn't that influential. It's like an obvious thing to get rid of it. But finding a standalone buyer is not easy. So they have to sell the whole thing because the other assets are amazing. The problem with Warner Brothers is the debt level. It's 35 or 40 billion still.
- [61:22]
D
Yeah. And they coming down all right.
- [61:25]
A
They've been paying down that debt. They've actually done a really good. What is it, 34?
- [61:28]
D
Yeah, it's. But it's down from 50 or something.
- [61:31]
A
Down from 50. That debt was incurred when they bought this business from AT&T or whatever a few years back. It was unsustainable. Could not compete. They don't even have like movies in theaters this year really. So they had like Superman was a really big hit that might revitalize their big franchise, which is dc. They also have Harry Potter, which potentially could be huge, although it's been dormant for a long time. They have a lot of assets. The studio is a great business. The streaming business is not great, but it's getting better. HBO has always been good. The rest of the shit they were throwing at the wall was not going well. But HBO still has a ton of value. And then the library. It's 100 years of some of the biggest smash hit TV shows and movies in the history of Hollywood. Like thousands and thousands of titles that can be monetized. New sequels, reboots, brand extensions, merchandise, theme park. It's like it's a great asset and I think ultimately Paramount will end up with it is is the way it seems. I don't really think there's going to be a million competitive bids coming out of the woodwork. I asked Sean to show us the largest global media deals. Let's put this chart up. So the enterprise value, guys. The enterprise value is the $45 billion in market cap plus the 34 billion in debt. So it's 77 and a half billion if you have to pay a 20% premium on the stock. Not on the not. You're not paying a premium on the debt on the equity. You're talking about a deal like in the 8, let's say 80s billion range. Ish. Here's where that would rank. AOL Time Warner maybe the worst media deal ever. 186 billion. And that was 25 years ago. So you get an idea of the enormity of that. Time Warner AT&T, also a disaster in 2016. 109 billion. Disney's big deal was 83 billion. Charter and Time Warner merged, that was 79 billion. Two cable companies, Comcast bought AT&T's broadband business. 76. So we're getting into that range where this could be like a top four or five. And I think there's really only one natural buyer who would want to take the whole thing at once. If they do. I mean, Paramount, if Paramount ends up with this whole thing and they could start selling off chunks of things that are worthless or a pain in the neck. I mean, that really could be a gigantic company. What do you think about that?
- [64:17]
D
I wonder what would. You can't kill the Warner Brothers name, obviously. What would it be called? How would that work?
- [64:26]
A
No, the Warner Brothers studio. Studio will live forever. So what ends up. What ends up happening is HBO and Paramount plus are kind of like slammed together in some way. And maybe if they're smart, they keep.
- [64:44]
D
It'll be the same hbo same way that Disney and Hulu smashed their apps together. You know, it worked. So. So Bell, and he was saying that this is not a bidding war because Apple is Apple. Netflix is just not. They're not doing it. They've been pretty clear.
- [64:59]
A
So Bellamy says Comcast is out there. Comcast owns Peak, Peacock, and they are shedding cnbc, MSNBC and the Golf Channel. They're getting out of another company. Brian Roberts, right after the election, couldn't wait to announce we are spinning off all of our news properties into a standalone company that will be publicly traded on its own. They named the new CEO. You could tell Roberts has no interest in the political aspects of owning a news business.
- [65:30]
D
So.
- [65:30]
A
So that's going.
- [65:32]
D
Here's. Here's the bottom line, I think, from. From Bellamy is that Zasov wants to create a media circus. He wants the attention. He wants shareholders to believe that there is a bidding war out there. But Bell, and he said the ZAZ strategy, which is all but broadcast via Bat Signal, is to fend off the Ellison overtures for all of wanted Discovery, amputate the gangress cable networks next spring and shop the studio and streaming assets separately to the many, many interested parties whose jockey will result in a grand windfall. Maybe that would ultimately be best for the studio and a streamer. Maybe, but it would certainly be best for Zaslav. Bellamy's the best. He said a delay would keep him flush with an eight figure annual pay. Eight figure. It's obscene. A comp package so gluttonous that his longtime benefactor, John Malone, whose boards are famous for shamelessly awarding outsized comp packages, recently walked it back slightly. And more importantly, a delay would keep the spoils of a Hollywood empire at Zaza's disposal, which is what many of his peers think is really going on here, put off the inevitable. And he keeps the attention of celebrities and billionaires. He keeps appearing on TV while sitting courts at a big sporting events. He keeps being honored as a humanitarian, and he keeps getting written about by people like me. So Bellamy over at Puck is saying that, listen, this is all. It's all charades. There is no bidding war. Like, it's. It's. He wants somebody other than Paramount to fake interest, and it's just probably not going to happen.
- [66:52]
A
David Faber said much the same thing when he broke the news on CNBC. It's like, it's not like there's 20 bidders, right? There's like a very small handful. And this is so messy. Now what you could see is an activist come in and you could see a private equity partnering with Hollywood company and coming in and trying to pick off assets. And like, you could have like three different groups come in and try to buy different parts of this. But, like, did. Is that what's in the best interest of shareholders to spend a year on that kind of a bake off?
- [67:30]
D
That would have happened.
- [67:30]
A
And watch this thing get picked. Watch this thing get picked apart piece by piece. Like, is that.
- [67:35]
D
No, the stock is shareholder wbd.
- [67:38]
A
That's not a good outcome, dude.
