Trump Is Winning His Trade War, Michael Cembalest on 20 Years Running Research at Jpmorgan, Earnings Reactions Galore

Summary

Podcast Summary: The Compound and Friends Episode: Trump Is Winning His Trade War, Michael Semblist on 20 Years Running Research at JPMorgan, Earnings Reactions Galore
Release Date: July 29, 2025
Host: Downtown Josh Brown & Michael Batnick
Guest: Michael Semblist, Chairman of Market and Investment Strategy at JPMorgan Asset and Wealth Management

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1. Introduction and Special Guest: Michael Semblist

In this landmark 20th-anniversary episode of "Eye on the Market," host Downtown Josh Brown and co-host Michael Batnick welcome Michael Semblist, a revered figure in financial research. Celebrating over three decades at JPMorgan, Michael shares invaluable insights from his extensive work shaping market strategies for a diverse clientele, including individual investors, wealth managers, and institutional clients.

2. Reflecting on "Eye on the Market" – A Legacy of Insight

Michael Semblist reminisces about the evolution of the "Eye on the Market" publication, highlighting its transformation from a semiannual report to a weekly essential resource, especially during the financial crisis of 2008. He emphasizes the publication's role in providing candid, data-driven analysis amidst turbulent times.

Notable Quote:
[05:40] Josh Brown: "Mary Callahan Erdos comes to you and says... you're doing a lot of research... So I want to go back to the beginning."

3. Significant Insights from Michael's Research

a. Meredith Whitney and Municipal Bonds

Michael discusses Meredith Whitney's dire predictions about the municipal bond market post-financial crisis, explaining how his own research debunked her alarming forecasts. By conducting comprehensive data analysis across 350 Metropolitan Statistical Areas (MSAs), Michael demonstrated that except for Detroit, other large municipal issuers remained stable, thereby reassuring investors.

Notable Quote:
[19:41] Michael Batnick: "Detroit was so different in ways people may never be able to appreciate... default rate in the municipal market, it was 0.1%."

b. Geopolitical Risks and Market Resilience

Exploring the relationship between geopolitical tensions and market performance, Michael argues that historical data shows minimal long-term impact on financial markets, with notable exceptions like the 1973 Arab-Israeli war. He contrasts this with current concerns, suggesting that while regions like the Middle East hold some volatility, major conflicts involving key players like China and Taiwan could pose significant risks.

Notable Quote:
[26:34] Michael Batnick: "There's just not a lot of evidence that geopolitics drives markets for more than a few weeks."

c. Yield Curve Inversion and Recession Predictions

Addressing the traditional belief that an inverted yield curve reliably predicts recessions, Michael presents his analysis from 2022. He explains that unlike past instances where rising rates led to corporate financial stress and recessions, the unique circumstances of financial repression and corporate sector surpluses this time disrupted the typical transmission mechanisms.

Notable Quote:
[31:58] Michael Batnick: "The transmission mechanism from rising policy rates to recession wasn't there."

d. Historical Market Patterns and Predictive Indicators

Michael shares his favorite historical analysis, demonstrating that stock markets often bottom before traditional economic indicators. Using examples from the Great Depression and the 2008 financial crisis, he illustrates how bank equity indexes consistently signal market bottoms well before other economic data catches up.

Notable Quote:
[38:57] Michael Semblist: "They said the capital shortfall was 3 billion... when they published these charts, we said... there are differences in how banks run themselves."

4. Trump's Trade War Progress and Market Implications

a. Recent Tariff Negotiations with Japan and the EU

The discussion shifts to President Trump's ongoing trade negotiations, highlighting recent deals with Japan and the European Union. Michael assesses the market’s positive reaction to reduced auto tariffs and substantial investment commitments from Japan. However, he also underscores the mixed reactions from European leaders, revealing underlying tensions despite the publicized agreements.

Notable Quote:
[82:04] Josh Brown: "So just on the surface, based on what I'm telling you, doesn't it sort of sound like Trump is winning this thing given all-time highs in the market and basically getting huge investment commitments from these countries?"

b. European Leaders' Skepticism

Despite the apparent market optimism, European leaders express reservations about the trade deals. Comments from officials like Sweden's Trade Minister and the German Chancellor reflect concerns over the long-term impact and the authenticity of investment commitments, indicating a complex geopolitical landscape.

Notable Quote:
[86:21] Josh Brown: "Benjamin Dussa, who is the trade minister from Sweden, said... the French prime minister mourned it as a... somber day."

5. Current Earnings Season Highlights

a. Major Stock Performances

The hosts delve into the recent earnings reports of major companies:

• UPS: Continues a five-year downward trend, missing guidance with "no guidance due to macro uncertainty."
• PayPal: Despite strong revenue beats, the stock faces severe sell-offs, reflecting skepticism about sustainable growth.
• Starbucks: Misses earnings but announces the controversial "Green Apron Service," aiming to enhance customer interaction.
• Chipotle: Experiences a significant decline, mirroring industry-wide struggles.

Notable Quote:
[73:27] Josh Brown: "Do you want me to explain what this is?"

b. Stock Market Reactions to Earnings

Michael Semblist highlights how the market disproportionately rewards companies that beat earnings estimates while harshly penalizing misses. This trend underscores the precarious nature of current market optimism, heavily reliant on a select few tech giants driving the rally.

Notable Quote:
[74:59] Michael Semblist: "They have a persistent pattern of lower highs. Not what you want to see."

6. Semiconductors and AI-Driven Market Rally

a. Dominance of AI in Market Growth

The conversation pivots to the critical role of artificial intelligence (AI) and semiconductor companies in sustaining the current bull market. The hosts emphasize that without the continued investment and innovation from giants like Nvidia and Microsoft, the market’s upward trajectory would falter.

Notable Quote:
[90:05] Josh Brown: "The only thing that matters is AI."

b. Market Capitalization Shifts

Michael Batnick presents data showing a significant shift in market capitalization from traditional leaders like Apple to AI-centric firms, illustrating the market’s realignment towards technology-driven growth.

Notable Quote:
[91:09] Josh Brown: "Do we need Apple in a bull market? No. So long as we have NVIDIA and Microsoft."

7. Leadership Lessons from the Financial Crisis

a. Comparing JPMorgan and Lehman Brothers

Michael Semblist shares lessons on leadership and risk management by contrasting JPMorgan's cautious approach during the 2008 crisis with Lehman Brothers' excessive leverage. He credits JPMorgan's resilience to effective capital management and strategic foresight, which ultimately saved it from collapse.

Notable Quote:
[57:43] Michael Batnick: "We were gradually pulling our horns heading into the financial crisis when we saw this."

b. Importance of Due Diligence

Recounting the due diligence process during the Madoff scandal, Michael emphasizes the necessity of thorough research and skepticism, reinforcing the importance of leadership vigilance in safeguarding institutional integrity.

Notable Quote:
[64:42] Josh Brown: "I can't help but wonder that as every academic and critic of the White House lights their hair on fire over the effective tariff rate, America is taking some steps to rebalance our economy."

8. Fed Meeting and Monetary Policy Expectations

a. Anticipated Fed Decisions

Looking ahead to the Federal Reserve's upcoming meeting, the hosts discuss current rate trends and market expectations. With the effective federal funds rate hovering just below 5%, they anticipate that the Fed is unlikely to cut rates imminently, instead maintaining a tight monetary stance to combat inflation.

Notable Quote:
[127:19] Michael Semblist: "Guys, this is a big L for me. I mean that, my God."

b. Market Implications of Fed Actions

Michael and Josh debate potential market reactions to Fed announcements, considering scenarios where dovish signals could either stabilize or destabilize the market further. They caution listeners to remain observant but not to make impulsive investment decisions based on speculative outcomes.

Notable Quote:
[129:35] Michael Semblist: "I hope we look back on this and say we were all making a big deal out of nothing."

9. Concluding Thoughts and Key Takeaways

As the episode wraps up, the hosts summarize key insights:

• Market Dependence on AI and Semiconductors: The sustainability of the current bull market is heavily tied to the performance and innovation within the AI and semiconductor sectors.
• Leadership and Risk Management: Effective leadership and prudent risk management are critical in navigating financial crises and ensuring institutional resilience.
• Geopolitical and Trade Dynamics: Trump's trade strategies have had mixed reactions, with significant investment commitments as a sign of potential market confidence, yet underlying geopolitical tensions remain a concern.
• Earnings Season Vigilance: Investors should remain cautious, recognizing that current market rallies are supported by a narrow group of high-performing stocks, and be prepared for potential volatility based on upcoming earnings reports.

Final Notable Quote:
[124:28] Josh Brown: "Stock market Americans are holding up the entire thing right now."

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Access the 20th Anniversary Compilation:
For those interested in delving deeper into Michael Semblist's comprehensive 20th-anniversary compilation of "Eye on the Market," the compilation is available as a PDF. It offers a rich collection of analyses, charts, and historical insights that have guided investors through various market cycles.

Follow Michael Semblist:
Stay updated with the latest "Eye on the Market" pieces by following Michael Semblist on LinkedIn.

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This summary encapsulates the key discussions, insights, and notable moments from the episode, providing listeners and readers with a comprehensive overview of the topics covered.

Transcript

[Josh Brown]

Ladies and gentlemen, welcome to the Compound and friends. Today's show is sponsored by Public, the investing platform for those who take it seriously. Build a multi asset portfolio of stocks, bonds, options, crypto and more on public.com or using the Public trading app. You can also access industry leading yields like the 4.1% APY you can earn on your cash with no fees or minimums. What else sets Public apart? AI isn't just a feature, it's woven into the entire experience. And who doesn't love AI? From portfolio insights to earnings call recaps, Public gives you smarter context at every touch point. Find out [e-mail] wat tonight's show is a monster of an episode. We started the week with Michael Sembelist, legendary researcher, strategist, just all around giant of the field. Michael is celebrating 20 years of his eye on the market research piece, which is probably the most important continuously running piece of research that goes out to individual investors, wealth managers, financial advisors, family offices, he hedge funds, institutional clients of JP Morgan, you name it. Everybody reads Semblist and Michael does not do media. I think we're the only podcast he does. I think he jumped on with Joe and Tracy once on Odd lots, but that's pretty much it. If you're going to hear from Michael, either you have insane access at JP Morgan or you're going to hear him on the Compound. And friends and we, we really appreciate him joining us and sharing some of the biggest lessons that he's learned over the last 20 years, last 35 years actually, since he's been at at the bank. So Michael is brilliant and we really enjoyed our session with him. If you haven't watched the video already on YouTube which came out yesterday, you're in for a treat because we're going to play the audio now. Following that, it's an all new edition of what are your thoughts Michael? It's Michael Batnick and I and we are right in the heart of earnings season. So we'll tackle some of the reactions in stocks like Starbucks, Chipotle, some previews of Microsoft and Meta and Apple, and we'll dig deep into some of the other things happening in the markets. Stick around, the boys will send you into the show. Thanks for coming. Hope you love it. Welcome to the Compound. All opinions expressed by Josh Brown, Michael Batnik and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Welcome to Live from the Compound. I'm your host, Downtown Josh Brown, here with my co host as always, Mr. Michael Batnik. On today's very special episode, we are joined by one of the most popular and the most requested and re requested guests in compound history, Mr. Michael Semblast. Michael's work has shaped how professionals and institutions think about markets for decades. He is the Chairman of Market and Investment Strategy at JP Morgan Asset and Wealth Management. He authors the widely followed Eye on the Market, a research publication known for its sharp analysis, irreverent tone, and deep dives into the market, the economy, geopolitical issues, et cetera. Over 35 years of experience, Michael is one of the most respected investment strategists on the street. Welcome back to the show. We're so happy to have you.

[Michael Batnick]

Thanks very much.

[Josh Brown]

How's that for a buildup that was.

[Michael Semblist]

All off the dome? Very impressive.

[Josh Brown]

There's more. So we invited you here to celebrate the 20th anniversary of a publication Michael never misses, I never miss, and it's called Eye on the Market. If you work in finance, it's very likely you get this sent to your inbox. And the 20th anniversary is a really big deal. And I think what we want to do today is really talk about some of the most memorable charts and some of the biggest insights that you've produced over the years. Putting this out. And I just want to say thank you so much for joining us in studio. And it was so much fun for me to go back and read some of these because I read them in the moment and one of the questions I kept asking myself was, did I pay enough attention to this at the time that it came out? What was your experience like going back through your own work?

[Michael Batnick]

Let's see. Well, our chart formatting was pretty crappy.

[Josh Brown]

When we started Fair.

[Michael Batnick]

The pieces. The pieces were shorter.

[Josh Brown]

Yeah.

[Michael Batnick]

Particularly before the financial crisis, when the world was simpler. But then once the financial crisis hit, the cadence of it went up. At one point, we had to publish like every week, the week that Lehman went into defaulted and then the GSEs were put into conservatorship. We published three times.

[Josh Brown]

Yeah.

[Michael Batnick]

So we wrote a lot more often back then because there was a lot of things to plow through.

[Josh Brown]

So I want to go. I want to go back to the beginning. You've done 4,500 pages worth of Eye on the Market.

[Michael Batnick]

Right.

[Josh Brown]

But like, that's the page count.

[Michael Batnick]

Yeah, it's called. We have this file called The Eye on the Monster. And that's. It's every Eye on the Market's ever been written.

[Josh Brown]

Okay.

[Michael Batnick]

And there's 584 of them.

[Michael Semblist]

Was it always Eye on the Market? Was that the first name?

[Michael Batnick]

Before that? I wrote a semi, a semiannual publication called On My Mind. But it was, you know, for a few years before that. But I In the market started in 2005.

[Josh Brown]

Okay.

[Michael Semblist]

So.

[Josh Brown]

So Mary Callahan Erdos comes to you and says, so you're doing a lot of research for the in house client call, which is like an 8:00am or 7:00am, right. Okay.

[Michael Batnick]

And I was the chief investment officer in the private bank at the time.

[Josh Brown]

Okay.

[Michael Batnick]

And she wanted me to start sharing externally to the extent that we could disclose what we were thinking about different portfolio strategies.

[Josh Brown]

So this is 2005. Did it start as an email product or were you physically.

[Michael Batnick]

It started as an email, except a lot of our clients didn't have email.

[Josh Brown]

Right.

[Michael Batnick]

So we had to print them and then snail mail them at times.

[Josh Brown]

Okay.

[Michael Semblist]

All right.

[Michael Batnick]

So people were still using Palm Pilots.

[Josh Brown]

So this is how Mary puts it. She refers to Eye on the Market as, quote, one of the most widely respected pieces of thought leadership in our industry. I think most people would agree with that. Jamie Dimon has referred to your Eye on the Market series as, quote, required reading. I'm guessing the success of the series has surpassed your wildest expectations from when you were 35 years old and they came to you and said, hey, how would you like to put this out on a regular basis?

[Michael Semblist]

35 years old.

[Michael Batnick]

35.

[Josh Brown]

How old? How old were you starting?

