Prof G Markets - AI Bubble Watch: Has the Hype Gone Too Far? — ft. Josh Brown

Episode Date: August 25, 2025

Josh Brown, co-founder and CEO of Ritholtz Wealth Management, returns to the show to discuss what drove the latest tech selloff and share his thoughts on whether AI has reached bubble territory. Then he and Ed break down the significance of private funds entering 401Ks and evaluate the viability of alternative assets in retirement portfolios. Finally, Josh offers a prediction for the Fed’s path forward following Jackson Hole.  Subscribe to the Prof G Markets newsletter  Order "The Algebra of Wealth" out now Subscribe to No Mercy / No Malice Follow Prof G Markets on Instagram Follow Scott on Instagram Follow Ed on Instagram and X Learn more about your ad choices. Visit podcastchoices.com/adchoices

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FINRA, SIPC, complete disclosures available at public.com slash disclosures. Today's number 20. That's how many dollars. participated in the World Dog Surfing Championships in Pacifica, California this month. The winner was a chocolate Labrador from Brazil named Cacao. When asked how the waves were, Cacao responded, rough. Why am I laughing at that? Welcome to Prof.G Markets. We are back from vacation with one of our worst jokes, possibly in history, but we're very excited about it. We've been out for two weeks. Somehow Scott is actually still on vacation. He should be coming back very, very soon. But I'm very glad to say that we have an incredible stand-in, the one and only, Josh Brown, filling in for him today. So Josh, thank you very much for joining me again on Profugee Markets. Our very first show back, very excited to have you on. I'm so excited to be here.

I wish I were on vacation, but since I'm not, this is the next best thing. Did you take any vacation this summer? I think I saw some stories of you jet skiing around. I don't know where you were. Were you on vacation? That's all day, every day. I'm from the south shore of Long Island. We're born on a jet ski.

But I went to, I did Lake Como and Milan earlier this summer. It was pretty cool. Oh, amazing. What were the highlights from Lake Como? You know what? The lake itself is the only highlight that you need. The hotels are fabulous, obviously. Grand Tremezzo and Pasolqua are two of the most beautiful hotels I've ever seen.

But like, you literally jump in the lake and it's crystal clear, you know, it's a mountain lake and it's pristine and it's worth the trip. All right. Well, I'm glad you got your rest. Let's get into this episode. Today we're discussing the latest tech sell-off and we're also discussing why private funds are entering 401Ks or might be entering 401Ks. So let's get started. Now is the time to fly, I hope you have plenty of the world at all. AI may be hitting its first real war. An MIT study released last week found that, quote, 95% of organizations are getting zero return on their generative AI investments. Adding to the unease, OpenAI CEO Sam Albin recently warned in an interview that we may already be in bubble territory.

Meanwhile, META just announced a restructed. of its AI division with potential downsizing ahead. These reports fueled fear on the market and triggered a sell-off in U.S. tech, sending every mega-cap stock on a multi-day decline. The NASDAQ fell more than 3%. And the S&P 500 shed $1 trillion in value. So a pretty significant sell-off here. We've had three main drivers for the sell-off, three main catalysts.

First were Sam Altman's comments. We're in this interview with The Verge. He said, quote, are we in a phase where investors as a whole are over-excited about AI? My opinion is yes, end quote. That was really what got investors spooked. Second, we had this meta news. It was a New York Times article about meta. According to the New York Times, meta is considering downsizing its AI division. And then third was this MIT study. This report from a research group at MIT called Nanda, this AI research group. And their report found, as I said, that 95% of organizations are getting zero return from their investments in generative AI. So those three stories were really what's set this off. That's what caused this sell-off. Josh, let's just start with your reactions, your reactions to the sell-off that we saw in tech last week.

So these things do tend to happen in threes. So I like hearing you run down that list of, no, I'm not even joking. So one of my formative experiences 25 years ago was, being a young retail stock broker trading all of the stocks related to the original dot com boom and there were there were literally three events that happened all within close proximity to each other that I don't want to say caused the top to be formed and then the subsequent 85% crash in the NASDAQ but they were like the most notable events that happened at the top So we can argue causation correlation.

But like those specific moments, because there's an echo here to what you just laid out, the first is micro strategy, the original micro strategy, not the Bitcoin treasury we know today. Same company, same CEO, had an accounting problem. They disclosed it. And it was like a $400 stock that fell 300 points. It was like shocking to the investor class because they were. trading 50 different stocks like Micro Strategy. I think at that time it was a quote unquote B2B internet software provider. The professor would probably remember more of the details.