- [67:39]
D
That would have happened when the stock was at $8 and it was staying there for a while. The stock is 20 bucks. It was up. It's up 90% year to date. It was up 10% today. So, hey, somebody thinks that there's a deal coming. Maybe there is.
- [67:51]
A
Sodak. Jason in the chat says Zaslov's the same genius who decided they didn't need the NBA.
- [67:56]
D
Yeah, well, he. He tried to keep it.
- [67:59]
A
He tried to keep it after saying it was too late. That was. That was. Talk about a bat signal that. That was like, smack Adam Silver in the face and force him.
- [68:09]
D
Yeah.
- [68:09]
A
To go talk to Amazon and Netflix and all these other. And all these other players. So that one did. That one didn't work out. Should we sell the compound to Paramount after they buy Warner Brothers? Should we be or should we sell. Do a deal with Netflix? What should we do? What's our, like, what's our streaming war game plan here? I'm not here. I'm not here in a game plan.
- [68:32]
D
I'm unequivocally team Netflix. Netflix, like, sorry, sorry, Sundar, I'm not interested.
- [68:38]
A
Why isn't Rob Passarello taking biz dev meetings with Netflix?
- [68:43]
D
We got the wrong guy. He's not watching this is he.
- [68:49]
A
Shout to Rob. All right, we have to come up with our Streaming wars game plan at some point, Michael. We'll. We'll go to Bagel Boss. We'll sit down. We'll. We'll chop it up.
- [68:58]
D
No, let's get. We'll get a pumpkin spice at the barn. We'll sit on the bench.
- [69:01]
A
All right, all right. We're not going to do a whole huge thing on the quote unquote private credit bubble. We're not going to go crazy here, and I'm going to tell you guys why. We have a very special guest for the compound and friends at the end of this week who is sitting right at the crossroads of media and private equity and private credit. Her name is Shonali Basak. She was, in my opinion, one of the best reporters covering high finance for Bloomberg. And now she's at iCapital, and we really want to have this discussion with her. However, I didn't want to let the moment go because Barry Ritholtz, my partner, Michael's partner, and one of the founders of the firm, reminded everybody he had like, everyone's talking about bubble all of a sudden. Like the Google search term for bubble. For whatever reason, like, bubble's going crazy right now. He unearthed this thing he wrote in 2011, shortly after the great financial crisis, when he actually did spot the bubble in real time. How to spot a bubble in real time. And it's a 10, 10 item checklist. And I just want to. I'm not gonna, like, read every word of this.
- [70:18]
D
I was about to say. I know it's more than 10. I just have a feeling. It, of course is. It's 14.
- [70:22]
A
Of course.
- [70:23]
D
Because I'm going to give. I'm going to give you 10 elements.
- [70:25]
A
That's. So is that the most on Brand Barry thing ever?
- [70:29]
D
Here, 10.
- [70:30]
A
10 things on my checklist. That's also 14 things. All right. But when you read these things out loud, I really think the private credit. We're not doing this with AI because there's not enough time on the clock. But with private credit, it checks everyone. This is my pick.
- [70:46]
D
It does.
- [70:47]
A
Okay, you're going to tell me which ones it doesn't. One, standard deviations evaluation. Look at traditional metrics to rise two or three standard deviations away from the historical mean. No one would argue that deals in the private markets are not going off at higher valuations than historically. Nobody would significantly elevated returns.
- [71:10]
D
Private credit is having incredible. Wait, wait, wait.
- [71:13]
A
It. What are you about to throw a laptop?
- [71:15]
B
No, no, no.
- [71:17]
D
Valuations. I don't know that valuations in private credit are, are elevated. It's, it's not, it's not like it doesn't work that.
- [71:25]
A
It doesn't work that way. It's, it's, it's, it's more like, it's more like the, the rates that you're accepting as an investor being much lower than what you would normally.
- [71:37]
D
Not true. Not true. Not true at all. There's a 600 basis basis point spread, and it's pretty, it's pretty consistent over private market.
- [71:43]
A
Private market assets are at parity, generally speaking, with public market assets. That's what's changed.
- [71:49]
D
We're talking about private credit and yields, people. There's not a chase for yield where they used to take 600 basis points and now they're taking 300. That's not happening.
- [71:58]
A
No, they'll take the 600, but they're lending faster and easier than they used to. Okay, so that's, that's you. We're not doing private equity, so I agree with you. It's not quite as black and it's not quite as apples to apples, but it's close enough.
- [72:13]
D
Let's keep going.
- [72:15]
A
Significantly elevated returns, private credit. One of the reasons why this bubble, you don't have to call it a bubble I will formed is because the returns have been damn good. We spent a lot of time with very low returns in traditional fixed income, and private credit filled that bucket beautifully. Yeah, the returns have been really good. And you can't have a bubble without great returns.
- [72:39]
D
But I, I feel like the, the word bubble is not helping here because a bubble is not just a word that you just throw around when there's, like, enthusiasm. A bubble is a, A, an environment in which the fundamentals have so far fallen behind the returns, such that in no way, shape or form is there any way out without the absolute excess getting wiped out. And you could say that there's a lot of activity.
- [73:04]
A
I think it's an activity bubble.
- [73:06]
D
Okay, but that's very different. It's very different. But also an activity bubble.
- [73:11]
A
It's different.
- [73:12]
D
I would also argue that we're. If this is an activity bubble, why still think we're in the early stages of this activity bubble? Like, they're just coming to us.