[Michael Batnick]

Math sucks.

[Josh Brown]

All right, So I was 45. 45. Okay, my bad. But I'm guessing from the day you started, Right. They must, like, this must have gone so much bigger than you ever thought it would have.

[Michael Batnick]

Yeah, I mean, it took a while, right? I mean, you have to, you have to compete for space. There's a lot of people get a lot of stuff in their inbox and you know, you have to get some calls. Right. You have to get some important calls. Right. You have to make it clear when you make the wrong call, what you learned and how you're going to try to avoid the same thing. But yeah, over time, it started to pick up speed.

[Michael Semblist]

What do you think was your best call?

[Michael Batnick]

I mean, a few things kind of jump out.

[Josh Brown]

Subprime stuff.

[Michael Batnick]

The subprime.

[Josh Brown]

I mean, not that you peaked early, but like, you had really fortuitous timing.

[Michael Batnick]

I saved an email that I sent to Jamie in the fall of 2006 saying, I've heard rumblings that the bank is about to start up a subprime effort. I think that would be a huge mistake. Let me tell you what we see going on underneath the hood in terms of leading indicators. Delinquencies, defaults and recoveries.

[Josh Brown]

Yeah, I think so. I think I had not read that. But that's 06 you were talking about subprime 18 months before it becomes the linchpin of something really monstrous for the market. And I know you stuck with it, you didn't just write about it once. But I noticed that you started right there with this particular compilation.

[Michael Batnick]

Yeah.

[Josh Brown]

Why was it important to do that? Was that like setting the table to just show like, look, we said some really important stuff.

[Michael Batnick]

I didn't want to start the compilation with a 2020 hindsight piece after the financial crisis had already happened. I wanted to make it clear that we did see some of the elements coming. I had absolutely no idea that the GSEs were in such bad shape that they were going to be put into conservatorship. But we did start the year underweight credit, high yield specifically and equities in 2008 because of these kind of concerns. And, you know, I actually thought the Lehman bankruptcy was going to be the bottom. And then, you know, we got a whole nother bottom after it was six.

[Josh Brown]

Months before the bottom. Right. It was. It was one. A bottom.

[Michael Batnick]

A bottom.

[Josh Brown]

That' when you started to get feedback for this and coming from people outside of J.P. morgan. So the first. So you start publishing, it starts going out. Is the early feedback, like super encouraging and makes you want to keep going or are there people taking issue with what you're saying or what was that like?

[Michael Batnick]

Well, you know, the more opinionated you are, the more people have issues with it. You know, people send in things and then legal people deal with them and, you know, usually you get the strongest reaction to things that don't have to do with markets. I mean, markets go. Market outcomes speak for themselves. And there's not a lot to debate after the fact about what a market outcome was. People tend to get themselves, you know, all twisted up when it comes to policy issues. Energy, vaccines and things like that.

[Michael Semblist]

Penguins.

[Michael Batnick]

Penguins, people and politics in particular. And that's when people kind of get very opinionated about things. But you can't write something that's strongly opinionated and not have a high tolerance for people that disagree with some of the things that you say.

[Josh Brown]

I actually would take that further. There are a lot of people who have decades Long careers on Wall street, and their primary skill set is saying absolutely nothing at all times. And for a lot of investment firms, a lot of banks, a lot of asset management firms, that's actually all they want. They want someone who's the face of the firm, who never disagrees with anyone, vehemently, never offends, never pisses off a client, and just right down the middle, here's the most plain vanilla version of events. And you very obviously have staked out opinions and you've gone the other way, and the bank has stood with you for the most part, I think you said. Only twice has content been shelved that you've done for Eye on the Market.

[Michael Semblist]

Are we allowed to reveal it's in the past.

[Josh Brown]

We could say what they were. Can I guess.

[Michael Batnick]

Is that where you want to go?

[Josh Brown]

Let's start there.

[Michael Batnick]

In the beginning of the podcast.

[Josh Brown]

Let's start there. You probably said, jet fuel doesn't melt steel beams.

[Michael Semblist]

Wow.

[Josh Brown]

No. Okay.

[Michael Batnick]

Oh, my God.

[Josh Brown]

No. What did you say that was. What did you say that was so crazy?

[Michael Batnick]

Is he's not like a Truth or.

[Josh Brown]

No, no, no, no. Not at all. What did you say that was, like, so controversial that it didn't put it up?

[Michael Batnick]

In March 2021, I wrote a piece on the mounting scientific evidence that Covid was an accidental lab leak.

[Josh Brown]

Yeah.

[Michael Batnick]

And I can see. And I talked to a wide number of hematologists, and the sad thing was that a lot of them felt this way but didn't want to go public with it. But I had the piece written, and, you know, the firm decided that it would be too problematic for China and could negatively affect our business in China. And the firm has been trying to do business in China for a long time. And so that piece got shelled.

[Michael Semblist]

I mean, not a lot of upside to publishing that I was gonna say.

[Josh Brown]

Were you relieved when they said, thank you for doing this work? But we don't think it's. It's.

[Michael Batnick]

No. I thought it was pretty. Given all of the competing narratives at the time, I thought it was important for people to understand that the paper that was written in February 2020 in the Lancet, talking about how, you know, it's definitely a zoonotic jump, and there's no debate about it was really bad science and irresponsible. And so I wanted to publish the piece, but it got shelled. I understand why it got shelled, but it got shelled.

[Josh Brown]

The piece would have been used for political purposes in the news. It would have become. It would have taken on a life of its own, far beyond the perfectly legitimate research purpose of why you wrote it. Okay. What was the other instance?

[Michael Batnick]

The other one happened this year. There's certain details I'm gonna sanitize. But a couple of our operating committee members wanted me to write a piece on the executive orders against the law firms when they first started happening, and how it was corrosive to good government and negative for the markets, and negative in terms of a signal of how the administration was going to be dealing with individual companies and firms and issues. So I wrote this piece, and I started out by saying that defending corporate lawyers was a rather unpleasant task. And I wrote about. The piece was called the Plumbing Snake. Cause I wrote about how in my family, I'm the one that has to unclog toilets and pick up dead animals from the yard, which is kind of like defending lawyers is on the same level as those unpleasant things to do.

[Josh Brown]

Quite an analogy.

[Michael Batnick]

Right? But now that I'm gonna do it, here are the reasons, looking back at 200 years of history, as to why this is bad for investors and bad for the United States.

[Josh Brown]

And these are the law firms that had launched lawsuits against Trump in the.

[Michael Batnick]

First term or simply had people working at them who in some years prior were involved with some litigation against the President.

[Josh Brown]

Right.

[Michael Batnick]

And this is different than, like, you may. Some people may not agree with the president's policy with respect to cutting NIH funding or CDC funding, but he ran on that. Some people. And people liked him for it. Some people don't like his immigration policy. Some people don't like his policy with respect to the Supreme Court. But all of those things he ran on, and voters voted. The law firm thing was different. That was something that was very personal to the president, and I think not in a very kind of constructive way for the investment community. But other operating committee members felt that. That it would just put a target on the firm's back, and it was inappropriate to publish, and that was the only one that was killed.

[Josh Brown]

Okay. So I guess I would take it a little bit further, and then we can move on.

[Michael Batnick]

Sure.

[Josh Brown]

I'm sure there was some interest. JP Morgan and Wall street firms engaged in a lot of M and A. And now there are a lot of personal issues with particular companies that want to do deals. And it seems that the market is not really particularly concerned right now. They think deals will get done. You just have to do and say the right things. Is that something that you think you might be writing about or.

[Michael Batnick]

I don't know. We'll see. There was a Lot of excitement about Lina Khan leaving her post and how the DOJ and the FTC would have a more pro merger approach to policy. Interestingly, Vance has misgivings about business consolidation and so do some other people in the administration who are not necessarily in favor of the kind of classic Sherman act approach to M and A approvals. But, you know, so far the business community is, is, is, is able to operate with a little bit more free rein than it did under Biden. Right.

[Josh Brown]

Yeah.

[Michael Batnick]

You've done, you and I have talked about this before.

[Josh Brown]

Yeah.

[Michael Batnick]

But you know that, you know that hold my beer thing. Yeah. That. People say the first term of the Obama administration set an all time record for the pace of substantial government regulation. And then Biden said hold my beer and the Biden administration's regulatory track record blew past what Obama did in his first term. So as we're sitting here thinking about M and A and business activity and things like that, that's the deregulatory stuff that CEOs in general at the Business Roundtable are hoping eventually become the dominant narrative of this administration.

[Josh Brown]

It's horse trading. And it's not. Trump's not the first president to engage in horse trading with corporations.

[Michael Batnick]

Read any biography of Lyndon Johnson.

[Josh Brown]

So now US Deal was able to be acquired and the government kind of got like warrants on the deal or something. CBS will be able to be. Viacom will be able to be sold to the Ellisons. But there was a settlement.

[Michael Batnick]

Let's see what happens. The language last night in the Japan trade deal talked about $550 billion of investment in the United States from Japan at the president's discretion. Now, I don't think he really means that, but those were the words that he used to describe it. So we have to kind of be on the lookout for some kind of Latin American approach to business dealings. But before overreacting, I'm going to wait to see what happens in practice.

[Josh Brown]

All right, let's dive in to some of the greatest hits from Eye on the Market. Michael, why don't you take over? So I know you pulled out some of your favorite charts that we revisited.

[Michael Semblist]

Yeah.

[Josh Brown]

Let's start with this.

[Michael Semblist]

As investors, we all know that a lot of the errors that we make are self inflicted, greed, fear, rash decisions. One of the big ones that you said our clients were quite concerned by was Meredith Whitney. And a lot of times these unforced errors are because we see it on the TV or in the newspaper like we have. People of authority are saying things that sound intelligent and smart. And scary and we panic. So you pulled out Meredith Whitney's 60 Minutes interview. What do you remember about that time?

[Michael Batnick]

Well, first I remember people telling me, you must not want to make any friends in this industry, which was true. What I remember was my email inbox is a direct reflection of the things that people are hearing, because the more our clients get scared about something, no matter how successful and knowledgeable they are in their fields, for many of them, their municipal investments are their safe harbor. So when they start hearing things negative about the municipal bond market, whether it's credit risk or maybe Obama had a proposed federal tax of 5 to 7% on municipal bonds for people AGI over 250, I start, oh, my God, what's going to happen? I get all these questions. And Meredith Whitney, like a lot of other people in the wake of the financial crisis, was looking to stake out, here's the next Armageddon thing that's going to happen. You know, look at me. And she staked out the territory that you were going to have massive defaults in the municipal bond market, and then it was going to become the biggest single issue in the entire US Economy.

[Josh Brown]

We got a million questions about that. This was the scariest thing in the world.

[Michael Batnick]

It was. And again, this is the safe harbor, bedrock for a lot of client portfolio.

[Josh Brown]

Yes, this is the risk off piece. And now you're telling people the default rate could be 20% or something, or.

[Michael Batnick]

She had some massive number 50 to 100 large municipal defaults. And it didn't ring true to us because when you dug through the details, it just wasn't there. So the next thing that happens, of course, is Detroit files. But Detroit was so different in ways people may never be able to appreciate than the other large municipal issuers, even places like Cleveland, Baltimore and Pittsburgh. Detroit was so different. So we went and we pulled reams of data across all 350 MSAs, which are the metropolitan statistical areas in the country, from the bea. And we looked at the size of the labor force and labor income tax payments. Violent crime, you look at violent crime, we looked at everything. And Detroit consistently ranked below the fifth percentile in almost every metric. And in a way, Detroit just was not in any way a bellwether for most of the rest of the municipal issuers.

[Josh Brown]

Right.

[Michael Batnick]

And it took that level of detailed research and a long report that we wrote called How Different Is Detroit? That we had to send out to all the clients to get them to be comfortable with the fact that we were going to kind of have a business as usual. Approach in the municipal portfolio and the subsequent 12 to 15 year default rate in the municipal market, it was 0.1%.

[Josh Brown]

Yeah. So what people need to understand about how meaningful your piece was in that moment in 2011, Meredith Whitney is three years, four years removed from having made a huge call. She was a sell side analyst covering Citigroup. Where did she work? Merrill or Oppenheimer, I don't remember. But she basically called Citigroup on their balance sheet on their solvency. And I think she predicted the demise of Citigroup, which of course like many other banks, ends up getting bailed out. So she's a cause celebrate celebrity.

[Michael Batnick]

Celebra.

[Josh Brown]

Celebra. Cause Celebra. She's, she's everywhere. She's like right up there with Roubini and all the other people that got credit for quote unquote calling the crisis. So her then saying here's the next crisis has a lot of weight.

[Michael Batnick]

It did, it did. And, but, you know, same as the music industry. A lot of your listeners probably love watching TV shows or reading blogs about one hit wonders in the music industry. There's a lot of one hit wonders as investors and there's one hit wonders as strategists. And they have this amazing call, right place, right time, and then they spend the rest of their careers trying to create another one.

[Michael Semblist]

Well, that's what happened after the GFC. You famously made the chart.

[Josh Brown]

There were 15 of those.

[Michael Semblist]

The consequences of listening to the Armageddonists. And a lot of these people have. They're still saying the same thing, but the market seems to.

[Michael Batnick]

Are you gonna show the chart?

[Michael Semblist]

The market seems to not really care about them anymore. They don't get a lot of airtime.

[Michael Batnick]

They used to.

[Michael Semblist]

Oh, for sure. Even five years ago they were still.

[Michael Batnick]

Do you want me to explain what this is?

[Michael Semblist]

Please.

[Michael Batnick]

Okay. So what we did was we took the date, the actual date on which people said an Armageddonist type thing, which is 100% chance of recession next year. I think people should have a zero weight to equities, all of those kinds of things. And then from that moment we went long, long duration bonds and short the equity market. And then this is what happened. If you had listened to those recommendations and then not adjusted your portfolio since. Right. Other people have done this kind of thing similarly. I just felt like doing it myself.

[Josh Brown]

In defense of some of the people on there. That wasn't the last thing they ever said.

[Michael Batnick]

That's right.

[Josh Brown]

Right.

[Michael Batnick]

Some of them died.

[Josh Brown]

Some of the pests.

[Michael Semblist]

So do you think that because you don't hear from these people too often. David Stockman, when's the last time he's been on tv? Do you think that investors have gotten much better at staying invested, at holding through the ups and downs, or is their extinction more reflection of not better behavior, but the market environment?

