Odd Lots - James van Geelen on Thematic Investing Right Now

Episode Date: July 12, 2024

James van Geelen, founder of Citrini Research, scored big when he made his weight loss drug-related investments last year. He was also early into artificial intelligence investments, making bets on picks and shovels plays, like Nvidia. So what's interesting him right now? And how does a thematic investor grapple with uncertainty from things like the upcoming US election? We talk about the next stage of AI investing, constructing election-related portfolios, going long water, and more.See omnystudio.com/listener for privacy information.

Hello, I'm Michelle Hussein, and for more than 20 years, I was at the BBC. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast, speaking to people from Nigel Farage. To love you trying ever so hard. Russian needs to be taught a lesson. To tech journalist Karaswisher. And the tech industry is running wild.

You know, they've gotten what they wanted and they've seen a huge run-up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to the Michelle Hussein show from Bloomberg Weekend, wherever you get your podcast. You certainly ask interesting questions. Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Wisenthal.

Joe, do you think it's fair to say that things seem a little uncertain at the moment? Well, yes. What do you have in mind? Okay. Well, of course, yes. And big things going on. So I was thinking particularly of three things. Okay. So number one is obviously U.S. presidential elections. And things seem very uncertain on that front. We're not sure who's going to win in November. And more than that, at this point, I think we're not entirely sure who the Democratic candidate is going to be. There's uncertainty there. But then secondly, there's uncertainty about the direction of the stock market in a number of ways. So we have seen some of the air kicked out of the tires of big outperformers from earlier in the year. I'm thinking specifically of Invidia and some of those big tech companies. They've come down recently. There are people talking about how AI is the future of, you know, industry, but there are also people talking about

how AI is a massive bubble. And I think Goldman Sachs had that analysis out earlier this week talking about how there was no actual use case for AI, which seems to be the polar opposite of some of the enthusiasm in the market. And then thirdly, we still have that underlying economic tension where it seems like there are some signs of a slowdown, but the Fed so far is kind of resisting any pressure to cut interest rates. So lots of things up in the air at the moment. Yeah. I mean, like you said, uncertainty is always with us in the market. But there are some really big questions about things that are going on. The AI one in particular, because a lot of people, as you know, it's like, wow, they're really spending a lot of money on all this chips and

electricity and the payoff is ambiguous. And so there are a lot of questions about that. clearly the political landscape, although, you know, on questions related to the market, look, the stock market has done really well under Joe Biden. It did really well under President Trump. Seems to mostly go up over time. But yes, the age of uncertainty, I would not disagree with you. So all of this had me thinking, you know, if you're an investor and particularly a thematic investor at the moment, I think you're facing some tough choices because it's not just a range of uncertainties. In some respects, it's like polar opposite. outcomes. Either you get Trump and everything that comes with it or you get Biden and everything that comes with that. And some of that is very different. Totally. Well, the other thing that I've been thinking about and the AI conversation really has driven this home, which is that if you're a discretionary investor, now me, I'm just spy and die all the way. So I don't have to think about all this stuff because I own NVIDIA and through my S&P 500 index fund. But if NVIDIA falls out of favor and

something else rises, well, I'll have that too. So I'm spy and die. But I understand that some people have to like beat the benchmark or beat the index or justify why someone else would pay them fees to invest money on their behalf. Then of course, you really have to get the call correct because the only way that you beat the market over this year or last year is if you've got the AI call. And if you weren't heavy on Nvidia or some of these other names, you almost certainly did not justify someone paying you money to invest. And so these are really tough questions for investors who have to do well, so to speak, relatively to answer. Yes. So I am very pleased to say that we have the perfect guest. We are going to bring back on James Van Geelan. He is, of course, the founder of

Satrini Research. We spoke to him last year about one of his big investment themes, which at the time was Ozempic and the associated GLP1 weight loss drugs. That was a huge winner. in the month since. We're going to get a handle on what he's looking at now and also his thought process for developing new investment themes at a time when a lot of things seem to be very uncertain. So James, thanks so much for coming back on all thoughts. Thanks for having me back. What are you looking at nowadays? Let's start with the easy question. Yeah. Well, you know, AI obviously is a huge theme in the market and I think heard of it. Yeah, have you really? Yeah. It's this little thing.

