← The Master Investor Podcast with Wilfred Frost
The Master Investor Podcast with Wilfred Frost
Dan Niles: Be Nimble - 30-50% AI Crash By 2027
00:50:28
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- [00:00]
A
Who do you think are best placed for the next three to five years of the mega caps?
- [00:05]
B
It's obviously Google. I mean, as I said earlier, they have the full stack and they're the ones you should bet on. And unless something drastically changes, they will continue to be the winner going forward because they've got everything and they've got the massive cash flow to fund it. So in the short term, our semis at the most overbought they've been since 2000 or 1995 before they had horrific corrections. Absolutely. But if you're taking a longer term view and you're trying to pick individual names, Intel's just gone back to where it was in 2000 this past year and it's still undervalued. To me it doesn't make sense that the stock market's at an all time record high and oil prices are up 60% this year and the bond market we saw last week, the 30 year yields and the 10 year yields hit the highest levels for the year. Like one of those is wrong.
- [01:05]
A
Should people have higher cash weightings than the normal right now?
- [01:09]
B
100%.
- [01:14]
A
Welcome to the Master Investor Podcast with me Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by Elseg Interactive Brokers, the World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. I am delighted to welcome back to the podcast Dan Niles, founder and portfolio manager at Niles Investment Management and one of the leading tech hedge fund managers of the last decade. Dan, you were the Master Investor Podcast first guest just under a year ago. A very good afternoon from London. Good morning to you there on the east coast in Florida. Thanks for coming back.
- [02:16]
B
Oh, my pleasure Wilford.
- [02:18]
A
It's always great to see you and what great timing because we've just had a bumper week of earnings from the tech side of the bargain over the last couple of weeks and markets obviously back at all time highs in light of that and some other factors, despite a lot of challenges ahead. I wanted to start though with this comparison you made a couple of weeks back, right at a day off, pretty much the short term market lows that we got in the middle of the Iran war. You wrote this on 31 March. History may not repeat itself, but it often does rhyme and you're comparing 2026 there, not to 1999, not to 2008, not to some of these final years of great bull runs, but to 97, 98. Just talk me through why you made that comparison, which by the way turned out to be right near the short term lows.
- [03:16]
B
Yeah, I mean if you look back and compare where we are Today, you're about three years into this build out for the AI infrastructure. ChatGPT came out at the end of 2022. So you're, you know, entered year four. If you go back to that time period 97, 98 and use Netscape Navigators launch as kind of the starting point of this new thing called the Internet, then 97, 98 you were in years three and four of the Internet infrastructure buildout. But back then, in 97, as you may remember, you had the Thailand currency crisis. And so then the S and P dropped 11% intra year in 1997. And then in 1998 you had the Russian bond default and the failure of Long Term Capital Management and the S and p went down 19% intra year. But if you look at the full years, 97 after that 11% intra year drop finished the year up 31%. In 98 the S P finished after that 19% intra year drop up 27. And why was that? It's because you had this backdrop of this huge underlying build out of this new thing called the Internet. And so that's kind of where we are today in that yes, you have this macro issue around oil and Iran, but in some ways it's a lot easier to deal with. Right. Because that was a man made event, the war. Whereas those currency crisis, Russian bond default you could say was more structural several years in the making. And so that's why I thought this would be the bottom. We'd get through the war obviously and then the markets would continue to bounce off those levels and continue to run up because of this AI infrastructure buildout. And one specific thing being agentic AI really kicking off in the beginning of the year.
- [05:23]
A
So all through last year, Dan, and as I said, and I refer people back to our conversation last June, you were saying, and you talked about the need to be nimble in markets that you were going to get bearish. The huge bull run in AI related stocks that we were already enjoying was going to take a pause at some point. Did we essentially get that forced because of a geopolitical event in the Iran war? And now it's done and dusted so we can go on to another meaningful at least year long Bull run in these tech stocks.