[Michael Batnick]

Well, to their credit, we lived through this period of financial repression that essentially put real rates below zero. That changed the reaction function in the markets. And so a lot of those people might have been right if the Fed had insisted on maintaining positive real rates like they had for the prior 50 years. But the fact is they didn't, and they were kind of flooding the system with money. And I think from our perspective, because, remember, I'm covering both our private clients and our institutional asset management clients, whether it's endowments, foundations, insurance companies and sovereign wealth funds and ERISA plans. Yes. There's more tolerance to hold through volatility than there used to be. And there's also less liquidity. And I think people have learned as asset allocators, it's very hard to kind of, okay, I'm going to sell here. I'm going to wait till it goes down, I'm going to buy it back again. And the market liquidity after the financial crisis is not there. After Silicon Valley bank failed, I don't want to go into too much detail, but we tried to acquire a substantial, meaningful position in the preferreds of some of the other banks, and it was almost impossible to do, in spite of what the Bloomberg screens were telling you they were available in. So in a world where the market depth isn't there, you can't do that as much horse trading at the asset class level as you might have done in the past. So, yes, people are more willing to stick with positions through good and bad.

[Josh Brown]

Yeah. I also think the retail component of the market, I think the retail of this current generation, they're bolder, tend to want to take more risks and do crazier things.

[Michael Batnick]

And ET by the way, ETFs also are a big part of that.

[Josh Brown]

Right. And that's the other component to it is just the reflex of, okay, rebalancing into stocks. They're down, buying my ETFs. Okay, let's talk about geopolitical risk. One of the takeaways, geopolitical risk is a generally poor signal for investors. We obviously agree. We do tons of content. Anytime something is going on geopolitically, people get nervous. Of course they should, because something is volatile in the world and, you know, maybe this means I should Take less risk. And of course it very rarely works out that way. But you specifically looked at this in 2014, looking at two major conflicts in the post World War II era, and tell us what you found.

[Michael Batnick]

Well, you know, there's the counterpart to Meredith Whitney in this space is a guy named Ian Bremmer.

[Josh Brown]

Yeah.

[Michael Batnick]

And Ian Bremmer, a lot of times will say things, this is the biggest year of geopolitical risk in the post war era. Maybe, but that doesn't necessarily translate into market risk. And I think sometimes investors don't try to think about that in a systematic way. So we looked at all of the post war geopolitical events, and with the exception of the Arab Israeli war of 73, none of them really had a lasting impact on the financial markets. And this was something that we did in 2014.

[Michael Semblist]

You think Middle east episodes don't impact the market because energy is such a smaller component, both in terms of US producing and just the sector's tiny bit?

[Michael Batnick]

First of all, if I had told you two years ago what was going to happen in Israel and Gaza and Iran, I think you would have guessed in the old days, crude oil 150. That's right. Remember, Arjun Murti at Goldman had a $200 price target for crude. And so people tend to overestimate the impact of some of these geopolitical risks. And second, I do agree, if you look on a chart of oil consumption per unit of global gdp. Right. The world gets more energy efficient every year. There's also some substitution going on slowly for whether it's gas or electrification for oil consumption. But in general, there's just not a lot of evidence that geopolitics drives markets for more than a few weeks, no matter what the events happen to be.

[Josh Brown]

I think saying Middle east also is probably not helpful from an investing standpoint. Iranian oil is technically not even on the market. If there were a conflict that involves Saudi Arabia, crude oil might react very differently.

[Michael Batnick]

That's right, yeah. I mean, there is this issue that the vast majority of Saudi oil is located in the Eastern province and the vast majority of the people that live there are Shiites, and that piece of territory happens to be in close proximity to Iran.

[Michael Semblist]

Right.

[Michael Batnick]

So those are real issues. But look, I'm much more concerned if I had to pick one geopolitical issue. If I wake up one day and I find out that China has imposed a naval blockade on Taiwan, which I expect them to do before the decade is out, I'm much more worried about the market reaction to that than anything that would take place in the Middle East.

[Josh Brown]

Do you expect them to do that within the next five years?

[Michael Batnick]

I think so.

[Josh Brown]

How does.

[Michael Batnick]

I mean that's a personal opinion. That's not the opinion of the firm or JP Morgan or its employees or it's anything.

[Josh Brown]

So there are some cases where geopolitical risk would have an enormous impact on the stock market, in my opinion. That would be one of them.

[Michael Batnick]

That would be one of them, yeah.

[Michael Semblist]

Why? I don't know.

[Michael Batnick]

Well, first there's only four months a year where this can be done. You like iPhones for weather and tidal reasons. There's only four months a year when this could happen. Taiwan used to get 55% of its electricity from nuclear and they decided to unilaterally reduce that to 5%. So they have effectively abandoned a lot of their energy self sufficiency because now they're big importers of LNG and I think I read that they have something like 12 or 18 days of coverage for natural gas. So it wouldn't take very long for a naval blockade to kind of bring Taiwan to a screeching halt. What happens there?

[Josh Brown]

I don't know.

[Michael Batnick]

But you know, I don't think that, that the Chinese government has infinite endless patience with the status quo. That's that, there's that, that's the signals that they're sending.

[Josh Brown]

This is one of those things where the hardest hit sector would probably be technology, at least initially. At least initially.

[Michael Batnick]

And then you'd have to see like where does it go from there? Right. What would happen to export policies and import policies for semiconductors? We don't know. Think about this. There's so much discussion about Europe and its pre Ukraine war exposure to Russian energy. So about 25% of European energy came from Russia before the invasion. The world is 70 to 80% reliant on Taiwan for advanced chips. So it's in another league of dependence. And so now there are scenarios where naval blockade or not, Taiwan is still able to supply the world with advanced chips. But that's the question.

[Michael Semblist]

Okay, do you want to get to how markets bottom or do you want to do your indicator stuff?

[Michael Batnick]

Either one.

[Josh Brown]

Let's do the indicators I think people.

[Michael Batnick]

Want to hear about which are kind of. Oh, that one.

[Michael Semblist]

Yeah.

[Michael Batnick]

This one was interesting.

[Michael Semblist]

Go ahead.

[Michael Batnick]

And for all the right reasons. The markets were really focused. And you remember this, it was just two years ago in the summer of 2023. Yield curve is inverted. And the yield curve since 1966 has a perfect papal infallibility record. Eight for eight in predicting recess We've.

[Josh Brown]

Had Campbell Harvey on the show a bunch, so.

[Michael Semblist]

Yeah, and I think the Sam rule was flashing then too. Or was that the next year?

[Michael Batnick]

Shortly thereafter started and by the way, even Claudia came out and said, ah, people are misreading it, but. So 8 for 8 inverted yield curves predict recession within 9 12, 18 months. But we went back and we looked at what was going on at the time of those recessions and this time just looked different. And so dangerous to say this time is different, but I had no choice. This time looked different.

[Josh Brown]

23.

[Michael Batnick]

In the fall of 22, in August 2023, we wrote this Rasputin piece because it was evocative of how higher interest rates were not killing the U.S. economy. Right. Because remember Rasputin, he was kind of stabbed, shot, drowned and poisoned before he died.

[Josh Brown]

Couldn't get rid of him.

[Michael Batnick]

Couldn't get rid of him like Nordberg. So what we did was we said, well, wait a minute, in the past when the inverted yield curve caused a recession, it was because the front end real rates went very high, whereas in 2022 they were barely above zero. So yes, they raised them, but raised them from minus 6 to plus point 2.

[Josh Brown]

The BA, the base that they came from had never been the base for a prior episode.

[Michael Batnick]

Then chart at the lower left in the past, every time the funds rate went up, you saw evidence that corporate interest payments were rising.

[Michael Semblist]

This was the craziest chart of all.

[Michael Batnick]

But during a decade of financial repression, who didn't know that they were supposed to term out their liabilities?

[Josh Brown]

We find out.

[Michael Batnick]

Here's the funny part. Who did it? The Fed, corporations and households who didn't do it?

[Josh Brown]

Banks.

[Michael Batnick]

Banks.

[Josh Brown]

Yeah.

[Michael Batnick]

Right. So the banks in general were the worst asset liability managers during this period of financial repression. Yeah, but as you can see here, yes, it's bad that the policy rate was shooting up, but corporate interest payments as a percentage of profits were still falling.

[Josh Brown]

Yeah.

[Michael Batnick]

So the transmission mechanism from rising policy rates to recession wasn't there. And maybe the most important one of all is the chart at the lower right, which is in the past. Why did rising policy rates cause recessions? Right. It's because at the time the Fed raised rates, it was a shock to the system. And the financial. And the corporate sector was offsides. A negative number means that the corporate sector has a negative financial balance, which means they're spending a lot more than they're earning. In 2020, the corporate sector was in surplus. So in the past, Fed raises rates, companies are offside, radically retrenched capital spending.

[Josh Brown]

Because they have to borrow and they have to pay more for borrowing, which would raise the hurdle rate. You would say, ah, maybe we don't need to do this expansion of our.

[Michael Batnick]

Business this time around. They weren't worried about that because in aggregate the corporate sector was in surplus. So we felt that there wasn't going to be a recession. And then, and then we had the eye on the market. The next January was the pillow talk, one about the bears falling into the pillow.

[Josh Brown]

Yeah. And not only.

[Michael Batnick]

And that turned out to be the right call.

[Josh Brown]

And you had corporations like Apple and Berkshire Hathaway with hundreds of billions of dollars in cash where actually higher rates was more net income.

[Michael Batnick]

Right.

[Josh Brown]

And we have never seen anything like that before.

[Michael Semblist]

And that was very out of consensus at the time. Everybody expected a recession.

[Michael Batnick]

Everybody.

[Michael Semblist]

All right, so what indicators do matter? You have another chart that shows some of your favorites. Let's talk about these.

[Michael Batnick]

Yes. Now these shift around depending upon what time period you're looking at. But we try to run these here. We did this one over like, you know, almost 30 years. And we run these over a long period of time. And we're trying to figure out like if you didn't know what was going on, but you just invested based on these indicators, would you make or lose money? So for example, when the leading indicator index is above average, you make 1.6% a month investing in the S and P compared to when it's below average, you only make 0.4%. So the good indicator, it's big, so it's a good indicator.

[Josh Brown]

Yeah.

[Michael Batnick]

What I love about the geopolitical risk index is the sign is negative. Right. You actually would lose money if you didn't invest when the index was high.

[Josh Brown]

So it sends you high, meaning more risk.

[Michael Batnick]

More risk. It's sending you in the wrong direction.

[Josh Brown]

Yeah.

[Michael Batnick]

And it doesn't mean that it would never work. But over long periods of time, there's just no benefit to the signals.

[Josh Brown]

So for the people listening to this, not watching it, some of these other quote unquote good indicators, CEO confidence, payroll growth, GDP growth, forward 12 month profits growth expectations, small business optimism. Most of these are intuitive.

[Michael Batnick]

Yeah, that's right.

[Josh Brown]

Most of these you just assume if I invest during a period of time where this indicator is rising, things are good.

[Michael Batnick]

That's right.

[Josh Brown]

Isn't that most of the time.

[Michael Batnick]

Most of the time this works.

[Josh Brown]

Most of the time this is pretty reliable, not negative.

[Michael Batnick]

And this is the thing that feeds into that, like that semiconductor looking chart with all the symbols on it.

[Michael Semblist]

So we just Mentioned that no indicator is infallible. Nothing works forever. To me, one feature of the market that I would say is permanent, works today, worked 100 years ago, will work a hundred years from now, is that the stock market will bottom well in advance of everything else. The stock market will bottom and rebound and the news will get blacker and blacker and blacker. And you'll say, what the is going on? Why is the Dow up 300%? They'll say disconnects stock rallies on terrible news. Well, yeah, that's what happens. So talk about this.

[Michael Batnick]

I think my favorite one of all.

[Josh Brown]

This is a great group of charts.

[Michael Batnick]

And we have charts here that go back to the Great Depression. And the. In the compilation, which people can find online if they look for it, we included a whole bunch of charts from the Depression. Same thing, but look at the chart at the upper right. Okay, so if you look at the S and P bank index, right, Whether it's the S and P bank index or you can remember, you can look at the KBW, same signal that index bottoms in early 2009 at a time when only 8% of the eventual bank failures had taken place.

[Josh Brown]

Hmm.

[Michael Batnick]

It's the most bizarre anticipatory signal in the equity market that I've ever seen. Part of it was driven by the SCAP program, which was, you know, the Geithner sponsored recapitalization of the banks and things like that. But you see this again and again at the lower left. It works in Europe too. In Europe, the European equities bottomed during the balance of payments crisis 2012, and it took another two years before the unemployment rate, which is a horribly lagging indicator, stopped rising. So you just see this again and again and again. And it's. Oh, actually the one on the left, on the upper left, that one's from the Depression. So only half of the bank failures had taken place by the times that Dow Jones had actually bottomed. So you just see this again and again.

[Michael Semblist]

So with stocks, it's hard to know what amount of risk is pricing. It's hard to quantify that. But with credit markets, oh yeah, you can and you did. So this is from December 2008. And this is just math. So talk about. I'm sure you remember this very well.

[Michael Batnick]

Yeah.

[Michael Semblist]

What did you see and what were you saying to investors about what sort of risk was being priced?

[Michael Batnick]

This was one of the only times that I can actually remember begging. We said we were begging our clients to read this eye. Please read this eye. In the market, you don't have to do anything, but you have to promise me that you're going to read it because you're never going to see a piece of paper like this ever again. Okay. And I understand the level of shock. Okay. So let's not be too much 2020 hindsight. It's December 2008. We're now looking at the second 40% decline in equity markets within a decade. Something that hadn't happened since the Depression. And I consider our firm to be pretty smart. Our firm bought $2 billion of Fannie preferreds over the summer that eventually got wiped out. Right. So even JP Morgan didn't understand the depth of the problems at the GSEs. Now that said, like you said, where were things priced? Look at that. Investment grade, first row, investment grade corporate bonds, implied default rates. Implied default rate was 14%.

[Michael Semblist]

And the worst ever.

[Michael Batnick]

The worst ever was 3. And we were assuming a 20% recovery rate. I mean, investment grade bonds rarely default, but when they do, or the recovery rates are well north of 80%. Let's look at high yield. The implied default rate was 55%.

[Josh Brown]

Which is like the end of the world.

[Michael Batnick]

Right? End of the world. So now there were some discussions.

[Josh Brown]

The worst ever for high yield junk bonds. The worst ever default rate in reality was 34%.

[Michael Semblist]

This is pricing at 55.

[Josh Brown]

And this was pricing.

[Michael Batnick]

Okay. So now if you invested, then you couldn't have any leverage at all because a lot of the pricing still deteriorated until March. So we made clear that when we were investing and when clients did it on their own, that you can't lever this at all.

[Josh Brown]

And also wherever you got the leverage from, they could pull it.

[Michael Batnick]

Yeah.

[Josh Brown]

Which is another risk, counterparty risk.

[Michael Batnick]

So you have to have the discipline.

[Josh Brown]

Yeah.

[Michael Batnick]

Every time something blows up to say, what's the embedded pricing assumptions, particularly in credit, because they'll just kind of jump out at you. On equity markets, you had the thing on the right, which is that the markets were basically pricing in zero forward earnings growth after, you know, 26 years at 10 to 15%.

[Michael Semblist]

Jim Chano said in bull markets people put a premium on promises and in bear markets, they put a discount on reality. And that's what that is, I think.