But that was notable within that same week or two period, this is March of 2000, Bill Gates came out and said he wouldn't buy his own stock, Microsoft. He was still the CEO at the time. And he was talking about how expensive valuations for tech stocks were. and he included his own his own company of course nobody wanted to hear that you know so you like

you have like these like touchstone events and you can't really point to one of them and say that was the moment but in hindsight you can go back and you could be like ooh that you know we should have known we should have okay so the things that you laid out to me

don't spell a death knell for the AI theme I my personal belief is we could run into the end of the decade at least with all momentum and the money that's been being spent, et cetera. But I think the past couple of days stock price action in the market tells investors how overowned this theme is and how

and how easy it is to now spook the herd. It doesn't take much. Like a rumor of Facebook meta restructuring the way it's doing its AI hiring is like enough to, you know, knock billions of dollars off all these semiconductor stocks and and and uh hyperscaler stocks so i think we're like in kind of a fragile state now and uh i think it's okay like stocks are supposed to be volatile um so the way i'm thinking the way i'm thinking about this is right now if you're an investor or you're a money

manager you should not be out there hunting for your 21st AI stock like the 20 you have is probably good and the last thing i want to say on this if you think think AI is going to be transformative for society. And if you are hugely bullish on the theme, and I know most people are, and with good reason, with your next thought, you should consider the fact that everybody else agrees with you already. Yeah.

Right? There are currently 20 AI-specific ETFs publicly traded. 20. They all own the same stocks. They all own Nvidia. They all own Microsoft. So 20 specific ETFs and all of them have been raising money this summer. 20.

And there are another 10 that are considered AI infrastructure. So like they also own utilities and power transmission lines plus Nvidia. So you got 30 ETFs that investors are using to capitalize on the AI theme. You got Nvidia sitting with a $4 trillion market cap. Broadcom is one of the biggest stocks. That's like the stock that people buy because they missed Invidia. AMD is hundreds of billions of market caps. So, like, you are not, by professing your bullishness for AI, you're not saying anything

that anyone doesn't already know. Yeah. Just go, I mean, I'm glad you said that about these headlines. I see these headlines, and it seems like a giant nothing burger to me. I mean, let's just look at Sam Altman's full comment. So he said, he said, quote, are we in a. phase where investors as a whole are over-excited about AI, my opinion is yes. And that's the part that I quoted, and that's the part that the street's worried about. He then directly followed that up.

He said, is AI the most important thing to happen in a very long time? My opinion is also yes. So, you know, he's just making a rhetorical point in an interview. To me, it doesn't say anything about his long-term thesis on AI. He also spoke, I mean, people are saying in the headlines, I saw this headline on CNBC where it's like, Sam Altman sees a bubble in AI. But he spoke very, very generally about bubbles. He spoke very generally about the idea that, you know, bubbles happen and people get over-excited and, you know, stocks can get ahead of their skis.

It's very general stuff. So to me, that I'm like, okay, whatever. Then you have the meta news. And let me just read you the full quote from the New York Times article. It said, quote. META is also looking at downsizing the AI division overall, which could include eliminating roles or moving employees to other parts of the company because it has grown to thousands of people in recent years, the people said. Discussions remain fluid and no final decisions have been made on the downsizing. So that's what they said about MET. Again, very soft news.

And then this MIT report, I do not understand this. I don't understand since when did a source. small group of researchers at MIT putting together a little research project, possibly by undergrads, I actually don't even know, since when did they become the leading authority on the adoption of generative AI? I mean, these are the kinds of numbers I see in consulting and research reports all the time. You know, these kind of broad numbers, oh, 95% of organizations, they're not seeing a return. Like, I've probably seen that like a million times on the internet. And then I sort of think, okay, so MIT says that, fair enough. But isn't this exactly the kind of thing that investors on Wall Street are supposed to be tracking themselves?

I mean, isn't it literally the job of the by-side analyst to look at the companies that he or she is covering and figure out, okay, this is the return that they're getting on their Gen. I investments. I mean, this is what we're all supposed to be focusing on. And then suddenly MIT comes out and says this little research number. A few media outlets pick it up because let's be honest, it's a fun story. And then suddenly we see this drawdown in the NASDAQ. We see the S&P lose a trillion dollars in value. And I just think it's fascinating that this is what brought down the markets. And I agree with your point where it's like, you know, this indicates that there's a level of sensitivity in the markets right now, which is interesting.

But I think back to a month, two months ago, you know, it wasn't a missile strike on Iran that brought down the markets. It wasn't the president firing the chief of the BLS for supposedly falsifying national economic data. It wasn't even the reintroduction of tariffs. I mean, we saw, you know, some small corrections, but the level of correction that we're seeing, in tech itself, it didn't really compare to this. I don't understand that. How is it that it was this little obscure research report from a little division out of MIT?

