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The Compound and Friends
Stocks After a Rate Cut With Nick Colas, the End of Quarterly Earnings Reports, Strategy Denied S&P Inclusion
01:54:07
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- [00:00]
A
Ladies and gentlemen, welcome to the compound and friends. Tonight's show is brought to you by public. We are also brought to you by Rocket Money. Everybody knows there are things you can do to reduce monthly costs and improve finances. But who has time to go through all their expenses and decide what to trim? With Rocket Money, crunching the numbers for you, leveling up your money game gets way easier. Rocket Money is a personal finance app that helps find and cancel unwanted subscriptions, monitors your spending, and helps lower your bills so you can grow your savings. Get alerts if your bills increase in price, if there's unusual activity in your accounts, if you're close to going over budget, and even when you're doing a great job. Rocket Money's 5 million members have saved a total of $500 million in canceled subscriptions, with members saving up to $740 per year when they use all of the app's premium features. Cancel your unwanted subscriptions and reach your financial goals faster with Rocket Money. Go to Rocket Money.com compound today. That's Rocket Money.com compound all right, this is an amazing show. We are super excited to bring this to you. Had an amazing conversation once again with my friend Nick Colas. Nick is scary smart. He comes up with new ways to think about what's happening in the market, new ways to forecast, new ways to plan for different eventualities. He's always thinking, always researching, and some of his ideas. Just when you look at it, you realize this guy just struck oil. This is exactly what's happening. And it's very often a lens that no one else is really looking through. So tonight's a really great example of that. We we're going to talk a little bit about some opportunities and sectors. We're going to talk a little bit about the upcoming rate decision at the Fed and all sorts of other stuff. It's always great to tape these what did we learn segments with Nick and I know it's been a minute, but really happy to have had him back this week. Following that, it's a new edition of what are your thoughts with Michael Batnik and I. We're going to start off with President Donald Trump wants to get rid of the requirement that companies file quarterly reports. Okay, I'm all ears. We'll dive into that and every other major thing that happened in the market this week. As always, it was a lot of fun to create this episode, especially with the people who join us in the live chat. If you haven't done that yet, we record what are your thoughts Almost every Tuesday at 5pm Eastern, and we'd love to see you there for the live. And who knows, if you say something funny enough, it might even make it into the show. All right, that's it for me. I'm going to send you over right now, boys. Make it happen. Welcome to the compound and friends. All opinions expressed by Josh Brown, Michael Batnick and their castmates are solely their own opinions and do not reflect the opinion of Redholtz 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. Ladies and gentlemen, welcome back to what Did We Learn? My name is Downtown Josh Brown. I am your host and with me today is my friend Nick Colis, co founder of DataTrack Research and the author of DataTrack's Morning Briefing newsletter, which goes out daily to 1500 plus institutional and retail clients. Nick's research partner and co founder Jessica Rabe, who's usually here, will not be joining us today, but she's here in spirit. Nick and Jessica also have their own YouTube channel, which you can find a link to in the description below. This week the Federal Open Reserve Committee has an interest rate decision to make and it looks like for the first time in nine months we will have an interest rate cut. The consensus is currently for a 25 basis point cut, although there is some chatter about a 50 basis point cut. The current odds as of this morning 94% chance of a quarter of a point cut, only a 6% chance for a 50 basis point cut. Nick, what are your thoughts as we head into that late Wednesday afternoon announcement?
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B
Well, I brought a little show and tell for this topic, so let's pop it up on the screen. It is all the Fed rate cuts since 1990 sized by 2550 and then 75 or 100. And the table here just shows how many cuts of those sizes have occurred in every year with a rate cut back to 1990. There's been 55 cuts of various sizes since 1990 when the Fed first started to really be transparent about what rate policy was. And 33 of those, or 60% were 25s, 33% or 18 were 50s and then 4 or 7% were 75s or 100. So the odds are usually for a 25 basis point cut.
- [05:15]
A
That's usually what the Fed does, say 2 to 1.
- [05:17]
B
Yeah, it's much more prevalent now. The thing to take away from this table is the Fed only cuts by 50 or 75 or 100, but mostly 50 when there's a recession or when we're just going have been through a recession. So the 50s happened in 1991-1992-2001-2002, 20072 and in 2020. So those are all recession or immediately post recession years. The only exception to this rule is last year when the fed cut by 50 to start the current rate cycle, that wasn't in a recession, obviously, it was more to normalize rates. And so the takeaway from this is you don't want 50 basis point cuts. 50 basis points cuts say the economy's in recession and you don't want that kind of signaling, which I think the Fed knows, traders know. So as much as there was some chatter about 50 earlier in the month, I don't see it. It's going to be 25.
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A
Okay, so let's, let's talk about the exception. So last year you could not have done a 50, you did 150 basis point cut. But like the thing that people should understand about that is that is coming off of one of the most extreme hiking cycles ever. So it's like the context of how fast rates went up and by how much is really important to normalizing last year's 50 basis point cut. In that context, it was almost more like a 25 basis point cut just because of how much rates had risen. Am I trying to rationalize something that's not really there, or do you think that's a good interpretation of the need for that 50 last year?
- [06:55]
B
It's a very good interpretation. However, let's think about the bond market did after that 50 basis point cut 10 years, rallied by almost 100 basis points of yield from September through the early part this year. So even then the bond market took that cut as a, that's, that was a lot. That was very stimulative. So the 50, you know, it's, it came and went and we had two more 25s. But you're right, the 50 was very exceptional. And as the historical data that I popped up shows, very, very unusual. We shouldn't expect to see that again.
- [07:25]
A
We had a massive Dow Jones rally last week and a big move up in small caps and a lot of cyclical stocks, home builders. And I was on TV Thursday and I think Friday was an even bigger rally than Thursday, but I think it was a gap higher for the Dow every day last week or something like that. And I was asked on TV, is this the market starting to potentially price in 50 basis points? And I sort of felt like, yeah, that actually could explain why this sudden burst of excitement for home building stocks, because that's the only thing that really moves those stocks. So do you think that at the. Do you think that's not really the case? What was happening last week was like the door opening to, wait a minute, maybe they'll do 50.
- [08:13]
B
No, because 50 is the short end of the curve. And things like home builders work off of mortgages were really the long end of the curve. And twos and tens didn't move all that much last week, which is interesting, but tens have come down a lot. And so I think what the market was saying was the Fed's going to be locked in on 25 every meeting for the rest of the year. That's going to pull the short into the curve down, and the economy's slowing enough, particularly the labor market's slowing enough, that you're not going to have a lot of incremental inflationary pressures. And so the long end of the curve comes down as well. And it was the market kind of the equity market signing off on what the bond market was already saying.
- [08:48]
A
Do you think the 25 basis point rate cut is already mostly priced in? No one's going to be surprised by it at this point. It's been telegraphed. It's where the betting market has already been. So it's like, all right, how would the market hypothetically react to the Fed doing 50, even if they did it in a hawkish way where they said, okay, we're adjusting rates based on our data dependence, but we don't see the need to do much more than this. If they kind of said it, not exactly those words, it would be such.
- [09:20]
B
A departure from the way the Powell Fed has operated, which has been much more slow and methodical. To many people's criticism of the Powell Fed, that's the way they've done it. So if they went 50% out of the blue with no pre warning, no Nick Timorous leak, no, no conditioning of the market, tremendous shock, and I think we'd revert back to that table that we started with, which is 50s happening recession, and the market would say, crap, the Fed sees something we don't see, we're going into a recession.
- [09:46]
A
I want to put that table back up and ask you another question. In 2001, there were eight 50 basis point cuts. Was that every Fed meeting that year was a 50 basis point cut? Am I reading that right?
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B
1991 was 25s? There were eight 25s. And then in 2001 yes. And if you add the two together, you'll see that there were 11 cuts.
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A
11.
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B
There were 11 cuts. There's only eight fed meetings in the year 2001. Jan 3rd was an emergency rate cut of 50 basis points. And that's when the market said, oh my goodness, we are really in some trouble because the Fed met an emergency meeting on the first full business day of the year and cut rates and then cut them again in the normally scheduled January meeting. So that was a, that was a very tumultuous year for those of us who remember living through it. That was a tough year.
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A
I think that was chart off. I think that was the hardest year of my career and I barely had a career. But I just remember every stock going down every day of every week of every month. And with almost no exception, every month was lower than the prior month. And then sort of like as a capper, after nine months of stock selling off, we had nine. Eleven. Yeah. And I lived in New York. I can't actually remember a worse period of time. For me personally, I can't believe that there were 11 separate rate cuts that year and eight of them were 50 basis points. I really, I didn't remember that detail until I saw it on your table. We are in the opposite of that situation right now. We've got stock prices that go up every day. We've got earnings growth every quarter. It surprises to the upside. And I get that there's like a little bit of squishiness in some of the labor metrics, but by and large, it's a pretty damn good environment for most people. So this looks nothing like that. So I guess I would agree with you. A 50 basis point rate cut would throw the market for a loop like the like. In terms of sentiment you might get. A lot of people say, wait, wait, wait, what did they do? Why did they do that? So it's okay. All right, so you're on board with the 25 basis points. You also believe the market pretty much knows that's what's going to happen. If that's the case, how important is the commentary accompanying the rate cut, the statement itself, the press conference? What do you think?
- [12:17]
B
The common wisdom and what I hear from clients is we're going to get a Powell that is less dovish than the Fed funds futures market says, because Fed funds futures say you're 60, 70% chance of cuts at every meeting through the rest of the year. And Powell's not going to want to sign off on that entirely. So it's logical to Think he's going to be a little more hawkish and be a little more narrative around data dependent. But the market knows which way the wind is blowing, so I'm not sure it really matters all that much. And against that backdrop, we have an amazing amount of positive earnings revisions for the S and P happening right now. You know, we've talked about this in prior, prior videos, but typically speaking, numbers come down all through the course of a year. That's the way they do it. Analysts start at 100 in January for the year and they end up at 87. This since the beginning of the third second quarter earnings season, numbers have just gone up every single week pretty much. And so we've got a tremendous earnings momentum right now, which no one's really talking about. So the whole of this worry about the Fed, I'm not too worried about it. The numbers keep rising, estimates going up, which is super unusual in a mid cycle market. And so I'm very heartened to see those numbers go up. And I think that'll more than offset anything from the Fed.
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A
That's a great segue. So let's talk about earnings estimates because one of the observations that I've made and I've heard you make and a lot of other people make, if you have a choice and there's a scale and you slide the scale and on one end is pay attention to the economy and on the other end is pay attention to earnings. If you had slid the marker all the way toward earnings and away from the economy, you probably outperformed over the last 15 years. And if your marker is all the way on the other end, where you're just constantly talking about economic data and macroeconomics, you have probably underperformed to a substantial degree, at some point maybe that will change, but probably not tomorrow. So let's, let's dive into the earnings expectations and the fact that they've risen since I don't know when we last talked. June or July.
- [14:21]
B
Okay, June, July, they're up every week.
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A
So you have an update to that. Let's put that table up. John and Nick will walk us through what we're looking at.
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B
Okay, so this is a grid that we've shown, I think the last two videos which our clients really love. They don't necessarily love the message, but they love the analysis. What this shows is S&P 500 fair values based on a range of PE multiples from 14 to 26 times earnings. And then assuming we get the current estimate actually comes true, true for 20, 25 and 20, 26 and then a range of different earnings outcomes. So maybe earnings are lower by 10 or 20% for this year, maybe they're lower by 10 or 20 or higher for next year. But it gives you a nice sensitivity analysis based on investor confidence as expressed by PE ratios and actual earnings as expressed by this range. And for those of you.