- [06:00]
B
Sort of yes and no. You did get a reset because of the Iran war. But the big thing that happened was this thing called Agentic AI. And by that what I mean is your viewers may be familiar with this thing called claudebot that came out at the end of November and it morphed and by January 30th it was called Openclaw. And so what that enabled you to do was before you would ask your ChatGPT or Gemini a question, it would give you an answer. So that's chat based AI. With Agentic you might go ahead and say, hey, this is Wilfred and go get me this data from the BBC website, go get me this data from the Bloomberg website, go to cnbc, get me this other stuff and then go ahead and put this all in Excel spreadsheet. Well, that requires 10 to 100 times more tokens to be generated. And you can see that in the token generation data where in the two months prior to January 30th and the formalization of OpenClaw, token growth was about 20% over the prior two months. In the two months following, the token growth was over 120%. And that token growth is continuing to grow because corporations are just really starting to adopt this because this is kind of what the promise of AI was, which is you replace people with this agent that can then run 24 hours, 48 hours and get whatever project you want done versus just a chat based AI query.
- [07:42]
A
So before we move on to the implication of Agentic and also the takeaways from Mag 7 Earnings about the Iran war, quickly, I mean, can you be bullish if the Iran war continues? Even on these big tech structural themes in the background? If the Iran war or the Strait remains closed for weeks and months from now, or do you need to see the strait reopen, you need to have it reopened?
- [08:10]
B
There's no question. I mean you might by some miracle get out of this, but Last of the 10, 10 out of the last 12 recessions have been preceded by a spike in oil prices, a sustained spike in oil prices. So if oil stays up at these levels in the mid-90s, and remember we were sort of in the 60s before this started, you're probably going to be flirting with the recession by the time you get towards the end of this year. I mean, McDonald's which reported recently, you know, surprisingly came out and said, hey, we're seeing some stress in our low end consumers. Their comp store sales missed, you know, you know, obviously they're all over the world and so when you see things like that start to pop up, you have to worry. And oil prices, they just seep into everything. But it takes time. So a spike and then a drop doesn't really matter. If it stays up at these levels for one to two quarters, you're going to have a huge issue because that'll seep into inflation, it'll go ahead and SAP consumers earnings power. And what we heard from McDonald's, you're gonna hear from a lot of other companies going forward. And this is gonna turn to a huge problem. And at that point you're gonna get a massive correction in the stock market. But the thing we know for sure, right, is we have an election in the United States coming up midterms in November. The incumbent party, when you have a spike in oil prices leading into that, just gets absolutely crushed. And so President Trump's gonna wanna get oil down and that means coming to some kind of resolution. And from what you've seen, right, that's where he's going. He's calling these things love taps, these exchange of military actions by Iran and the US which tells you he really wants this thing to end.
- [10:07]
A
Well, let's hope we get there. I do continue to wonder whether this is a harder genie to put back in the bottle than everyone might expect. But I guess we shall see. This episode is sponsored by the World Gold Council, the global experts on gold. They champion gold as a trusted strategic asset, providing market leading research to help investors understand gold's role and modernize how gold is owned, traded and used. Developing industry standards and market infrastructure. Learn more@goldhub.com this episode is sponsored by Interactive Brokers. Building wealth starts with the right broker. And Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com masterinvestor. Let's talk about Agentiki, because the other thing you wrote in your end of March post was the way in which this changes the bargain of which type of tech stocks are going to benefit the most. And in particular focusing on the need of CPUs rather than necessarily all the stocks that had performed previously. Expand on that for me a little.
- [11:40]
B
Sure. Well, as I said earlier with the Gentic, you're doing multiple actions, Multiple calls to APIs, opening up applications like an Excel or a Bloomberg or a cnbc website or sec website, etc. And doing all of these things. And so you need an orchestration engine, you need Something that goes ahead and organizes all of that. That's what CPUs do very well. And if you go back to training, you're just doing the same thing over and over and over again. When you are training these AIs, that's what a GPU does incredibly well. And that's why you saw like an Nvidia absolutely explode higher. Because CPUs weren't really valuable in training. You move to chat based AI. Again, that's pretty decent for a gpu. But now when you move to a Gentex, that's great for a CPU. So you went originally from about, let's say eight GPUs for one CPU. When you move to Agentic, that ratio gets closer to one to one. And so that just again shifts what kind of hardware you need to run this. And you know intel has been given up for dead for decades, right? The stock has just gotten back to its peak in 2000 this year. But between this move to agentic plus the fact in Intel's case that they're probably going to end up with some pretty big foundry customers by the end of the year to help with supply being secure, being produced in domestic fabs run by US companies in the United States and in this case intel, that's really good for them. Obviously it benefits names like AMD as well, which I also mentioned back then.