But I think that the most important way to basically track this theme is it's one of those technologically innovation-driven kind of themes. And the way that I view thematic investing is along this spectrum of you have disruption or continuation, and then you have macro drivers or microdrivers. And I'm not talking about necessarily macro and the sense of macro economics, but demographics shift. even like consumer attitudes, the Overton window shifting, just big things changing versus big things staying the same. So over the past 12 months, you know, there have been probably 10 or 12 themes that I think have really made themselves known in the market and the way that assets move. And right now, there have been a few that I've probably overstayed my welcome in. I think that some of them are getting a little bit frothy.

Yeah, you were early to AI, right? Yeah, and that's one of the risks of doing this kind of investing. You know, there's a great quote from Robert Schiller. Nobody has ever made a decision based on a number. They always need a story. I don't know if that's the exact quote. But another one of my favorites is Kyle Harrison said that price is a number today multiplied by a story tomorrow. And the way that I view investing is it's always going to prioritize a good story and a good narrative.

And that's what has the making of a theme because you need people to make the decision to execute a trade and move price. And then you also need on the other side something to actually happen in the real economy. And as far as artificial intelligence, this kind of fast-moving, innovative theme that we don't really, you know, you can say, what is AI going to look like five years out? and you'll get five different answers from five different people. And I started from a place of, you know, which became consensus very quickly, the picks and shovels, right? And then the picks and shovels are the picks and shovels. And then you get this thing where, you know, during the gold rush, it wasn't just everyone showing up to sell picks and shovels, you know, just everyone waiting there until the, so we have to kind of look now for this controversial thing of, does AI have use cases?

Right. And I think it's pretty clear that it does if you're looking for it. But in terms of like monitoring the way that it's going to progress, I think the biggest component here is going to be going from B to B to C. And what I said about two months ago was that the company that was going to make this really happen, it's not going to be Microsoft with chat GPT and OpenAI I think it's going to be Apple

and if any company can get it done it's going to be Apple and you have this kind of dynamic where you need something to happen that forces people to use it right? It's kind of like Facebook or social media

in general where you know there's only so long you could go without being connected to everything and everyone and Apple is you know have you ever texted someone like hey I'm coming over and then you get in the car and if it connects to car play it'll give you a notification that says like you know directions to Joe's house yeah your phone knows everything about you right and your phone knows who you are it knows what you're doing it knows what you want to do it knows who your mom is and that information combined with Apple's trust and the consumer trust and the idea that they place a high premium on privacy,

you can't have this AI assistant that knows everything about you if you think that it's going to be stored on a server in Cooper Tino. It needs to be on your phone. So the next thing is how do we start having these big models that are trained, you know, that are trained in these very big data centers and, you know, all this CAPEX that spent on that, now we have to, just like every other technological trend, we have to miniaturize it, right? And we have to basically have your phone doing inference, you know, sending to those models, but also these smaller models. I mean, can I push back on that real quickly?

Sure. Because I've given up every piece of information about my entire life already to the Internet. And it all, yeah, of course I have, just by existing in the world. Right. I mean, I'm not, and it all exists on servers somewhere. in either Cupertino or Amazon servers or whatever. What is it about AI specifically that changes that need? Because like I said, I've given, I don't want to,

but just the reality of life in the world is, my information's already out there. So AI has two sides, training and inference, right? And you can train on, you know, all this data that you've already given up to the faceless kind of entity that controls the world. but what AI brings about is in real time drawing conclusions from that data. And it's two-sided.

There's convenience and then there's privacy concerns. And I agree with you that convenience definitely outweighs privacy concerns when it comes to the consumer. But when you have this ecosystem that Apple has created with this walled garden, and then you kind of alleviate the privacy concerns and you have this constant inference that's going on. And there will come a time where, you know, you'll be walking down the street and you'll say, I just called Tracy, you know, a week ago. What did we talk about? And when did we say we're going to meet? Okay, can you text Tracy and tell her? Actually, I have a thesis that just got destroyed, so I don't really want to talk about that one. And, you know, can you text Joe and let him know too? And then can you look at my calendar? When am I available? You can be walking down the street.