- [73:20]
A
Number three, excess leverage. Every great financial bubble has at its root easy money. You're going to deny that one?
- [73:27]
D
I don't, I don't have a strong opinion. I don't know. I'm not.
- [73:30]
A
We had easy money all over the economy And a lot of it went into, okay, four new financial products. I know you're not going to fight with me on that one.
- [73:39]
D
You think private credit is new?
- [73:42]
A
No, I think the amount, I think the amount of products and the amount of quote unquote innovation in the space to get wealth management people in, family office people in. I really think it was a Cambrian explosion of new species.
- [73:56]
D
So you're right. The explosion in new interval funds off the charts this year, 100%.
- [74:03]
A
Okay. Expansion of credit. This is. Barry said this is beyond mere speculative leverage. With lots of money floating around, we eventually getting around to funding the public to help inflate the bubble from credit cards to helocs. The 20th century was when the public was invited to leverage our. So again, not apples to apples, but apples to what's close to an apple? A plum. It's close enough. We're doing that now. We're in that process right now. I would say it's expansion of availability. And this is the industry's big push. 6 trading volume spike okay, this doesn't trade. So of course it's tougher analogy. But when you talk about an activity bubble, I don't think anyone would disagree. The amount of launches and, and, and, and product creation would suffice to replace trading volumes in, in this sense.
- [74:56]
D
One thing.
- [74:56]
A
Seven.
- [74:56]
D
Wait, hold on. One thing that's important to mention is that the activity in the wealth channel, it's, it's up and to the right. At the same time you have a lot of traditional institutional investors pulling back on their investments in private credit. Like they're full. They're good.
- [75:10]
A
It's a good point. Perverse incentives. This is the, this is the thing that will argue with Sonali where you have unaligned incentives between corporate employees and shareholders, you get perverse results like 300 mortgage companies blowing themselves up. I do think that there's a lot of syndication and a lot of loans being sold and resold and packaged, not unlike previous debt bubbles that we've seen in history. And I also don't think that we even know you're right. I just don't think we know.
- [75:38]
D
How's this for a perverse incentive? Charging the leverage, not just the underlying. It's like.
- [75:43]
A
Yeah. Amplified the charge you see on the, on the borrowed. Yeah.
- [75:46]
D
So that's tortured.
- [75:47]
A
Number eight. Tortured rationalizations. Look for absurd explanations for the new paradigm price to clicks ratio aggregating eyeballs. Dow 36,000.
- [75:58]
D
Do you think that's this? I don't.
- [76:00]
A
This one's tough. I would not Say it's the only way you. It's a rationalization. I don't think it's tortured.
- [76:07]
D
No, it's not.
- [76:07]
A
It's just people saying 60, 40 is dead. It's now 60, 20, 20 and 20% is private, private debt. And I'm like, well why? These are non traded junk bonds. Why is that the new 20? That's a tortured rationalization for me.
- [76:22]
D
All right, so here's the non torture part of it, is that these borrowers, which represents 90% of the economy. Okay, they're not all junk. Represents 90% of the borrowers of the economy. They traditionally were being served by the, the, by the, not the giant banks, but the midsize banks. After the GFC regulations were put in place that made these loans much more expensive to make, they pulled back and stepped in Blackstone. So that's not a torture rationalization. It's very straightforward.
- [76:49]
A
I agree with that. There's a reason this whole industry just 10x and the reason is we decided we don't want, we don't want deposit institutions like bank of America and Chase taking deposited money that's supposed to be safeguarded for the consumer and gambling in markets that are not transparent, not liquid, et cetera, et cetera. So somebody had to step in because businesses still need loans. Yep, perfectly legitimate. I'm with you on that. Number nine, unintended consequences. All legislation has unexpected, unwanted side effects. Okay. We just described that number 10, employment trends. A big increase in a given field, real estate brokers, day traders, may be a clue as to a developing bubble. You can't argue this with me. You can't.
- [77:47]
D
Go ahead.
- [77:49]
A
Yeah, the smartest kids from my daughter's graduating class last year, a year and a half ago, coming out of her high school, literally the smartest kids, the ones that went to the best schools. You talk to them or their parents, where are they going after college? What are they? Private equity. Private equity. Private equity. Private. Didn't even know what the it is. They're just repeating what their big brothers and sisters are telling them because they see who's making money in this world.
- [78:16]
D
Let me ask you this just to interject here. Do you think that in five years we're gonna look back and say there was a lot of sloppy behavior, which I think we probably will, but. And also in five years the industry is going to be a lot bigger than it is today? Because I think both things are probably going to happen.
- [78:31]
A
Yeah, I don't think I'd argue with that because I do think people that are adopting these private asset investments as part of their portfolio are not going to run away. I think they're going to stay, stay put. And I think most of these funds aren't going to blow up. A lot of them will be. A lot of them will be fine.
- [78:50]
D
They can't leave.
- [78:51]
A
What I think is going to happen, though, that's a little. A little nuance. I think a lot of financial advisors are going to have to apologize for locking people's money up in the next downturn when people actually want it out or want to know how it's doing. I think there's going to be. I think there's going to be a reckoning.
- [79:09]
D
So there's been. There's been two stress tests, one of the GFC and one in 2020. And the defaults were not crazy. The actual navs, now you could say the navs are fake. Okay, fine. But the navs did not crash nearly as much. And I think advisors 2020, I think advisors and clients are going to love this in a downturn because guess what? It's not like people are going 100 in on this stuff. They'll have liquid assets. If they want to pull from that, they can. That's what the Treasuries are for.