- [13:32]
A
Well, let's just dwell on both of those because you, as you said correctly, recommended them in March. I mean, intel, as you've already mentioned, they've rallied so aggressively. Have you taken profits? Have you seen enough gains in just a matter of weeks?
- [13:49]
B
Well, I mean, here's the thing. There's obviously the short term and then there's the long term. If you think about it, we still haven't had Nvidia or Apple or any of the people that have talked about getting a relationship or Tesla with Intel starting to produce yet. If you look at it from a valuation basis and you say, okay, the one thing you know about semiconductor stocks is the earnings estimates are always wrong, right? They're either way too high or they're way too low. If you look at valuation and you say, well, I'm going to just look at it from an enterprise to sales basis and you look at where an AMD is trading or tsmc, you can say, wow, you know, intel is still undervalued relative to those companies on an enterprise value to sales basis. And so the stock should be able to continue to rise. And for me, terminal value standpoint, like what is this stock Worth two to three years from now, the composition of the business should look a lot different. Right. They'll probably have some combination of Nvidia, Apple, Tesla, others producing chips on their foundry business and that will make the company a lot more valuable than what it was in the past. So in the short term are semis at the most overbought they've been since 2000 or 1995 before they had horrific corrections. Absolutely. But if you're taking a longer term view and you're trying to pick individual names, Intel's just gotten back to where it was in 2000 this past year and so, and it's still undervalued relative to what it can probably ultimately earn. And so would it surprise me to see the stock go down 15 to 20% along with the entire semiconductor index over a short period of time? Absolutely. It wouldn't surprise me at all, but. But do I believe that by the end of the year they'll be higher than where they are today? Yes.
- [15:59]
A
And Dan, what do you say when, you know, just to broaden it out again, when you see the sox, the semis ETF up 70% year to date in light of also having, by the way had the Iran war challenge and people say it's 1999, not 9798. Do you have to rethink your thesis there when you see those really attention grabbing performance statistics in the short term?
- [16:25]
B
No, because the other side of it, Wilfred, is that Agentic requires 10 to 100 times more tokens than chat based AI. And so that's the difference. You're not talking about a small change, you're talking about an absolutely enormous change. I think when you look at where capex growth is right now, you can see that the numbers have moved up pretty dramatically. So you started the year thinking hyperscaler Capex up maybe around 30% for the year. Then Q1 guidance was given when companies reported Q4 results in, you know, January, February and then that number moved from 30% capex growth for 2026 up to about 60%. Then a couple of weeks ago the big hyperscalers all reported again and that number moved from 60% CAPEX growth to 70%. And so then this ties back to the fact that you're not talking about a small change in token generation required with Agentic, you're talking about 10 to 100 times more tokens needed when you do an Agenta query relative to a
- [17:41]
A
chat based query before we move on to earnings. And there was obviously some phenomenal numbers in the last couple of weeks from the big tech players. You mentioned the shift from the need for GPUs to CPUs. Is that bad news for Nvidia?
- [17:57]
B
Well, on the margin, it'll change how the stock performs that one. Obviously Broadcom's another one relative to some of the other players. Right. Because Agentic requires more memory. It requires with some of the architectural shifts underneath that requires more optical. And so you only have a limited budget. You don't have infinite money out there. And so what you're going to spend that money on is going to shift. And if the ratio was 8 GPUs to 1 CPU and that ratio is going to move closer to 1 to 1, then obviously the stocks that are tied to that, those will be the ones you want to take a look at. And so that's why for me, the microprocessor vendors are a lot more interesting right now than the GPU vendors or other parts of the food chain.
- [18:49]
A
Hi guys, it's Wilf. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do go give us a five star rating and leave us a comment. It really helps other people find the podcast too. Now back to the episode. Let's dwell on earnings of the big tech players that we've seen over the last couple of weeks. Is Google Alphabet the standout of the Mega Caps?