[Josh Brown]

So that was a pretty remarkable time.

[Michael Batnick]

It was.

[Josh Brown]

So as you were begging people to read this particular piece, did they?

[Michael Batnick]

Yeah, they read it. They all read it. And some, you know, and look, we are in our business, we have a combination of discretionary funds that we oversee, that we control and then we have other funds that are self directed. And so, you know, we did what we were going to do in our self direct, in our, in our discretionary business. And some of the self directed people came along for the ride as well. Another similar episode when Lula was first elected in Brazil. Remember him? Yeah, he's back. But when he was first elected in Brazil, one year default protection, which is the equivalent of going along a corporate bond, you could sell one year default protection in Brazil for 30%.

[Josh Brown]

Really?

[Michael Batnick]

Right. That's how much fear there was around Lula. We went out to all the clients. The only people that did it were Brazilian.

[Josh Brown]

Okay. They weren't as worried.

[Michael Batnick]

They weren't as worried.

[Josh Brown]

Okay.

[Michael Semblist]

So let's assume at some point in the future there will be another downturn, the stock market will fall, the economy will contract. You wrote bank equity injections had historically been much more successful in boosting real GDP growth and boosting equity markets than government purchases of bad loans from banks. So my question to you is, do you think that the next rescue plan will look more like 08, where we have all these programs and you have QE and monetary stimulus, or will it look more like 2020 where there'll be more fiscal stimulus, which obviously had a much different and larger impact.

[Michael Batnick]

Yeah.

[Josh Brown]

Depends on the nature of the crisis.

[Michael Batnick]

Yeah, but I understand the question. To me, I don't think you get an Alphabet soup approach like 2008 again, because think about all of the stuff that was taking place in the financial sector back then with GE Capital and with Wachovia and WaMu. WaMu was underwriting mortgages and they were making 3% on them at a time when the rest of the banking industry was making half a percent. Those are some pretty funky mortgages in order to be able to make that much money. So a lot of the kinds of things, and derivatives particularly, that have now been all moved on to centralized exchanges instead of being bilateral. I don't think you have the same kind of risks in the banking system. And by the way, look what's happening with private credit. A lot of the cuspier bank loans that used to exist within the financial system have been shunted onto private credit where people are dealing directly with investors. So I think the next crisis is not about the banks.

[Josh Brown]

I think I don't fully agree with that part. I think we've sent a lot of the cuspier lending activity out to the private credit industry, but now there's this recursive thing happening where the investors in those funds are coming from the wealth management operations of the systemically important financial institutions. The banks Themselves are not taking balance sheet risk. Their clients are. Yeah, I mean, let's be honest.

[Michael Batnick]

I agree with that.

[Josh Brown]

That's where the money is coming from.

[Michael Batnick]

I agree with that. But that has different implications.

[Josh Brown]

Agree.

[Michael Batnick]

If something goes wrong, it's not a direct implication.

[Josh Brown]

Now rich people have bigger problems than corporate executives.

[Michael Semblist]

My point is that fiscal sending people checks is a much quicker way to stop the bleeding, the economic bleeding. Unfortunately, we did that in a time where people had nothing to spend the money on except to buy stocks. And so, and then, and then in crypto and then we turned the power back on. There was so much money, not enough supply of goods and inflation. Yeah, unfortunately, I think that will be the prevailing lesson is that when you send checks you get rampant inflation when in reality we don't know what would have happened if there wasn't.

[Josh Brown]

They're never going to run that back. It made Biden a one term. No, I never do that.

[Michael Semblist]

I understand.

[Josh Brown]

Yeah, yeah.

[Michael Batnick]

No, I mean, what was so unique about the COVID situation is that there should have been a normal recession, but it was short circuited because of the PPP loans and other things that were done. So that doesn't almost. It almost doesn't count as a recession because the normal transmission mechanisms, from weak economic growth to rising defaults didn't happen. So we haven't had a real traditional recession since the financial crisis.

[Michael Semblist]

I mean this, this says it all right. Like you have a chart that shows a stimulus response to Covid and there's nothing like it.

[Michael Batnick]

No, there wasn't any. We thought, we thought that the, you know, the great. The global financial crisis was a lot of stimulus. Look at that chart on the right. In terms of money supply growth, it's.

[Josh Brown]

It's unbelievable. It needs its own. I want to talk to you about the role of humor in your work. You're a funny guy. You really are a funny guy. Because I'm an idiot. This is my favorite thing you've ever done. Do we have this?

[Michael Semblist]

Is this CGI where there's really next to you?

[Michael Batnick]

Oh no, they're still on my couch in my office.

[Josh Brown]

So this is your Liberation Day tariff webcast.

[Michael Batnick]

I bought them on Amazon.

[Josh Brown]

And for the people listening, it's Michael Semblist with his two panelists. One is a emperor penguin and the other is. Is that a rook? What are they called? Baby penguins. It's a rookie. So what, what did you gain? What kind of insight did you gain from your guests that day? What do people say when they see that everyone's in on the joke, right.

[Michael Batnick]

Well, no, I can't really tell anybody in advance that I'm doing this.

[Josh Brown]

No, of course not.

[Michael Batnick]

Just in, just in case, you know, people get cold feet and say, I.

[Josh Brown]

Made a whole career out of surprising people rather than asking for permission.

[Michael Batnick]

You know, I think it was. It was. You have to remember the fact. You have to remember how we got here.

[Josh Brown]

Yeah, yeah.

[Michael Batnick]

So Howard Lutney comes out with the cardboard thing and here are the Liberation Day tariffs.

[Josh Brown]

Yeah.

[Michael Batnick]

Okay. Again, the president ran on. I love McKinley. McKinley was the father of the modern tariff. I like, I don't have any problem with the President implementing policies that he ran on. And the voter said they wanted. Yeah. The issue is, how do they do it? So they come out with these Liberation Day tariffs and they say, we're doing it based on this formula. The morning they get announced, I actually get an email from the guy, the academic who wrote the formula that they based it on and they completely botched it. Yeah, the formulas would have been. The Liberation Day tariffs were four times higher than they would have been had they correctly interpreted his work.

[Josh Brown]

But they were looking for bombast. They weren't trying to. They weren't trying to say something that was formulaically accurate. They were trying to.

[Michael Batnick]

Well, but then don't. Then don't. Then don't put a form in the footnote. Wow, okay.

[Josh Brown]

You got to base it on something.

[Michael Batnick]

Well, then, then copy paste.

[Josh Brown]

But so, but so the joke here, the joke Here is the McDonald Islands.

[Michael Batnick]

The, the Nobody Lives the Herd and McDonald Islands were included on the initial.

[Michael Semblist]

How did they get on there?

[Michael Batnick]

Well, because they basically. They basically had some 19 year old intern grab a list from Wikipedia of all of the countries that exist and paste them into a thing and they said, let's put tariffs on everybody. And that's how it showed up. I just think that if you're gonna do something like this that reverses 100 years of policy, you should have somebody, you know, who is able to rent a car do the analysis. Right. We have to be 25. So, like, do it right. Find somebody that will, that will substantiate what you're trying to do and do it responsibly. And I didn't think they were doing that. So this was my way of suggesting that they could have been done better.

[Josh Brown]

The market reaction to that was chaos. Because the rollout was chaos. What do you expect? Right.

[Michael Batnick]

Right now, that said we had a 20% correction. And then, you know, I went back to the toolkit and on the webcast that we did on that same webcast, I showed a chart saying going back a hundred years, every time there's a 20% sell off, you know, 85% of the time, a year later, the markets are higher.

[Josh Brown]

Yeah.

[Michael Batnick]

So for all the concerns that people.

[Josh Brown]

May have, nobody has a problem with that. The problem with that is does 20 become down 41st? That's the, that's the issue. It's not will we recover? It's what happens between now and the recovery does get way worse.

[Michael Batnick]

But you know, an 85% success and a 20% sell off covers a lot of sins. You just buy economically and earnings. And so we felt that, that it was enough to justify some additional risk taking.

[Josh Brown]

All right, this is another one I loved in real time when you did it. I think this one spread like wildfire. I picture the FT Alphaville people who I'm friends with, they must like wait with bated breath for the next. Michael Semblist. During a European financial crisis. This is your son's Legos, right? And you basically construct this hierarchy of who has to bail out who to save the European financial system. And for people that are not watching this, they're listening to this. Michael Scott, every relevant group, Spain and Italy, the German parties, Finland, the German Social Democrats, you've got the European Central bank. And they're all represented by various LEGO Stormtroopers characters. There are stormtroopers on here.

[Michael Batnick]

I was, I was, I was the storm.

[Josh Brown]

I'm sorry, who are the Stormtroopers in this? The EU Commission.

[Michael Batnick]

Yeah, they must have loved that. This didn't go over super well in Europe, but this. Okay, so first, a couple of important things. Normally I wouldn't have the time to do this. Cause this took a lot of time to stage, but it was during one of those LIPA blackouts on Long island and so we had plenty of time. What's that?

[Josh Brown]

Was this Sandy?

[Michael Batnick]

I don't remember exactly what was happening, but we had like a five day blackout and I had plenty of time for this kind of diorama work. Second, this was actually part of one of the most important decisions that we ever made was there was more carnage in the US than in Europe during the financial crisis. And a lot of people were overweight Europe and stayed that way for much of the decade. In 2010, as you saw in the compilation, I did not like the dynamics that I was seeing which we can get into. But we were violently and massively underweight Europe compared to the US and have been since then. I don't think there will ever be an asset allocation position that we will have in portfolios that will ever make as much as what we've made on that. And so that funny looking diorama was one of the pillars of the reasons why we were so confident being underweight.

[Josh Brown]

Your conclusion was that the US stress tests were real. Very real.

[Michael Batnick]

They were, to his Credit used a 9% default rate, which had only happened during a brief period during the recession, to stress test.

[Josh Brown]

But what that did is force the banks to raise enough. Raise too much money to either raise.

[Michael Batnick]

Capital or dedicate pre provision income to rebuilding their balance in Europe.

[Josh Brown]

They were smoking crack. They assumed a $3 billion loss for.

[Michael Batnick]

The entire, for the entire financial system in Europe. They said the capital shortfall was 3 billion.

[Josh Brown]

I'll tell you one better. They were raising interest rates. They were worried about inflation in 2010.

[Michael Batnick]

The other thing, and I don't think you put it in the deck, but the other thing that people can see in the compilation that's amazing is if you go back before the euro and you look at things like industrial production and current account deficits, the north and the south move the same. They put the Euro in place and then they broke apart. It's actually a textbook definition of the opposite of what a currency union's supposed to do. A currency union is supposed to force all those macroeconomic variables to converge the way they did. Remember, there were multiple dollars in the early 1800s and, and as, as the regular dollar became the standard across the country, inflation and growth and income and all those metrics across the United States started to converge. Yeah, in Europe they blew apart. And so that was a signal to us that something was seriously broken. And that brokenness would in fact affect earnings and multiples and everything else. And boy, I mean that I'm comfortable with that diorama and our positions in Europe being put on my tombstone. That's how much money we have.

[Josh Brown]

A chart showing the absurdity of. You showed the dispersion between European countries was further apart than if you had just created a currency based on all the countries whose first letter is M. That's right. You said these countries have so little in common that if we just took the M countries around the world that would be a more cohesive or the.

[Michael Batnick]

Countries at the 40th latitude, I mean you can create, or you could reconstitute the Ottoman Empire.

[Josh Brown]

That ended up being the right allocation call because it's a dysfunctional. It's effectively a dysfunctional situation.

[Michael Batnick]

It's a political vision, it's not an economic reality. In a way, there are wonderful things about the European vision. Similarly, Europe is leading the world in decarbonization. Right. And there's a chart in the compilation. Europe is leading the way with respect to renewables displacing other forms of fuel. Europe's also leading the way in terms of industrial shutdowns and departures. Right. Europe's also leading the way in the cost of electricity. So Europe has certain political objectives that at times override market and economic objectives. And as investors, we have to be able to respond to that.

[Josh Brown]

The front page of the Journal today. The big debate in Europe is air conditioning or not. So this is an example of what you.

[Michael Batnick]

Can we just spend a minute on that?

[Josh Brown]

I would love to.

[Michael Batnick]

So that people understand what's going on. Something like 90% of homes in the United States have air conditioning. Even in really northern climates in Europe, that's not the case. Okay. So you have fossil fuel based heating. So there's a huge push in Europe for people to electrify their home heating with a heat pump. Right. So for everybody listening, what's a heat pump? A heat pump essentially is an air conditioner that works in reverse. Right. And it's very efficient. It can convert one unit of heat into three units of electricity. So it's a very kind of energy efficient device. But if you give people these heat pumps for their winter heat, they'll just flip them and use them as air conditioning in the summer. So we ran some numbers and for countries like Turkey, sorry, for Italy and Greece, all the CO2 emissions benefits that they would get from pushing these more efficient heat pumps would be lost if people start using air in July and August. And is a classic unintended consequence thing that you see in Europe all the time.

[Josh Brown]

Right. So I want to. I know we have a.

[Michael Semblist]

That's a good transition. Let's end on leadership.

[Josh Brown]

Yeah, let's do this.

[Michael Batnick]

Already done.

[Josh Brown]

Well, let's do. Let's. You gave us the hard out. We don't have one. Michael and I will sit with you all night. Um, let's do this thing about what was Lehman doing? Because it's a great segue into the leadership at what was JP Morgan not doing that Lehman was doing? And you were there at the time. So I think that's a really great lesson for investors to take from this.

[Michael Batnick]

Well, you know, part of this dates back to the first Bush administration. And you guys will probably remember this. Before 2004, there used to be something called the broker dealer NET Capital Rule 12 to 1. 12 to 1, exactly.

[Josh Brown]

That's the max leverage a broker dealer could take.

[Michael Batnick]

That's right. No matter. Forget about risk adjusted like 12 to.

[Josh Brown]

One hard stock, which is a lot already.

[Michael Batnick]

Yeah. And under the first Bush administration, the broker dealers were effective at lobbying the sec and they rescinded this rule and essentially put in some squishy, touchy feely limitations. Within two years, all the big five broker dealers were 30 plus in terms.

[Josh Brown]

Of Bayer, Lehman, Merrill, Goldman and Morgan Stanley. Goldman and Morgan Stanley. Okay.

[Michael Batnick]

And so part of the backdrop was understanding how what looked like a footnote y thing in the Journal about a change to risk based capital rules had this seismic impact on what was going on in the actual markets. And we saw it and that was also kind of a scary thing that was taking place. And we responded by kind of gradually pulling our horns heading into the financial crisis when we saw this. The reason that I put together the chart on the right was all the banks were essentially bum rushed into taking the capital whether they needed it or not, with the exception of US bank, which was the one bank that said, no, we won't take it. And, but not all the banks are the same. And Jamie gave a couple of talks where, look, we'll take our lumps and we will continue to take our lumps. But putting all the banks together in one boat and kind of blaming them for everything was what didn't make sense because it was a very heterogeneous group. And look at this chart, right there was that giant Alphabet soup of all the facilities that were required. Citigroup, Merrill lynch and Morgan Stanley and aig, you know, used the vast lion's share of this. And so, you know, at the time that we published these charts, we said, look, you know, we have issues like everybody else, but there are differences in terms of how banks run themselves and how they manage risk. And, and these were some of the charts that we used.