Yeah. And the productivity gains from your phone doing. inference and inferring what it knows about you from that data. That's huge. Real quickly, so you mentioned the picks and shovels, NVIDIA, then the picks and shovels who provide the picks and shovels, then people got to tell you about Super Micro and the RACs and maybe Dell. Super Micro, I never heard of it. I've heard of it. Just so we're clear, your long Apple. Yeah, any name that I mentioned inherently, I'm automatically going to be longer short of that name that yeah you mentioned the privacy concerns and I just thought back to this moment my husband and I were in our kitchen and we were talking about something really innocuous like corn or something

and suddenly Alexa started telling us a joke about corn and like we hadn't said Alexa or anything like that it just started talking like clearly had been recording everything that we were saying and I I will admit that that was that was kind of a jarring experience I would be less surprised if my Apple phone did that versus my Alexa that I use to turn on the lights and things like that. Yeah, it turns out that large language models are really good at language. Surprising. I think that the next kind of picks and shovels idea, the thing is everyone's always, well, what are we going to invest in that's doing the use cases? And then those same people will come around and say, why are these five stocks driving the entire market? And the thing is,

the latency between a company starting and becoming successful and doing an IPO has gone a lot longer in the past like two decades. So if you're a public equity investor, you might not really get to, the use cases that you can invest in are those five stocks. And combine that with, you know, everything else. And like you said, the uncertainty. When there's uncertainty, people tend to crowd into things that they know are going to work. I think that really the picks and shovels thing will probably play out again, but when it comes to edge AI and doing inference on device and kind of, I mean, this is probably a controversial statement, but I think that we might see the first real true replacement cycle, like real replacement cycle where Apple comes out with

the new phone and it has all these productivity gains and it has all this new hardware and it can do these things. And if you don't have that phone, you can't do it. And it becomes kind of like that sci-fi movie Gattaca, where, you know, if you're, if you're, if you're, yeah, if you're left out, you're just, you're just left behind. I've been wondering about this, because at some point in my life, it stopped being important to upgrade. I mean, at some point in my life, it stopped being important or interesting to even tune into, like, the new Apple events, and those used to be big events online, and then people stopped. And then at one point, if someone asked me, what iPhone do you have, I would have told them the answer, I said, oh, the iPhone 5,

whatever. I have no idea which one I have right now. I got it a couple years ago. It does everything I need. I've zero idea which one it is. So I've been sort of wondering, yeah, so you think that there's the potential at least for some unlock of new capabilities where the people who don't have that new phone actually feel, oh, I really just can't interact in the same way that people who have it do. Yeah. And that kind of replacement cycle drives that new picks and shovels thesis where you're looking at all these kind of, you know, system on chip names and that's where I see this theme that, you know, everyone is talking about going. But the thing about thematic equity is that if you let it, it just becomes momentum investing. Because themes are stories and stories translate into momentum very easily.

And when people do an association with momentum, they're always thinking about kind of momentum in a market like what we've been seeing. And, you know, that's not the case at all. There was plenty of themes in 2022 when everything else was going down. I mean, tech going down was a theme, you know, the interest rate hikes, the inflation for the first time, that, you know, that's a theme, that's a story that grabs people's attention and makes them go to their terminal and execute a trade. And same thing with energy and, you know, the war in Ukraine. And so I try my hardest to, it's super cliche. but think a few months ahead at least. Join Bloomberg in New York or via live stream on May 19th

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This event is proudly sponsored by Kindrell. Register at Bloomberg Live.com For something like the U.S. presidential elections, you know, again, things are currently up in the air and you can look at the polls and have a sense of who might have a lead, but overall it's pretty difficult to tell who's going to be in office come next year. How do you start preparing for something like that from an investment perspective? So if the question, how do you start preparing it? The answer early, early, you start preparing. early, right? I don't think that, you know, was anyone surprised that we have an election this year? Yeah, some people, you know, some people really are because of how few people have been paying attention. I mean, that's, it's one of those things where I think it's like when you're a kid and you touch the stove and you get burned and you're, well, I'm not doing that again. That's how I think

the 2020 election was for me. So as soon as I saw that the year was an election year, I started kind of preparing for this. This was back in January when the odds of Trump even being a nominee, right, or like being the Republican nominee were like 20%. It was relatively easy back then to look at these very kind of exposed equities and say this is a swap, I guess, on Trump being a nominee. So I've seen some sell-side research about who would be exposed. One clever one, the company five below. He sells a bunch of cheap stuff, which you can't sell cheap stuff if there's a massive tariff tariffs on cheap stuff. And that stock has been, well, that's a total dock. That stock was over 200 back in March, and now it's at 102 at the time we're talking about this.