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A
I'm sorry, Nick. Nick. Before we go forward, so just to keep the chart up for clarity, just so I make sure I understand this, there are only seven scenarios in which stocks should go higher and then all of. And those are in green. And then all of these blue or red scenarios represent the market effectively staying flat or declining.
- [15:34]
B
Yes, that is correct. There are 49 potential scenarios on this table.
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A
Because it's seven by seven. Okay.
- [15:42]
B
Yes. And only seven deliver upside a bunch. 1, 2, 3, 4, 5, 6, 7 are fair value or a kind of fair value, and the rest show declines. And all the analysis is meant to show is that we need to, we're trading at very high multiples, which we all know. But we also need to believe in higher multiples or earnings upside in order to belong here. Because it's not just enough to say, hey, we're at 22, 23 times earnings. Okay, fine, we need to say, okay, I want to make money here. So how do we make money? We make money when PE multiples go higher or when earnings beat. So for example, simplest scenario, the simplest scenario for 10% upside, 11% upside to the S and P from right here is if we earn $305 a share next year. Now that's two bucks higher than it was the last time we spoke. So numbers have gone up a little bit and we do a 24 multiple on those numbers. So kind of peak.fresh kind of valuations. That is the cleanest upside story. If you have trouble with that story, you gotta think about your stock exposure. I don't. And we'll talk about why not. But that is the central takeaway from that grid is that you've gotta believe not just that we hold 22, 23, that we can get to 24, otherwise it's super hard to justify being along us large caps.
- [16:57]
A
So how do we, how do we convince ourselves that either earnings estimates will go higher and they've been going higher, but continue and or multiples will go higher? What's the story that we need to tell ourselves in order to justify. Okay, that's where the upside is going to come from for large cap US stocks?
- [17:19]
B
Yeah, it's obviously the right question. To ask and really dig into. And we've got some fundamental stuff we can talk about in a minute. But let me just give my high order explanation or high order answer to that question. PE multiples, valuations, they're a function of investor confidence in the future. That's what they measure. When PEs are 14, no one has any confidence like in 2018 or 2020. Ps got to 14 in a heartbeat because you had the Fed raising rates or you had a pandemic, confidence went out the window. Conversely, when you're 22, 24 times, like you were 22 times through most of 20, 20, 21, that means investors have a huge amount of confidence. And in that case it was because we had a lot of fiscal and monetary stimulus that was shoving money into the economy and we weren't going to get a recession. Fine.
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A
Okay.
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B
Now you got to believe in 24 times, and 24 times is a little bit higher than dot com. And so the question becomes, are you as confident in two things? The first is the US economy and the second is the fundamentals of the companies leading the stock market higher. On the first point, I think you can have a high degree of confidence in the US Economy because the Fed's cutting rates, the long end of the curve is finally coming down. And so the backdrop is pretty healthy. And the labor market's squishy but not rolling over. So that's the fundamental.
- [18:33]
A
I also think you've got a demographic tailwind and you've got less immigrants competing for jobs and they might not be the same jobs as the jobs that kids coming out of college would get. But just generally speaking, you do have a tighter labor force almost for political reasons, and you have a lot of 30 year olds in this country and they're gonna work. It's not the same as when the labor force was so dominated by boomers and a lot of them were just opting out via labor force non participation. With a population that's heavily concentrated amongst people in their late 20s, early 30s, they're going to work. So I feel like that demographic slash immigration story is how you can get past mentally the squishiness in the labor market data.
- [19:25]
B
Yeah, that absolutely feels right. And we'll see in the next couple of weeks. That initial claims number last week was a little bit worrisome and there's some commentary that maybe it was due to some fraud in Texas. So we'll see what this week's data looks like. But it was a three standard deviation above the mean reading, which is by definition, hyper unusual. So I'm, I'm willing to be convinced the labor market is still solid, and I do believe it. But I'm also cognizant that the Data is not 100% compelling.
- [19:53]
A
Yeah. Now that, now that we've got Jon Voight as the head of the bls, it should be a little bit more convincing that the data is good. I think that's like a part of the sideshow that's happening here politically is just the upheaval at the bureau itself and a lot of questions now being asked that haven't been asked in a while and maybe should have been. Can we even trust the veracity of this data or how it's collected or what it means? But that being said, if you believe in the data, it's not as strong of a labor picture as it was a year ago. Two years ago.
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B
Absolutely. And look, I mean, as a sidebar.
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A
It is.
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B
Strange that we measure unemployment the same way as we did in 1948 with a survey of households and businesses. And I understand why that's the case. From an economic analysis standpoint, you want continuity of the data series. But it is pretty astounding that we measure and manage a huge economy with the same basic math as after World War II.
- [20:56]
A
Okay, all right. So if we're at the current valuations and the plan is to remain long and hope for one of those blue or green outcomes, either fair value or the market has room to trade higher in the near term, then we have to get comfortable with the individual components of the indices themselves. So let's start with Nvidia. It's the biggest, most important stock in the world. It's where a lot of the growth is coming from for the s and P500 this year and next year. And I know you've got an interesting way of thinking about the fundamentals of the nvidias of today versus their counterparts from 30 years ago, 25 years ago.
- [21:39]
B
So we did this a couple weeks ago for clients. And let's pop up the Nvidia intel comp. And I'll walk you through it. So this is Intel's second quarter financial results, some basic measures and. Sorry, Nvidia's. And then this is Intel's financial results in 1999. So literally, apples to apples, what they have in revenues, margins and so forth. And the upshot of this data is I'll just run through these numbers. Nvidia's operating margins are 1.8 times as high as Intel's. In 1999, intel powered obviously the PC boom in the late 90s, Nvidia is powering AI. So kind of equivalent in terms of their position in the market. Net margins. Nvidia's net margins dollars of income for every dollar revenue. 2.3 times what Intel's was. 57% versus 25%. Nvidia's asset intensity is 8 times less, 8 times better than Intel. Intel ran its own fabs in the 90s. Nvidia doesn't. So intel has 20 times revenues to PP&E. Turns return on equity. Nvidia's is 106% ROE annualized. Based on Q2, intel was 23%. So Nvidia is 4.7 times better on ROE than Intel was. And intel was no slouch. It was a great company. And then if you compare the size, if you inflation adjust Intel's revenues in 1999 to now, it's like $57 billion. Nvidia's annualized revenues just based on Q2 $187 billion. Nvidia now is three times the size of intel on an inflation adjusted basis and it's seven and a half times more profitable. It's making annualized $106 billion. Intel would have made $14 billion inflation adjusted. So the upshot here is intel is just a hugely better business than intel was in the 90s. Nvidia.
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A
Nvidia is a better.
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B
Yeah, Nvidia is much better.
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A
Intel looks downright industrial compared to the Nvidia numbers of today. It's like, and this is apples to apples because intel was probably the most important stock of that time. Some would say Cisco, some would say Cisco, but like it's a semi, so it's a better comp to Nvidia number one. And number two, it was every bit as elemental to that bull market. That bull market was about the PC revolution combined with the Internet, combined with server demand and laptops and even phones eventually. So Nvidia is, I think, Intel, I think is the right comp to Nvidia of today. And you illustrating that Nvidia is seven and a half times more profitable than Intel. All right, so maybe we don't deserve a multiple that's seven and a half times higher.
- [24:24]
B
But like 2x why not?
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A
It should be higher, right? Isn't that like a very obvious.
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B
Yeah, absolutely. And this. So two points. First is I also ran the Cisco numbers. Intel's were better, which is why I popped those up. But we also have the Cisco numbers in our report. The second is that this is the crux of the problem with valuations today, and we have other examples, but let's just sort of hit this now. I don't know how you value these companies versus the 1990s. I just know that you have to value them more highly because the returns are better, the margins are better, the asset intensity is lower, the competitive advantage is better. And we'll touch on that in a second. And the upshot is, is it worth 2x, a multiple of 1999? I don't know, 50%? I don't know. It's definitely more. And that's what the market struggles with. That's why we're at 22 times earnings, because the market knows we're better than we were in the 90s. We absolutely are.
- [25:16]
A
What was Intel's peak multiple back then?
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B
Yeah, 24 and change. 25.
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A
Okay, so it's absurd to say that Nvidia should be worth seven and a half times that. You know, like, obviously, because A, it's unlikely that they will preserve their operating margin. It's even more unlikely that they'll keep the revenue growth rate. They're not telling people they can. Nobody honestly should expect that. So, okay, so. But is it, like, outrageous for Nvidia to be valued at twice as much as intel was? Not really.
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B
Not really, no. And not with those returns on capital. I mean, this is kind of a grimy financial analysis topic, but 100% ROE is insane. A hundred percent. You're taking your equity and you're earning all that money for your shareholders every year. Two companies do that. Nvidia is one, Apple's the other.
- [26:17]
A
Yeah, it's.
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B
Right, It's.
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A
It's not something that you would expect to be repeated across 20 different companies.
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B
No.
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A
So it's extraordinarily unique.
- [26:26]
B
Yeah.
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A
Okay, you have another comparison. You have meta versus IBM. Yeah, meta. Meta of today. IBM in 1999.
- [26:34]
B
This one was just sort of a sentimental choice for me because I remember Lou Gerstner and IBM in the 90s, and it was one of the best run, most highly regarded companies on the planet. And so this lines up Meta's Q2 and IBM's 1999, and they're kind of remarkably similar in some ways. The ROEs are actually exactly the same at 37.6%. And interestingly, IBM was a more capital efficient company at a PP&E level than Meta is today. But where the difference comes in is in margins. IBM was a 9% margin business in 1989. Meta is a 39% net margin business today. 4.4 times higher so Meta is expressing a much stronger level of competitive advantage, meaning it has a stronger moat by virtue of showing those margins than IBM did in the 90s. And IBM in the 90s was a fantastic company. Meta is just way more fantastic. And interestingly, when you inflation adjust the revenues, Meta of today is almost exactly the same size as IBM in 1999, like 190 billion versus 170 billion in inflation adjusted revenues. But Meta makes five times more money on an inflation adjusted basis. It's making annualized $73 billion. IBM inflation adjusted would make $15 billion. So meta by virtue of margins, by virtue of size is wildly more profitable than IBM in 1999. And for those of you who remember IBM in the 90s, this was a well run company, this was a well regarded company.
- [28:02]
A
Can I also point out, and I don't think it shows up in any of these particular items, Meta is way more aggressive about investing for future growth. And probably that was the problem that IBM has, was that it was way too focused on returning capital to shareholders and not thinking big enough about technology in the aughts decade and the 20 teens decade. Which is why effectively the stock price did nothing for I don't know, 16, 17 years until, you know, recently. Whereas Meta is full throttle. We don't know whether or not all of that investing is going to pay off. But what we do know is that they are not managing future growth the way that IBM was.
- [28:52]
B
Yes, that's an excellent, excellent point. Totally agree.
- [28:56]
A
Okay, do we think, given this, do we think that Meta is appropriately valued relative to the way IBM was being valued at the top of the dot com bubble in 99? Is there room for a higher valuation or is it pretty much already getting it?
- [29:15]
B
I think you touched on exactly the right point, which is what's the investment profile of Meta vs IBM back then? And Meta is doing, you can argue about how much they spend, but they are putting money to work in anything that they think will grow. So they tried the Metaverse. They renamed the company for the Metaverse. That didn't exactly work out, but they didn't deter them from taking another swing when it came to LLMs and Gen AI. So they're still trying. And I think your point is so well taken that IBM in the 90s was writing the PC boom, but then they kind of gave up and because they didn't make their own chips very much, they didn't leverage Moore's law and then they missed cell phones, they missed a ton of things and they were dead. Where Meta is Still in the game, still trying. And I think you have to attribute that a lot to Zuckerberg being the founder who still runs the company and whose wealth is tied up in the value of that company. And he's not going to let it die that way.