How is it that that spooked the markets? I think it's because all of the gains in the market this year have come from the AI infrastructure theme. There's no other show in town. Even the GLP1 stocks have been falling. Like nothing else is working. So then people say, all right, well, what are the top performance?

sectors this year. Utilities, tech communication services, and financial, I think financials neck and neck for the third spot. All of those are directly related to earnings growth that's coming from the AI infrastructure buildout. The utilities is obvious. I don't need to explain it. These stocks have just undergone a once in a century re-rating. They're all at 52-week highs. They all look unbelievable. And the story that they're telling investors is that, They are submitting formal proposals to their regulators for a rate increase. And the justification for the rate increase is the fact that they need to spend money, CAPX, in order to keep pace with the demand coming from the hyperscalers for more electrification needed to facilitate the ubiquitous use of AI.

There's one particular utility called Dominion, which I wrote about recently for CNBC. Dominion is like this 100-year-old company, sleepy, boring utility, right? And it just so happens. They're based in a place called Loudoun County, which is the cloud data capital of the world. It's in Virginia. And the reason it's there is because a million years ago,

AOL was based outside of D.C. And that's where, like, the first, they weren't calling them data centers back then. This predates even cloud computing. But, like, that's where the first cluster of this stuff started to be built. And then Yahoo came and then Google came. Now, Amazon has spent $50 billion there. So, like, this is an example of a utility that is completely transforming itself because of demand coming from hyperscalor AI infrastructure.

And that's why the utilities are leading the market. Tech, why tech is working. That's obvious. Why communication services is working. That's obvious. keep in mind meta is in that that uh sector alphabets in that sector um why financials why are financials so good because wall street came alive this year we have ipos core weave figma um bullish believe or not uh circle like all of a sudden the amount of activity private equity private credit

uh underwriting m&A is back there are deals again like that's why they're financials are but all of this is coming as a result of the AI buildout and then the ripple effect coming so you asked the question like I don't understand we we were we're shooting at Iran and nobody cares but an MIT study and a Facebook rumor surface that could be negative for the AI theme and the NASDAQ loses a trillion of value that's that's why it's the whole thing there's nothing else going on GDP growth is is sluggish, no offense to anyone who believes otherwise or they think the data is fake. The labor market is okay, but not as good as it was last year, right?

Wage growth is gone. So now you have price growth. You have inflation, but no wage growth, not a great recipe. That's probably why we're going to put a communist in the mayor's office in New York. Like what other stories are out there? What else is happening in the economy? And the answer is nothing. it's it's the high-end consumer who owns stocks out there spending with abandoned um the reason

they're able to do so is because their portfolios are absolutely juiced by record insane amounts of capex being spent on AI and if you pull that leg of the stool away there's no way we would have had a 30% recovery off the liberation day low as in April no chance not a chance if If you don't have that leg of the stool, there aren't two other legs. And that's what the market is very precariously balancing itself upon. Well, I think that that really sums it up. And I think that is possibly what I think that is probably what is most concerning is it does emphasize the extent to which the entire market is dependent and reliant upon this AI story. And so, yeah, an MIT report comes out.

And suddenly people get very nervous. I mean, by the way, I'm almost shocked by the lack of conviction that investors seem to have. The fact that this report comes out and then they say, oh, our thesis is wrong. That to me is a little bit crazy. Well, in fairness, in fairness, we're talking about a 2% move. But the NASDAQ has like tripled in recent years. It's not. They haven't reversed their opinions, but there has certainly been a vibe shift in AI in the last two or three days.

We're seeing it in the markets. We're also seeing it online, chatter. People are saying, oh, is the AI story? Is it not going to happen? The Sam Walman thing is notable, but I think people don't understand what he's saying. He's not saying there's a bubble in AI. He's saying there's a bubble in other people investing in things that might compete with him. Yes.

He's still going to raise money in the private market at a $500 billion market cap. You know he is. He's going to, he'll break every record on the books for a privately held company that only two years, ago was like a not-for-profit, he's going to raise money at a half a trillion dollar valuation. So what he's basically saying is he sees a lot of other people funding things that could represent a challenge to chat GPT and other products at OpenAI and they're destined to fail. And that's that's that read between the lines that what he's basically saying is we own this and all these other valuations people are paying for other startups are are going to

foolish. He's not going to say it the way I'm saying it, but that's what he means. Yeah. No, I think that's definitely right. But just going back to what you say there about the reliance, the dependence in the markets on AI, just some data here. So the top 10 stocks in the S&P right now account for 40% of the entire market cap of the S&P, 25% of the entire earnings of the S&P. InVIDIA alone makes up 8% of the S&P. It's the largest single stock concentration in over 40 years. We've seen this just unbelievable KAPX spending, leading AI companies spending a 10x increase in KAPX in the past three years. This is basically the AI market. This is the entire stock market. This is all

that anyone cares about. And I just, as a money manager yourself, I mean, how are you supposed to kind defend against that. You can't just get off of the AI train. There's clearly a bunch of AI hype that's happening. And that's sort of what Sam Altman is alluding to a little bit. But how are you supposed to sort of protect yourself and keep those two things in your head at the same time? One, yeah, of course we've got to invest in AI. AI's the next thing. Two, at the same time, what does it mean that this MIT report is shaking investors' confidence, at least a little bit? I think Palantir is a really powerful example. of the case that we make with our clients.