- [79:37]
A
I have a little bit. I. I have a little bit of a longer. I have a little bit of a longer Runway behind me than you do. And I'm just telling you, there were a lot of people who were pissed off because they were in mortgage funds and real estate funds and hedge funds that had illiquid assets. And this is how advisors lose clients in a downturn. It's not that the stock market falls. Everybody gets that. That's part of the deal. When your money is locked up and you can't buy the dip or you can't pull some out to make yourself feel better and put it in cash, you get really angry. And it's not like these things are throwing off 30% returns where it's like, fine, I can live with the illiquidity.
- [80:18]
D
I certainly agree that there will be advisors who are completely irresponsible and reckless about the way they build portfolios that aren't thinking about the downturn, that don't have enough reserves, that aren't setting their clients up for success. 100% that's going to happen, without a doubt. I also think in aggregate that in the next downturn, people are going to want more illiquid stuff because they're not going to want to feel the pain. They're going to be like, like, oh, it was only down 7%.
- [80:42]
A
I don't think that's, I don't think that's the general public.
- [80:44]
D
Oh really?
- [80:45]
A
Very smart.
- [80:45]
D
Oh really?
- [80:46]
A
You're very smart? Most people don't think that way.
- [80:48]
D
Dude, one of.
- [80:49]
A
Sorry, you're giving people more credit than this.
- [80:52]
D
This is the behavioral argument. I think one of the reasons why private credit has resonated so much in, in, in the past couple of years is because of the pain of bonds in 2022. That's what that was a huge catalyst to spark the inflows. Oh my God, I'm getting 8%, 9% and I don't have to see the marks every day. I mean I want more of that.
- [81:09]
C
That.
- [81:09]
D
So I think the same thing happens in the next downturn.
- [81:12]
A
Okay, we're gonna, well, we're gonna find out what's next. Let's do these last, let's do these last ones. Credit spreads. Look for a very low spread between legitimately AAA bonds and higher yielding junk can be indicative of fixed income risk appetites running too hot and junk markets for sure. Okay.
- [81:28]
D
No, no, not case. Close. Dude, I'm telling you the spreads in these products are fairly consistent. They're around 600 basis points, give or take. Now the speed at which they're being done and the way that loans are being made with probably sloppy diligence, that is definitely happening.
- [81:43]
A
Not everywhere the spreads are. The spreads are appropriate given the amount of risk that people are taking.
- [81:48]
D
I'm saying in average, the spreads are where they always are. You know, if you just look at that, and I'm not saying you should, that's not where you see the bad behavior. It's in the documents. The loans like the sloppy behavior.
- [81:58]
A
It's not the rates people are accepting for risk. It's. It's in the speed of transaction.
- [82:03]
D
Holy shit. We just got $7 billion in floors. Put it to work. That's where you see the blow ups.
- [82:08]
A
All right, all right. 12 credit standards. Number 12 on Barry's boom boom Credit standards. Low and falling lending standards are always a forward indicator of credit trouble ahead. This can be part of a bubble psychology. Do we have to articulate anything about that or two more. 13 default rates. I thought he said very low. Wait. Very low default rates on corporate and high yield bonds can indicate the ease with which even poorly run companies like First Brands can refinance.
- [82:45]
D
Say it again.
- [82:45]
A
This suggests excess liquidity and creates false sense of security.
- [82:48]
D
100%. Howard Marks was on TV the other day saying the Worst loans are made during the best of times.
- [82:55]
A
100%. Okay. Last, last 14. Unusually low volatility equity. And this is explicitly equity. Low equity volatility readings over an extended period indicates equity investor complacency. In the credit world. There were no losses. So the complacency is, like, understandable.
- [83:16]
D
No, but I think the complacency, I hate to say complacency, the lack of volatility in the equity markets makes it such that people are more lackadaisical with what they're doing with their money. And check, check, check. So, yeah, there's definitely. There's not nothing. There's definitely some going on.
- [83:31]
A
Can I just, Can I just say Barry, eight on that, on that top 14 list he ate.
- [83:37]
D
Yeah, he did.
- [83:38]
A
There's just no way that was.
- [83:39]
D
He was full.
- [83:39]
A
That was vintage Woodholts.
- [83:41]
D
That's good stuff. Yeah, there's elements, for sure.
- [83:44]
A
You want to show me this chart? Because I don't know what it means.
- [83:49]
D
Sure. We could do this.
- [83:50]
A
I said quality.
- [83:51]
D
So. So bank of America, now, this is the consumer. Okay, this, these are not corporations. But for all this talk, and we've been, you know, belaboring this point a lot on recent shows about how desperate the media is to feed us the blow up, we're just not seeing signs of stress in the consumer. I'm sorry, this is Consumer Net charge offs. Look at the gray dot, Josh. It was 98 basis points in the first quarter.
- [84:16]
A
It's actually fallen.
- [84:17]
D
It's falling. Then it was 90, now it's 82. Bank of America serves Main street. And I just, I look at the data. I'm sorry. Anecdotes aside, I'm sympathetic to all the bad stories as well, but the data is the data and there's just not a lot of stress out there.
- [84:33]
A
Okay. I can't, I can't disagree.
- [84:35]
D
All right, we're going up. I think this is, I mean, this, this is a topic worth covering. So last week we spoke about a lot of potential value stocks. We'll look back on those in a year and see how these stocks did. But this is a tweet that made the rounds. And, and it's great stuff. Steve Mandela, the founder of Lone Pond Capital, said, I don't need an analyst to tell me when a 10 PE stock is cheap. I need an analyst to tell me when a 40 PE stock is cheap.