- [30:05]
A
Right? Gerstner was a board appointed CEO, not a founder. This is Zuckerberg's baby. I also think Zuckerberg does not like giving Apple a third of the profits from Meta's apps. And they seem to be hell bent on creating their own device platform, starting with the Ray Ban glasses. Because whatever the next form factor is for the AI age Internet, I don't think that they want to be taking a backseat to Apple in terms of where do the profits get diverted from all this activity. I think they'd like a primary relationship with their users and putting that equipment in people's hands. IBM gave away its computer business to Asia. They went the other way is my point. All right, and you've got one more, and this is a fun one. Microsoft in 1999 versus Microsoft today.
- [31:03]
B
Yes, this was another another, like you said, another fun one because it's nominally the same company, same symbol, same, you know, everything. But the companies are very different. The margins are relatively similar. 39% then, 36% now, net margins. But Microsoft, interestingly, is a much more PP&E intensive company now than it was in the 90s. It was very lean back then. So it spends a lot, has a lot more money invested in equipment, in hardware. It still doesn't matter because their ROEs are higher now than they were in the 1990s. ROE's now is 32%, ROE back then 27%. So Microsoft's a slightly better business. But the magic of this analysis is back on this bottom two lines. If Microsoft had grown by inflation since 1989, it would be about a $38 billion revenue business, about a $15 billion net income business, just if it grew by inflation CPI. In reality it is a $300 billion business. So basically 10 times what inflation adjusted should have been and it's making $109 billion in net income versus 15 inflation adjusted. So call that eight times more. And this to me explains the power of technology generally. Because here's a company that has held margins the better part of 30 years and grown 10x where it should have been just given inflation growth. That's the power of technology. Moore's law. The permanence of technology is a driver of revenue growth, of net income growth. And so you end up with a company that is orders of magnitude bigger than you would have thought possible 25 years ago.
- [32:41]
A
What's so interesting is right just after this 1999 period's worth of numbers is when Bill Gates steps down, hands the reins to Steve Ballmer. Ballmer then presides over 16 years of modest earnings growth, but a flat to down stock price. And ultimately the company makes this full bore pivot into cloud computing. Builds the second largest cloud computing platform in the world. And that's how you get a company that if they were just muddling along selling office software and operating systems and maybe a little bit of revenue from Bing and Xbox, it's a $38 billion business. But they didn't do that. They reinvented themselves for the cloud era. And that's how it gets to 300 billion in revenue. And they take the cloud guy and they make him the CEO and Ballmer goes off to the NBA. So I agree, it's a really fascinating what if, like, what if they had not built Azure and had not gotten into the cloud to the degree that they did? Be a very different story here.
- [33:50]
B
Totally. It would be the CPI numbers, not the numbers that are today.
- [33:54]
A
Okay, so your upshot here is that big tech business models have gotten a lot better over the last 30 years. Better margins, more efficient companies, faster growth, more defensible moats. And to look at today's valuations versus 1999 doesn't quite tell the right story or doesn't give investors enough credit for being smart enough to know that things have changed.
- [34:22]
B
Yeah, that's exactly right. Now I'll sum it up. As you know, I worked for Steve Cohen for a couple of years and one of his favorite sayings was math is not an edge. If you can do it on a calculator, it is not an investment edge. So as much as I respect the PE multiple analysis that we started with, and obviously I dedicate some time to doing it for our clients, it's the reasons why those numbers are the way they are that actually make the investable edge. And I've staked my thesis on the idea that these companies are substantially better than the ones that we're benchmarking against the 1990s and deserve a higher multiple. So I'm totally comfortable with the 22 multiple on the S and P because we're looking at companies that are orders of magnitude better at the top of the stack than they were in the late 1990s. Not just in terms of size, but cash flow and roe. Everything.
- [35:07]
A
To your credit, this is something that you've been saying for 10 years. And I know because I've been reading you. And this was. It's easier to say today because we've all kind of accepted it. This was not popular to have said five and 10 years ago when people were still carrying on about cape ratios and everything was a comparison to 1999. It was not a popular thing to say. Yes, multiples are high. And here's why that's a good thing, because the market is recognizing that business has changed. And some businesses are extremely unique. Now. I feel like most people have gotten over that and they get it. But back then, it just looked like, oh, Nick's being complacent again about elevated multiples. Like. Like, here we go again. This time it's different, blah, blah, blah. It turns out this time it was very different. And I want to give you credit as somebody who recognized that a long time ago.
- [36:02]
B
Thank you. Yeah. And I'll tell you. I'll tell you where it comes from. I covered the crappiest sector on the planet for a decade. I covered the domestic auto industry in the 1990s, and I did it for Steve as well. And that taught me to respect these valuation measures and these return on capital measures because the auto companies are horrible at it. And so when I look at these tech companies, I can see them with fresh eyes and say, no, this is materially better than anything else I've ever seen.
- [36:27]
A
This ain't Ford and GM. This is an amazing thing.
- [36:29]
B
This is not even IBM in 99.
- [36:32]
A
Okay, speaking of sectors, let's finish with this recent thought that you had. It's kind of fascinating to me, and I'd love to have you walk us through pe multiple expansion and changes in earnings growth expectations.
- [36:46]
B
Yes. So let's pop the visual up. This is something I did for clients last night, and I'm a little embarrassed that it took me this long to figure out this paradigm. But let's walk through it. The table here shows how every sector of the S and P has performed year to date. And we have outperforming sectors on top and underperforming sectors on the bottom. And then we decompose that price return into two things. The first is the percent change in the forward PE multiple. How much did PE multiples change this year, up or down? And then by extraction, we know how much earnings expectations change because the price return is just a function of changing pen and change in earnings expectations. And the takeaway from this is the winning sectors. Communications, tech, industrials and utilities. Average 7% better PE multiples and 9.4% better earnings expectations. And both of those numbers are better than the S and P as a whole, which was 12% up on the year, driven by 4.7% PE multiple expansion and 7.3% net change in forward expectations. So the recipe for a winning sector has been on average both a better forward multiple because investors have more confidence in earnings and enough of an earnings momentum story so that the street says, okay, these guys can continue to show better earnings growth than expected. That's the case with, in some form, almost every outperforming sector. It is not the case with underperforming sectors. So you end up with much less PE multiple expansion and almost no change in forward earnings expectations for losing sectors. And my investment takeaway from this, and we can talk about the numbers individually, but the one sector that stands out is financials. They've had some very good changes in forward earnings expectations. 10%. They've only had 1% improvement in PE multiples. That's an opportunity, I think. I think financials can work between now and year end and end up outperforming.
- [38:36]
A
So, all right, that's the thing that jumps out to me. So in other words, the forward PE for the financial sector in January to start the year was 16 and a half and 16.5 and right now it's 16.7, so unchanged. But forward earnings estimates are up 10%. So the financial sector has gotten no credit in the form of like an upward rerating for the fact that they're growing earnings this year by 10%. I wonder if you have an explanation for why is it just we're trapped in this thing where people think a bank should be 1.5 times book value and that's just what it's going to be. Or you think there's another reason why financials haven't had the benefit of that rising multiple.
- [39:23]
B
I think you touched on a really important one. Banks, bank balance sheets, bank risk profiles, lending standards, credit quality. I think that's probably 80% of it of it. And so, yes, I mean that's a group that has persistently had a very low multiple because the bank component of financials, which is now call it 40% of the index, 50% of the index has this cap in terms of perceived peak roe, but with some deregulation, perhaps some more deals like we saw last week, you get more fintech, more fintech, you get a little better multiple. And let's not forget, like Visa and MasterCard are in financials now. They didn't used to be so we have some potential for rerating on some of the growth side as well. So financials to me is like the easiest trade into year end, I think.
- [40:05]
A
Yeah. I think there was a period of time where MasterCard was in consumer discretionary and Visa was in tech.
- [40:11]
B
Yes.
- [40:11]
A
Is that true?
- [40:12]
B
It is true.
- [40:15]
A
Okay. One of the more interesting stories this year market wide is in the financials where Robinhood got added to the S&P 500 Coinbase, became a huge market cap company. A firm has done really well. You've got like all of these new fintechy kind of financials that now have a meaningful enough market cap where compared to the JP Morgan's and the bank of Americas which are enormous, they actually show up. You've also had big turnarounds in Wells Fargo and Citi, which are years in the making. I feel like the financials are more interesting this year than they've been really going back to the financial crisis, there's a lot of dispersion within the financials. I know there's more dispersion in areas like industrials, but like within the financials you got this big rally but then you have some stocks that have done incredibly well in there and it's just. It feels like it's been a while since people were excited about these stocks.
- [41:18]
B
It is. And I think you touch on a really important kind of macro point for the market is re ratings, better multiples. They will like not happen for years and then they'll happen all at once. And it happens when the group proves itself. And I think this group is really finally starting to prove itself both in terms of growth and in terms of balance sheets.
- [41:36]
A
Two other things that jumped out at me. Just a quick comment from you. Utilities did have the jump in forward PE multiple probably because increased demand as a result of the AI capex build out and a lot of these names, even the regulated ones, are getting re rated because of this new layer of demand. Does that seem justified to you?
- [42:01]
B
It does. I mean I always struggle with utilities. Like how much of it's a rate story, how much of it's a secular story? It feels okay. And I think the rate story is probably just as important as the as the secular growth story.
- [42:11]
A
So rates come down and people are looking for things that still have a high yield.
- [42:15]
B
Exactly.
- [42:15]
A
Utilities become more competitive with bonds.
- [42:18]
B
Yeah, but you know, like Staples haven't had the same benefit and Staples have pretty good yields too. So you can point to the secular story in utilities to say that's why utilities are working in Staples or not.
- [42:27]
A
Okay, last one. Consumer Discretionary. I'm surprised by this, and I know it's a weird sector because Amazon and Tesla make up such an outsized portion of this, but Consumer Discretionary is now selling at the same multiple that it was in January, despite the fact that you did have, oh, I guess, I guess only 4% earnings growth for the group. So it's kind of underwhelming earnings growth. All right, so that makes sense to you too, then you would say.
- [42:58]
B
Yes, it does. Okay, sure.
- [43:00]
A
Okay. Okay. None of these sectors have really fallen off much other than energy in terms of forward PE multiples. Excuse me, have any energy is higher health care healthcare. Okay, all right. And that. And that's easily explained by just how difficult it is to navigate being a health care company in 2025.
- [43:23]
B
Yeah, it's funny. If you look at the top 10 names in XLV, the Large Cap Healthcare ETF, like 40% of them are up decently on the year. It's just. The rest are just disasters.
- [43:33]
A
Yeah. Okay. All right, Nick, this has been incredible. I want to remind people that if they appreciate your insights, and I know they do, there's a lot more where this came from. And I want to send you guys two places. Number one, you can check out Nick and Jessica on their very own YouTube channel. It's YouTube.comnickcolis and Jessica Rabe, where they are published on a regular basis. And you could subscribe to Nick and Jessica's research@datatrackresearch.com Just as 1500 other institutional investors and individual investors do. And you guys are publishing five days a week, which I still find extraordinary and awesome. So thank you so much for your insights. We appreciate having you. Please say hello to Jessica for us and hope to see you again soon. Great.