And just to back up, we're not bearers on AI. And, you know, we're, we've been invested in this theme the entire way up. Obviously, these are some of the biggest stocks in the world. I've been bullish and talking about Nvidia, long Nvidia personally, for 11 years now. So, like, I'm not, I don't want to give people the impression that I'm, like, predicting a crash. But we're very sober when we talk to clients about the possibility. that there could be a hiccup along the way or something worse. And, you know, we preach diversification, which seems really quaint right now.

But like Fannie Pax, it will come back into style eventually. It always does. It could be many, many years between now and when that happens. We're managing $6.5 billion for over 4,000 families. And people have a lot of money at risk in the stock market with good reason. People are going to have very long lifespans and they need to earn above inflation returns. And our job is to help people, you know, get from A to Z and Z could be a long way off. So we have to take risk.

We have no choice. But we want to take intelligent risks. I was talking to client yesterday, extraordinarily wealthy person, very successful, way more successful than I am. But one of the things that we're talking about, you know, he's saying, look, I understand. understand, diversify, et cetera, but it seems like none of these other stocks matter anymore. And he had a really good point. I remember a time where, like, Target would report earnings. The markets would almost shut down because everybody would want to hear what the CEO had

to say about the outlook and the consumer and but no one even, no one even notices anymore. There were times where like McDonald's and Home Depot and like these were like bellwether, like what, what is the state of the consumer? let's tune in and listen, these earnings reports in the last week, they just, they come and go because they're not the thing that's driving earnings. When you talk about the size of the hypers in the S&P 500, like what percent they make up, proportionally, the earnings growth is even bigger. The earnings growth is coming from a very select group of stocks. They happen to be so gigantic that it's meaningful for the overall index. And then you start to

talking about like, oh, Freeport MacMoran is a bellwether for copper demand. And nobody gives a shit. I don't even think its market cap is $20 billion. So like, it almost doesn't matter. The amount of, the amount that Nvidia's market cap moves in a day is larger than 400 companies in the S&P 500. So, so what people say like, oh, the, the, try to connect the dots, the stock market, the economy, from my perspective, they've never been further apart.

So I don't think the Main Street economy is bad. I just don't think it looks anything like what the S&P has done over the last couple of years. And that people struggle with that disconnect. So our message, you know, to get to the answer to your question in a very roundabout way, but our message, Ed, is the market that we're in right now is not the market that we're always going to be in. This year, the factor with the most import to returns is momentum. fine we all understand that but that's not every year some years it's dividend yield some years it's balance sheet quality some years it's competitive moat some years it's it's value some years it's

it's a size factor and small cap does better than large cap it's been a minute but it happens the the purpose of maintaining diversification is you always have to say you're sorry but you also never have to say you're sorry you are not going to be able to race invidia and broadcom with a portfolio year after year and not eventually pay the penalty. So I mentioned Palantir. This company put up one of the most insanely good earnings reports. I have ever seen I'm doing this 28 years insane on every metric,

the rate at which they're at in corporate customers, the rate at which they're adding government contracts, the growth of cash flow, the growth of profit, the growth of profit margin. You look at this report and then the CEO comes on the call and he's like, fuck you to the haters. Literally, that's what he did.

The stock has now erased the entirety of its post-earnings pop. It had this massive move where like... It's down like 10% right? Something crazy there. So like every growth manager who owns stocks and didn't own Pallentere basically had to buy it that day

or get fired, right? And then like within a week, that entire post-earnings pop disappears What is the message? The message is, yeah, we already know how good AI is. We already get it. We already know how good Palantir is. That's why it's a $400 billion market cap on revenue of $4 billion.

We get it. Everybody gets it. There's no one left to figure it out. So that's really what we're trying to get across the clients. It's not saying we're bearish on AI. It's just like, dude, how much more? do you think could possibly be in the tank given that everyone agrees.

But I think some people would say that sounds a little bit like a bubble. It is a bubble but it could be but it could be 1997. It doesn't have to be March of 2000 yet. Of course it's a bubble. There's a CAPEX bubble every generation.

It's not that rare. It's not that unique. We had them in the 50s. We had them in the 60s in the 70s. But it always happens. It's happening again, no big deal. It's not a signal to sell everything and hide. Not every KAPX bubble has to result in a generational crash.