What stands out to you as being exposed? Depending on what the theme is, I create either a long, short basket to kind of gain exposure. Because I don't ever want that kind of idiosyncratic, like, single name equity risk where a company ends up doing really well. and it has nothing to do with my actual thesis. So I constructed a basket that kind of played on a few different themes. Tariffs was a big one of them, right? So you look at how much comes from China. First you look at Trump's what he says, right?

100% tariffs, 60% tariffs. And the thing is protectionism from China trade, that's not a partisan issue anymore. Right. Right. There are no China doves in the government. But Trump is certainly a unique brand of that when it comes to the trade policy. So that seemed like the most asymmetric way to kind of capture that. So you look at five below, for example, restoration hardware, floor and decor, you know, Best Buy, these companies that really do a lot of business when it comes to China.

And that's a lot of their input costs. And tariffs really would affect them. And that's your short side. And then you say, okay, well, who is going to be all right? here and that comes down to pricing power you know if consumers start consolidating their spending because of tariffs who can kind of keep that pricing power regardless and like Costco Walmart some of the automotive parts like O'Reilly that's your long side so that makes up one component of the

basket and then move on okay and the thing is for the past three years one of my exposures to a theme has been bytonomics So, you know, that was big on electrification and infrastructure spending and generally fading the idea that we could have a recession when fiscal policy is spending like a drunk and sailor. And we said, okay, well, now we need some kind of offsetting beta here. We need some Trump beta. And there are these orphan equities like Fannie Mae and Freddie Mac. And, you know, I looked at the story and I said, I don't think that that's going to happen. He didn't do it the first time, but it doesn't matter because it's a story.

So people are going to take action based on that story. Then looking at things like private prisons and law enforcement. I remember that from 2016. That was like a big Trump winner. Yeah. But that was when I was kind of looking at this, that I think was the first place that I start is basically sell-side research just to see what is being said. And there were a lot of kind of, well, here's how, you know, these equities performed when Trump was president.

Here's how they performed when Biden was president. And if you go into anything like that with that kind of thinking where you're just overfitting to like two periods of time. I mean, when Biden was elected, if you had that kind of thinking, you would have went long, clean energy. Right. Which some people did. And short oil. And you would have gotten destroyed because like no matter who's the president, they're going to be bigger forces at work. So you really have to try to specify and get rid of as much.

incongruous kind of correlation. So names like Axon or Geo Group or, you know, Core Civic, those will probably benefit. I had kind of a fun one that was a company that makes the storefront glass for retail stores because I figured no matter who wins this election, there's going to be people that are angry. It's funny you mention Fannie Mae Equity because it still exists there. It's like that cockroach. But I've always thought that it's like the boomers crypto. It's like that. It's like, if you look at, like, there is a Fannie and Freddie Twitter. Yeah.

And it's like they talk the same way that people are talking about the random tokens. But their money spends just as well, right? And it moves the bid up. Yeah. So I think that I came into this year all prepared, right? Here's how the basket is going to look. The thing that really made me the most satisfied about this, I mean, the basket has done quite well because Trump odds went from 20% of being the nominee to, you know, 63% of being the president. president and the performances tracked that pretty well. And there are a few other aspects of that

basket, but the thing that obviously didn't make me happy because something that I owned went down, but right after that debate, which I think, you know, there were a lot of people that were surprised by that. And I guess you could, if you were drawing a chart of like, should I be concerned about Biden's performance in a debate? After the state of the union, you, you know, maybe you had some moments where like he's talking about you know where's that lady that and the lady died three three weeks ago or something or or you know there were signs there were signs but you know i wasn't necessarily surprised by that and when that happened the binomics basket you know goes down by five percent and then the trump basket goes up by 10 and you know that's kind of reinforcing

where it shows you that you know you're not just writing beta you've been allocated to the right thing I was going to ask how you weight those respective baskets, like a Biden long short basket versus a Trump long short basket. But maybe you equal weight it and then the returns are asymmetric, as you just mentioned. Yeah. There's some discretionary aspect where I think that, you know, something matters more than or that investors are paying more attention. You know, I don't, I didn't think back in March that this tariff aspect was getting as much

attention. I figured that would kind of progress and get more attention as the year went on as Trump said more about trade policy, whereas something that's, you know, his first order thinking is, you know, if Trump's president, we're going to need more, you know, border prisons or, you know, that. So the waiting kind of changes throughout the course of the narrative progressing. It's kind of weird, like going back to, if we had a 100% tariff on imported goods, and this is a little bit of a sidetrack, I feel like that would be incredibly disruptive to the way we do economics in this country, and I don't have any opinion on whether it be good or bad. I'll leave that to