- [44:24]
B
Thanks so much.
- [44:45]
A
What up, Michael? How are you?
- [44:49]
C
What's up? Happy birthday.
- [44:51]
A
Yeah. Oh, guys, It's Ritholtz Wealth 12th birthday. What do you get a 12 year old for their. What would you get a 12 year old right now if you had to buy a birthday gift?
- [45:00]
C
Probably one. Shit. One share of Uber. Let's go.
- [45:05]
A
12 year old boy. You get him a share of stock. What's going to do with that?
- [45:09]
C
No, no, real talk, Michael.
- [45:11]
B
No, no.
- [45:12]
C
Give him a Steph Curry Jersey.
- [45:15]
A
Steph Curry. Maybe Anthony Edwards.
- [45:18]
C
No, maybe Steph is a 12 year.
- [45:20]
A
Old now into Steph. Yeah, yeah.
- [45:23]
C
I don't know.
- [45:23]
A
All right, listen, I don't know. I don't. I don't know what to get either. Anyway, happy birthday. Ritholtz Wealth Management. 12 years old. Pretty, pretty incredible. I was looking at some old photos of, of how far we've come and how far you've come in terms of the way you're dressing. I just want to point out for the pounders, Michael is just bodying the fit today.
- [45:46]
C
Dude, it's Tuesday. It's Tuesday. I had to dress up.
- [45:49]
A
You look great. You look like a million dollars. All right, guys, welcome to what are your thoughts? Every Tuesday at 5pm Eastern, Michael Batnik and I go live with the fans to talk about the biggest headlines in the markets, in the economy, all the things that matter to the investors and the traders who watch the show. So great to be with you guys live once again tonight. Want to give a shout out to the situation room? Who recognized Michael is in a corner office on Bryant Park. That's correct. Bonus points if you could tell me what street. No googling, no googling Kashking is here. Thank you guys for going live. Hey, this is what it's all about. Akbar Muhammad Chris Brown just got that compound navy truckers hat. It's the best one, guys. The hat is available. I can't say forever, but right now, I don't shop dot com. I don't shop dot com. We have the official compound trucker in two colorways and I like both. I. I rock both. So Georgie D. Is here, back from vacation. Joe Altamoro. What's up, pounders? What's up, Joe? All right, all the gangsters are here. We have a sponsor tonight. Let's, let's give a quick shout out to our sponsor, public. Michael, what's going on with public these days?
- [47:06]
C
Listen, this is the platform and this is not lip service for those who take investing seriously. This is not a gimmick. This is not meme land confetti. This is real deal investing. Okay? So if you want to learn about industry leading yields, if you want to learn about whatever you want to learn about investing, factual stuff, research, trading, go to go to public.
- [47:31]
A
So public doesn't really tell people how to invest. It doesn't sit in judgment of what you do or what asset classes or what strategy. I think it's basically trying to make it so that if you're serious about investing, you have a really great app and they also have industry act, industry leading yields on the platform. You can still get 4.1% APY on your cash with no fees and no minimums. They're also festooning the platform with AI, which I think everyone's interested in. So Wait, hold on, hold on.
- [48:06]
C
This important. This is important. So yes, you're right. Go to public.com/what are your thoughts? Slash. I'm sorry, that slash. W A Y T. This is paid for by Public Investing. Full disclosure and podcast description. I just want to say one more thing on the stuff they're building this tool where you're going to be able to type out what you want. Let's just say that you say I want the S&P 500, but no Mag 7 or I want the S&P 500, no materials. Oh my God, it's coming.
- [48:31]
A
Yeah.
- [48:32]
C
Unbelievable.
- [48:33]
A
I was playing with, I was playing with the early version of it. Janik texted me and. Or Yannick, text me. Or life, somebody texted me and I was playing with it. I really think that for a self directed investor, the combination of a great app, but then the ability to like just use AI to ask a natural language question and get the tool here, do this magic.
- [48:56]
C
Magic.
- [48:56]
A
Yeah, I think it's. I think it's tremendous. So huge fans of the guys it public and thank you guys for sponsoring the show. All right, Trump wants to get rid of quarterly reporting. Let's put this up. Subject to SEC approval, companies and corporations should no longer be forced to quote, unquote, report. Not sure why that's in quotes. On a quarterly basis, quarterly reporting, exclamation point. But rather to report on a six month basis. This will save money and allow managers to focus on properly running their companies. Did you ever hear the statement that, quote, China has a 50 to 100 year view on management of a company, whereas we run our companies on a quarterly basis. Not good.
- [49:40]
C
Not good.
- [49:42]
A
Four exclamation points. All right, what are your thoughts? Let's start right there. Just on the statement itself.
- [49:51]
C
Oh, I love it. I love it. So here are my thoughts. I did the, the meme of the girl. Was she drinking something where she went like, like that.
- [50:01]
A
I don't know what you're talking about.
- [50:03]
C
The girl that made several faces like.
- [50:05]
A
Yes, maybe, and then she's like puckered up almost.
- [50:10]
C
Yeah. So anyway, that's what I went. Within the span of five seconds, I said, terrible idea. Wait, actually. And the reason why I said terrible idea is, okay, we need transparency. Okay? Investors need to be spoken to. Now, I understand that these quarterly reports suck up resources, time, financial and otherwise from these companies. I understand the short term nature that this allows investors to think every 90 days. So from that point of view.
- [50:42]
A
I.
- [50:43]
C
Think we need it. But it is tricky. But if you don't Hear from companies regularly, they will lie to you aggressively. So I think ultimately this is not good. But I don't think it's black or white. I think there's sides being made on both sides, cases made on both sides.
- [51:02]
A
Okay, why does Trump care about this?
- [51:07]
C
Oh, that I don't know.
- [51:08]
A
Okay, who's in his ear telling him. And I'll tell you another thing that's bad for America early reporting.
- [51:16]
C
Here's what I would guess, because he.
- [51:17]
A
Didn'T come up with this on his.
- [51:19]
C
Own out of nowhere, perhaps this is, we need more public companies. One of the reasons companies aren't coming public is because it's a pain in the ass to become public. Get rid of this, ease the burden a little bit. And maybe this was his idea, but I fear that even though it's a distraction, it's a time suck. I think that if we were to just do a semiannual report, the shit that companies would try to get away with would be so, so, so far over the top.
- [51:45]
A
Okay. I sort of feel strongly that they should allow companies to move to a semiannual. But then don't get upset when companies, when investors opt only to invest in companies that give them transparency into earnings and operations at least every other. Every 90 days. Like, in other words, I like that. What will the multiple be on a company that voluntarily says, you know what, we don't want to, we don't want to tell you what's going on until another six months go by?
- [52:20]
C
It depends on.
- [52:21]
A
They'll be at the same time.
- [52:21]
C
It depends on the company.
- [52:22]
A
On the company, maybe. Okay, say more.
- [52:24]
C
Berkshire investors wouldn't give a shit.
- [52:26]
A
I might be the only company that could get away with it.
- [52:29]
C
Yeah, probably.
- [52:30]
A
Who else would you trust?
- [52:32]
C
Tesla.
- [52:35]
A
Tesla could just never report earnings and nobody would give a shit.
- [52:38]
C
So I don't think it's black. I don't think it's black or white. But this was top of mind for me because I was, I was just listening to Apple in China, which is a phenomenal book about Apple and their growth and China, everything like that. And Tim Cook tried to get away with it early in 2018. They were having serious trouble in China. And that's just said that they didn't do a great job being transparent with the investors. Like, a month later, bad news came out of China and they're like, wait a minute, we just heard from you. And they were like, oh, well, things they knew, they knew. And this is Apple. So if Apple is playing games and there's a class action Lawsuit after that. If Apple is playing games, you got to hear from companies. So I get that it's a waste and it's a charade, and I get all that. But you need to hear from it. So I. But I do like your idea about let companies decide.
- [53:24]
A
Okay. I also think it's important to point out why we have companies reporting on a quarterly basis. It didn't just like magic. This was not on the tablets that God handed to Moses on Mount Sinai. And then it's just like, oh, we report quarterly. Because in the Bible, this came about because in the 1960s, basically that was the early days of the financial scandal. We just had scandal after scandal after scandal and all kinds of mini crashes. And the academics and the regulators and Wall street power brokers all met and discussed and law firms, and they came up with, well, at the heart of this problem is that investors have to wait too long to find out what's going on. There's not enough transparency throughout the course of the year. And a lot of companies are doing things where we wanted to deal with it till the end of the year. So they're pulling something early in the year, and then they have months to cover it up or hide it or obfuscate it. You can't do that when every 90 days you're putting your results up. It makes it harder to hide things. So we had this thing in the early 60s called the salad oil scandal. It sounds quaint now, but there was literally a company that had tankers that were supposed to be filled with salad oil. Somebody was cheating, filled them with water. By the time it got reported to investors, it was like way too late. A lot of money was lost. It sounds hilarious today, but this was a huge deal in the early 1960s. It led to a lot of reforms. So in 1970, after a whole wave of these things, I don't remember the names of all of them, they adopted Rule 13A13 under the securities act of 1934. And this was the rule that required a Form 10Q, which is the quarterly report, be filed with the SEC every 90 days. It took effect in 1971. By no means was this the end of financial scandals, but I do think, like we've had this evolution in the 80s. The way they did earnings reports was press release, and they would send it out to the wire services. If you were a big company, the AP would pick it up. It would be in the newspaper. IBM reported earnings yesterday, Right. And then there were fax machines. And then in the early 90s, when we had Conference call technology. That's when these things started to become Wall street analysts sitting on calls with management. You talk first, then we get to ask you guys questions. The format that we know of today really is only a phenomenon that's existed for the last 30 years. And not all public companies were doing these calls And Q&As, really until about 25 years ago, we had something called Regulation Fair disclosure or REG fd. And I was new in the business, but I remember when it was adopted. This is the prohibition of selective disclosure of material information to only analysts or big investors. People can't believe this when I tell them, but in 1999, it was perfectly legal for Cisco Systems CEO to call his favorite analyst at Morgan Stanley and say, hey, the quarter is going to be a few pennies light. Like, this was what you paid Wall street for. This was alpha. You literally were able to have corporate management selectively disclose things to certain hedge funds or certain analysts. And then the analysts would white glove the stock so the analyst would color it so it's not the end of the world. And they would kind of like gradually walk the stock lower. But the whisper would go out because everyone knew the Morgan Stanley analyst is best friends or plays golf with the CFO of this company. And people just said, oh, Morgan Stanley downgraded it. Well, he's the ax on that stock. And he would know if there's an earnings problem. So that was the world of the 90s. And that's why active management was in its heyday and people were willing to pay mutual fund managers and hedge fund managers unbelievable amounts of money because it was like a legal form of inside information. So Regulation Fair disclosure is really being adopted in 2000 is really when the earnings season, earnings conference call. That's when this thing really gets solidified. And we've been living with it for 25 years and nobody's really questioned it. So I mean, I do like that somebody's like, wait, why are we doing this? I kind of think it's cool. But even, even if you say, maybe we don't need to spend all this money and time and aggravation and maybe it's not good for investors to judge 90 day periods, fine. But just remember, these things came into existence for a reason, because less transparency, more scams. Thoughts?