- [84:58]
A
That's so brilliant. That's such a brilliant insight. It's so true.
- [85:02]
D
It's so good. So I want to take a moment to Talk about a stock that I've been wrong about. And the stock is Apple. So Apple is about to hit $4 trillion in a market cap. The stock has had market new record high yesterday. New record high. The stock has had market performance performance over the last five years. So the Q's are up 100%, Apple's up 100%. Obviously some of its competitors, Google, Meta, Microsoft, are up a lot more. And if you look at like the PE ratio, which I do and a lot of others have, and you say, how does this make sense? It's at 40 times, like this is madness. And it's at whatever 30 times forward, whatever it is. Okay, look at the operating margin and we've spoken about this. But like this is I guess the story of why the elevated multiple makes sense.
- [85:52]
A
I had this right from jump street. I had this right from jump street. Apple is being valued like a high margin consumer staple, which is exactly what it is. Your iPhone breaks, you get another iPhone. You might not buy the newest model. You're not my. You might not buy the Pro Max, but you are buying another Apple. Your iPhone breaks, you do not say, let me check out the Galaxy ecosystem. It's a consumer staple. You have your brand of paper towels that you buy that's got a way higher, way higher switch potential because bounty is fine, but the other one is probably fine too with this. It's high margin and it's a locked in consumer. And Costco is 50 times earnings. How does that make sense? Alex?
- [86:42]
D
Walmart. Walmart is 40 times two.
- [86:45]
A
Oh my God, you almost choked on that. Is that a big enough jug of water for you? I worry that you might get dehydrated.
- [86:51]
D
No, I'm a big, big straw guy. I love the big straws.
- [86:56]
A
You should drink four or five of those and then go right to the hospital. So Apple, that's the way Apple's being valued, the way costs. Costco is being valued in such a way. It's not that they're growing fast enough to justify, it's that you know for a fact those earnings are going to be there. People prize certainty. And the way a Stock gets to 30 times or I'm not saying it deserves, it ain't got deserve got nothing to do with it. What it's about is people prize consistency of earnings over growth of earnings in some cases. And so in the case of Costco, people have a membership. They're not going to go somewhere else to shop. We know the earnings are going to show up and that's worth the premium to the market. Apple is no different.
- [87:45]
D
We.
- [87:45]
A
We know they're not going to grow 30% a year, but we know that the earnings are going to show up. We know the buybacks are going to happen. We know the cash flows are massive. And we know that in three years, the same amount of people or more who are using an iPhone will still be using an iPhone. And that is where this stock gets the multiple in addition to its insane levels of profitability.
- [88:09]
D
Amen, brother and sister. That was great. Great stuff, Josh. I also want to share one. So the stock got a huge pop yesterday because the 17 is tracking much stronger than the first two weeks of the 16 people are buying it. But start this chart from Six College. John, you could skip the gene tweet. All right, so we know that the iPhone revenue has been. Has plateaued. It just has. It's not growing at all. It's fine. It is what it is. But to your point, Josh, it's still there. And the street doesn't care about it, because a lot of the reason, and this is not breaking news here, the big reason why the margins are what they are. It's not the hardware, it's the software. And look at services. Look at the percent of the total profit. It's.
- [88:52]
A
It's locked in. Yeah, they're locked in. Yeah, they know it.
- [88:56]
D
All right, last thing. This is a hilarious jab. Berkshire blew its Apple stock investment. Yeah, sure they did. They may have left. They may have left $50 billion on the table.
- [89:06]
A
What do they make a trillion dollars in Apple?
- [89:07]
D
Yeah. Greatest trade of all time, dollars wise. All right, what do you want on the Shiller P?
- [89:15]
C
Uh.
- [89:17]
D
Me either.
- [89:18]
A
You know what? It. We're not doing it.
- [89:20]
D
Yeah, it's enough.
- [89:21]
A
Okay. I want to get to this unemployment thing. Let's. Let's do an amuse bouche just to set the table here.
- [89:27]
D
Dude, nobody knows what that word means.
- [89:31]
A
It's that little thing on a spoon that the chef sends out to your table before you even order.
- [89:36]
D
Wow.
- [89:36]
A
Just to, like, get your little clap.
- [89:38]
D
That was impressive.
- [89:39]
A
Just to get, like. Just to get your, like, your palate going. Going. It's usually something. It's usually like some kind of, like, not a. I don't want to say.
- [89:46]
D
It's like a sorbet. Sorbet. A sorbet.