You could just have a bare market follow this. And what if it starts three years from now? Think of all the money that you are missing out on making, worrying about it's a bubble, it's not a bubble. The answer remaining that the diversification is key, I assume, is basically where you ultimately land. But again, it's an interesting thing because a lot of people, as you say these days, is saying, well, diversifications for losers, you might as well be in the S&P 10. If I listen, I have some clients where if I listen to them, their portfolio would be like 30% Invidia, 30% Palant here. And by the way, they would have won big.

The problem is, what does that look when this ends? What does that look like? And I want to say one thing about the bubble idea, and then we can move on. the 2000 bubble burst it's real it's really important i was talking to a venture capitalist who i was about my age we both had roughly the same uh experience when we when we start in the 90s um there were there was about uh i don't know let's call it 450 billion in market cap in the in the stocks uh that that we tend to identify with the 2000 bubble like it was not large at $450 billion of market cap, the combined profits of all of those companies was like

15 billion. It was tiny, like literally tiny. Open AI is going to do like $15 billion in profit this year alone by itself. And when you look at the revenue of the companies involved today and the market cap and the amount of employees and the amount of customers, it's literally night and day. Back then, forget about price to earnings ratio. These were companies that were pre-revenue. No revenue, no business model. You can't say that today. These companies are among the most successful companies of all time on every metric.

Tons of revenue, tons of earnings, tons of growth. So it's not a great analog. Back then, there were 200 million internet users. There are 7 billion internet users right now. It's a completely different world. So I don't love the comparison. for that reason. And it's almost too easy of a comparison.

Everyone's trying their best to figure out how do we make the analogy. And that's kind of when you know, okay. It's too easy. It's too easy. Yeah. We'll be right back after the break. And if we're enjoying the show so far, be sure to give Proctu markets a follow wherever you get your podcasts.

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This week on Criminal, in 2019, E. Gene Carol published an essay called Hidious Men. In it, she said that President Donald Trump had sexually assaulted her in her Bergdorf-Gudman dressing room in the 1990s. Donald Trump told her reporter that it didn't happen and that, quote, she's not my type. You knew he would react, though. I thought he would say it was consensual. This summer, I went to visit E. Jean Carroll at her house in the woods.

We spoke about what her life has been like since she wrote that essay and what it was like to sue Donald Trump twice. You can hear my conversation with E. Jean Carroll on the latest episode of Criminal. Listen wherever you get your podcasts. Support for the show comes from Base Can. There are so many project management platforms out there through a virtual rock and you'll hit a few.

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assets like crypto, private equity, and real estate. Supporters say the move could unlock fresh capital for the private markets while also opening the door for Americans to gain exposure to investments that they are typically locked out of. So this executive order actually happened a couple of weeks. ago. I've been on vacation, so that's why we haven't really covered it. But it is important. It essentially means that your 401k manager, so, you know, for us, it's a manager called Empower. So that's a 401k administrator. So you have the plan sponsor, which is the company that you work for. Yes, please. And then you've got the administrator, which is effectively like the platform

that you log into to make your investments. Yes. And those platforms can now offer alternative investment. So private equity, private credit, even digital assets like crypto. And there are $9 trillion in retirement accounts in America today, and 90 million Americans have some form of retirement accounts. So this is a big deal for private market investment. It's basically opening it up to $9 trillion in capital. And so I think this is relevant for for a lot of reasons, one of which is we've been talking a lot on this show about this idea that retail investors are increasingly locked out of investment opportunities that are reserved for private investors, institutional investors, accredited investors. We've talked about that

as well. And I've talked about the idea that you've got Open AI, which is being valued at half a trillion dollars, most valuable private company in history. And yet, if you're a regular investor. If you're a retail investor, you can't get in. So that's kind of another talk track, but it's certainly related. It's also relevant because you wrote an article about this new executive order on your blog page, downtown Josh Brown. So, Josh, give us your reactions to the executive order. A lot of people are saying this is going to open up the opportunities for retail investors. Now they can get into alternative assets. And there are other people saying, No, this is going to sort of expose retail investors to all of the risk and the craziness

that exists in the private investment world. Plus, Trump was being lobbied by all of these private investment groups. Yeah, all right. I think it's a really big deal for the private equity and private credit industry. I think it's a nothing burger for investors. I actually, there's no danger here. The danger is like lagging returns because you're going to take a portion of your 401k. You're going to allocate it into some high fee private equity fund. You're going to lock up

that portion of your money, which is already locked up anyway. You're sitting with a 401k for decades anyway. So that's not a big deal. So you're giving up liquidity, but who cares because it's not liquid for you anyway. All right. So I could see that people saying that's a negative. I don't really view it that way. I think the longer you hold investments, the better personally. So I don't know that that's definitely a negative in a 401k. So put that hysteria aside. The other thing people will say is like, oh, you're exposing people to new. You're at risk anyway.