- [58:30]
C
Well done, Golf clap. That was very good. One of the things that I was thinking about as you were doing your monologue is that easing the burden on new companies coming public, we need to hear from them more than ever. Imagine, hear from core weave Every six months you could have an earnings report where the stock could drop 60%. So Oracle stock, Oracle is one of the top 10 stocks in the world. Its stock went up 40% because there was new information. A $300 billion contract with OpenAI that was not in the stock. And then we got the information and the stock had one of the biggest one day moves of all time. Could you even freaking imagine if it was a new issue and you heard from that every six months the stock, a stock could fall 90%. Conceivably, I think that's bad news.
- [59:15]
A
Like, like, okay, we're going to ease the burden on corporations, but we're going to amp up the daily volatility. Having companies drop these truth bombs out of nowhere after not saying anything for months and months and months. It's not like that's not great for anyone really.
- [59:31]
C
Yeah, so I don't, I don't hate it. I don't think it's like the dumbest idea. So maybe the idea for companies to opt in, but I really am against the idea of just, it's semiannual, like just a blanket across the board that I don't like at all.
- [59:46]
A
So we got some guys in the chat saying this is definitely coming from the all in people and David Sachs. Oh yeah, that sounds right, that sounds right. I was thinking about that because those guys do want to see more IPOs. They're very involved in the venture world. They're definitely hearing from the founders that they back, that they invest in. Like why would I want to go public and then do quarterly updates? So I think that's maybe true. Some other people are saying no, no, no, no, no. This is like a whisper coming from Lutnick. Howard Lutnick, of course, having spent his entire career on Wall street at an investment bank, could be that too because Kander Fitzgerald obviously involved at the shallower end of the pool in terms of like small caps coming public and making markets in smaller companies. And yeah, this is a frequent complaint of sub $1 billion public companies. They're being held to the same standards as Fortune 500 companies that have the resources to do all this investor relations shit. Not every company wants to devote 10% of their annual profits into complying with all these regulations. So look, I get it. I like that it's being discussed. It's not one of these things where I knee jerk hate it. But like deregulation, the whole thing with all forms of deregulation, it's just important to remind people these regulations aren't naturally occurring. They came about because throughout the course of market history, there was a need for this. Now, if you say, well, the auditors are better, and therefore, as long as the auditors are getting reports each month and they're seeing the money, then maybe the public doesn't need to see it that often. I could be talked into that. I don't love it. So I actually don't think anything now. That being said, Atkins, at the head of the sec, he's going to study it, he's going to talk to people, and I think he's going to hear both sides. Funny enough, I think the lawyers that represent public companies are going to say, don't do it because you're basically taking the cash cow away from them. This is what they get paid for. So it'll be surprising if we ever hear, I don't know if this public comment or not. It'll be surprising to hear who was against deregulating the quarterly report. Anyway, it's an interesting idea. It's really weird that Trump is weighing in on this and then an hour later he's got football opinions. It's just crazy. We have a president who's like, just omnipotent. Whatever's going on, he's got tickets.
- [62:24]
C
Hey, hey. He's an ideas guy. He's a take guy. He's a take machine.
- [62:28]
A
Hey. Incidentally, he had a public company in the late 90s that went to 0. DJT. Not the current iteration of DJT. It was the actual casino. Yeah.
- [62:40]
C
Oh, oh, I know. It's public. Okay.
- [62:41]
A
It was like a six dollar stock. I'm like, oh, my God. Donald Trump's has a public company. He's like the richest, most successful businessman in the world. How come it's $6? And the guy I worked for was like, don't buy it. And we eventually went to zero. So they were definitely making quarterly reports back then. I don't know if he was involved with running it. I just know it was named for him. I think this probably goes nowhere, but it'll be interesting to hear. The conversation would be my final take.
- [63:15]
C
I don't like it. I don't. Hate it, hate it, hate it. Okay. Adam Butler did a post on Twitter that I thought was was timely and noteworthy, and I want to talk about it. It's long, so I'm going to paraphrase and skip a few lines. He said, here's a hard truth about modern society. We don't practice capitalism anymore. Skip a few lines. Social media is a canonical example. It's established fact that Twitter, TikTok, Facebook, Instagram, et cetera. Algorithms which are tuned to maximize advertising revenues via limbic activation and produce political division and derangement, depression and a host of other problems. But regulating against these algorithms might impair corporate profits. So America doesn't regulate them because the system is not designed to protect the rights of Americans to not be exploited by corporations for profit. The system is designed to protect corporations rights to extract maximum profits from citizens. This is pathological sociopathy at societal scale. So here's where we are, and I skipped a bunch. We built the most powerful resource allocation machine in history, then let it allocate us. We became the resource, the product, the feedstock. If you think I'm being dramatic, ask yourself, when did we last make a major policy decision that hurt corporate profits but helped actual humans? That silence you hear, that's the cancer winning.
- [64:30]
A
I mean, he sounds like Scott. He sounds like my friend Scott Galloway. Scott was basically like, these are the most powerful people in the world right now. The people who control these algorithms and everything they do is about more advertising dollars. And the very simple way to generate more advertising dollars is to keep people engaged. And nothing keeps people engaged like rage. Yep, it's like a look. Porn works, okay, but these companies are not going to go 247 porn. The only major social media network that's allowing pornography right now, throw out Reddit, is X. So Instagram, you can't even show a nipple. And you know, so they're buttoned up there. So what do they do? Like, how do they like amplify engagement if they can't do. If they can't do naked girls, the way they do it is by making us all want to kill each other. And what's interesting is there's no limit on violence. You can show executions. You could post video clips of beheadings. Like the stuff after October 7th, just like women bloody being paraded through the streets. The algorithm will show you those clips 7 million times until you want to go load up a gun and shoot somebody. And there's no limit on it. And so basically we've said like, okay, no porn other than X, but unlimited violence. And maybe every once in a while we'll put a little warning thing that somebody just clicks through, but no check on it whatsoever. No age limitation. Anyone can see anything.
- [66:11]
C
There was. You saw the. I didn't watch this. I assume you didn't either, but there was a beheading last week that's all over the Internet.
- [66:16]
A
So I don't do social media, so I Don't see any of that shit. And I'm gonna tell you right now, I quit Twitter. I was on Twitter, I would say seven hours a day for 10 years. Ish. And I quit in 2020. It's five years ago. And every time somebody sends me a tweet, yo, look at this. Oh, this is so funny. Listen to this stand up comic. Look at this. Like, I don't know, baseball, play, whatever. I go to it, I watch the thing, and then immediately under it starts populating the most vicious, disgusting, racist violence, fermenting content I've ever seen. And I immediately click away. And I'm like, holy shit, I can't believe how much time I used to spend here. I think it's gotten worse. I think most people would say it's gotten worse. It didn't used to be this way, but like that's where these companies make their money. They have to keep you on, they have to keep you coming back. And the way to do that is to constantly trigger your, your, your central nervous system, like your, your amygdala. It wants you to feel rage and fear and anger and it wants you to take sides and join a team. And now we got kids that are doing this from the time they're 8 years old, now they're 22 and they're shooting people. And I don't like corporate profits are at an all time high. Hooray.
- [67:41]
C
Yeah, it's just, it's bad.
- [67:42]
A
Dude, you got. Society is who hate themselves at 13 years old cuz the algorithm is showing them girls that are skinnier than them. None of it's good. And listen, I use social media. I guess right now technically we're on YouTube. This is social media. And I would not say that all of the evil fully outweighs all of the good. A lot of good has come from connecting the world, my own career included. I just, I think Adam Butler is exactly right. And unfortunately the money is flowing and they're gonna use us being at each other's throats to fund this AI build out. That's the reality, that's what's happening. And unapologetically. And it gets worse every year. And now the people who control these platforms, they are best friends with the President. So, you know, maybe you wanna solve this. It's not gonna get solved right now. Maybe another, maybe another era.
- [68:43]
C
I saw a reel on Instagram where a woman's house burned down and she's like walking through the ashes and she looks into the camera and says, do you need the best soap for scrubbing burned down houses. And it was like, what? Staged or otherwise? It's so demented.
- [69:09]
A
There was a guy at the university in Utah, right after Charlie Kirk was murdered, there was a guy who looked into his phone and started promoting his channel. Yeah, like everyone around him is running for their lives. There's no way of knowing if more bullets are coming. This guy is into his phone promoting his channel, live streaming. The chaos of what's going. Like we're now at the point where it's more important to please the algorithm and get likes and engagement than it is to run for our lives in the middle of a shooting.
- [69:47]
C
So nothing explain it. Nothing pleases the algorithm like rage and depression. And I think this has helped fueling the big disconnect that we talked about a couple of weeks ago where it's like, people think that the world is going to hell economically. People think that everybody's getting left behind and it's just not true. And you have to resist the algorithm. Are there people that are struggling? Obviously that is always the case. Always. But the disconnect between what you're seeing from the headlines and what is reality is so mind bending because it's the algorithm, it's not real life. So let's move on to this chart. For example. This goes to the corporate profit piece that we're saying, like corporate profits at all cost. All right, so US Nominal gdp, which is a better representation of the overall economy.
- [70:33]
A
This is so.
- [70:34]
C
Versus the gap between that and the operating margin of the S and P 500.
- [70:40]
A
What are the. What are the. What's this. What are the two different Y axes? So the blue on the left is the operating margin.
- [70:48]
C
Operating margin. Now listen.
- [70:50]
A
15. 15% now.
- [70:53]
C
Yeah, so. So what it's actually measuring is less relevant than this. Just look at those lines. Okay. They used to track basically one for one.
- [71:01]
A
Yep.
- [71:01]
C
And I don't know exactly what happened two years ago, but the gap is real and it's growing. And this is. This is not made up. This is not the algorithm. But I want to make the point. This is very important. It's not as if. Chart off, please. It's not as if the corporations are doing amazing and the average citizen is just getting. It's just not true. It's not true. Listen to what these companies are saying on their quarterly reports. They have no incentive to lie. So I pulled this from the transcript. This is from Live Nation, I think every quarter for the last 12 quarters, I've been asked what's going to happen in the US when The consumer goes away. You guys are too far over. Right? And so for the same 12 quarters, we've said things are going fine. This is from Urban Outfitters. We just have not really seen any weakening in the consumer right now. We feel good about the macro environment and the consumer, despite headwinds and tariffs and all sorts of headlines that are out there. This is from Tractor Supply. From our view, the consumer is healthy and resilient. Remarkably resilient. Josh, just before we came on, Sarah Eisen tweeted. What did Sarah tweet? She said, financial services companies in the payments and loan space. Okay. And I think these companies see the consumer are saying consumers are doing.
- [72:15]
A
They might know. They might know something.
- [72:18]
C
They're doing better than you think. Reading the papers, Ally Financial, bank of America, they're all saying the same thing. And I'm not saying again, yes, there are people that are struggling, but this idea that, like, it's only the rich that are doing well and everybody else is getting left behind, it's just not true. It's the algorithms. It's not true.
- [72:35]
A
So there's a few things going on here. The first is ignore surveys, focus on data. All of the credit card companies are putting out tons of data all the time on earnings reports. In between earnings reports, they're literally telling you what's happening with actual spending on debit and credit cards. Data so much more valuable than a survey. You could ask people, how do you feel about the economy? And they could give you an answer that is entirely colored by whatever else in their life they're pissed off by. And what you're gonna come back with, as the surveyor is they're unhappy about the economy. No, they could be on it. They might hate Biden, or they hate Trump, or they hate their local congressperson, or they just read an article about somebody's teaching their kids something in kindergarten they weren't happy with. Like, they could be angry about anything. And they're not telling the survey that they're pessimistic about the economic outlook. It's not. It's not data. It's vibes. It's feelings. It's irrelevant. It's a huge waste of your time.