- [19:22]
B
I mean, absolutely. I mean, you're seeing it in the numbers, right? Where if you look at Google cloud for the fourth quarter, the growth rate year over year was 48%. When they reported the March quarter, that growth rate went from 48 to 63. So that's a 15% acceleration. You look at AWS, that growth rate went from 24% to 28%. So 4%. Given that they're the biggest of the hyperscalers, that's not bad. You look at Microsoft, however, and you go that growth rate went from 38 to 39. And so they're clearly the one that's struggling, but it's still accelerating slightly. And that's why you can look at kind of these are the numbers versus what these companies are all saying and see who's actually executing well and picking up a lot of share.
- [20:17]
A
And what do you think Google are doing well at the moment?
- [20:21]
B
Well, the thing is, Google has the full stack, right. If you look at them, they've got a leading large language model in Gemini, right. Microsoft relies on OpenAI. So they don't have one of their own. Amazon, who's heard of Rufus, so they've got that. They've obviously got their own chips. They've been producing their own internal chips for over a decade, which is the longest of any of the three. You've also got enormous cash flows funded by their ads business. And then you have end devices that they can distribute this technology through with their Pixel phones, which are really the model for the entire Android ecosystem, which is over 75% of all smartphones sold wide are Android phones. So they've really got that full stack from top to bottom which no other company has.
- [21:12]
A
Let's touch on Apple next is Tim Cook announcing his departure at a moment in time when he wants to think about his long term share price performance?
- [21:26]
B
I mean, I'm not sure exactly what his motivation is, but I would say this. If you look at what Tim Cook did, well, he was really good about the supply chain. Continuing on the legacy of Steve Jobs when he took over, don't forget the iPad had just been launched. And so the year he took over, Apple's revenues were growing 60% and the next year I think it grew like 40%. And then the growth obviously has slowed down since then. And so what innovative products have really come out there hasn't been a lie. If you think about the last one. It was his Vision Pro ski goggles as I like to call them, and nobody bought those. And so I think now putting a hardware guy in charge that hopefully can give you some innovative products, I think that's going to be interesting. And this year you should get a AI enabled Siri. Right? And they're a couple of years late on this product and finally get a foldable iPhone probably late this year, early next year. And that should drive a pretty big upgrade cycle because when you've seen big upgrade cycles, typically they're driven by changes in the form factor and you saw that with the change to the iPhone 6 where you went from a 4 inch screen size to a 5 and a half inch screen size and the growth accelerated from 7% growth on the top line to 28% growth on the top line in their next fiscal year. So I think that's what I'm kind of looking at and excited about. Obviously the valuation's really high, but what you've seen is that people sort of do seem to treat their iPhones like consumer staples products. I mean it's shocking to me and Apple was one of my top picks coming into this year. But it's still surprising, even with oil prices as high as they are, that you've had the fastest 2/4 of year over year growth rate since 2021 when you had Covid and everybody had to figure out how to work from home. And we're buying iPhones and everything else to make that happen.
- [23:42]
A
Let's touch on Meta. I mean, a lot of people have dwelt on Meta for a couple of quarters now with worsening free cash flow metrics. Were they the worst set of the mag 7 numbers that we've just had? Do they actually worry you or is it overdone that concern?
- [23:58]
B
Yeah, I don't think it's overdone because again, if you go back to, well, who has a stack, you know, Meta has with their latest launch a model that's not too bad, right, in terms of large language model. But what they don't have is Amazon, Google, Microsoft, all have a public cloud and so they can go ahead and sell excess capacity to other companies. Meta doesn't have that and they're pretty late in terms of trying to develop their own ASIC chip so that they can, you know, get their costs down. Obviously they've got big cash flows, they got great monetization. The other thing though, which has nothing to do with AI, which should bother you, is this March quarter they saw the first decline sequentially in history of people using their family of apps. So if you think about what they do, they sell ads, right? So how do you make money? Well, there's two ways. You get more users and you make more money per user. You now looks like you might have reached a saturation point on the adding more users part of it. And so you're taking away potentially one leg of growth, which makes sense, right? You've got three and a half billion people using their app, which obviously it's not allowed in China. And so that's a big percentage of the entire world's population. And so it had to happen at some point. And so that should concern you from a growth standpoint combined with the fact
- [25:32]
A
of no public clout in terms of who the ultimate winners are of the Mega Caps, we've mentioned most of them in the last 15, 20 minutes. Who do you think are best placed for the next three to five years of the Mega Caps?