- [89:48]
A
It's, like, cold. Yeah, there's. There's oftentimes there'll be, like, a cucumber involved or a little gazpacho sometimes has a dainty little drop of oil on the top of It. It's like this. It's like this. It's like the chef. It's like the chef showing you how swaggy shit's about to be. And I. I like it. Yeah. Someone said, go Biff Grebel's microgreens on foam in a tiny spoon. You're goddamn right, cook. All right, here's the unemployment rate in the United States, just to set the table historically low. So what I'm about to say is not intended to act like that's not the case. We are in a very healthy labor market. The thing is, it is noticeably deteriorating for certain segments of the population who either are forced to switch jobs right now or want to. There are very few places for a lot of these people to go. And the job search, as New York magazine puts it, has become a humiliation ritual. Let's put this. Let's put this. This is. I think this. Guess this is a magazine cover. Or this is the. Or this is just the art that's accompanying their feature article this week. And this resonated so much with me here. The job search has become a humiliation ritual because I hear anecdotally so many people who are going through this right now. And it's more than I can remember for a long time. So I won't read the whole thing, but here's New York Magazine. Roughly 7.4 million Americans are now unemployed. As of August 2025, approximately 1.9 million Americans have been looking for work for six months or more, the highest share of what we call long term unemployment since the pandemic years. And six months is typically the longest you can collect unemployment in most states. Unemployment numbers, of course, only paint part of the picture. Even the employed, for a variety of reasons, may want or urgently need to acquire different jobs. So we keep saying it's a low fire environment, but a low hire environment also. And I think that that's what this gets to the heart of many office. This is New York Mag. Many office workers have historically been better paid and relatively shielded from poor working conditions. But now the promise of upward mobility and identity through a job is starting to slowly dissolve, leaving a generation of laptop workers. That's who we're talking about. Knowledge sector workers who are not bosses, confronting a new hostile economic and cultural landscape. What sets this downturn apart from the panics and busts of the past is that now every layer of labor, from hiring to firing is increasingly mediated by automations and algorithms that cannot hold the irreducible realities of human life. So you apply for a job it's not even a person reading your resume. It's software. And you don't even know why you're being weeded out or why you're not getting a return phone call. And the answer increasingly is you are literally talking to AI. And this is the humiliation, ritual aspect of it. And I believe it's acutely difficult for the type of people that I'm hearing from. These are recent graduates. Maybe they got their first job right out of school. Maybe they didn't even get that. They're not in a great spot. A lot of them are trapped because there are less and less companies even willing to take a meeting, even willing to take an interview right now. Companies from the top down are slowing down on hiring because there's so much uncertainty about what if we put all these people on and it turns out AI could just do all this shit that the entry level kids used to do. Before I go further, what are your thoughts?
- [93:40]
D
All right.
- [93:41]
A
Yeah, you don't talk to as many people as I do. You. As you know, I'm like always out and about in the community.
- [93:46]
D
Excuse me, I've unfortunately, I've sent a few of these emails. Don't tell me. I don't talk to people. That's all. It's literally all I do all day is talk to people.
- [93:53]
A
As a salt of the earth person, though, I just, I feel like I have a lot more of these conversations on the ground, in the trenches than you do.
- [94:00]
D
You are the opposite of whatever that is. I don't even know what that is. All right, no, here, here's my thoughts. And, and I, I have, I have lots of thoughts. I have competing thoughts. I change my mind on this. I go back and forth, forth. There have been periods over the course of history where getting a job was extremely difficult. When I graduated during the gfc, young people were toast. It was really hard. And that has happened over and over and over again. And at some point the labor markets cooled and people were able to, to get absorbed into it. I also think that this time is different, particularly for this young cohort, because all of this grunt work is being automated and it's, it's scary. Like, I am a. I am a techno optimist. I think that technology has and does a lot of amazing things and that we, we as in society always figures it out and we get to the other side. And that's true, but it doesn't mean that there's not a lot of people that are displaced in the meantime. And so while society is not going to crumble. And we're going to be better in the future. We always are. The people that are feeling the pain right now, I don't know where they do or what they turn to because these jobs are not coming back. So for example, a Bloomberg article today, OpenAI has more than 100 investment ex investment bankers help it to train its artificial intelligence staff on how to build models as it looks to replace the hours of grunt work performed by junior bankers across the industry. And here's the dark part. They're paying people 150 bucks an hour to write the code that's going to wipe out out potentially tens of thousands of future jobs and this.
- [95:35]
A
Billions. Billions in salaries, right? Yeah, wipe out billions in salaries.
- [95:41]
D
They're paying 150 bucks an hour to wipe out billions in salary. So this is happening here obviously, and it's going to happen in many industries. And I think if you're not concerned, like, I don't know, how could you.
- [95:52]
A
How could you Wake up, Wake up. Right. If you're not concerned, what, what are you paying attention to? One of the first chapters, I think the first chapter in my new book was about Just Own the. Just Own the Damn Robots was the name of it. It's based on a blog post I wrote years ago, 10 years ago probably. And I opened up that blog post and the chapter of the book with this excerpt from Player Piano by Kurt Vonnegut. When I read that story this morning that you just referenced about OpenAI training its model on ex investment bankers, like how to do dcf, how to bring a company public, blah blah, blah.
- [96:31]
D
Right.
- [96:33]
A
So this chapter is a fictional character named Rudy. And Rudy is a machinist who's worked in this factory for 40 years. And they tell him he's retired, but he has one last job to do. His last job, his last day of work. He has to train this machine. Vonnegut wrote this in the 50s. I want, I want people to understand this. He has to train this machine in his exact precise movements. I think he's a lathe operator, whatever that is. I'm not, I don't know. But like the machine is recording. This is pre computer. It's a science fiction book. It didn't really happen. But the machine is mimicking what this man does with his physical movements. And when he's done training this machine, the management people, management class, they come to him and they say, okay, thank you so much, your work is done here. You're off to the R and R. And the R and R in that book is this community outside of town of former factory workers whose new job is. I think it's like Rex and Reclamation or something. Basically, when a bridge breaks, they have to the worst jobs. They have to pick up up a dead animal on the side of the road. Like that's what happens to these people in Player Piano. And when I read things like that today, first of all, it's insane that Vonnegut could picture that 70 years ago and it's happening right now. But I also think it's like, it's like some of these things, we really do want to take these as signposts for what's to come. Now, I know there are very impassioned people on the other side of this in Silicon Valley, like Marc Andreessen, who have written very poignant essays about why AI will expand employment. And I tend to agree with that. But there's a gap in between, right? The creation of the new jobs and the destruction of the old. And we don't know if that gap is one year or 10 years. And that is the thing that I think is, is front of mind for a lot of people. This is the Associated Press new survey. 47% of US adults are not very or not at all confident they could find a good job if they wanted to. An increase from 37% when the question was last asked in October 2023. So basically, in two years time, we went from half the country feeling very confident that they could find a job to just 30. Oh, I'm saying it backwards, but 47% of US adults don't think that they can get it. You want to take a guess what direction that goes?