- [73:47]
C
And also, if you're on the. Dude, if you're on the algorithm for eight hours a day, how do you think you're gonna feel about how things are going worse every minute?
- [73:53]
A
How do you think you feel worse every minute? It's like whatever the opposite of Zoloft is, that's x.com worse every. Every minute you spend on it. It's worse. Here's the actual reality. The XRT, which is the retail sector ETF, is up 11% year to date. 63% of the companies in that index are above their 50 day, 73% are above their 200 days. There's not just Walmart going up. Okay. If you actually look at what was reported on retail sales today, great number.4% month over month, three months straight, spending is actually re accelerating after it stalled out in the first two quarters of this year. So you could take that and you could take a survey where some old man picked up the phone and vented his frustration about inflation into something that the surveyor takes as gospel about how the consumer quote unquote feels. It's bullshit. And the way you know it's bullshit. Try to book a flight somewhere. Like try to try to stay at a, at a four or five star hotel during a holiday. Like any, anywhere you look, there are people that.
- [75:06]
C
You're out of touch.
- [75:07]
A
Spending.
- [75:07]
C
You're out of touch, Josh. I'm kidding. Although you are out of touch. But listen to what these companies are saying. Yeah, yeah, yeah. Josh is the only one going on vacations. Listen to what Ally is saying. They serve, they don't serve the, they're not American Express. Okay. All right. Now it is, it is also, it is also true that obviously, obviously, obviously it is a K shaped economy. There's no doubt about it. So there are people that are doing better than others, as is always the case, but particularly today. I saw a great chart showing that the top 10% of income earners are now responsible for half of spending, which is up from 35% at the turn of the century. So yes, both things can be true. And this is a really interesting chart that I had not considered as to why spending seems to just be up and to the right. Look at this chart from variant perception. So look at the red chart. Now, it's projected out into the future. But this is up and to the right. And what we're looking at for people that are listening is retirees. So 65 years and older is a total percentage of consumption. They say retirees continue to make up more and more of US consumption. They're less sensitive to job market feedback slope below. Still sensitive, of course, to wealth effects from home values, et cetera. But these people that are retired, they.
- [76:23]
A
Have all the money already. Yeah. So that's a really great chart.
- [76:26]
C
Market is doing.
- [76:28]
A
That's a really great chart. If you're 55 to 64 years old, the state of the labor market is not the relevant thing. The relevant thing is, what is my house worth? What is my stock market slash retirement portfolio worth? And the answer to those two questions is just endlessly up into the right. The third question is, do I have the wherewithal to borrow, use credit card debt, revolving line of credit? Can I basically, at this point in my life, do whatever I want? And for tens of millions of households, that is basically the case, not for everyone. So for those people, the ups and downs of the weekly jobless claims, this is not the thing that's driving their decision making, because it's not the thing that's driving their ability to spend. It's how wealthy they feel. And so this booming stock market is producing economic growth for that cohort of the economy. And it's a big cohort. Look, for 50 years we yelled at people in this age group, or 50 years, 30 years yelled at people in this age group. Save, save, save, save, save. 401, 401, 401. It worked. And you could say it was a self fulfilling prophecy because you start out with 30 million households that are using 401ks to save, and then you get 60. So now all these new households buying in are just pushing stock prices up higher for the people who got in 10 years before.
- [77:58]
C
Tough shit, dude. That's how life works. Guess what? I paid a lot more for my house than Zola did. That's the way it works. And this demographic warfare, people are upset that the boomers have all the money. They're 70 years old. Guess what? When we're 70, we're gonna have all the money. What do you. How do you think compound interest works?
- [78:16]
A
And when we're 70, we would trade a lot of our money to be 30. Like a lot, like a lot of it. Many, many, many 70 year olds would all would trade all their money. Pull me back.
- [78:28]
C
Don't be 30.
- [78:29]
A
I'll figure it out. You don't want to be there.
- [78:32]
C
You'll get there.
- [78:33]
A
All right, this was interesting. Microstrategy. I know we're calling it strategy now. I'm sorry. Apologies to Michael Saylor. Denied entry into the s and P500 despite meeting. Yeah, and I didn't see this reported that widely because maybe they'll just fix it and they'll let them in eventually. I don't know.
- [78:56]
C
But you know the Isaiah Thomas meme. I met the criteria, but I wasn't selected.
- [79:06]
A
All right, so it's important to point out this isn't like a government thing. This is standard and Poor's S and P global indices that make these decisions. It's a committee. We actually had Sam Stovall on our show. He used to be the chairman of that committee. And they meet periodically and they look at public companies that have grown very large and they make decisions. Does this company meet the criteria for inclusion? Famously, the biggest issue they've ever had was Tesla because Tesla became like a $200 billion company with no profits. And one of the things that's required for index inclusion is like four consecutive quarters of positive earnings. And Tesla just was so out outside of the traditional bounds of that that they, they had to consider it. They did wait. And they famously added it way after people had made so much money, it looked like they were added at the top.
- [80:05]
C
Is it a strategy in a very similar situation? Does their operating business make any money? I think it made like, I'm making this up. I don't want to throw out a number, but it made very little. It makes very little money.
- [80:13]
A
Yeah. So that's the thing. It's. That's the thing. It's like a investment company more than it is an operating business. They do have a very small software subsidiary that's not really relevant to the stock price. It's like the remaining kernel of the original business that we used to call MicroStrategy. But I don't know. I feel like it's kind of a big deal. JP Morgan weighed in on this. They said the s and P500 index committee's decision to reject Strategies Inclusion represents a significant setback for corporate crypto Treasuries. Quote. Last week, The S&P 500 Index Inclusion Committee rejected MicroStrategy from being included in the most prominent equity index in the world. This is signaling that the committee, which can apply discretion in its index decisions, is concerned about including MicroStrategy. That's effectively a bitcoin fund. The bank argued the rejection is a blow not only to strategy, but other corporate crypto treasuries that have proliferated in recent months in an attempt to replicate MicroStrategy's crypto accumulation model. So maybe. Well, it did get into other indices. So JP Morgan noted, it's in the NASDAQ 100, it's in the MSCI USA, MSCI World Russell 2000 and the crisp US total market index. CRISP is what Vanguard uses. They don't. They don't. They don't necessarily use S and P, but I don't know. Do you think this matters to anyone?
- [81:57]
C
I mean, it matters in the sense that Strategy is not a small market cap. And so inclusion in the s and P500 would give it more dollars invested. But what's interesting about strategy, more so than the inclusion or lack thereof, in my opinion, is the weakness in the stock relative to the strength in bitcoin. Like, it's not, it's not. The shine is off, and I don't know if it gets it back. Maybe it will, maybe it won't, but it's not. It's not hot right now.
- [82:22]
A
So is this, I haven't been following that closely, but is this the Jim Chanos investment thesis where he went long bitcoin or a bitcoin ETF and went short strategy? And his, his idea was that like the gap strategy will not keep its premium to its nav. And so being long bitcoin is a hedge against missing out on bitcoin going to a million. All right, so.
- [82:55]
C
He'S saying like, I don't want to be short strategy because if a bitcoin goes up 1,000%. Yes. Strategy might only go up 500%. Right. So in the last six months, bitcoin is up 37%, strategy is up 10%. Let's show the next chart. So this is basically Jim Chanos trade. Next chart, please. Microstrategy. Okay, so he is betting that this chart breaks down. He is betting that this chart breaks down. And what you're showing is that the outperformance of MicroStrategy relative to IBIT peaked in November 2024. And I believe that's when IBIT listed options came on the market. So strategy was working because if you wanted exposure, I mean, it's working for various reasons. But if you want exposure to crypto and you couldn't own it and you want to leverage exposure, you can get it. Well, now there's plenty of options. You can literally buy options. And so if this thing breaks down and boy is it hanging on support, it sort sure looks like it's going to break down. Then channels is going to make a lot of money. If it rips in his face, then he'll lose. Then, you know, then, then I'll lose money.
- [83:52]
A
Okay, so we now have five digital asset trusts, right? These are calling these DATs, five of size. There's probably dozens because everyone's imitating everyone else. You have microstrategy or strategy, which is $74 billion in value. I don't know how much bitcoin do they own? Or is that the amount of bitcoin they owned?
- [84:19]
C
That's the amount of bitcoin they own pretty remarkable.
- [84:22]
A
So how big is the market cap? Is it double?
- [84:24]
C
Is it a buck fifty? I mean, that's huge.
- [84:27]
A
Yeah. Okay, the next one is Tom Lee Bit Mine Immersion Technology, which is, which is eth. But I think they also are buying other crypto tokens or coins.
- [84:44]
C
But I think it's ETH.
- [84:46]
A
It's like 9 billion worth of ETH.
- [84:49]
C
Hold on. So Strategies, Strategies Market cap is starting to cut you off the strategies market cap. Market cap peaked at, let's see, it peaked at 130. It's now down to 95.
- [85:01]
A
That's a lot of lost market cap.
- [85:04]
C
Especially in a bull market.
- [85:06]
A
Right. That's with the price of bitcoin rising. Okay, I would be. I'm not in this. I'm not in the trade. I'm not shorting it. I'm not involved in it at all. I would be terrified right now. Because if you get a bear market in bitcoin, which happens all the time, just a normal run of the mill bear market, if this thing's underperforming on the way up, what the hell is it going to do on the way down? I don't know, but I would be nervous. I just lost an AirPod. All right, we have bit, we have bit miner immersion, which is ETH, and then we have Mara, which is 6 billion worth of BTC. It's also a minor. This is one of the original sucks.
- [85:46]
C
So I bid is up. Ibit is up 25% year to date.
- [85:50]
A
Mara, I'm going for this AirPod.
- [85:52]
C
Keep talking, go ahead. Mara is up 4.5%. If you guys are interested in learning more about these treasury companies, our friends Straza and Alfonso did a killer video on YouTube. I watched it the other day talking about a lot of these companies are pivoting to AI and not just like an LOL pivot because they have all of this compute power and know how. So Riot, for example, Riot is one of the companies, the original block mining companies, Riot has pivoted to AI and they're up 71% year to date. They are on fire. No, it's not funny. It's for real.
- [86:29]
A
I know.
- [86:29]
C
It's not just. It's not, it's not, it's not just a name change. They're like actually doing shit.
- [86:33]
A
These are, these are all sandcastles. The wave is coming. All right. Sharplink Gaming SBET. So I've never heard of this $3 billion again. If I were on Twitter all day, I'd probably know all about It. But I'm living my life instead. 3 billion an eth. And then the last one, metaplanet. $2 billion. Is this Japanese?
- [86:57]
C
This is the one. I love this one. This is the one.
- [87:01]
A
I don't know.
- [87:01]
C
I don't know.
- [87:02]
A
Why is it called Meta? Wait, what's the ticker?
- [87:04]
C
Wait, is this the company that was mining eth on Mars?
- [87:09]
A
Oh, why did you say so?
- [87:10]
C
Yeah.
- [87:12]
A
How quickly can I get long this stock? Okay, so look, and then of course we didn't. We don't have. We don't have Dan Ives thing, but Dan's thing is for Worldcoin. And I don't know what the market cap is. I'm sure it's $900 billion. But like if the biggest one of these and the most established is not going to be blessed with an index inclusion by S and P A, could that potentially change as people get more accustomed to the fact that these exist? Or B, do people just say we don't care if it's in the index. We really believe in this strategy of issuing shares to buy more crypto until this company corners the market, gets 5%. Which you think it's version two?
- [88:01]
C
Yeah. So no, I think yes to both. I think yes to both. I don't think anybody's buying strategy. I'm sure there are people that were front running this, but I don't think the actual thesis of strategy is not to be included in the S&P 500.