- [25:50]
B
It's obviously Google. I mean, as I said earlier, they have the full stack and they're the ones you should bet on. And unless something drastically changes, they will continue to be the winner going forward because they've got everything and they've Got the massive cash flow to fund it.
- [26:14]
A
This episode is brought to you by Elseg, the leading global financial markets infrastructure data and analytics provider. To learn more about how ELSEG connects businesses, investors and markets worldwide, visit elseg.com this episode of the Master Investor podcast with Wilfred Frost is sponsored by BNY Investments, a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice Foreign. That's all the positives, I guess. Let's talk about some of the negatives of of the AI trade overall in the latest set of earnings, the ft. And a great piece of this that they pointed to the fact that about a third 34% much higher than normal, much higher than in recent years of profits, came under the guise of the income for the Mag 7 names which includes but isn't totally reliant on revaluation of their non listed assets like the open AIs of this world or stakes in the anthropics of this world. Does that worry you when we're all celebrating big increases in earnings but it's not all increases in free cash flow and could fall as quickly as it's risen in future quarters?
- [27:47]
B
Yeah, absolutely. I'm approaching it from a different angle. I, I look at it and say well when did a genic AI came come out? Well, you could say January 30th if you want to take the formalization of Openclaw. So when should that ramp start to decelerate massively? Well, probably early next year. What do I think happens to these stocks sometime early next year from wherever they get to, they probably go down 30 to 50%. And so you've definitely all of these structural issues you're seeing, they're definitely going to be a problem. And taking a very recent episode. So let's ignore the, you know, the Internet build out and oh, you know, 2001, 2002. Think about what happened in 2022. The Magnificent Seven as a group on average that year in 2022 went down 46%. That was the average change in the stock price and that was just coming off of the build out of COVID So fast forward to where the stocks are today, all the optimism out there and I hear things like well you know what, semiconductors might not be cyclical anymore. And so I start to laugh because I go, well if you remember coming out of COVID that's what a lot of people were saying. Well, you know, there's a structural buildout and you know, memory is not going to be cyclical. And then I think Micron had four quarters of negative gross margins. So by the nature of semiconductors, where it takes a couple of years to bring up a fab and demand can change, and you brought up earlier, Wilfred, which is 100% true, what if this war doesn't get sorted out? Or even if it does get sorted out, much like the ExxonMobil CEO said at the beginning of May, it's going to take a, you know, it may take longer than what people think for this oil prices to normalize. You could have a huge issue as you get into early next year because of that. And you've got two companies that are accounting for half of the backlog at the Hyperscalers, which is OpenAI and Anthropic. They're half. So if one of the two starts to struggle, and I've been saying this for a while, I think OpenAI ultimately has an issue because they don't have the cash flow to fund their ambitions. And you've already seen it by the way they're talking and what they've decided not to do, then you're going to have a huge problem. And OpenAI is focused on the consumer where Anthropic is really focused on enterprise, which is why you've seen revenues at Anthropic now surpass what OpenAI is running at. The last numbers we have obviously are anthropic is around 45 billion annualized run rate and revenue, and OpenAI is right around 24 billion, which is very different than where it was at the beginning of 2025 when OpenAI was running about 6 billion in annualized run rate revenues, and anthropic was at 1 billion. Right. So it's gone from 6 billion for OpenAI to 24, and it's gone from 1 billion at anthropic to 45. And so if you get to the end of this year and all of a sudden you've got an issue with OpenAI, then that could accelerate this process. So, you know, you started the interview saying, hey, I was talking about being nimble, I think, in our first podcast, and I think you still want to remain nimble, because things can change very quickly in this space. If all of a sudden you have a problem with an OpenAI because not everybody's going to win, which I think I said in our first podcast. And right now, obviously the market's getting a lot more discerning. Right. You can look at stock, at the software stocks as an example of that, but that applies to AI as well, which is not every company focused on this is going to do well. And that shakeout, you could argue, started late last year. Obviously, Microsoft's down for this year, which I, I believe it should be. And things could get a lot worse in the future because if you back up and think about this, and you saw this on some of the earnings releases, you're not getting this massive increase in revenues at OpenAI and Anthropic, which started last year at 7 billion combined and now is running closer to 70 billion a year and change later without that extra spend coming out of the budgets of some other companies, because every company that's using those two wants to show return on invested capital to their shareholders. And so they've got to figure out, well, where are we cutting? And so that's another thing in the background that's the negative of this, of some companies are going to suffer because the money that would have been spent with them is going to go to the likes of OpenAI and Anthropic.