others. It is sort of funny to think we're going to have this big tariff, this big change in how we interact with the world, and so we're just going to take it all out on, you know, $5 billion company five below. Like, I just have a feeling that if we did have this wholesale reorientation of how we trade, like, they're not going to be the only company that it's affected. And I think when people kind of look at, when I share my portfolio with people, which, you know, I know some people are kind of neurotic about that, but I'm not big enough to where I think that someone's going to, you know, attack me. But when I show my portfolio to people, they are kind of taken aback by how many securities are in there. But the way that I view it is, you know, I have diversification at the security level, but I'm very concentrated in these themes. And the thematic level.

Yeah, so like GLP1s might make up 15, 20% of the portfolio, but it's not just Lily. And it's not just Novo Nordisk. It's also, you know, something like Torrid, which is a woman's kind of fashion for plus size clothing. But you would be short that one. No. Oh. Well, think about it, right? You don't teleport your weight.

Hmm. If you're 300 pounds and you go down six sizes, first off, you're happy that you're losing weight, right? So you want to show that off, but you're still plus size. Oh, I see. Okay. So you're buying clothes the whole way down. Ah, all right. And then there is, in fact, you know, like this is like well documented.

There is a rebound effect from GLP1 drugs. If you stop them, you regain a portion of the weight. Oh, so it's actually like the weight fluctuation that matters here. Okay. I mean, if you know anyone that's overweight that struggled with their weight, they have these closets full of just, you know, various sizes of clothes. So, you know, but the general idea is applying second order thinking to capture a theme in not just the most obvious way, because that's going to be the most crowded way.

And that's, that's like I said before, you really want to try to not just have this be story-based trend of following. Yeah. Wait, I love talking about second order effects. And I have a bunch of favorite examples that I have probably said on this point. podcast before, so I'll spare all our listeners from repeating those. But do you have a favorite sort of second order play? I want to hear yours first. Well, the one I always think about, well, there's the gummy bear one, and then there's also like the sawdust one. Got gummy bear? Hold on. I'm going to have to look this up. No, I remember what it was. Oh, do you remember the gummy bear one?

Yeah. Do you remember both of them? Yeah. Oh, okay. Well, I don't remember the sawdust one. I'll look up the sawdust one. It has to do with chickens or something like that, and there wasn't cows and milk. Right. So after the housing bus, then there wasn't enough wood and there wasn't enough sawdust and that wasn't good for cows and then that wasn't good for milk production. So no one would have expected as a result of the 2008 housing collapse that you would see milk prices go up because there was less milk. But apparently that's what happened because the cows didn't have as much sawdust. They weren't as comfortable. They weren't as productive. And so there was less milk.

And then what was the gummy bear one? The gummy bear one was that this is what someone told us, that due to the collapse, an auto production during the pandemic, that there wasn't as much demand for leather, for the seating, and that a lot of the, I guess, gelatin that was needed for gummy bears came out of that supply chain or something like that. And so it affected gummy bear production when the chip stopped coming. I mean, I would love to meet the person that predicted that. Yeah, right. Right? If you, and so when it comes to what I do, there is kind of like a, you get kind of deferred in your ability to be like, yeah, called it.

You know, because I don't forego security analysis entirely. I don't, you know, I make sure that if I'm shorting a company that it's a bad company or if I'm buying a company that it's mispriced and, you know, that it has upside. So you never really know for sure. And sometimes even, you know, they'll get on the earnings call, especially if it's like a short and you know what, or you think you know why it went down. You know, this is like the last time I was on, we talked about the Titan stapler. Oh, yeah.

Right? And obviously they eventually started saying, well, this probably has to do with those weight loss drugs. But, you know, in the beginning when it's going down and when the company's, you know, seeing decreased revenue, sometimes it takes them a little bit to, like, realize what's going on. And sometimes they never do, you know. Well, I remember that about restoration hardware, too, because it started going down like a year or two ago and people were worried about, like, oh, this is a recessionary signal. And I remember saying this online and basically saying, well, maybe it has more to do about with restoration hardware specific things and issues there rather than macroeconomic conditions. And people went nuts.