[Josh Brown]

So in your compilation, you point out that Lehman was running at 35 to 1 and in one part of their business, 100 to 1.

[Michael Batnick]

Yeah.

[Josh Brown]

And JP Morgan was not doing that.

[Michael Batnick]

No.

[Josh Brown]

I want to ask you if this is true. There's an apocryphal story that I heard from someone who was working on a trading desk at J.P. morgan, right in the heart of this, the run up to the crisis. And Jamie was taking a tour, as he frequently does, and just talking to people on every floor, and he asked somebody to quote something, probably a bond, maybe a mortgage, something. The trader gave him a quote of where it was trading, where it was being valued. And this is At a time where people are worried. And the way he tells the story, Jamie said, what's the price? He quotes the price. Jamie said, oh yeah, sell some. He said, what do you mean? He said, let's see if that's the price. Sell some. And of course the trader can't get a sale off at that price. And that was kind of like a microcosm, I guess of a bigger story where JP Morgan realized where the market was versus where the reality was were not the same things you believe that you think that story's true or something like that might have happened.

[Michael Batnick]

I haven't heard that one. But having seen it's a good one though. Having seen Jamie in action, it's entirely plausible. He is very involved on a detailed level in terms of when he meets with management teams and they present to him. Put it this way, that experience is entirely different than that same experience with these CEOs that preceded Jamie. Like everything about the level of preparation, the consequences for being unprepared, you know, and the kind of questions and due diligence that are going to be asked of you that change radically.

[Josh Brown]

Well, he so on leadership, he stands so far apart from the other leaders of that era. One of them was the best golfer in the world, apparently. We won't name names. One of them was a world champion bridge player. Jamie didn't, Jamie didn't have the reputation for having those hobbies. He was focused on the risk taking within the bank and what to do about it. And they're the last, they're the last one standing. Literally.

[Michael Batnick]

Yeah. You know I've, and I've mentioned this before. You know, my job requires me to low to know a lot of things about a lot of things and so pretty deeply. And there are a lot of times when I need to reach out to people and get help on certain things. Sometimes something will happen and I'm starting out with a deficit of knowledge that I have to build really fast. A couple of years ago, remember when Credit Suisse blew up and there were the Cocoa bonds which were the European version of preferred stock, but they were kind of different than the way US Preferreds function and nobody had ever heard of the Devils are in the details. There's a lot of times when I have to get a, to speed on something really fast or something within the energy space and I need to understand really quickly how some new technology might work. The halo effect that Jamie has created for the firm over the last 20 years is amazing. I can call people and say I'm the chief investment officer at J.P. morgan Asset Management. Will you talk to me? And almost always the answer is yes. And I attribute that having nothing to do with me because they most of the time never heard of us. But because of Jamie and the impact he's had on the organization, they return your call. And one of the only times that people that. That didn't work was you called Elizabeth Warren. I'm not going into that. During the summer, during the summer of 2008, yeah, we were getting a lot of calls from clients. Why can't you guys make 11% annualized return with a 2% Vol. Like this Madoff guy? And so I said, well, I don't know, Let me look into it. So I start looking into it. I can't find any information. And the whole thing is very sketchy. I went onto the early version of Google Maps, and I looked at the building in which the custodian was allegedly housed, and it was the back of a Chinese restaurant. So the whole thing seemed really kind of funky to me. So we said, okay, let's do a due diligence trip. So we get in the car and we go up to Connecticut to see the feeder fund. You know, they had that. I'm not going to mention any names, but, you know, there was that feeder fund.

[Josh Brown]

This is the fund that's raising money from people and passing it over to Madoff. Right. Okay.

[Michael Batnick]

And we had like a 19 section questionnaire that we wanted to ask. And the first one is, can we meet the principal? And the answer was no. And I said, okay, we're leaving. And they said, well, no, no, no, no. And we just. We got up and we left. Because if we can't meet the principal and talk to him, the rest of the questionnaires are relevant. So I went back and I put some notes in the files saying, like, I don't understand what's going on here. And I drew a picture of a unicorn on their total return chart. And I said, I don't get this. This doesn't make any sense.

[Michael Semblist]

Yeah, it looks like private credit.

[Michael Batnick]

Right? And wait, so wait, hold on.

[Josh Brown]

So he's a $50 billion fund then too?

[Michael Batnick]

Right. So I just drew a picture. I'm not even a good artist, but I drew a picture of a unicorn, put it in the files, and forgot about it. And then eventually the SEC ended up deposing me.

[Michael Semblist]

What do the chart look like? Up and to the right.

[Michael Batnick]

Up and to the right. It was the 11% annualized return with 3% percent fall. And I got deposed by the SEC who wanted to know what I knew when and why didn't I tell everybody and what was going on. And, you know, I answered all the questions. I mean, I. There wasn't much to say.

[Josh Brown]

They wouldn't talk to you.

[Michael Batnick]

They wouldn't talk to us. But at one point, the deposition kept going on and on and on. And I said, well, you know, why didn't you read the Harry Marcopolis note from 2001 that said Bernie Madoff is a fraud and the lawyer that was representing me in the deposition almost had a heart attack?

[Josh Brown]

Yeah.

[Michael Batnick]

Yeah. That was the end of the deposition.

[Josh Brown]

Yeah. Michael, this isn't what we're here to do. We're not here to score points.

[Michael Batnick]

By the way. You. If I can just say a couple of other things, please. You. There's my favorite of all the pieces in there is the one on the, you know, why the financial crisis happened the way that it was.

[Josh Brown]

17 did we have this. We liked it too.

[Michael Batnick]

This is my favorite in the market. And the reason it's my favorite one of all time is the public narrative from the government and all of its agents and both parties was the private sector did it. The rating agencies are responsible. The banks are responsible. Reckless bankers, reckless lending.

[Michael Semblist]

It was policy.

[Michael Batnick]

Now this, you'll have to read the piece because this is like a spaghetti chart. But I want to show you something here. Those red lines are taking. Are rising. And now we're looking at the 90s here up until 2005. These represent the portion of Freddie and Fannie underwriting that is effectively subprime and alt day risk. This is before. Look at the black line. That's the private sector. So the GSEs loaded up on alt A and subprime risk way before the private sector did. And why did they do it? Because of the blue line of the GSE low and moderate income lending targets that Congress established. And there's a quote that we pulled from the year 2000 from the HUD reports that is the most amazing smoking gun I've ever seen in the history of smoking guns, where they say, let's have the GSEs do subprime type lending without calling it subprime. And we will eventually lure, like the sirens, we will eventually lure the private banks to their death by doing this.

[Josh Brown]

Was Bush the ownership society. This was George W. Bush extolling the virtues of homeownership and we need to create more homeowners.

[Michael Batnick]

This was a combination of Clinton, Clinton and Bush.

[Josh Brown]

Right.

[Michael Batnick]

And by the way, and Andrew Cuomo was the head of hud. When some of these things happened. So, you know, and to read about how aggressively the public sector tried to. After the financial crisis changed the history of what actually happened, I'm glad that I had the historical records to kind of show, no, that's not what happened. This is what happened. And there are some lessons to be learned here about risk taking and risk underwriting and things like that. So I love that one. There was also a piece at the end for how I ended up in the asset management business. That's also worth learning. That has to do with a piece of candy.

[Michael Semblist]

That was a funny story in the lunchroom.

[Josh Brown]

So, Michael, we think this is just an extraordinary document and it is the culmination of decades of your work. And it's just incredible. Where does the artwork come from? Because that's a really big part of the presentation.

[Michael Batnick]

Well, no, for the vast majority of the history that I. In the market, we would commission.

[Josh Brown]

Yeah.

[Michael Batnick]

Almost like a magazine.

[Josh Brown]

Almost a magazine.

[Michael Batnick]

Yeah. To draw. And they're. And they're beautiful. And then more recently, we, we've been using ChatGPT just to do certain things, but I hire artists once in a while. There are, there are things that GPT can't do.

[Michael Semblist]

Can we get 20 more years?

[Josh Brown]

Yeah. Todd, what do you think?

[Michael Semblist]

Todd?

[Josh Brown]

Keep going though.

[Michael Batnick]

There's a lot of. I've.

[Josh Brown]

What else?

[Michael Batnick]

Still a lot of fish. I've never caught. I've never caught a permit, which is on my list.

[Michael Semblist]

You could do both this time.

[Josh Brown]

Go catch a penguin.

[Michael Batnick]

I'm going to. I'm going in, in early in late August. I'm going to British Columbia.

[Josh Brown]

Okay.

[Michael Batnick]

To catch on a kayak. I'm going to fish for sturgeon, like 7 to 8 foot sturgeon.

[Josh Brown]

Okay.

[Michael Batnick]

So I've done it before and almost, you know, it was pretty dicey. So I can't. I'm looking forward to trying it.

[Josh Brown]

Well, on behalf of everyone on Wall street, everyone off Wall street, anyone who's ever read Eye on the Market, anyone who's a regular reader, Michael and I, and we here at the compound would just like to say thank you for your extraordinary contribution to our knowledge. I get smarter every time I finish reading one of your pieces. I learn something. And, and I want to thank you.

[Michael Batnick]

Because I kind of like Boo Radley. I lived in silence for most of my career and you guys were the first place where I went, you know, to talk to a broad, like podcasty type audience.

[Michael Semblist]

Well, now you have your own show. How do people find. How do people find your podcast?

[Josh Brown]

Yeah, let's tell people where they can get more.

[Michael Batnick]

Michael Symbol. Well, I. I post every eye on the market on LinkedIn now. So if you go to my LinkedIn profile, you can find the anniversary piece. You can find and the other pieces that I write.

[Josh Brown]

This is. This is amazing. Thank you so much for being here. We appreciate you guys. Make sure to follow Michael Semblist on LinkedIn if you want the latest eye on the market piece and by all means go and hunt down this 20th anniversary compilation, you can get it as a PDF. It is extraordinary. You will absolutely become a better investor once you've digested it. Thank you so much. Okay. Okay, here we are. Hey guys, we're not late. Just Dave is in the chat saying where are these guys? They're late. Probably jet skiing. What do you mean? We literally started at 4:59. Come on guy, we're right on time. James Sykes is here. Dr. Horton, Roger Weatherford, Pedro. We see you. Brian Gill, Shy Locke, Georgie D. All the gangsters who are in the chat tonight.

[Michael Semblist]

Did he just say Shy Locke?

[Josh Brown]

That's somebody's name. Riley Anderson. Yes, it is.

[Michael Semblist]

Nope.

[Josh Brown]

Yep, it is. Go back and. Go back and roll the tape later. What do you want me to tell you? Hamoud Walls World, James Dean to dispute me on that one? I don't think it's the actual. So I'm just saying. All right guys. Welcome to an all new edition of what are your thoughts? We are your co hosts. With me tonight, as always is Michael Batnik. Michael, say hello to the folks.

[Michael Semblist]

Hello.

[Josh Brown]

Ladies and gentlemen, super dramatic pause. My name is downtown Josh Brown. For those of you who are new to the show, we are here to talk about the biggest issues happening currently on Wall street. In the markets, in the economy, etc. We are super excited to be here live with all of our pounders in the live chat. Those of you listening out in podcast land, we appreciate you too. Tonight's show is brought to you by public.com and public trading.

[Michael Semblist]

I need to. I need to tell you the reason for the pause. I need to defend my honor.

[Josh Brown]

The meter is running, dude.

[Michael Semblist]

Okay, I know, I understand. The reason for the pause, sir, is because sometimes you introduce me and then you keep going and sometimes you tell me to say hello to the folks. So I pause because I don't know which way you're going.

[Josh Brown]

Okay, good. And good improvisation. I appreciate.

[Michael Semblist]

Thank you for your attention to this matter.

[Josh Brown]

Okay, great. All right, where was I? Public is the investing platform for those who take it seriously. You could build a multi asset portfolio of Stocks, bonds, options, crypto and more.

[Michael Semblist]

That's right, Josh. Plus, for a limited time, you can earn a 1% match on all IRA deposits, IRA transfers and 401k rollovers. Easy.

[Josh Brown]

Guys. Fund your account in five minutes or less. Find out more at public.com Watts as in what are your thoughts? That's public.com/w a Y T paid for by Public Invest and full disclosures and podcast description. Okay, couple of things before we get into topic one. I have like a couple of mini subtopics, really interesting reactions to earnings. And I know we're going to do a whole thing on, on earnings. But just like in the last day, it's pretty wild what's going on with some really big stocks. I'll tell you the ones that stood out to me. Tell me what you think. UPS just absolutely hammered. The stock is down five years in a row at this point.

[Michael Semblist]

Yeah, Always. Always.

[Josh Brown]

Oh my God, did they beat the shit out of that. UPS said, hey, no guidance for the rest of the year due to macro uncertainty. Wild.

[Michael Semblist]

You know, this might be the cleanest downtrend you'll ever see. It hit the 200 day about 500 times over the last couple of years.

[Josh Brown]

So I, you know what? I don't get stuck in stocks like this anymore. Like anyone with using any kind of Trendline stop or whatever is just watching this thing fall like a knife. No one's long this stock unless they're completely on fundamentals. Like, you can't be looking at this chart and saying that there's anything attractive about the rate at which people are willing to sell it. PayPal, they, they smushed it. Spotify down 11%. Worst day in two years. And Spotify, just a really weird call, a really weird quarter. Spotify was supposed to do 5 million premium subscriber ads. They did 8 million. But they had a surprise payroll tax because of gains in the stock price that they owe for employee shareholders. And it like wiped out, you know, on an accounting basis, wiped out the profit on the quarter. And they didn't have great things to say about the ad business. Apparently. He said, we're gonna have to use more AI to figure out the, you know, how to get the ad business growing. So that one deserved.

[Michael Semblist]

I want to say one thing about the Spotify thing. Spotify is, even after it's in a 20 drawdown, the stock is still up 193% over the last 12 months. This is still the premier name in the space. And so, you know, it's a giant winner that's given some back. No big deal.

[Josh Brown]

I would.

[Michael Semblist]

I don't. So it's easy for me to say.

[Josh Brown]

But you know, yeah, I'm not in it currently. I would way, way rather buy this down 12% and sell it. And I'll do you one better.

[Michael Semblist]

Go ahead.

[Josh Brown]

It's actually, even with this little micro crash, it's still above its 200 day.

[Michael Semblist]

Yeah, it looks viable.