- [32:56]
A
As you've always said, Dan, you need to be nimble and you've laid out a lot of the factors that you're watching for and the upside and potential pullback ahead. I just wonder in light of all of that, whether, and I know everything's got a price and we need to wait to see what the price is and with it the demand. But whether the mooted upcoming OpenAI IPO might be one of those moments that you're looking at as a moment to switch from positive to negative outlook for all of this stuff.
- [33:28]
B
Or you could look at and say, hey, gives you a company to short to hedge your portfolio. Right? And so it depends on how you want to look at it. But, but you're right, typically if you have a bellwether name running into problems, it's going to cause issues. And remember, you could, you could very easily argue OpenAI, you know, late last year, some of these issues came from them because at one point the forecast that they had out there was they were going to spend 1.4 trillion in capital commitments over eight years. And you're going, how are you going to spend that much when your revenues at the end of last year were running at 20 billion? Where are you going to come up with that money? Especially when your cash burn gets worse before it gets better? And that started the shakeout in some of these software names, obviously, like an Oracle as an example of that. But could that get a whole lot worse? Yes. The other thing is, to your point, you've not only got OpenAI, probably going public, you've got SpaceX and you've probably got Anthropic. And so those companies are going to come out all at trillion dollar probably plus valuations. That money's got to come out of some other names. It's not like mutual fund managers are sitting on a lot of excess cash. They can't buy charter, so if they want to buy that, they're probably going to have to sell something else because these aren't the normal small IPOs. We're talking about huge IPOs and they're going to be a big portion of the indexes that these managers track against. And so they're going to need a weighting in those names. But the fact that those names are going to enter a lot of these indexes a lot quicker than normal means that the weightings of these other names is going to go down. And so there's going to be a. It's going to be interesting to see how this works because if you're a bull, you can say, oh my God, you know, these companies are going to get public and then everything's going to go up together. If you're more going a lot of these stocks like it doesn't, to me it doesn't make sense that the stock market's at an all time record high and oil prices are up 60% this year. And the bond market we saw last week, the 30 year yields and the 10 year yields hit the highest levels for the year. Like one of those is wrong. And so all of that combined with what you rightly brought up with the OpenAI IPO, SpaceX, that should come out sooner, we're going to see how that impacts the markets. And some of this is you have a theory and then you'll see how the stocks react when these events occur.
- [36:13]
A
So in light of that trio of unsustainable factors, oil prices high, bond yields high, stock prices high. Should people have higher cash weightings than
- [36:25]
B
the normal right now, 100% like at the end of March. Obviously as I wrote, history may not repeat itself, but it often rhymes. I thought that was a good time to really get aggressive right now. If you're right, and you very well could be that this is going to take a lot longer for this situation at the straight of Hormuz to get sorted out, then you're going to see stock prices collapse to catch up with where bond yields and oil prices are. I don't think that's the case. But you know, right now I'm viewing things as you should be sitting with a lot of cash. You should be very nervous on how this ultimately gets resolved because the first thing I do every morning is I look at where are oil prices and where are bond yields and where's the stock market. And then for me it's always about risk versus reward. And right now I go, one of these massive markets, asset classes, is wrong. And that could cause a lot of disruption when one of those potentially reprices to have things make more consistent sense. Now, on the positive side, on Friday you should get a new head of the Federal Reserve. Kevin Warsh has talked about thinking rates should be lower. Rightly or wrongly, he's looking at AI as a deflationary force. He's looking at trimmed, mean pce. I always like to joke, you know, if you narrow the scope of what you're looking for enough, you can always find something that supports your case, right? That has inflation at about 2.4% versus over 3 when you look at core PCE. So we'll see how things go. But really, since the end of 2022, the market's been driven by two factors, right? Easy money by the Fed. Well, that certainly looks like it's going to continue as of Friday. And AI, and as we've talked about earlier, that seems like it's going to continue. So that's why that famous saying goes, right? The market can stay irrational for longer than you can remain solvent. And so you could see it continuing to be irrational for a while as long as those two twin forces of easy money and AI or powering it.