But that's exactly what it was, right? Like the renovation boom and the furniture boom continued for some time after that. Restoration hardware, yeah, it wasn't a recessionary signal, but there is a great signal to be had in the story of restoration hardware, which is if you own a company and the CEO starts coming on and spends head. at the earnings call talking about macroeconomics. Oh, yeah. Sell that company. That's a bad sign.

That's a good. Yeah, there was like a famous conference call, and it was right in 2021. And it was sort of like an equivalent of, although one of the best moments on TV ever, like the Kramer, they're nuts or whatever. They're blind at the Fed in 2006 or seven about Bear Stearns. And he went on. He's like, they have no idea what's coming on. Recession, recession, recession. A bunch of people took that seriously, but it seemed like a restoration hardware story.

And then the rest of the economy just kept chugging along. There are times when uncertainty kind of rears its ugly head and does wreck some investment theses. Maybe wreck is a strong word, but I know you were, for instance, looking into how to play water and water shortages in the future. But lo and behold, a couple weeks ago, the Supreme Court made a decision having to do with something called the Chevron deference that seems to have caused additional uncertainty for that particular thesis. Can you walk us through what happened there? Well, first off, water in the realm of thematic equity, water is waterloo kind of, it's this battle that it's always a good idea to be long water if you think that GDP is going to go

up. Unless you're in China, where water use is actually declined as GDP has gone up because they've been really serious about efficiency. But the idea is if you buy water, you're never really going to blow up, you know, unless like real, unless it's like global financial crisis, you'll be pretty safe. You can, there's always going to be some doom and gloom about water. So if you get on the phone with an investor, you can say, well, we own water because of, you know, here's this big report from whatever, you know, the, and it says that, you know, water scarcity and this, that, and the other thing. And you ever see, well, you guys obviously have. You've seen the movie the big short, correct? Yes. So you know how that movie ends. The last scene,

Oh, yeah, and I didn't understand it. It was like these title cards. Right. And they're like, and next water. And then it fades to black. I was like, yeah, and then he's like, oh, and he's buying almond farms. Yeah. And I was like, they like left it hanging.

I was like, yeah, I didn't get it. That was Michael Burry. Yeah, that was Michael Burry. And it's like, and now next, water farms. And then they fade to black. We're just ending to a movie I've ever seen. Yeah. I think like when the levy breaks is playing in the background.

And, you know, but it's really dramatic, right? Yeah. Michael Burry, you know, our protagonist is only investing in one thing, ellipses. Water. Yeah. And, you know, that's the way that this thesis has kind of been presented for decades, where it's this kind of apocalyptic. You have this idea in your head where, I mean, everybody has this.

And it's like an evolutionary fear. The water has to be okay. The water quality has to be okay. And there has to be enough of it or else we can't do anything. So it's always been that kind of thing and I really Didn't want to just write about water because it's like a well you know here's what's going on with water So I wanted to focus on the non-apocalyptic parts and I don't want to buy anything because of pessimism I want to you know and what had happened was

These microplastics these forever chemicals the EPA handed down a law that mandated that that that you have to control the level of microplastics or as their, you know, PFS, right? So I spoke with people in the industry and everyone is really, really excited. If you are in the business of, you know, remediation or, you know, making sure that the water is clean, you were really excited about this and probably still are. But the thing about thematic investing is that uncertainty is kind of anathema to it. where people want to buy on a story. You know that Drach and Miller quote,

I made 120% of my money on the simple, obvious ideas and lost 20% on everything else. And that's kind of the way that I viewed these themes where you want this cultural touchstone, you want everyone to realize that, oh, this is going to be big, this is a big deal. And whether that's, you know, in a niche area or in a wide-ranging area,

that is less important. But it has to have that moment. And when you have something that adds uncertainty, even if you disagree, right, when it comes to what happened with the Chevron deference, in the simplest possible terms, basically, the stated policy has been for the judiciary to defer to experts. So if you have, you know, an expert. In the federal bureaucracy. Yes, exactly. And obviously, the campus small government doesn't love this because they view this as, you know, unelected technocrats that are kind of driving. policy and what happened with Chevron deference was for a long time if you had the EPA saying,

no, this is bad. They would say, okay, yeah, probably, you know, you know more than I do. Right. Now with this ruling, that is not the case anymore. Right. And that has wide, wide ranging impacts that I don't know, because I am not an attorney. So the basic just with water here is that, okay, there was a theme, not the apocalypse end of water, but this, persistent demand for water cleaning due to microplastics. The EPA had put down this rule, and the Chevron ruling by the Supreme Court raises ambiguity about the teeth of that or the enforceability or the persistence of that, and this is the kind of thing that's toxic to a thematic investor. Yeah, and, you know, I still believe that that thesis is fine. I mean, I look at it,