[Josh Brown]

A 200 day was is 562 stock went out at 621. So it's like still in an uptrend, which is unbelievable because it's far off the high Now I'm going to keep this one on my radar. Last one I wanted to mention is Starbucks reported after the close they missed by 15 cents. But the press release was like, our turnaround is ahead of schedule, so the stock is higher. And they announced something called Green Apron Service, or they're talking about this Green Apron Service, which I have to ask you personally.

[Michael Semblist]

You don't know my product placement.

[Josh Brown]

Very well done.

[Michael Semblist]

Thank you.

[Josh Brown]

I hate this idea. They want to like, talk to the customer more. They're gonna sunset all of the pickup window stores and only build coffee houses from now on. And they want to have like, like the employees have to smile at you. Don't look at me ever.

[Michael Semblist]

Stop it.

[Josh Brown]

And then they have to. I don't know. I don't want to make eye contact with strangers on the street. Like in this day and age. Are people looking for more smiles? Like forced corporate smiles? Is anyone. Does anyone want that? The employees don't want it.

[Michael Semblist]

And then the writing, I don't like this.

[Josh Brown]

Take the writing of the name on the cup. Does anyone have time for that shit anymore? Is that.

[Michael Semblist]

You got to get a smiley face.

[Josh Brown]

I mean, why are we making people do that? Grown, grown adults have to take a Sharpie and misspell people's names. I thought we advanced away from that. What part of the customer experience is that enhancing? So anyone like, oh, I stopped going to Starbucks, but now I hear they're writing people's names on the cups.

[Michael Semblist]

So are you asking me for a reaction to you not liking smiles? I mean, this is nonsense talk.

[Josh Brown]

No, this is his turnaround plan. This is Nickel's turnaround plan. And I guess, like, I feel like it's going to turn around, but it's not going to be because of like Green Apron Service.

[Michael Semblist]

Okay, can we talk about the business and not the smiles? So it is six consecutive quarters of same store sales declines not good. In the US it was negative 2% in the rest of the world is even worse. But the stock is up 4%. I do own the stock. The stock is up 4% because expectations were obviously worse implied in the price. And we found that out just in the after hours. Now, it could be done tomorrow, who knows? But I was looking at this this morning. Chipotle's performance and Starbucks performance since he left.

[Josh Brown]

Horrible.

[Michael Semblist]

One is up 20%. One is down 20%.

[Josh Brown]

Yeah. Chipotle is one of the worst stocks on the board. So Chipotle looks like Nike.

[Michael Semblist]

I think Nike Bounce. Nike Bounce.

[Josh Brown]

By the way, I think the actual reason the stock is up in the after hours is the biggest overhang on Starbucks, aside from the penmanship of the baristas and not enough smiles aside from that, is China. It's their most important international market by far. And they've been struggling there. And they announced that they have received 20 companies have submitted proposals to be their joint venture partner in China. So basically, if you don't have a joint venture partner in China that is Chinese, you ain't gonna win there. And that's very deliberate. That's just how that country works. I totally get it. So they can't go in alone in China any longer. Or the Chinese owned coffee houses are just gonna eat their lunch. So I think the street is encouraged to hear that they're moving forward with finding a JV partner and signing something that's advantageous to Starbucks shareholders because the status quo is just not. It's not going to work.

[Michael Semblist]

What else caught your eye?

[Josh Brown]

PayPal was like, not a bad report so far. Is getting so much credit just because they're like, you know, they, they had great guidance, revenue guidance. 60 or 70 million above what was expected. But it's not, it's just weird to see that dichotomy between PayPal and. So far, they're not identical businesses. But I think their customers are identical. I think the people. Right. So it's just, it's odd like how much credit so SoFi is ripping. That stock looks amazing right now. And I'm not saying they didn't have anything good to say. They did. PayPal is just getting annihilated. And I don't, I don't know what. That's another turnaround story that never seems to turn around. We're like in year, year three of the PayPal turnaround and this thing, every time it gets going, they report earnings and it just is annihilated again.

[Michael Semblist]

Yeah.

[Josh Brown]

So those were the, those are the big ones that I was looking at over the last day or so. And I know we're gonna do some more earnings stuff later in the show, so we can put a pin in that. Can we talk about Trump?

[Michael Semblist]

I suppose I, I'm disinterested in this topic, but it is your topic, so let's go ahead.

[Josh Brown]

Well, the show is called what are your thoughts? So I'm hoping you have some thoughts because this is probably the third biggest story in the market this year. And the conjecture on Wall street appears to be that Trump is winning and Wall street was, I would say, universally opposed to tariffs. Just to a man or a woman. Anyone writing research on the sell side, any strategist, anyone covering companies, just everyone said, this is inflation, this is going to crush the economy, this is going to destroy demand, this is going to lead to layoffs, this is going to lead to huge earnings problems, et cetera, et cetera, et cetera. And it is. But he's kind of getting what he wants from the countries he's negotiating with. And I want to just put this graphic up. So the threats, the 145% with China, for example, all the way on the far right of this graphic. The threat against Vietnam, the threat against Canada, Mexico, as you can see, the imposed tariffs or the agreements are substantially, obviously better than some of the things that we were most concerned with. And that's by design. And everyone.

[Michael Semblist]

It's called negotiating.

[Josh Brown]

Yeah, it's how he negotiates. What's like a worst case scenario. Let me throw that out on the table. Okay, so we got through that part. He made a deal in the last four days with Japan and then the EU back to back the Japanese deal. Seems unclear that they even know what they agreed to chart off, which I think is really funny. There's a handful of articles today where people from the Trade Ministry or whatever are sort of like, I don't really know if. I don't think that. I don't think we are certain of what we're doing. But what the Japanese deal and the EU deal have in common is they both involve foreign countries buying more things from America. So it's not just about tariffs. It's now about like make investments in the United States.

[Michael Semblist]

How does that market enforced.

[Josh Brown]

So I'm really glad you asked that. We'll go there in one second. The headline on the Japanese trade deal before we go to Europe, auto tariffs reduced from 27 and a half to 15%. Japanese automakers actually rallied on that, believe it or not. Japan pledges $550 billion in investment capital under US direction. That's the part the Japanese weren't so sure.

[Michael Semblist]

Wait, it's like a blank check.

[Josh Brown]

That's what it sounds like. And there's like profits that go to the, that go to the United States or maybe directly to the White House. Not sure. Commitments to purchase U.S. goods, aircraft, energy and agriculture. That's very good here. U.S. claims the majority, 90% of returns from the investment package. I don't know if the Japanese agreed to that, but fine. What Japan gets, that sounds scientific, that sounds crazy. What Japan gets, they avoid the 30 to 35% threatened tariff on exports, they maintain access to our markets, greater certainty, blah, blah, blah. Elevated diplomatic status because they're accepting the new framework before Europe and, and before China and, you know, some other shit. But like, it's funny to me that like the first headline is like, we have a deal. It was a 70 minute phone call, we closed the deal. And then the Japanese were like, wait, what? But the market doesn't care. The EU deal, you asked the question like, how do we enforce this? I thought this was a really funny story. Basically chart off. I'm sorry, guys. So Trump sitting in the room with the Europeans and he says, how could we be certain the Europeans won't shrug off their plans after a deal is agreed upon? The EU leaders assure him that their investment plans are real. And Trump goes. His words prove it. According to one of the people who's in the meeting.

[Michael Semblist]

Reasonable.

[Josh Brown]

This is the Wall Street Journal. EU officials rattled off the names of companies they said already were prepared to invest. With a trade deal in place, planned investments of almost $200 billion would grow by even more. They told Trump. At the end of the talks, Trump said he would impose 15% baseline tariffs on the EU instead of the 30% he had threatened. He said the EU would now be investing $600 billion in the US under the deal, including a separate commitment to buy another 750 billion worth of American energy products from the US over three years. European officials said the 600 billion is based on private companies investment. So that's like Volvo is going to build a plant in Indiana. I'm making that up. But like that's what that means. So just on the surface, based on what I'm telling you, doesn't it sort of sound like Trump is winning this thing given all time highs in the market and basically getting huge investment commitments from these countries? What do you think?

[Michael Semblist]

I do think that's what it sounds like. I mean, that's what the smart people are saying, like Neil Dutta for example, and he knows more than I do about this stuff.

[Josh Brown]

Yeah, we're going to take Neil's quote in one second because I thought that.

[Michael Semblist]

Was really not much of a market reaction, like, European stocks rallied, which you mentioned already, but because 15 is better.

[Josh Brown]

Than 30, that's really what it boils down to. And one of the interesting things is that the EU has the authority to negotiate trade on behalf of 27 countries. Right. And they don't like it at all. And they're making themselves, they're making their opinions heard. We actually have some examples. Benjamin Dussa, who is the trade minister from Sweden, said, quote, the least bad alternative to a standoff. The French prime minister mourned it as a, quote, somber day that he called tantamount to, quote, submission. The German chancellor, the head of the largest economy in the eu, said his country would, quote, suffer considerable damage under the agreement. The Spanish prime minister said he could support the deal without, quote, without any enthusiasm. Hungarian prime minister summed it up best, quote. Donald Trump ate von der Leyen for breakfast. End quote. So that's the European reaction. It's the European reaction, is it? Do it. Let's just. Let's just be done with this topic. Here's Neil Dutta, and then we can move on. He says. I can't help but wonder that as every academic and critic of the White House lights their hair on fire over the effective tariff rate, America is taking some steps to rebalance our economy. For the PhD academics losing their minds, the issue is that this is a win in the traditional sense of the word. Entering a hot dog eating contest might be stupid, but if you eat the most hot dogs, you win. So Neil kind of likens these tariffs to having the same effect as a consumption tax or a VAT tax. That's the right way to think about it. When you listen to the company calls today and yesterday and the way that they're talking about how they're dealing with tariffs, they're eating a little bit of it. They'll pass a little bit of it on. It ultimately takes the form of, like, an invisible. Well, it's visible. But an unitemized VAT tax. The more you consume, the more of these tariffs you're gonna end up paying. And wasn't, you know, it's. The White House doesn't frame it that way, but, like, that's sort of how it turns out to be.

[Michael Semblist]

Okay, well, if it had to be, I'm glad that we won. I don't like tariffs, and I wish that we never did it. But if you Know, I'm a patriot and I'd rather win than lose, but who knows what sort of ramifications is gonna have long term. Like these are our biggest, most important trading partners or at least certainly near the top of the list. And you're, you're forcing them into submission and really pissing them off. I hope it all works out.

[Josh Brown]

Yeah, I think it's not even just the long term thing. I think it's, it's long term, but then it's also like we haven't really seen a material pullback in spending across the board. But there are certain categories where this stuff is just, it's making people switch to something else.

[Michael Semblist]

Yeah.

[Josh Brown]

And you might say, good, switch to something American. All right, there'll be some of that.

[Michael Semblist]

Listen, I hope, I hope we look back on this and say we were all making a big deal out of nothing. We switched and the world went on. That'd be my hope. All right, let's speak to moving on. Let's do that. So last week or the week before, we were talking about semiconductors and the AI trade is powering everything. That is where it starts and stops this market rally. It is not being powered by the consumer. It is not being powered by anything other than artificial intelligence and the hyperscalers continuing to spend.

[Josh Brown]

Was I early to this?

[Michael Semblist]

Half a trillion dollars?

[Josh Brown]

Yeah, I think I was, I was saying like six months ago, the only thing that matters is AI.

[Michael Semblist]

Yeah.

[Josh Brown]

And it's kind of like everyone just accepts that now.

[Michael Semblist]

Well, it does because the market is making all time highs as earning expectations are making all time highs. And embedded in those expectations is monster profits from Nvidia and the likes. And so that's it. That is all that matters right now. But getting back to the question, can the market rally without semis? I honestly do find it hard to believe. Not forever, but like for today, that is what's powering the, the market. But chart kid. Matt made something interesting that this is a, a question that we've asked in the past. It's not the first time we said, can the market rally without. So chart on, please. John. Here's Apple. And we're showing that Apple's weight in the S and P peaked. And in my estimation it will never be higher than it was. It was 7.8% in the summer of 2023. It is now down. This is a big change. Its weight is down 27% from 7.9% to 5.7%.

[Josh Brown]

That's a big deal.

[Michael Semblist]

And the market, that's a big Deal. And the market is up 40 plus percent over the same time. Not apples to apples comparison, pun intended, but just, you know, interesting thought experiment.

[Josh Brown]

So I think, I think, I think that market cap went to Nvidia and Microsoft. I think it's that cut and dry, almost like a direct transfer. Microsoft is going into its earnings tomorrow at record highs. Its market cap is up by a fifth in the last two months. That came right out of Apple. Would anyone dispute that the money did not come out of Apple and go into Wells Fargo? I think we all sort of understand that large cap managers who are invested in the AI theme are pivoting to Nvidia and Microsoft and away from Apple. They may pivot back but like that market cap doesn't disappear into the ether. You know, I'm one of these guys who has to know, you know, where did it go? That's where, that's where it's going.

[Michael Semblist]

Yeah. So however, if, if there is a.

[Josh Brown]

Moment in time, put Matt's chart back up. Ask the question, do we need Apple in a bull market?

[Michael Semblist]

Well, no, the answer is no.

[Josh Brown]

I mean there's no, we know that we don't, but we do need an Apple replacement. Like, like you need another, you need another Mega Cap.

[Michael Semblist]

That's right.

[Josh Brown]

We need to pick up Microsoft. So for the listener, for the viewer, I don't know when the last time you looked up Microsoft's market cap, you probably think it's 2 trillion. It's actually about to, it's about to be 4 trillion. So like do we need Apple in a bull market? No. So long as we have blank. And in this case it's Nvidia and Microsoft, like they're passing the, they're passing the torch back and forth. That's what's happening right now.

[Michael Semblist]

But would you agree the biggest risk to the bull market, at least today it's disappointing. AI numbers or guidance? Obviously that's it.

[Josh Brown]

I think that's the biggest near term risk to the market that one of these, and we've said this, one of these companies shocks Wall street with like a guide lower because they're spending too much on AI, like, like an earnings shortfall because they just don't have the ROI from the investments they've been making. And not yet.

[Michael Semblist]

It will.

[Josh Brown]

It's not happening yet.

[Michael Semblist]

Not yet. No, no. Google just up their guidance, their capex by $10 billion. It's not happening yet. It'll happen actually, but not yet.

[Josh Brown]

Correct. So, but that is the day that happens. You literally could see a circuit breaker on the nasdaq if it may never happen. Maybe all of this, maybe all of this spending is super profitable and, and they'll outrun that concern.

[Michael Semblist]

But I'm pretty sure that at some point in the future, I don't quote me, in a time we will get ahead of ourselves if we're not there.

[Josh Brown]

It's just crazy to me to have like bellwether stocks for the real economy like chipotle and ups just like dive bombing to 52 week lows and people saying the consumer is holding this up. No, it's not, it's not.

[Michael Semblist]

It's hyperspace.