- [99:11]
D
Yeah.
- [99:12]
A
Okay. So I think these things are, they're notable and we're documenting in the real, real time as we do the show. And we're not doing it to like scare people, but like, I really feel like people need to wake up.
- [99:24]
D
I think you're gonna, I think, start thinking about this. I think you're gonna start to hear a lot about universal, basic, basic income as a result of this whole in a couple of years. And I agree with you agreeing with Andreessen. Yeah, in 10 years, 20 years will be great. The economy will be humming as a result of all of this technology. But in between now and then, it's going to be ugly for a lot of, for millions of people.
- [99:42]
A
The optimist. The optimist right now is not saying creation of new jobs. The optimist now is saying four day workweek.
- [99:51]
D
Great.
- [99:53]
A
Okay, maybe, maybe that's the silver lining. Last thing on this. Seasonal hiring. Job seekers have now overtaken job postings for the first time since the pandemic.
- [100:03]
D
Yeah, but that's sort of always the case. No more people looking for jobs than there are open jobs.
- [100:07]
A
Well, see, there's two layers to the. No, it's not always the case. We had two job openings for every person looking for a job in 2021.
- [100:15]
D
The recent history that was the aberration.
- [100:18]
A
Okay. Seasonal searches for holiday jobs were up 27% year over year at the end of September, 50% above 2023 levels. In contrast, seasonal job postings only increased by 2.7% compared to last year. What that means is there are going to be a lot less people who rely on these seasonal jobs getting them. The percentage of seasonal job postings explicitly mentioning urgent hiring is down significantly from 10% in 2021 to 2% in September 25th. All right, just keep, keep it in the back of your head. Last thing. Many employers are taking a cautious approach to hiring in Q4, 2025. 45% expecting to maintain their current workforce. This is the highest number of employers saying they're holding steady since early 2022. And there's a lot more. But this is the reality. Now. I don't know when this cracks and finally hits the headline employment numbers, but I am telling you, the Fed is going to be reacting much quicker as these job numbers start to come out than they have been throughout the balance of this year. Because I don't think they're going to have the same choice that they think they have right now. Right now they think they're striking a balance. I don't think that they're going to have that luxury. I don't know if it's the next report or the one after, but this is going to go from a luxury of waiting to cut to a necessity. And I think it's going to happen quick. What do you think about that?
- [101:54]
D
There's so much nuance in here. Because if it's only happening at the entry level position at the 2022-25 age bracket, I don't know how they react to it. And I don't know how Fed cuts help.
- [102:07]
A
They don't. But that's the tool that they are holding. A hammer. Yeah, they're holding a hammer. They don't. They're not also holding, you know, five other. There's, there's limited things that they can do. They can, they can buy bonds and they could lower interest rates.
- [102:21]
D
I would be surprised. I'd be pretty Surprised if in two years from now we were like, huh, Remember, we were worried about AI taking young people's job and it just never happened. I, obviously we all hope that happens. I'd be, I'd be pretty surprised if we don't see it in the data.
- [102:36]
A
I think the thing that's going to surprise us is the opposite direction of what you just said, which is white collar mass layoffs.
- [102:44]
D
So that's, that's the.
- [102:46]
A
I think they're going to come. They're going to forget about seasonal Christmas workers. Shit. It's going to be. We just heard Accenture. Accenture just said they're getting rid of 11,000 people after getting rid of 10,000 people earlier in the year. And explicitly they're saying we will hire other people. They have to be ready to upscale for AI. The people we're letting go of, we don't think that they can.
- [103:14]
D
Yeah. So that's the consult.
- [103:16]
A
That's the consulting firm to Fortune 500.
- [103:19]
D
I want to clarify something that I just said. When I said that's the nightmare scenario, I don't mean specifically white collar workers losing their job. What I mean is this. If you see unemployment tick up in a meaningful way up to 5%, up to 5 and a half percent simultaneously, you see corporate profits at an all time high in the stock market at an all time high, that is a very dangerous cocktail. And I think that's a. There's a very, this is, there's a decent chance that happens.
- [103:40]
A
Well, this is why you're going to get Mayor Che Guevara in a month. It's exactly this, politically, that is dangerous. I agree. Okay, Enough. Good news.
- [103:52]
D
Yeah. So you make the case and then.
- [103:54]
A
I have a mystery chart.
- [103:55]
D
Good news. Good news. I thought I was on mystery chart duty this week so I don't have to make the case, but I will quickly make the case for a stock.
- [104:01]
A
I think that it clearly said that you weren't.