and I've spoken to attorneys, and they say, well, you have these two existing appeals, but this happened before the Chevron deference ruling, so you have to track those appeals, but that's the only thing that matters. This isn't going to change, you know, whatever was going to happen before this ruling, that's what's going to happen now. If those appeals are, you know, overturned or upheld, that's what matters. And I think that it's still going to work. But the thing is, I was playing the story. And I'm playing the fact that, you know, like a week after I wrote about it, started becoming this like cultural thing you see these memes on twitter about like microplastics and in in certain parts of the male anatomy yeah this goes on the radio so i think we

can't say yeah i mean i i stop myself you're the one that said it um but you know it's the idea where nobody can be okay with the water and there's always been an issue of payers like to see things they like to pay for things that they can see so they like to pay for the roads being fixed or they like to pay for like new things being built but you don't really see the water but with social media and the idea that you can make everyone aware of like microplastics and there's so many emerging contaminants out there just from you know the unabashed capitalist progress and industry so i still think that there will be companies that will make a lot more money because of PFS, but for now I have to say, well, I don't know if the risk is worth the reward here.

Maybe I'll just wait until these appeals are decided and then the story can progress. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews.

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That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. I want to talk a little bit more about the AI story where we started. And so, first of all, Druck and Miller, there were two instances in the last year. He said something about, like, Chad GPT came out. He knew that they were training on Nvidia chips and he went along, Nvidia and killed it. And then there was the story of Javier Miele having one in Argentina and claims that he went on perplexity AI and said, should I invest with Argentina?

And he gave him some ETFs and he bought them and he did well. So much admiration for the sort of simplistic thinking and well done to him. But, okay, the sort of Chad GBT AI and Vida thing, very well known. And now there are all these questions about, okay, a lot of money is being spent on chips and electronics. and is there going to be this payoff or who will get the payoff from that? How do you think about that specific question? Outside of Apple, and I understand your argument about why they're in the position to actually deliver valuable services, in the broader world, businesses feeling like they need an AI

strategy or needing it to like complement their software, how do you sort of begin to answer that question? Well, it seems like the question that you're asking really is, is it a bubble? Well, there's two ways that it could be a bubble, right? There could be people who are just overpaying for the stock because they feel like, I want to ride this wave, or businesses overpaying for the CAPEX because they think that they need to do something with AI to be in the game. And it turns out that maybe they don't. So I'm actually kind of interested in the second one of not whether there's an equity market bubble in AI,

but the question of whether the business investment, which is pouring into AI-related things, will materialize as results in revenues for the company spending. It's sort of the idea that, okay, everyone has to develop their own in-house AI offering to compete. But, like, actually, maybe in five years' time, we find that everyone just buys an off-the-shelf AI thing and plugs it in like they do Microsoft Word or whatever, rather than spend billions on their own thing. And whether the sort of quality of the services that an AI model can produce for the companies, whether it's a software company like Salesforce, or whatever it else, actually turns out to be something valuable that they can resell and capture value from their end customers. So I think the answer to your question, or at least some color on that question, is I don't think that there's ever been a truly revolutionary technology that has not been accompanied by some excess CAPEX, that we look back and we say, well, that was wasteful, right? Because when we look back, we also have the benefit of seeing which areas get commoditized.

And we look at how cheap, you know, whether it's broadband or, you know, you can go all the way back to the railway. Railroads, yeah. Yeah. You can, you know, the thing is, you know, without steam engines, we wouldn't have trains. And without trains, we wouldn't have planes and without, you know. And there was this progress that was made. And it catapulted forward the human race. but that doesn't necessarily mean that they were responsible about it, right?

They built too much. They built too fast. They financed capital projects through equity sales at extremely elevated prices. And, you know, I mean, but that doesn't change the fact that during the railway mania, the total route mileage of railways in the UK went from, you know, like 1,800 miles in 1843 to 6,000 miles in 1840. So 200% increase in seven years. And, you know, maybe we have to ask ourselves, sometimes do you need this CAPEX bubble in order to progress the technology? Sure.