[Josh Brown]

Stock market Americans are holding up the entire thing right now. And stock market American spending is being fueled by the wealth effect created in Silicon Valley as a result of the AI capex race. And that's it. And there's no other story. I don't give a shit what you think. There isn't. And I can't imagine people don't see that connection now. This will age really poorly if we never have that moment. And like the economy, the overall economy re accelerates.

[Michael Semblist]

But we will have that moment at some point there will be a disappointment. Obviously that's where the stock market works.

[Josh Brown]

Callie did a thing on her site today, I think this is right, she's like if you own the spy, like a third of your portfolio is now in three stocks. Like, like that's, that's what's, that's what's holding everything up right now. And what's so funny is there's a lot of circular spending going on. Like, like Meta and Microsoft are the ones buying all the chips from Nvidia. Nvidia is selling those chips and the end customers are spending on all this cloud compute in return right back at Microsoft. And, and Meta, like it's, it's extremely circular and I don't, I don't think the extent to which that's, that's holding up the market is fully appreciated. Everyone's a gay. Tech is dominant. Man. If this goes into reverse, I don't know what catches us. Yeah, but there are no stocks big enough is my point. Yeah, there are no stocks big enough. Apple reports this week. Let's do it. Let's do like a couple of quick previews here. During the previous quarter, Tim Cook said the tariffs could add 900 million to Apple's costs for the Q3 fiscal quarter. Well, guess we're about to find out because we're there. Revenue expected 89 billion, which would be a 3.7% year over year gain. And a 2.1% gain in earnings per share. Barely growing.

[Michael Semblist]

This is just not a growth stock.

[Josh Brown]

Hasn't been barely growing. Let's put this chart of the EBIT up. Here's the quarterly year over year growth in cash flow. It's like effectively nil. All right, Microsoft, a little bit more of a bright spot. 73.8 billion in revenue, expected $3.38 in earnings. That would be 14.1 and 14.5% growth respectively. And if they do those numbers, this company is just incredible. Last quarter they beat on the top and bottom line. Let me see what else I would say. Oh, Azure. Revenue growth. Last quarter it was 35% year over year hedging out changes in currency which was better than the 31% growth this quarter. Analysts are looking for the same thing, 30 to 4 to 35% and they've already guided CapEx to be 80 billion for the year.

[Michael Semblist]

John, throw that chart on the CapEx one. This is it. Yeah, this is it. This is the entire story. We're looking at capex to revenue. We shared this chart a couple of weeks ago, but if you're listening, it's Microsoft, Alphabet, Amazon and Meta. Notably absent is Apple because they're just not spending any money. But these companies are supporting the stock market and as long as they got higher. And if you think that Microsoft and Meta are going to be out of step with what Google said last week, you're, you're no way not going to.

[Josh Brown]

Meta is. Meta is the same night expecting revenue of 44.8 billion. That would be a 15% 14.8% year over year. Earnings should be up 13 and a half percent. EBIT should be 17 billion, up 14.6%. Meta has grown operating income the last three quarters. 46%, 39% and 31%. They already increased the midpoint of their capex guidance. Also they went from they were at 62 and a half to 68 billion in April and they raised it. So that's all this week. Gun to your head. And Amazon, which we previewed last week, we jumped the gun a little bit. We don't have to do that. Again, gun to your head, which one of these is going to have the best. I won't even say report, but reaction. You have to pick one.

[Michael Semblist]

Yeah, not Microsoft just because the stock is just perfect. There's no hiccup. I would say, I would say Amazon.

[Josh Brown]

Okay. I want that to be right. I think it's going to be Meta and I'm purely basing that on the Advertising numbers from Alphabet last week.

[Michael Semblist]

I hope these, you know what, I hope all these stocks get hit, frankly. We need.

[Josh Brown]

No, I'm not in it. It's fine.

[Michael Semblist]

No, no, no, no. I don't want anybody to lose money, but we need a reset. Just a little bit of reminder of what risk is. Like, the desert needs water. People are out of control.

[Josh Brown]

I wonder if the analysts are going to push Zuckerberg on some of the hiring that he's doing. Like he's giving people billion dollar salaries. Like, I wonder if anyone's gonna be like, so hold on, you're just going to acquire every AI startup or take 50% stake or whatever. You're just literally going to spend billions of dollars on acqui hires. And I want to hear him say, yeah, that's what we're doing. Because that's literally what they're doing. It's. I mean, it's insane. They're building this meta super intelligence thing that is like their, the new thing they're calling their AI effort and they are just going out of control, like recruiting people out of everywhere and paying top dollar. And I wonder if anyone's going to ask them about like, is that sustainable?

[Michael Semblist]

John, we have that, that headline from Apple.

[Josh Brown]

Keep talking, Josh, what's the headline?

[Michael Semblist]

All right, so Apple has lost its fourth AI researcher in a month to meta marking the latest setback to the iPhone makers artificial intelligence efforts.

[Josh Brown]

Who the is that sitting in the chair? Is that a. Is that Jeremy Irons? That's an actual person?

[Michael Semblist]

I don't know.

[Josh Brown]

Look at that.

[Michael Semblist]

But no, this is.

[Josh Brown]

When I have gray hair, I want to have hair like that.

[Michael Semblist]

That man, that is a delicious head of hair. Tim, Apple is obviously going to get a lot of questions about like what are they doing?

[Josh Brown]

Well, is it sustainable? And the last time they embarked on like a spending spree like this, almost completely unchecked, was the Metaverse era. And it only took like one or two really scary stock price reactions for them to knock it off. And they eventually knocked.

[Michael Semblist]

It took a while.

[Josh Brown]

You think so?

[Michael Semblist]

No, I feel like it took two quarters. No, no, it took a while.

[Josh Brown]

Really?

[Michael Semblist]

Yeah. Anyway, let's keep it moving. Let's do some morning stuff, right? Let's do growth reactions, etc.

[Josh Brown]

All right, I asked Sean for this and chart kid Matt. Two of the goats at Red Holds wealth management. Well done, boys. So far, 168s and P500 companies have reported that's going into today. So there's more. But just to give you a flavor, this week we're going to get 162 reports. So this is a really, really big week. It's like the Super Bowl. In addition to all these Mag 7 names, you also have a Fed meeting and a GDP report thrown into the mix. Jobs report on Friday. Blended earnings were for the S&P 500, which is actual plus estimates up 4.5% year over year, which is 17 basis. 171 basis points above estimates at the beginning of the season. That's good. 5 of 11 sectors posted a year over year increase in profits. What is this chart? Oh, this is the blended earnings growth. So you can see like, it's about half and half, but all the market cap is on the left side. Communication, services, tech, financials. These are the biggest market caps in the market. These are the ones that matter most, and they are holding up the market, quite frankly. The only reason we're at a 22 multiple. Let's do the sales growth next.

[Michael Semblist]

One can't fake sales.

[Josh Brown]

So the only sector with negative sales, Energy. But again, that's like hugely commodity dependent. It's very noisy and it's not really the way to think about those stocks. But every other sector blended is seeing year over year earnings growth, revenue growth. Last one is actual earnings growth. Energy, negative 25%. Technology plus 17.2. Communication services, plus 17.2. This AI, like, I don't know. And people like, well, financial Assistant AI. Yes, it is. Yes, it is. All these bull markets that these financial companies are feasting on are directly related to AI. It's all one trade.

[Michael Semblist]

It's all AI. By the way, speaking of AI, um, I was out.

[Josh Brown]

Do we agree to aoi?

[Michael Semblist]

No, I. Like, I was at. I was at dinner with Dan the other night and his ETF. Guess how much is in the Ives ETF. He launched this one July 16th. Holy shit. It just launched. Guess how much.

[Josh Brown]

300.

[Michael Semblist]

400.

[Josh Brown]

No way. Really? Oh, my God.

[Michael Semblist]

He's like, we're. I don't want to say anything else, but it's unbelievable.

[Josh Brown]

$400 million in like, did he pay for dinner? It's pretty. Dude. It's impressive.

[Michael Semblist]

Very impressive.

[Josh Brown]

All right, next chart on this show, we root for Dan Ives all the way. All right, the beats are being rewarded at pretty much an average of 1.1%, which is pretty good. The misses are being annihilated. Like, the huge rally we had 30% S&P rally off the lows of April. And the market is saying like, okay, we gave you the benefit of the doubt. Show us the number. And God, God help you if you miss by a penny or two. They're taking stocks down by an average of 5.2%. This is the worst one day price reaction for missed earnings. You have to go back to Q1 of 2017 to find a more punishing environment. So you have an 82% beat rate, which is good, above average. But God help you if you miss. Like ups. They are, they are carrying you out feet first. And I bet you that continues. I don't think that's gonna, I don't think that's gonna change. I think that's gonna be the story of this earnings season. We gave you the benefit of the doubt. Your stock price rallied 20, 30%. You better put up. And not every one of these companies will. Which brings me to my question for you. Do you think by the time we get to the tail end, which is in video, do you think this will have been a successful earnings season from the standpoint of like, all right, we may not have made new highs, but we held up. Like, we held the gains. Like what? Like, how do you, you think that'll be the perception?

[Michael Semblist]

Yeah, I do. I don't really debacle.

[Josh Brown]

You really need this week's MAG7 earnings then to be good?

[Michael Semblist]

Yeah, and I expect them to be.

[Josh Brown]

But if they're not, it's another correction, right? Like another market wide 10%.

[Michael Semblist]

When you say they're not. I think it depends less on the numbers and more on what they say, more on guidance.

[Josh Brown]

I think it depends more on the reaction itself.

[Michael Semblist]

I'm saying, but the reaction will be a function of guidance, not what they did last quarter. I just don't, I just don't see them being like, whoops, we, no, we got over our skis. I just don't see it. Like it's still so early and based on everything they've said for the last couple of quarters, the idea that they're not going to affirm or continue could happen. I just don't see it.

[Josh Brown]

Heather. Heather McFarlane in the chat is reminding me of something. Dan said something like it's 9pm but this party goes all night long or something. How did he remember he said that? I mean, I know he said that a bunch of times.

[Michael Semblist]

Okay.

[Josh Brown]

Or something like it might be midnight, but this thing goes all night or so or something hilarious like that. All right, it's, I guess it's too early for the Mag 7 to materially disappoint. So as long as their guidance is good, this should go down as like a good earnings.

[Michael Semblist]

I Think so. But Also, listen, the Vix is at 15, and people are going out of their mind speculating. If we get a little slap on the wrist, like, all right, I'm here for it.

[Josh Brown]

Yeah. All right. The weight loss drugs are crashing. This bull market is. It's way past midnight. This bull market is now in a complete and total hangover from whatever went on last year. These stocks are just being destroyed. So Novo Nordisk, I guess, came out with an earnings report over in Europe, and, man, they crushed this stock. It fell as much as 30% at one point, wiped out $93 billion of market cap. And the problem for Novo, and we've been talking about this on the show, like, we did a whole thing about hims being sued being, like, having a partnership with Novo Nordisk break apart over generic sales of Semaglutide and Tirzepatide and all of these compounders that are knocking these guys off, well, it's like having a huge material effect. This company just lost 100 billion in market cap because of this. Novo cut their sales outlook now expecting 2025 sales growth of 8 to 14%, down from the high end of the range was 21%.

[Michael Semblist]

Oof.

[Josh Brown]

Yeah, really bad. Said operating profit would be lower than previous forecast. This is the second time they've cut their forecast just this year. Chalked up the diminished outlook to the availability in the US of copycat versions of WeGovy, the company said. Despite US regulators recently ordering an end to the practice known as compounding, it has continued with multiple entities still marketing and selling unbranded versions of Semaglutide, the main ingredient in Wegovy and Ozempic. So they have to, like, I mean, this is just going to be lawsuits. Law enforcement, maybe, like, I don't really know. I don't know what they would do. I don't know if the FDA gives a shit, really. I feel like there are probably thousands of companies in the United States and around the world just making their own version of this drug and selling it. They're all running advertisements like crazy. Hims is a really good example. Hims has the distribution. Novo has the patented product. Which would you rather have right now? I think you'd rather have the distribution.

[Michael Semblist]

Mm.

[Josh Brown]

If the consumer doesn't give a shit and they're willing to buy knockoff version, then you'd rather have millions of customers that are hooked into your website, then have the stupid patent. What good is that? So that's. That's crazy. We have some charts I want to show you this is Novo Nordisk versus its market cap. Michael, the losses here are staggering. This was almost a $700 billion company, and I think it was the largest market cap in all of Europe for, like, five minutes last summer. Do you remember us talking about that?

[Michael Semblist]

Yes, I do.

[Josh Brown]

Yeah.

[Michael Semblist]

The stock is down by two thirds. Tough.

[Josh Brown]

It's a $240 billion market cap and still dropping like a rock. And that's not over three years. That's over six months. Yeah, it's wild, right? Okay, here's Eli Lilly. Not as bad. Eli Lilly almost hit $1,000 a share. It's been flatlining. It's in a 17% drawdown. But compared to how much it had gone up since 2020 when. When this weight loss craze started, that's not terrible. It just looks like a pullback. Let's show that this. Nice.

[Michael Semblist]

To me, it looks very heavy.

[Josh Brown]

I'm not buying it.

[Michael Semblist]

It looks. It's going to 600.

[Josh Brown]

Next chart. This is just the share price, so it's at 776. Again. It was almost a thousand last September. And it's, you know, it's not. It's not looking good. All of these rallies are sold. You have this persistent pattern of lower highs. Not what you want to see. And they're fighting the same battle that Novo Nordisk is fighting. They might be better at litigation or something, but, like, the trend is definitely against these guys. So I don't. I don't think this is a. I don't think this is the type of blue chip stock being down 17% that I'm like, yeah, I can't wait to buy it.

[Michael Semblist]

Great.

[Josh Brown]

In the chat, they're saying Novo should donate $1 billion to build Trump golf courses. Suddenly, there would be aggressive enforcement. Yeah, you know what? That's obviously hilarious, but, like, I wonder if Novo Nordisk, outside of the General Pharma. Pharma lobby, has any power whatsoever to make the stop, because I don't know what kind of money is being spent on the other side by the compounders to have it continue. It might just be a lobby battle until somebody gets serious about enforcing this stuff. And in the meanwhile, these stocks are just absolutely.

[Michael Semblist]

All right, let's rewind the clock. I feel like stock market investors always, but especially in 2025, have a very short memory. There's a lot of risk taking, a lot of speculation, and how quickly we forget what we just lived through. Three months ago, Ryan Dietrich, quote, tweeted this tweet from back in May. This is in May 2nd so I guess a month, three weeks after the bottom Goldman said markets might not have bottomed. Wells Fargo, could we test the low? Is Morgan Stanley retesting the low end of 5000 is feasible. JP Morgan sees S&P falling to 4000 in worst case scenario bank of America sell the rebound in U S stocks. So Yahoo Finance put together this banger of a chart that shows how the 2025 price targets have evolved over time. And like they always do, I'm not throwing shade. This is the job. It's impossible not to do this. I would have done the same thing. You follow the market. So you had the initial forecast coming into the year, they were all pretty aggressively bullish and why wouldn't they be? And then you had the TAF reaction of the freak out and of course they lowered their estimates. And just like that they're back to where they started. If not even higher. We could skip the next one.