- [104:05]
D
Dude, I was. I had a busy week. All right. Layoff. So I will quickly make the case for a stock that has had a very nice. A very healthy uptrend with a very healthy pullback. A stock that you own. A stock that, that I followed you into. Thank you for the recommendation. The stock is toast. I think it is set up nicely going into earnings elevation. Expectations are low. What? Did you sell it? Expectations are low. They just announced another partnership with Amex. I think the stock is set up nicely in of terms earnings.
- [104:28]
A
I bought more last week.
- [104:30]
D
Okay.
- [104:31]
A
I bought, I bought it. I had a buy I had a.
- [104:35]
D
A 35. You got filled.
- [104:36]
A
Yeah, I got a 35 on the nose. I had a. I had a buy in like a GTC forever, and we got it.
- [104:44]
D
Okay.
- [104:44]
A
And I bought a bunch more. And I'm an investor, not trading it.
- [104:48]
D
All right. If it goes down to I'll buy more mystery chart.
- [104:51]
A
This is a name that you and I have both traded on and off. I am not currently invested in it. That'll be one of my clues. It's one of the most fascinating stocks.
- [105:01]
D
Good stock. I like this one.
- [105:02]
A
It's one of the most fascinating stocks in the market to me. So here are my clues. This company cannot grow. It is a 1 or 2% annual grower, but it's in one of the highest tech areas of the market.
- [105:15]
D
Is it Zoom?
- [105:17]
A
Look at you. I only had to give you two out of three clues. I think I'm about to buy this stock. What do you think?
- [105:26]
D
I'm looking. I'm looking. I'm looking. Oh, I do like the setup. I really do. I really.
- [105:29]
A
I think it's inflecting. I think it's inflecting.
- [105:31]
D
All right. I really like it.
- [105:32]
A
Do you know?
- [105:35]
D
Do you.
- [105:35]
A
So we pay Zoom. We're a corporate customer. We use them. Our. Our employees are not allowed to call or text clients from their personal cell phones. So all of our employees have a Zoom phone number that they can use for calls or texts. This is an industry regulation. Some of the big firms paid billion dollar fines over this during the pandemic. Zoom had just announced they now have 10 million corporate phone customers. Zoom phones. So people look at this business and they think it's just the video calls. They don't understand that when companies say, no, we're going teams only, the salespeople at these companies revolt. This is in the transcript.
- [106:18]
D
Teams only.
- [106:19]
A
And they say, they say, all of my potential customers want Zoom. Why are you making me do this? As teams? And the comp. You know, the company says, all right, fine, get an enterprise license for Zoom. We'll use that too. They have the best product on the market. I know it's Google Meet. I know it's Slack Huddle from Salesforce. I know it's Microsoft Teams. Zoom has the best, easiest to use product on the market. And I think long term that wins. The problem is, how do you monetize it? It's a very competitive market and it's hard. So they're going into other areas of enterprise software and they're winning. And they. They said that they just got two Fortune 15 customers. I don't know which companies they are as enterprise clients. So the problem here is the growth rate. The good news is it's like 18 times earnings. You're not paying attention. You're not paying for growth here. And they have $8 billion in cash. They could do an acquisition. They could buy back a ton more stock. And the best part, the reason this stock crashed, the way we showed it to you guys, employee stock options, just out of control. Because the problem is they recruited all this talent like everyone else. So they say to somebody, you come work here, give you a $200,000 base salary. We'll give you $100,000 of stock. The stock collapses. The employee's like, what the. I just lost my hundred grand in stock. They topped all those employees off. They said, okay. Topped up. They said, okay, here's more stock. And it got out of control. And the CFO just said on a call, we are listening to Wall street, and Wall street is telling us we have to be more chaste with our stock option excesses. And now you could even have a float shrink situation on your hand because they've gotten way more disciplined. So the stock is stable. A company is stabilized. They're not growing. That's why it's so cheap. If they find a way to grow, it's. I think it's $100 stock. That's 5% growth.
- [108:31]
D
Can I tell you my best part? Chart. There's a big ass gap at 96, and I bet it gets filled.
- [108:37]
A
Yeah, it's got to get tonight. Yeah, of course.
- [108:40]
D
Well, yeah, I think it's that.
- [108:41]
B
I think.
- [108:41]
D
I think it's going there. I like this.
- [108:43]
A
I don't have. I don't own this stock. Nobody's expecting anything not in it.
- [108:47]
D
Nobody's expecting anything out of this business. Nobody.
- [108:49]
A
I think I want to be in it before the next earnings call because that could be the inflection point.
- [108:53]
D
Yeah, I might join you. It's. It's in a month. I like it.
- [108:56]
A
I'm really good at making the case.
- [108:58]
D
You're good.
- [108:58]
A
Good. You're good. I feel like if I were your. If I were your broker, I would. I would just have your money spinning.
- [109:04]
D
I'll take 11 shares. Yeah, why not?
- [109:06]
A
All right, guys, that's it from us. I know we ran long, but there was so much to get to. Thank you so much for watching. Thank you for those who showed up in, in the live chat. We love it. We have so much fun with you guys. I want to mention tomorrow's an all new edition of Animal Spirits with Michael and Ben. We're gonna do Ask the Compound with Duncan and Ben. And then at the end of the week, week again, Shonali Basak making her first appearance on the compound. And friends, she is amazing. You guys will agree with me once you get a chance to see that show. She will not disappoint. And we're gonna have a very in depth conversation on some of the biggest topics happening on the street right now. Keep it locked on the compound. We love you. We'll talk to you soon.
- [109:50]
D
Sa.