- [88:13]
A
Somebody named Yokubu Tenshi says Meta Planet is a tax loophole for Japan. All right, I got to dig in there. I have no opinion. I got to, I got to dig in there. I'm not going to say any more on this. Okay. What happens after rate cuts, Michael?
- [88:29]
C
You tell me.
- [88:30]
A
Okay. I don't know if you guys saw this thing I did with Nick Colis yesterday. It was really good. I just want to replay his chart really quickly. This is every rate cut over the last since 1990 by size of rate cut. Have you ever seen this before?
- [88:48]
C
Nope.
- [88:48]
A
Okay, so we've had 3325 basis point rate cuts, 1850 basis point rate cuts, and only four 75 or 100 basis point rate cut. You could basically see that all of these 50s, with the exception of last year took place during a crisis like real deal crisis, like 2001 and 2008 and 2020. So Nick was making the point. We really don't want to see a 50 basis point. It's almost 96% chance I think right now. Chart off based on the Betting markets that tomorrow, Wednesday we're going to get 25 basis points. Where are you with this?
- [89:34]
C
Listen, 96%. I don't want to fade that. I'm not going to zag just for the sake of zag.
- [89:38]
A
No, where are you on how much is that price? I know it's priced into the bond market. You think the stock market, we get that probably very little reaction. What if he zags, dude? What if he's like people. No, I'm good.
- [89:54]
C
You know what doesn't exist much anymore? People don't sell the news. You know why? Because the news is so. Well, the news is so thoroughly disseminated and ingested. I mean, it's possible that we sell off because, you know, why not? But like sell the news is sort of an ancient thing.
- [90:11]
A
You mean like sell the news as a, as a buy the rumor. Sell the news like as a tandem thing? Yeah, well, so the shortcut is to not sell the news because if you just stay long, then de facto you've bought the rumor of the next thing. So why do anything ever at all? All right. Anyway, I thought that was a good point Nick made. Let's pop this chart. Returns after the first fed cuts. So this is like our data now. This is our stuff. So on average chart.
- [90:41]
C
So chart kid Matt shows that on average the s and P500 is up 9.6% a year later. Two thirds of that is from multiple expansion. The other third is from earnings growth. But of course average here sort of hides what the truth is. So let's show the next chart. This is the forward 12 month return broken down by individual rate cuts. And it's, you know, it's sort of all over the place. More up than not, but some bad ones in there.
- [91:11]
A
Wait, wait, let me just ask you a question. So this is showing the dates of the initial rate cut of the cycle.
- [91:21]
C
That's right.
- [91:22]
A
That's the starting point.
- [91:24]
C
Yes. And then the diamond is the drawdown, max drawdown 12 months later.
- [91:28]
A
Okay.
- [91:28]
C
Versus the average and the 12 month return.
- [91:31]
A
So what's the takeaway from this?
- [91:37]
C
This is not satisfying, but it's mixed.
- [91:40]
A
Right? So there's no like, there's no concrete narrative of we start a rate cutting cycle. Oh, and by the way, is this the start of a rate cutting cycle or a continuation of the one of the from nine months ago?
- [91:54]
C
I think it's new, but yeah, no fair point. I think this current environment is so weird. I still think with the mashup of AI and hyperscale spending of tariffs and whatever's going on there of vibes of demographics, of a post Covid world, this is a very odd market. Coupled with the fact that we've had this really strong bull market amidst a rate hiking cycle and we're rallying before rates are even lowered. But this idea that stocks are gonna sell off, like materially, that the first rate cut is gonna be the top.
- [92:31]
A
Dude, that's it. We're writing the book right now. The book does not exist. I wish I could say, oh, this is just like the 1957-1968 we're writing.
- [92:43]
C
No, analog.
- [92:44]
A
We're right, yeah, we're writing the screenplay like right this minute. So.
- [92:50]
C
So you'll like this. You'll like this. David Kelly had a good take. He was talking more about like the actual impact on the real economy, forget about the stock market. And he had maybe a bit of a contrarian take. He said the first and most important impact of lower interest rates and aggregate demand comes via its impact on household discretionary income. And it is negative. This can be seen by looking at household interest income and expense separately. On the income side, Americans had households had a total financial assets of 125 trillion, 14 of which were held in deposits. Assuming that all of those were fully impacted by the fed, easing a 1% decline in short term interest rates would reduce annual household income by roughly $140 billion. Now, yes, now, hold on. The 140 billion is not all spent, obviously. But he makes a point that even if you were to compare that with the liability side, a lot of the liabilities are fixed in nature and the assets dwarf the liabilities. So if you look at that, I thought you would like that part. So he said that a 1% interest rate reduction across the board would reduce annual interest expense by $30 billion. So $140 billion, minus $30.
- [94:01]
A
90 billion. 90 billion in spending at risk.
- [94:04]
C
But wait, the truth is that those don't net each other out because the $30 billion in interest expense, that's money. Good. That is money that's being spent. Okay? The $140 billion, it's just, it's Jeff Bezos earning another billion dollars a day. You know what I mean? Like, it's not the same.
- [94:19]
A
All right, I get that. But still, I just want to take this moment to point out this is one of my best calls ever. 5% overnight rates, risk free, were a stimulus for the economy. They were a stimulus for the top 20% of households that own the whole stock market, own the whole bond market. They had never, ever felt richer than they did when they checked their 401 record high stock prices. Then they checked their savings and checking account at the bank and saw a geyser spewing more cash into their.
- [94:53]
C
You're not wrong. You're not wrong. But you just mentioned a key component of this. They saw the 4% cash ends in the stock market. All time highs. If the stock market. If the 5% or the 4 and a half percent interest rates crush the stock market, the income would feel like a drop in the bucket.
- [95:07]
A
Fine, but it's mental. It's not the.
- [95:10]
C
You're right.
- [95:10]
A
The dollar amount in the income to me is not the thing. It's the wealth effect produced in someone's mind when they see that not only are they making money in their real estate, their stock portfolio, the value of their small business, then it's like, oh shit, my money market funds are paying me 4%.
- [95:30]
C
Yeah, yeah, I'm going to.
- [95:31]
A
I'm gonna go take. I'm taking my whole family to the sphere to watch the backstreet Boys. I'm doing it. I'm doing it right now. I don't give a shit. Yep, my money's making Money. It's been 15 years since people were able to say my money makes money. Okay? So I really felt that way. What's this wall of worry? Graphic. Let's put this.
- [95:51]
C
All right, so we were talking last week, two weeks ago, about is the AI sentiment survey data just garbage? And I think a lot of survey data is. But man, this, this is, this is, this is not noise to me. This is segment. So here's what we're looking at. Chart. Kid did this wonderful thing where he showed what happens on the left. This is the average path for 22 weeks, which is where we are today when the s and P500 rallies. 20 to 30%, obviously that's a gray line. It's up to the right. And what happens, of course, every time is that the average change in bullish sentiment is also up to the right. When stocks are going up, people get more bullish. Duh. However, what we saw in this current example is a ridiculous rally. Very fast people got left behind. And the current change in bullish sentiment is flat. This is remarkable, dude. And I know that the AI is a certain segment of investors. It's not the entire population.
- [96:50]
A
It's all people.
- [96:51]
C
But be that as it may, dude, the S and p just rallied 30% to 22 weeks and no bullish change in sentiment. So the wall of. Nah, I don't think so. I don't think.
- [97:01]
A
Throw it out. Update your data set. Okay. Don't throw it out. Create a tapestry.
- [97:06]
C
Nah.
- [97:06]
A
Of different sentiment survey data sets. Talk to bro. Go talk bro.
- [97:12]
C
Don't. You don't talk to anyone. You don't talk to anyone. You talk to me.
- [97:16]
A
No, no, no. I mean, if you're a surveyor.
- [97:18]
C
Okay, fine.
- [97:19]
A
So let's stop calling people at home.
- [97:22]
C
Okay, how about this?
- [97:23]
A
Who have to put their pictures in to answer questions.
- [97:27]
C
Schwab has this report that I mentioned all the time called estacs or. Or stacks or whatever they call it. And this is quantitative. This is not a survey. And the last four months, there's been barely any rebound in activity. Actual activity. People are not euphoric. They're not even bullish. Now, obviously, this. Don't talk about open. Yeah, there's people, there's pockets. Okay, I get it. But there is still a lot of doubt about the sustainability of this bull market. There is. That's a fact. I'm not making that up. People are down in this bull market.
- [97:56]
A
So that's bullish.
- [97:58]
C
Yes.
- [97:59]
A
I like that. All right. Okay. Last thing I wanted to get to, the NASDAQ just announced they're going to tokenize every stock that trades on their exchange by the year 2026. I think.
- [98:13]
C
Big deal.
- [98:14]
A
Do you understand what they're saying or no?
- [98:16]
C
So I read the report, and I don't. There wasn't a lot of.
- [98:21]
A
Why? No, the post.
- [98:23]
C
The post. The post.
- [98:24]
A
It was their post. It was like their press release.
- [98:27]
C
Yeah. So it was a lot about how the rails. The blockchain rails are better. It's coming. Listen, you might not like it. You might think it doesn't make sense. You might question is inevitable.
- [98:37]
A
The integration. This is NASDAQ writing. The integration of tokenization and blockchain tech alongside traditional market infrastructure presents an extraordinary opportunity for the system. These capabilities have the potential to deliver profound benefits to issuers, investors, and economies globally through reduced frictions. I like that. Accelerated settlement times. Everybody likes that. Automated processes, of course, and improved efficiencies in capital and collateral management. I am excited to share that we have submitted a filing to the SEC to facilitate the trading of tokenized securities on the NASDAQ stock market. I don't know if that means they're going to say to the issuers who list on the Nasdaq, we are going to create a tokenized version of your security and we'll do it safely and we'll test it and it'll be ready In a year? Is that what they're saying?
- [99:38]
C
I don't. I have a lot of questions. I don't know how it's going to work. I know these are not derivatives. They are actual tokens that represent shareholder like voting rights. Like these are real shares on the blockchain. I don't know. I have a million questions. I don't know. But this is coming. And think about, like, I'm not an expert in this market structure by any means, but like 80 hours, like, and think about all of the inefficiencies, the roadblocks, the hurdles for companies trading around the globe. This is all coming.
- [100:05]
A
There's a guy named Simon Taylor who writes something called Fintech brain food. And he went out of his way to point out how different what NASDAQ announced was from what Robinhood announced. So he's basically saying, like Robinhood created tokenized stocks, which basically were derivatives. You own a claim on a claim, it's a SPV or a special purpose vehicle wrapped around a stock. Your redemption rights are controlled by the SPV holder. So in other words, if Robinhood goes under, that's who you're in business with. Like, that's your counterparty, not the corporate corporation that issued the stock. They just put like their own wrapper around it. That's not what NASDAQ saying. NASDAQ is saying we're actually tokenizing the actual equity. So you keep your shareholder rights. We're not stuffing the equity into a token and then selling you the token. We're making the equity the token. I thought that was interesting. You keep your voting power, you get your dividends directly, and the only thing that changes is it's on blockchain rails, which is the less friction, faster settlement part.
- [101:19]
C
Where does this custody, like, is this like you have to have your own wallet? I don't get how that's going to work.
- [101:23]
A
He's saying the infrastructure. I'll just quote him DTCC's app chain, built on enterprise Ethereum using ERC Dash 3643 standards. I don't know what any of that means.
- [101:35]
C
No, I understand. Say no more. I get it now.