[Josh Brown]

Wait, can we stay here?

[Michael Semblist]

Sure.

[Josh Brown]

So Wells Fargo and Morgan Stanley never changed their target.

[Michael Semblist]

Good for them.

[Josh Brown]

They, they just, they just like wrote it out and, and were the last to react. I guess my question to you would be why wouldn't everyone just not react? Why do they have to? I know the market fell a lot.

[Michael Semblist]

I think because when you're, when you're 20% above or below your year end target, it just looks like sort of ridiculous. I think maybe what other defense could there be?

[Josh Brown]

Doesn't this look more ridiculous?

[Michael Semblist]

Well yeah, with the benefit of hindsight.

[Josh Brown]

But given be the last to downgrade, then who gives a shit? No one. No one's like, in other words, like.

[Michael Semblist]

Yeah, I understand what you're saying.

[Josh Brown]

Like game theory in the, in the next 20% bear market, like you know what, we didn't save anybody any money anyway. If we downgrade now, what if we just don't?

[Michael Semblist]

Yeah, that's not how life works. But touche.

[Josh Brown]

No, but you see what I'm saying.

[Michael Semblist]

Oh, I see what you're saying. I understand.

[Josh Brown]

Pure. From a pure gamesmanship perspective. All right, we could download grade it now and maybe it falls further. No one's going to give us credit for that.

[Michael Semblist]

I agree. If you're not first 20. If you're not first, you're last.

[Josh Brown]

Or just don't even bother.

[Michael Semblist]

Right. So Dietrich tweeted that the S and p is up 8.6% year to date, about average. And then Balun is just, you know, no notes, just a perfect 10 out of 10 response. Eric said 8.6% is amazing given the amount of negative headline Firepower thrown at the market by the media. Adjusted for that, it's up like 30%. Yeah.

[Josh Brown]

Wait, so. So in other words, it's an average year, but like, what's the. What, what is he saying? Four out of 75 years, stocks have gained 8, 10%. Like we almost never have an actual average year.

[Michael Semblist]

All right, so we never have an average year because when the market is down, on average, it's down 13%. When the market is up on average, it's up 20%, 20 plus percent. When you, when you net those two out, yeah, it's like 8 to 10%, whatever it is. But I don't care about that. I care about Eric's. Eric's point is that when you think about how black it got in April, everywhere, the fact that we're up 9% of the year is pretty remarkable.

[Josh Brown]

Again, I know we're beating this dead horse, but it needs to be said over and over again, at least for future posterity. Pull the XLK out. Pull the XLC out. And we are negative on the year, of course.

[Michael Semblist]

Yeah, no doubt.

[Josh Brown]

So it's only a plus 8.6% year because of this once in a lifetime capex explosion thanks to a software program that nobody saw coming as recently as three years ago. Like, that's it. There's nothing else going on that could possibly have this market up 8.6%.

[Michael Semblist]

But maybe that's the thing about a bull market. There's always something else. There's always something that bails us out.

[Josh Brown]

Yeah, but this felt like one of the all time kick saves and we, you know, we can't run it back a different way. Like there's no. This is just what it is. No counterfactual. You can't prove it, as people would say. What if something else came along? Yeah, maybe.

[Michael Semblist]

Yeah.

[Josh Brown]

I don't know. All right. IPO did this go public? Is this going public tomorrow?

[Michael Semblist]

Figma on Monday race. The preliminary pricing.

[Josh Brown]

It's not out yet, but I'm trying to think. I think it's this week. There's a few reasons why this one's notable. Okay, you and I used Figma when we were working with the company that built our last website. They used Figma as the design doc for us to all go into and point out like mistakes in the design before it became live on the website. So that's the way Figma is used. And it's definitely a competitive space. They don't have it all to themselves, but it's a pretty big company. This is Martin Pierce at the information. Sometimes good things happen to nice guys. I'm talking about Dylan Field, one of the More Grounded founder CEOs you're likely to meet in tech. His design software firm, Figma, looks to be sailing toward a very strong public debut in the next week. Figma raised the preliminary pricing range for its IPO Monday to between 30 and $32 a share, from an initial range of 25 to 28. At the upper level of the new range, it's a market cap of 18.7 billion. Blah, blah, blah, blah, blah. It's look, it's a rev. It's a 48% revenue grower. It's, it's got like a lot of the attributes that people are looking for in a, in a software stock. There's a lot of deep client capture, etc. Or your designs are already in there. Why would you switch providers? Like, we'd like these types of stocks. It's definitely at risk of AI doing what they do better and cheaper and faster and blah, blah, blah. But then, of course, this is the kind of company that will say, hey, we're going to do our own AI and our product is going to improve. So I think it's notable that we can still get these $18 billion tech stocks to market that aren't even AI plays. It's just a design software company. But I like that we're still seeing deals.

[Michael Semblist]

Well, I love that line. Dylan Field, one of the More Grounded founder CEOs you're likely to meet. Nobody would ever say the same about you. And it's great to see good things happen.

[Josh Brown]

What the.

[Michael Semblist]

Yeah, you love, you love seeing good things happen to good people. But wait, there's more. Throw this tweet up, please.

[Josh Brown]

I'm not one of the more grounded tech CEOs, you know?

[Michael Semblist]

No. All right, Jeff Richards. The last five technology IPOs are up 142% on average.

[Josh Brown]

Amazing.

[Michael Semblist]

Kind of wild. The last 20 are up 93%, performing well beyond the locked window. So he said the last 12 months, the prevailing narrative was there is no IPO market. Well, smart companies prepared anyhow, and we're ready to take advantage of favorable, favorable conditions. So you'll have to see it. This is really, really important to a functioning capital market that these new companies can be treated well by public investors. We need more of that.

[Josh Brown]

So, yeah, you never know when the window is going to be. The windows going to reopen. A few good weeks in the NASDAQ and they're doing deals again.

[Michael Semblist]

Yeah.

[Josh Brown]

So that's exactly how it works.

[Michael Semblist]

All right, So I am going to make the case that everybody needs to be cool. Maybe no more new positions for a minute. Let's let the market breathe. We have just had a spectacular run. The Vix is at 15. We're seeing a lot of silly behavior. And I'm not telling you to sell your 401k or stop anything like that. I'm just saying for individual positions, if you're feeling strong, relax. The market has been on fire. I, you, all of us, we're not geniuses. So just take a breath. And I brought data. So few tweets from Bob Elliott. Not trying to be a Debbie down or just trying to be a little bit sober here. Speculative trading indicator, the three month rate of change. We've seen this twice in previous history at the end of the dot com bubble and at the end of 20. The 20, 20, 2021 mania. Okay, that's number one.

[Josh Brown]

Number two, look at, look at this. This is, this is as clear as a bell. Yeah. The implication is maybe it goes further, just calm down. But not much further.

[Michael Semblist]

No idea. You never know. All right, here's another one. Quantitative analysis from Bob, or I guess this from Goldman that Bob tweeted. Stocks typically underperform after sharp rises in speculation, which is pretty intuitive, right? So they're showing sharp increases defined as a three month change in the indicator exceeding 15 points or roughly the top 5% of observations since 1990. And they show what happens 3, 6, 12, 24, 36 months later. And it's not a catastrophe, but you know, you would expect a little bit of backing and filling. Another thing, this is from Jason Getford, a sentiment trader. So Helene Miser tweeted that the S and P at new all time high and fewer than 100 stocks making new 52 week highs. So what that means is this rally is fairly narrow. It is, it is AI and only AI And Jason shows that when you, when that happens, especially when it starts to cluster where you see new highs with fewer and fewer participating stocks on average returns aren't great. Not catastrophic, but just not great. So my point is, my point is we're all having a great time. If you're in individual stocks, unless you're in the bad ones, you're making money and just pump the brakes a little because the wind has been an hour back for the last three months off the lows really uninterrupted and we're extended, to say the least.

[Josh Brown]

I got another, I got another thing here for that. Jim Reed is the head of Macroin Thematic research at Deutsche Bank.

[Michael Semblist]

Ooh, research. Okay, now you have my attention.

[Josh Brown]

Yeah, Research is like finance. When I say it, better pay attention.

[Michael Semblist]

I'm leaning in.

[Josh Brown]

We're back to a boom in margin debt in the stock market. So this is investors buying, borrowing against their own stocks to buy more stocks. So it's not like borrowing in general. This is.

[Michael Semblist]

Don't margin at me.

[Josh Brown]

I mean of all the things, I'm talking to the listeners, talking to the viewers. So this is like borrowing at stocks to buy more stocks. Okay. The level of margin debt accumulated on the New York Stock Exchange in May and June was the fifth largest two month increase since 1998. So we're talking about the rate of increase.

[Michael Semblist]

Okay, so people are going nuts. People are going crazy.

[Josh Brown]

The only periods with larger two month increases were right before the 2000.com bubble burst and right before the 2008 financial crisis. Quote. While the current surge doesn't quite reach the extremes of those prior episodes and could therefore easily climb further, it still ranks among the most aggressive 12 month rolling increases on record. More ominously perhaps, quote margin debt. Listen to this one. As a percentage of GDP now exceeds levels seen in both 2,027. Adjust for the margin debt as a percentage of GDP.

[Michael Semblist]

Don't, don't come to me with that nonsense. Give me the market cap because the more. Because the market capped relative to GDP is, is near all time highs. Why would you adjust mark margin debt for gdp?

[Josh Brown]

It's not relevant, just a way of thinking about the level, the level of speculation relative.

[Michael Semblist]

The point remains. The point remains. There's a lot of speculation up there. And so yes, this can continue. We could be up 25% before the year is over. Who the hell knows. So I'm not saying like panic, sell your stocks like, but.

[Josh Brown]

So what are you saying? What should people do?

[Michael Semblist]

I'm saying that if you are thinking about putting on a new position because you feel like you missed it and you feel yourself buying out of the fear of missing further gains. If you feel that impulse, take a beat.

[Josh Brown]

Okay, what about existing positions?

[Michael Semblist]

That's up to you. That's, you know, use your own risk management. I'm not. Whatever. I did a little bit of shaving last week. A little bit shaving?

[Josh Brown]

Yeah, I sold a bunch of stuff like, like some shares of things that I'm keeping or just like outright got out of things that just were a waste of time, like Pfizer. And I'm not like looking for like, ooh, what's my next. What's my next stop because I hate it when the market is so extended. It's been up like it's been above its 50 day moving average for three weeks straight. And it's just like you feel like there's nothing to buy. Now things are starting to get interesting again with all of these earnings reaction blow ups in like really good companies. And I'm just like sitting back and I want to see, I want to see if some opportunities get created.

[Michael Semblist]

Guess what? I guarantee they will. I mean that's.

[Josh Brown]

Well, they are already, but like we're going to get, we're going to get a hunt. What do they say? 160 reports this week? Like we might have seen nothing yet.

[Michael Semblist]

Just. Yeah, don't feel like you're never going to get another shot is what I'm saying. Okay. Yeah, just, just take.

[Josh Brown]

By the way, unless, unless you are fully invested with every dollar you'll ever earn and you'll never have a fresh dollar to put into the market. This is great.

[Michael Batnick]

All right.

[Josh Brown]

Mystery chart.

[Michael Semblist]

Okay.

[Josh Brown]

John, please. What is this?

[Michael Semblist]

Okay, it's a. Oh, I know what this is. This is the two year.

[Josh Brown]

So close.

[Michael Semblist]

Okay, ten.

[Josh Brown]

No, wrong direction.

[Michael Semblist]

Oh, okay.

[Josh Brown]

Three month fed funds.

[Michael Semblist]

Oh, all right.

[Josh Brown]

Whatever. Reveal. You were close, dude. You were close.

[Michael Semblist]

That was embarrassing.

[Josh Brown]

All right, there's a fed meeting tomorrow. I think we're almost out of time to discuss it. Put that chart back up please.

[Michael Semblist]

Guys, this is a big L for me. I mean that, my God.

[Josh Brown]

You should like. I feel like everyone, everyone working in investing should like sort of be able to do that. Right?

[Michael Semblist]

I'm ashamed. Yes.

[Josh Brown]

So we're showing you guys the federal funds effective rate and we're hovering just below 5%. And I don't think we get a rate cut tomorrow, but maybe they use the, the presser to set the stage for the September cut and they'll use August, the Jackson Hole convention to like kind of reinvest in the messaging from tomorrow. But that's, that's sort of what's going on. We have one more chart. All right, so this is fed funds rate expectations. So you could see the blue diamond represents the FOMC's own year end estimates. The green diamond is market expectations which you could see fell all the way down to, for 20, 26, fell down to 3% but have since been rebounding, meaning that we think terminal rate is probably higher rather than lower. And the FOMC's long run projection is about 3%. So we're far away from these projections. If they're going to start cutting. It better start soon. And they might have to at some point, but right now they don't have to and they're not. And tomorrow's probably another non event. What do you think?

[Michael Semblist]

Not. Yeah. Nothing. Nothing could say.

[Josh Brown]

Is there anything he could say that you think would, would be a surprise in either direction for the market?

[Michael Semblist]

Oh, there is absolutely anything he could say. What if, is there anything that he.

[Josh Brown]

What if he's super dovish? What if it's a dovish hold and he's like, yeah, listen, we could, we could totally cut rates. Like not in those words, but like if that's what he implies.

[Michael Semblist]

I think, I mean, I think it's gonna be a lot about tariffs now that there's more clarity.

[Josh Brown]

Right.

[Michael Semblist]

Because that was the unknown, that was the only reason why they weren't cutting rates.

[Josh Brown]

So they're gonna, they're gonna ask him 10 different questions about what did the President say to you behind closed doors and blind? And do you have any plans to leave before May? And that's, it's going to be like, all the drama is going to be about like them trying to get him to say something about Trump and he's too smart for that.

[Michael Semblist]

I am not a fed watcher. I will not be tuning in. I'll see the highlights.

[Josh Brown]

Not, not this one. I watch, I watch the good ones.

[Michael Semblist]

This is, yeah, this is, this is, this is a nothing burger. That's right.

[Josh Brown]

All right, guys, thank you so much for joining us and making this show the, the platform that it is. Love everybody who comes to the live on YouTube. That's 5pm every Tuesday. Those of you listening, thank you so much. We appreciate you as well. And you can always catch the, the video replay and it's just, it's unbelievable how much engagement and how much you guys are responding to the show. So we love you for that. Tomorrow is Wednesday, which means it's an all new edition of Animal Spirits, starring Michael and Ben, my personal favorite podcast. There'll be a new Ask the Compound and the end of the week we've got an all new compound and friends with a returning champion guest. So from all of us here at the compound, we thank you, we appreciate you. Leave a rating and review and we'll talk to you soon.

[Michael Semblist]

Sam.