- [39:00]
A
It's interesting though that you use the word irrational for stocks to do well when you're so constructive on the underlying theme behind them. It just kind of, I guess, speaks to how long this rally's been going on for, just to dwell on rates a little bit. Easy money from the Fed, Kevin Walsh taking over. Totally get that part. When you talk though about high bond yields, what is the maturity that you really look at and the level that you really watch out for for levels that would worry stock market valuations? Is it. I mean, it's interesting, by the way, because the UK 10 years already up at 5%. So the sort of 4.3, 4.4 level of the US 10 year is some stuff of dreams for people over here. What is the key level where if we continue to rise past it, on what maturity that you would be worried about?
- [39:55]
B
I mean, I look at them all, there's not one answer. So I look at the two year because that's typically what the Fed focuses on. There's sort of the mantra on Wall street that the Fed funds rate will converge with wherever the market is pricing the yields and that's the two year. And so I watch that and if that continues to rise and I go, well, that means the Fed won't be cutting, they might have to raise, which obviously that you can make a good case for the need to raise rates right now, right? Core PCE is nowhere near 2%. It's over 3%. With oil impact seeping through the economy, that probably has more pressure to the upside than downside. So I look at the two year for that reason. But then the real key is what do people think the long term impact of these things are? And so that's why I move up to the 10 and then the 30. And also if you tell somebody, hey, instead of being in the stock market, you could get near 15% yields, well, which one would you pick? Right, that's, that was the situation when I was in college back, you know, in the 1980s. Well, it's obviously not 15% but at 5%, which is where the 30 year just hit. So you can get a guaranteed 5% return for 30 years. Well, that's a lot better than where it was during COVID So at what point do people say or the 10 year, right? And as you said, the UK's got much even higher rates. Like when do you say, well, you know what, I'd rather get that guaranteed return over 10 years or two years. Or you pick your favorite maturity, because I'm getting older, I'm going to retire, I live through 01 02, I lived through 2022 or I lived through whichever time period you want, right? The late 80s, et cetera. And I just don't want to have all that wealth eviscerated because if you look at what Warren Buffett's done, and the Berkshire Hathaway annual meeting was just recently, right, he's sitting on record levels of cash and it continues to go up because he's looking at some of these longer term metrics and saying the valuations make no sense and I'm just going to keep raising cash. And you brought up a good point, right. There are these things I worry about, but in the short term, which is very different than the long term, the short term momentum is to the upside. I mean, it's shocking like even today, right, oil prices are up again and the stock market, at least when I was just looking at it, pretty much didn't care. And so that's why I, I'm reminded of the late 90s like 1999, where I go, yeah, I thought stocks were expensive coming out of 98 to 99, and then 1999, they just exploded higher. And so that's why I think we've still got some more room to the upside in the short term. But, you know, as you said when you started this podcast, you have to be nimble and look at, you know, what does oil do, what do bond yields do? And then what does the stock market do to figure out, well, what's the market thinking? What's the market focusing on? Because, you know, the market gets irrational and it'll stay irrational for a long period of time. And I think you're kind of in one of those phases, but you do have some fundamental underpinnings that can kind of support that, much like in 1999.
- [43:32]
A
Dan, I wanted to ask as well quickly about your view on quantum computing, because we talked about some of the biggest IPOs coming, that there's going to be a few quantum computing relating IPOs which obviously won't reach the hundreds of billions or the trillions of dollars, but they'll attract attention to quantum. Is this something you really buy into? What are its implications, I guess, for the broader tech and AI trade?