And I think that, yeah, there are certainly areas. And I don't think that we'll know exactly where we say, well, that was irresponsible or where we say, well, that was a great business decision. because you look at, you know, it obviously is intertwined. You can say, well, I care about the KAPX side, but I don't care about the stock market side. But, you know, the companies can sell equity and fund KAPX with that. And you look at some of the sell side estimates on electricity, for example. And I have a great screenshot. Or actually, it might just be an actual picture because I think this was in 1998.

And it's of a cell-side report that is talking about the Infoelectric Revolution and the fact that if everyone is going to have a personal computer and every personal computer is going to be connected to the Internet, well, you know, that's going to be a billion dollars of spending on computers. And then there's going to be a trillion dollars of spending on the electric grid. And the electricity demand is going to grow at a 13% kegher for the next two decades. It sounds very familiar. Yeah. Yeah. It sounds super familiar. And then you look at electricity demand over the last 20 years and it's flat. And I think that that's just a natural progression of a new technology.

That's something that almost has to happen where you have, you know, if you want to deliver the promise in certain places it's going to be overstated. And do we need a better electric grid? Yeah. We really need a better electric grid. It's terrible, especially in some places, it's just terrible. Maybe what we need is for data centers to get better. built in areas where they can just revise the electric grid. But I do think that there are areas

where we'll look back and say that was irresponsible cap-expending. What would you need to see to take money off the table from some of your AI plays? Or have you done that already? I'm always taking money off the table. It's not even a question of like, I mean, my job is to invest, not to not invest. And it takes a lot for me to sell something and go to cash. like a lot. You know, I'm a strong believer that there's always an opportunity somewhere. That got put to the test in 2022, and there were. There were opportunities in plenty places on the long side or the short side. And I think that when I make that decision, I'm not saying,

do I think that this has reached a peak? I'm saying, do I think that there are better opportunities elsewhere? And sometimes that is just the natural progression of some narrative in the market, or just real things happening. I mean, Nvidia has pretty much priced in the idea that we need to build out these data centers, and now we have to say, okay, well, what else are we going to do?

And, you know, I mean, it doesn't matter if I'm a believer or a non-believer. It only matters if the market is. All right, James Van Gila and from Satrini Research, thank you so much for coming back on all lots. Thank you. That's great. Joe, I enjoyed that conversation. I like just thinking through

investment ideas. No, I like that one, just getting to think about, you know, so actually what really struck me was his comment actually in the water part of it. Yeah. Well, what becomes the fly in the oitment of a thesis? And why, when does it become like, okay, here's a theme, but it's just not going to take hold. Yes. Hard enough, so to speak, such that it becomes a real investing theme. And so the idea is like, yeah, there probably is going to be a lot more demand for, filtration in the future to clean the water, but with a little bit of a regulatory ambiguity now in the wake of the Chevron decision, that suddenly, like, this is just not going to take hold the way it might have in a different decision, and therefore it's not going to be quite as

powerful as an investing theme. It's like, it was very useful. Well, I thought the framing of price and story mattering to thematic investment was important because there is a situation where you can be a little bit too smart and you see something that no one else possibly sees and then, you know, that something just never gets reflected in the price. Like there have an instance of that, instances of that throughout history. And so you really need both the, I guess, the underpricing, or, you know, at least the price to be like relatively attractive plus the momentum provided by that story to make really compelling investment. And then if you get something like, Nvidia where, you know, at least up until maybe the beginning of last year, it was underpriced,

certainly relative to where it is right now, plus all that attention from investors, then you get this massive winner. I'm so impressed by those Druckin-Miller comments where he's like, oh, yeah, they used Nvidia chips for chat, GPT, AI seems like a big deal. I'm going to go along it. Whereas me, I'm like, oh, they already know. Everyone knew that they were like using Nvidia chips, so it's all priced into the market, but that's why I'm not there.

a lot of people saying like a year ago that it was all priced in. Yeah, me. Yeah, okay. I hadn't seen that five below chart either. That's no, I knew, so I hadn't looked at the chart in a while, but it really, look, if you have 100% tariff. It's gone from over 200 to like 100 in a few months. Let's just put that there is not much you could sell for $5 and below in the world, in a world of 100% tariffs. Yes. I'm sure there's a pun you could do then about the stock price. being below something. But okay, shall we leave it there? Let's leave it there.

This has been another episode of the All Thoughts podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Joe Wisenthal. You can follow me at the stalwart. Follow Ergis. James Van Geelan. He's at Citrini 7.

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