When you cite Nvidia is 8% of the S&P5, well, what do you think America owns in the 401K? They're already at great risk. They already are overloaded in gigantic technology stocks in the midst of a KAPX bubble. So it's like, it's not like, oh, now all of a sudden they're at risk. Stocks are risky. They're inherently risky. Here's a fun fact. I don't mean to name drop.

I was talking with legendary investor, Peter Lynch, considered to be the goat. Literally, literally. Name drop. Love it. Fine. Whatever. I'm owning it.

Exactly. You own. I'm dropping that name. I'm picking it back up. I'll drop it again. Peter Lynch asked me a question. He stumped me. He said, do you know what the average range of a New York Stock Exchange stock is?

um over the course of a year and i was like the average range like like how much from the high to the low and i said like 30 percent he goes okay 90 percent of people say 30 percent it's a hundred he said he said josh it's a hundred percent what and and i i said what do you mean he said well just think about it a stock starts the year at 20 drops to 14 rallies to 28 that's a 100% range. It's not linear. It doesn't like go in the direct, you know, it doesn't go all in one direction. It doesn't, the average stock doesn't double or get cut in half.

Yeah. So like the, he's like, he's like, people don't even understand the basic, the basics of how volatile the stock market is. So I bring that up to you so I could drop a name. No, I bring that up to you, Ed, because the, what does that have to do with anything, huh? Public stocks are volatile. Yes. So private equity, which is just privately only.

companies that volatility is not like this new dimension of risk okay so the hysteria around this is is is not necessarily founded um the last thing is is actually really important yeah um for for the people listening to this everyone pay attention to me uh i hope you already happen this is really important you're not forced to do anything you no one's gonna like shove private equity down your throat. They might include it as a sleeve in a target date or a life cycle fund, but it's going to be tiny. You won't even know it's there, and you can opt out of it if you don't want it. You could say, well, I'm not buying that lifecycle fund because it has private equity. And I read something about the high fees of private equity funds, and I don't believe

in it. And I'm opting out. Yeah, but those are the listeners of this show. Those are the people who kind of know what they're doing. I mean, it's certainly going to be a lot of people who don't really know what any of this means, but, but the, the administrator is going to say, oh, you got to get into this. This is the greatest thing since sliced bread. You won't, all right. So you, yeah, you won't hear that for an administrator because none of them want to get sued. And that's one of the interesting things I wrote about. That, I agree with you, Ed. That's not a good thing. If, if plan sponsors start pounding the table to their employees, why they should allocate private equity, that's problematic. But there's no incentive.

for them to do that. So it's not, I don't think it's a real danger. What's, what's actually going to happen is, these will be, these will be very large providers like Blackstone and Vanguard and huge private equity firms.

And they'll create specific vehicles meant precisely for this 401k use case. So you are not going to be investing alongside people that traditionally invest in private equity. They're going to create like a kiddie pool. for you. I'm not saying it's going to be bad. I'm just saying don't think you're investing with Mark Cuban. You will 100% or not. Those people are getting into the top, top, top, top funds. That is not going to be available through Vanguard and fidelity. It's just it's you can't, why would they? If you're an amazing private equity investor, why would you be looking to take in retail flows?

It makes no sense. Nobody would do it. So I don't think this is that. big of a deal. And I don't think that many people are going to be into it. The crypto stuff will probably attract an audience faster. Young workers who see an option to put 10% of their 401k into a Bitcoin fund, they're going to do it. A hundred percent they're going to do it. The venture thing is really where we get silly. So you kind of interchangeably, we're talking about open AI and private equity. To be very clear, like, venture capital opportunities do not belong in a 401K. Just it's, it's like the ultimate asset class mismatch. There's absolutely no reason for there to be shares of privately held experimental companies with no earnings and revenue. The,

the odds of that working at scale or zero. The nature of venture capital is like, one out of 50 companies turns into something and one out of a hundred can outperform regular stock market. It's like very, very difficult odds. It's a very specialized market where the practitioners know what they're doing. You can't export that into a mutual fund wrapper and throw it into, you know, an insurance company's 401K. So I don't like that at the wall. I don't think it's necessary. So in summation, you will see private credit be substituted

for some public bonds. You will see private equity be substituted for some of the equity portion. It'll be minor. Very few people will actually be interested. I don't think anyone's going to be massively hurt by it. Venture capital in a 401k is fucking stupid.

And Bitcoin is probably going to attain some real fund flows, just given how much young people are attracted to being invested in crypto. I find it interesting that venture capital is sort of off the table. It's too silly in your view, but Bitcoin, you don't seem to have, or crypto, you don't seem to have the same view.

I'm not endorsing people do this, but I think it's, I think it's just an easier, it's an easier rollout into a product at a 401k than venture capital would be. How does a, so you could have an existing mutual fund. some of the large asset managers do this where they have a sleeve in their portfolio for pre-public, pre-IPO venture-back startup. I'm okay with that.

