Podcast Summary: "The Blue Chips of Junk" | The Compound and Friends

Release Date: January 24, 2025

Hosts: Josh Brown, Michael Batnick, and Bob Elliot
Guest: Bob Elliot, Co-founder, CEO, and CIO of Unlimited Funds

1. Introduction and AI Innovations

The episode begins with light-hearted banter between Josh Brown and Michael Batnick, quickly transitioning to a discussion about OpenAI’s latest release—the agentic AI. Bob Elliot introduces the topic by showcasing OpenAI’s new AI agent, highlighting its capabilities such as booking reservations and managing grocery lists through services like OpenTable and Instacart.

• Notable Quote:
  • Bob Elliot (00:36): "The killer use case, the app for crypto is here."

Key Points:

• OpenAI’s agentic AI can perform tasks like booking tables and handling grocery orders.
• Concerns are raised about the security and practicality of granting credit card access to AI agents.
• Discussion on the future potential of AI in automating everyday tasks and the necessary safeguards required.

2. Apple's Siri and Conversational AI Integration

The conversation shifts to Apple’s efforts in enhancing Siri’s conversational capabilities. Michael Batnick criticizes Siri’s current functionality, emphasizing the need for a more advanced, ChatGPT-like interaction to make it truly conversational and useful.

• Notable Quote:
  • Josh Brown (03:20): "They're using ChatGPT, so of course they'll get there."

Key Points:

• Apple is investing heavily to upgrade Siri, aiming for more natural and intuitive conversations.
• Current limitations of Siri include disjointed responses and lack of memory between interactions.
• The importance of making AI assistants more personalized and context-aware to meet user needs.

3. Market Expectations and Asset Valuation

Bob Elliot and Michael Batnick discuss the current market sentiments, highlighting the high expectations placed on the stock market, particularly on high-growth sectors like AI and tech.

• Notable Quote:
  • Michael Batnick (25:15): "The growth rates expected for MAG7 companies are still high, but they're expected to slow."

Key Points:

• The market is pricing in exceptionally high earnings growth, especially for MAG7 (top tech) companies.
• Concerns about whether these high expectations are sustainable given broader economic indicators like GDP growth.
• The potential disconnect between stock valuations and real economic performance.

4. Earnings Reports and High Valuations

Josh Brown uses Netflix as a case study to illustrate how high-growth companies with elevated earnings multiples can thrive despite skepticism. The hosts analyze Netflix’s recent earnings, recognizing its success but questioning the long-term sustainability of such high valuations.

• Notable Quote:
  • Josh Brown (34:55): "Turns out it was cheap. But who could have known?"

Key Points:

• Netflix’s record subscriber growth and revenue increases beat analyst expectations.
• The challenge of valuing companies like Netflix, which defy traditional valuation metrics due to their innovative business models.
• Discussion on how the success of such companies affects overall S&P 500 valuations and investor behavior.

5. Bond Markets, TIPS, and Portfolio Diversification

The hosts delve into bond markets, focusing on Treasury Inflation-Protected Securities (TIPS) and their role in portfolio diversification. Michael Batnick explains the attractiveness of current TIPS yields and how they compare to stocks in terms of risk and returns.

• Notable Quote:
  • Michael Batnick (59:08): "The term premium expansion is a pro-growth story, reflecting high growth expectations."

Key Points:

• TIPS are offering attractive real yields, making them a compelling option compared to traditional bonds and cash.
• The significance of term premiums in assessing the bond market’s outlook.
• Strategies for incorporating TIPS into investment portfolios to balance risk and enhance diversification.

6. Hedge Funds, Fees, and Investment Strategies

Bob Elliot and Michael Batnick discuss the challenges within the hedge fund industry, particularly the high fees and liquidity issues. They critique the traditional 2 and 20 fee structure and introduce Unlimited Funds as a more cost-effective alternative that democratizes hedge fund strategies.

• Notable Quote:
  • Michael Batnick (86:57): "Fees are too damn high, and they're essentially taking 100% of the alpha."

Key Points:

• Hedge funds often charge high fees that can erode investor returns, especially for underperforming funds.
• Unlimited Funds aims to offer hedge fund-like strategies with lower costs and greater transparency.
• The importance of aligning investment products with investor liquidity needs and performance expectations.

7. China’s Market Dynamics and Political Influence

The discussion touches upon the divergence between US and Chinese stock markets, emphasizing the significant impact of political decision-making in China on its market performance.

• Notable Quote:
  • Michael Batnick (80:56): "They can determine whether or not the market goes up or down."

Key Points:

• Chinese stock markets are heavily influenced by government policies, making them unpredictable and risky for investors.
• Contrast with US markets, where macroeconomic fundamentals play a more significant role in driving stock performance.
• Caution advised against investing in markets where political factors override economic indicators.

8. Bond Market Insights and Real Yields

The hosts analyze current trends in the bond market, discussing the implications of falling real yields on TIPS and the overall attractiveness of bonds in the current economic environment.

• Notable Quote:
  • Josh Brown (68:22): "We're pricing a set of conditions over the next five or ten years that look as good as the pre-GFC boom."

Key Points:

• TIPS are currently offering some of the best real yields in decades, making them attractive for long-term investment.
• Rising bond yields in conjunction with strong stock performance indicate a pro-growth market sentiment.
• The importance of understanding term premiums and their reflection of growth expectations.

9. Conclusion and Final Remarks

The episode concludes with promotional content about upcoming client meetings in Naples, Florida, and a brief reflection on the discussed topics. The hosts encourage listeners to consider diversification and cautious optimism amid high market expectations.

• Notable Quote:
  • Josh Brown (93:07): "How much gold do you guys have in your strategic portfolio?"

Key Points:

• Emphasis on the importance of diversification through bonds and gold to mitigate potential market downturns.
• Encouragement to explore innovative investment strategies that align with the current economic landscape.
• Final thoughts on maintaining a balanced and informed approach to investing in volatile markets.

Notable Quotes

• Bob Elliot (00:36): "The killer use case, the app for crypto is here."
• Josh Brown (03:19): "They have an unlimited amount of money and they're using ChatGPT, so of course they'll get there."
• Michael Batnick (25:15): "The growth rates expected for MAG7 companies are still high, but they're expected to slow."
• Josh Brown (34:55): "Turns out it was cheap. But who could have known?"
• Michael Batnick (59:08): "The term premium expansion is a pro-growth story, reflecting high growth expectations."
• Michael Batnick (86:57): "Fees are too damn high, and they're essentially taking 100% of the alpha."

Insights and Conclusions

Throughout the episode, the hosts emphasize the critical balance between market expectations and underlying economic fundamentals. They express skepticism about the sustainability of current high valuations, particularly in the tech sector, and caution against blindly following market sentiment without considering macroeconomic indicators. The discussion highlights the importance of diversification, advocating for investments in bonds and gold to protect against potential market downturns. Additionally, the critique of the hedge fund industry's fee structures underscores the need for more transparent and cost-effective investment solutions, pointing listeners toward innovative alternatives like Unlimited Funds.

The conversation also underscores the complexities of navigating global markets, particularly with the unpredictable nature of Chinese stock markets influenced by political decisions. Overall, the hosts advocate for a disciplined and informed approach to investing, leveraging diverse asset classes to build resilient portfolios in an environment of high expectations and potential market volatility.