- [43:59]
B
Yeah, I'm a huge believer in quantum. I think we're going to get there. But there's the famous Bill Gates quote that technology is often overhyped near term but underhyped long term. And I think quantum kind of fits into that category. I think it's going to take longer to get there than what we imagine. Don't Forget the earliest AI papers were written over 50 years ago. When did ChatGPT show up? End of 2022. So I think with quantum it's somewhat similar, but I think when it does hit, it's going to be like the Internet, where again, the earliest papers were like 50 years before that came about. And it's going to revolutionize everything. And so we'll see how these IPOs come out and how they do. But you know, there's the bullish side of it, which is you go, oh my God, people are going to have to invest in these quantum computers. There's also the bearish side of it is if you can do all this stuff with a quantum computer, then classical computer demand is going to fall off. And so that's going to be the interesting push pull of quantum. But it's an area where we've got some investments in right now. You know, you always want to think through the timing. Obviously some of the Quantum stocks were a lot higher a few years ago, they've collapsed. But I do think with some of these IPOs, it's going to draw attention back to the space. And much like with AI or much like with the Internet back In the late 90s, this is something that's going to change the face of technology as we know it over the course of the next several years.
- [45:41]
A
It's interesting though that we started comparing it to 97, 98. If you had to guess or kind of tie yourself to a year comparison now it's more likely 98 than 99.
- [45:56]
B
Yeah, I 100% think so. Because remember, you didn't have something like an agentic AI during the Internet build out. There wasn't something new type of version of the Internet that came out that then all of a sudden caused a step function increase in the amount of capacity that you needed. In the case of AI, you have a step function change, it's 10 to 100 times more. Now. Obviously costs are dropping a lot underneath that as all this infrastructure gets put into place. And so it's those two things. If you look at what happened in 0102 and why the NASDAQ went down 78% from peak to trough. The reason was people were building, assuming that Internet traffic was going to double every three months. What happened was Internet traffic doubled about every year. It slowed down to those levels and then that forced a repricing on everything underneath what you have right now is agentic AI is driving a 10 to 100 times increase in the number of tokens you need if you switch from a chat based AI conversation to an agentic platform. So that's why I'm looking at this and saying, do I think, you know, stock prices in certain areas of semiconductors have gone parabolic. Do I think that, you know, people thinking these, the sector is not cyclical anymore are crazy? Absolutely. But you know, I was thinking that in the late 90s as well. And so. But don't forget the massive moves we had and then what happened even at the beginning of 2000. Right. I think, you know, the, the Nasdaq I think was up another 20% at the beginning of the 2000 period. So. But this is why I think it's more like 1998 in the sense that you've only are entering year four of this build out and you have this huge step function change in what you need because of this thing called agentic AI which just started at the beginning of this year. And that's why I kind of go well, the growth rates are going to continue to look astronomical until you anniversary that which is in the beginning of next year. You know, be nimble. I think there's a phrase out there that says have strong convictions but loosely held. And so look at what happens, but then look at how the market reacts to what happens, because that's what's important. And that will tell you when people's mindsets have switched to from oh my God, this agentic AI thing is really wonderful to oh my God, the cash flows of all these companies are dropping and OpenAI or somebody else has got an issue and this is about to fall off a cliff. And so my advice would be just be nimble and don't get too greedy on the way up. And that would, I guess, be my best advice.
- [49:15]
A
Dan Niles, always a pleasure. Thank you so much for joining us once again on the Master Investor Podcast.
- [49:22]
B
Thank you for having me on Wilford.
- [49:24]
A
Next week on the Master Investor Podcast, we will be speaking to the Chief US Equity Strategist at RBC Capital Markets, Laurie Calvert. Please do hit follow or subscribe on your podcast app to make sure you receive that and all of our future episodes. But for now, our thanks again to the one and only Dan Niles.
- [49:43]
B
Thank you, Wilfred.
- [49:45]
A
The Master Investor Podcast is sponsored by Elseguard Interactive Brokers, the World Gold Council, and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. This podcast is produced by Paradine Productions and Master Investor limited In association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.