But like, you can't invest into Andresen Horowitz in a 401K because they're not going to give you the access to be able to do so. So like, just, you're not going to get the best of the best. And in venture capital, you have to be in the best funds.

You can't be the fourth best fund. There's just no way. So I think that's like a very winner-take-all type of investing. Bitcoin is a commodity. One Bitcoin's as good as another Bitcoin, and a Bitcoin fund doesn't need a manager. So that's where I would draw that distinction. Okay. Well, I'll lay down my views on this.

So I think this has been sort of portrayed as, oh, we are democratizing access to alternative investments. That's been the pitch. That really has been the pitch. And that's the part that I really find a little annoying. And I think it's especially annoying to me because I've been talking a lot about this, about how the private markets have been getting so big, and there's so much money now, that they are essentially acting as if they are the public markets.

There's basically no incentive to IPO if you're an OpenAI, or if you're a Stripe, or if you're a data bricks at this point. If you're a big venture-back company, And as you say, with massive profits, massive revenues, you're well on your way. It used to be that you go public to get some liquidity. You don't really need to do that anymore. The liquidity is there in the private markets. And what it essentially means is that if you want to get in on AI,

you only have your invidias and your big tech stocks to choose from in the public markets. You can't invest in Open AI and Anthropic and all of these other AI startups that honestly, that's where the action's kind of happening, at least on the consumer side. The 401K, though, is not the answer to that problem. Well, so, so fair enough. And this is part of my issue here. So the way that this has been presented is that now you have access through your 401K. And by the way, I agree the 401K is not where you should be putting that money.

But I also think there should be a distinction here. there's a huge difference between investing in a private fund versus investing in a private company. If you want to go invest in a private company with some leftover money that you have, I think that would be great. And the big difference between those two things is, you know, one is autonomy. I mean, you're kind of just letting these money managers decide what they're going to invest in. And as you say, these venture funds that are going to go in these 401Ks are probably going to be ridiculous. And the two, the other big thing is the fees.

I mean, you're going to be paying stupid fees for these funds that, as you've pointed out in the past, don't even perform well. I mean, I think one thing that you brought up in your article is that actually the stock returns on the top private equity companies. I love this. The stock has outperformed their own funds. People hated this. People hated this so much. Let's take Blackstone as an example. Yeah.

This is one of the best performing stocks in the – S&P financial services sector. It actually, when it came public, it wasn't a corporation. It was a partnership. And they changed the structure because a lot of funds couldn't own it as a, as a partnership structure. They have to invest in corporations. So all of these companies, KKR, Blackstone, they did these conversions.

And now they're all in the S&P 500. I think Blackstone's up 1,800 percent since it came public in 2007. And that's including the stock probably losing like 60 percent. percent of its value during the 2008 crash. So this has been a runaway winner. I can promise you, Blackstone doesn't have a single fund, private credit or equity that has done as well as its stock price has. At least I don't, at least I'd be shocked. I really don't think so. I know the average fund is not. So what we did, my research partner, Sean and I, is we took the universe of the top 10 publicly traded private equity and private credit funds. And you know all the names. It's Aries.

It's Apollo. It's Carlisle. These are amazing companies, by the way. But we took the top 10. We market cap weighted it and then we equal weighted it just to make sure that we weren't being unfair. We compared it to Bloomberg has a PE index benchmark. And I'm sure people will complain about what's in it. But effectively, it's the best way we know of to track the returns of private equity funds. So basically, we raced the sponsors themselves, like the companies that launched the funds, their publicly traded stock prices versus the products they sell. And the results are hilarious.

So if you had invested in the market cap weighted basket of the top 10 private equity companies invested in their stocks, the $100 turned into $264 going back to 2022, if you had put the money. into the Bloomberg PE index benchmark, let's just assume that's like an approximate of the average of all their funds, $100 were to turn into $113. So it's like not even, like you almost can't even

To put it in percentage terms, the funds return 4% per year, the stocks returned 38% per year. Yes, now, is it fair? I'm just using the last three years. No, and I don't know what the next three years will be. Maybe it'll be the opposite. But it struck me,

why be a player in the casino when you can own a piece of the casino and let other people try to pick private equity funds to invest in? So I just thought that was an interesting way to think about it. Yeah. And I think it's indicative of the point, which is, I think unanimously understood at this point, which is that these funds, net of fees, are not very good. They, I mean, you compare them to the S&P. The S&P consistently, I don't know if there's really been a, a 10-year span in the history of the stock market, where the S&P has underperformed these P-E funds, maybe in the early days of private equity. In the early days, like if Mitt Romney was your private equity manager at Bain Capital in

1993. You got it on the Biscope. Yeah. Their returns are amazing. Like, I read Steve Schwartzman's biography last year. It's incredible what these people have done. I'm friendly with Harvey Schwartz at Carlisle. I interviewed him for my podcast.