- [101:38]
A
Accenture, Consensus, Citigroup, Mastercard, Santander and Visa are all backing this working group. What this means is 24. 7 trading around the world, instant settlement, programmable ownership, access to US equities for anyone, anywhere in the world. And I guess the way that he wrote it up is it's a really big deal. And all of the comments are all these other fintech nerds and they seem to be going crazy for it. So look, I, I'm not going to do this thing where I'm like, no, I'm going to say, yeah, all right, it's the nasdaq. This is not a fly by night organization. It's not a broker dealer. This is one of the most important exchanges in the world. You think they're going to destroy the stock market with a new innovation? I doubt it. So I'm going to let this one breathe and we'll see how it goes.
- [102:32]
C
We could look back in 20 years and think like, obviously when you look back, there's a lot of revisionist history, right? Your memories morph into what you wanted to believe or what you want to believe you believed back in the day. And we might think like, this was so obvious, obviously technology was going to get better. Why would you not think that technology was going to get better? The financial rails of today were built in the 70s. And I was listening to. My God, I'm getting annoying with this audiobook stuff. But I was listening to Chuck Klosterman. He wrote a book called the 90s. And during the Internet, the early days of the Internet, and even in 95, people were like, what is this digital Internet? What is this digital highway? Like, I don't. And now people look back and like laugh how naive I was. And we might do the same.
- [103:16]
A
I'll do. Well, not everything from that era though ended up turning out to be true. So we only have like the winners to look back and say, oh, this was so obvious. But I have the benefit of hindsight because there was a controversy early on when I started in the business, which was the, the decimalization of stocks. So my first two years as a stockbroker, we were trading stocks in eights and quarters and sixteenths, which we called teenies. And they wanted to make every trade go off in a penny. And like right now, like now we like take that for granted. But back then you would sell a stock at 3 and 5/8 and hope you could buy it back someday at two and a quarter. And getting rid of that was super controversial. People like, no, don't do that. Why would you do. They ended up wiping out profits for the market makers for about 15 years until Citadel came along. They wiped out small cap broker dealers who needed that 8th or that 16th in the spread to justify writing research on all these companies. They killed the IPO market. It was not without its casualties. But I think most individual investors would say this ended up being a great thing because my the bid ask spread is now a penny and it used to be 30 pennies. And that adds up when you're doing big, big lot.
- [104:41]
C
So can't. Can't we look back in 10 years and be like, could you imagine that, like, markets used to be closed, like, just because people needed to go home?
- [104:49]
A
Yeah, yeah. Listen, that's why. That's why I want to hear more about the nas. Like the. What is the NASDAQ you're going to. And why does the NASDAQ think this is good for them? Most importantly, why. Why are they leading the charge? It can't just be innovation. For innovation's sake. There's got to be some money to be made here. So I want to know what it is. But I have an open mind.
- [105:11]
C
Okay.
- [105:12]
A
You're case.
- [105:13]
C
I'm going to make the case. I was. So I'm moving, as you know.
- [105:21]
A
And not, not to brag, you bought a beautiful home. I'm so proud of you.
- [105:26]
C
Thank you. So I got home on Wednesday night at midnight, at 6:30 in the morning, Robin woke me up and said, let's go get out of bed. We're moving. And for the last five days, it's been nonstop. My national grid wasn't turned on, so I'm taking the kids back and forth to shower. We can't shower in our house.
- [105:45]
B
Oh, God.
- [105:47]
A
And then yesterday, that would never happen with Sprinkles in charge.
- [105:50]
C
No, I know.
- [105:52]
A
No chance.
- [105:53]
C
I know. And on Saturday or Sunday, I had two hours. Robin was with the kids or whatever. And so obviously I'm at my computer doing work and I'm getting caught up because it's been. We've been off for a few days at Future Proof.
- [106:05]
A
And what's so funny, Adam said your new house is 90% mudroom, 10% house.
- [106:11]
C
It's true. And I thought to myself, and there's a reason I'm telling the story, I thought to myself, I'm a maniac. Like, I have two hours and I am absolutely going hog wild on a beautiful Saturday afternoon, catching up on emails, whatever, preparing for this week. And it. I thought to myself, I thought to myself, that quote. And then I realized, like, I connected it with this. I was listening to Karen Sadman, Baker Becker. Excuse me. She was on Patrick o' Shaughnessy's podcast maybe four or five months ago. And she said the quote to somebody that rejected her or passed on her company. The company's clear, by the way, like, why are you going to win? And she said, because I am a animal. And so As I was thinking about that to myself doing work on a Saturday, when I had a minute, I thought about her and I said, oh shit, I meant to buy that stock. And I don't even, I don't even know if clear is a good business or not.
- [107:12]
A
Like I don't care thing at the airport that they convince you to do because TSA Pre is not fast enough.
- [107:17]
C
But she was so beyond impressive. I texted Patrick like she is amazing. And I meant to buy the stock. I forgot to buy the stock. I pulled up a chart to see what was going on and I said, so pull the chart on. Pull the chart up please.
- [107:34]
A
So wait, why, why all of a sudden it had such a horrible debut.
- [107:41]
C
Next chart please. This is the free cash flow and the revenue. The business is doing phenomenally well. That'll do it. So I haven't dug into the fundamentals. I'm going to listen to the most recent call and find out what's going on. And I probably still will buy the stock. So my point is I wanted to bet on her and I just forgot to buy the stock. And when you've got just amazing special people like this, you just got to bet on them.
- [108:03]
A
Just like pure Jockey. Yeah, See it's, it's interesting and I think this is why you've gravitated a little bit more than I have to like private market investments and venture backed companies. Because that's the whole ball game. It's. There is no business. There's an idea of a business. You're betting on jockeys, you're betting on the people. I was talking about you like that.
- [108:24]
C
You like my friend today about one of our mutual companies that is crushing it. And I said like whatever Rob's doing, my answer is I want to give you money. I don't even care what you're doing, but I believe in you.
- [108:35]
A
Okay, so you like, so you're a big like management guy. Bet on the person guy.
- [108:40]
C
Huge, huge. You know what? Last thing and then I'll shut the up about, excuse my language about these audiobooks. So Steve Jobs, listen to this quote. No, you know what? I feel like my brain has been deprived of oxygen because I haven't read a book in three years because I don't have the mental energy at the end of the night.
- [109:00]
A
Remember I told you that was going to happen 10 years ago and you.
- [109:02]
C
Believe my brain shuts down at 8:45 and I go to sleep at 9:15. I am wiped. At the end of the day I can't physically read and I Don't care if it's cheating. Fake reading is better than no reading. And I feel like I'm alive again with these books. So, anyway, Steve Jobs said. Just talking about people. Steve Jobs said it doesn't make sense to hire smart people and tell them what to do. We hire smart people so they can tell us what to do. So you're goddamn right. I'm all in on these people.
- [109:29]
A
All right, listen, I don't hate it. I was all in on you when I met you. So, hey, you're getting torn to pieces in the chat, but also nice.
- [109:37]
C
Awesome. Thank you. I appreciate that.
- [109:38]
A
Super savage spirit says Michael looks like a rich, bald CEO right now.
- [109:43]
C
I'll take it.
- [109:44]
A
That's not bad though, right?
- [109:46]
C
You know what? When I was 26 years old, I made $900 for the year, okay? And when Josh hired me, I made $36,000 for the year. So I will take.
- [110:02]
A
Don't reveal my methods of indicating people to join it.
- [110:06]
C
12, 12. 12 years ago, okay? So I will take rich, bald asshole all day.
- [110:10]
A
All right. Dude, you're the man. We're so proud of you for your new beautiful home and your new mud room. And. I got it. I gotta tell you, that was a killer. Make the case. I gotta look at that stock. Okay. Mystery chart. And then we're. Get out of here. I forgot what I. Oh, yeah. Yeah. Okay. All right. The top pain are. These are three charts.
- [110:32]
C
I know what this is.
- [110:34]
A
No hint. Wait, you're going. No hint. You're going to guess all three.
- [110:39]
C
All right. Let me just try.
- [110:40]
A
No. And don't Google anything. Hands down, dude.
- [110:43]
C
Hands up. My hands up.
- [110:45]
A
I can't see you. All I see is the charts to the screen. Okay.
- [110:49]
C
All right.
- [110:49]
A
Guess the trifecta. Guess the trifecta.
- [110:52]
C
Audacious. Is this the Russell 2000? The value and the growth.
- [110:57]
A
Sad trombone.
- [110:59]
C
No. Damn it. All right, go ahead.
- [111:01]
A
I wanted you to do it.
- [111:02]
C
I got too ambitious. I. I bit off more than I could chew. That's on me. Hand up. Hand up.
- [111:05]
A
I wanted you to do it. I guess you're not really him after all. I thought you.
- [111:10]
C
What is this? Give me one clip.
- [111:12]
A
The top pain is a sector. And.
- [111:14]
C
Okay.
- [111:14]
A
Pains 2 and 3 are the two largest companies in the sector.
- [111:19]
C
Okay.
- [111:19]
A
I think you could do this.
- [111:21]
C
Okay, hold on. So it didn't take out new highs. I don't know, man. I'm getting nervous now. I'm a failure. I'm a loser.
- [111:27]
A
I'm watching the chat to see if anybody's going to get it? No one has it.
- [111:31]
C
So what got absolutely kneecapped in March. Well, everything did. And these are the two largest stocks.
- [111:37]
A
Yeah, the two largest stocks in the sector. And on top is the sector Spider.
- [111:41]
C
All right, let me just. I'll just go with xly, Amazon and Tesla.
- [111:45]
A
I'm sorry.
- [111:46]
C
All right, what is it?
- [111:47]
A
The reveal. Please, John, if you please. So this is the energy, energy sector. Xle on top. ExxonMobil below it and Chevron below that. They're all the same chart. Obviously these two companies make up a huge proportion of the xle. They all look the same. And here's my question to you. What happens when they get back to that cliff from March? Do they get the way or is that the biggest breakout for energy stocks in five years? What do you think? What's going to happen?
- [112:22]
C
I really am. A chart back on Ninny Muggin. Let me say.
- [112:26]
A
Look at this dude. Look what's setting up here.
- [112:29]
C
I'm looking that chart. Visual is not great. Oh yeah. All time highs.
- [112:34]
A
All right, we have individual charts. Let's just roll through them really quickly.
- [112:36]
C
Okay.
- [112:37]
A
Yep. Going. It's going. Right. Okay, I agree. Golden cross and the XLE. We like it. Next chart. Oh, Golden Cross and ExxonMobil.
- [112:47]
C
Man, I gotta. I should buy this.
- [112:48]
A
About to take out overhead resistance. This is the one. The next one. I actually own Chevron. I'm long size. Yeah, but look at this gap fill coming up. It's gonna happen. It's going to happen. We're going to go. We're going to 170 on Chevron. Massive, Massive. Golden Cross happened here about a month ago. And this stock just will not look back. I think, I think they could all work. They should all work together if they're going to work.
- [113:15]
C
Looks great.
- [113:16]
A
Dying to see what happens at that March cliff. I can't wait. I'm anticipating that happening sometime around year end.
- [113:25]
C
What is this Barry bullshit?
- [113:27]
A
Remember that little Exxon. All right guys, thank you so much for watching. I know we went a little long tonight, but it's only because we love you so much. Really appreciate all the shout outs in the chat. Make sure you follow the channel, for God's sake. If you want the trucker hat, go to idonshop.com while supplies last. And I can't guarantee that. So hurry up and we'll talk to you soon.
- [113:52]
C
Sa.