Boom. Well, I'm saying, like, I revere these people. I think they're amazing. But that doesn't mean that an individual investor needs to own a product necessarily in a 401K. Like, if the goal is long-term compounding equity returns, I think the stock market's good enough. That would be my comment. We'll be right back. If you're enjoying the show so far, hit follow and leave us a review on Procter,

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Pick any two breakfast items for $4. New four-piece French toast sticks, bacon or sausage wrap, biscuit or English muffin sandwiches, small hot coffee, and more. Limited time only at participating Wendy's Taxes Extra. We're back with Profi markets. The final thing that I've been thinking a lot here about is this distinction between the private markets and the public markets, which in my view,

the distinction is becoming increasingly blurry. I don't know if you agree with that. Yeah, that's true. I mean, the private markets are functioning pretty much like the public markets. And, you know, I just think it's, I think it's a shame that this is happening

because I think it's a shame that we're not having more companies, more strong, growthy AI companies, that have really proven themselves. They're not going public. And I'll just put it flat out. I want to invest in open AI. I want to invest in all the AI sort of.

Or they are coming public, but once all of the money has already been made. Exactly. Coming public at a full valuation. And that's a shame. And my issue is, I think a lot of people saw this headline. They said, well, this solves the problem.

You can get in. It's like, no, no, no. I can get in in some bullshit basket and pay one to two percent in fees, per year and then pay the 20% in the carry. I was going to say if there's a venture capital fund that's like actively courting people in their 20s and 30s that are not like sent to millionaires, you probably don't really want to invest there.

The best way to get in early on a hot venture-backed private company that then goes public is to work there and be paid in part with RSUs or I. some sort of stock option. That's the best way. The second best way is to be like the college roommate of the guy that founds Uber. Like that's a really great way. And I'm saying this like half facetiously, but like at the end of day, life is not fair.

Don't you think everybody wishes that they had the ability to invest in Facebook in 2006? Like obviously everybody, it's just it's not going to be democratized because the wealth of the world is not democratized it sucks get mad about it start a band put on uh eyeliner what i mean like what do you what do you want me to tell you like it's it's not going to be fair it's never going to be fair so it's become increasingly unfair is what i would say it's it's gotten it's gotten a little out of control one thing that's true one thing that's true ed and one one one reason that's true yeah people people talk about the small cap premium in the stock market, which is vanished.

But there used to be this concept that small caps offered better performance than large caps over time. And there were all these reasons for it, like growing earnings off of a smaller base and the multiple increasing as companies become more well known. Like there are a lot of good, that's vanished. And people don't understand why it vanished. The reason is the best young growth companies no longer come public as small caps. Exactly.

They come public with $20 billion valuation. they go right into the S&P. This is my point. $500 billion valuations. Open AI is 19th most valuable company in the world. It's a private company. And 10 people benefited. Exactly.

And my point to you, Josh, is that's new. That's new. And I do believe it is unfair. And fair point, you know, I'm complaining. Go start a ban. Go work for Open AI if you really want to. Maybe I fucking will. Maybe I'll be their podcast.

But my point is, We, the young people, the retail investors, can't get in. And I just want to say this, because it happened while I was on break. There was a business insider article that came out about this at this point that I've been making, specifically about how all the best companies are staying private and kind of the shitty companies, Sands, maybe Figma, going public. And so we're frozen out. I disagree with that. I disagree with that premise. I don't think it's all shitty companies going public.

But, okay, continue. okay uh less impressive companies maybe i'm being too harsh well remains to be seen who's impressive you need a little bit more seasoning uh you need a little bit more time for these for these companies to see which are the good and which are the bad we'll we'll table this one and then you and i will get i get into an argument about this later because we do need to go through this i just want to cover this one point joe wisenthal uh podcaster bloombo journalist shout to joe that's my boy i i like the guy. He came at me on Twitter. He posted this article. He said, the way people talk about wanting to get access to hot private companies drives me crazy, riddled with hindsight bias

and other biases. I just want to say, Joe, you got it at me next time. He screenshotsed the article, Ed Elson, Ed Elson, Ed Elson. People talking about this, it's clearly it's me talking about it. So he's got it at me next time. That's a vicious sub-tweet where he screen grabs your quotes in an article he doesn't like that's like that's that's a very aggressive i don't know why he's coming at me you and joe you and joe if you guys if you guys spend time together you guys actually would probably be friends uh joe is awesome i totally agree um but we're going to have to get over this boot i'm going to connect you guys behind the scenes after this i'll do it i got it okay thanks josh let's take a look at the week ahead we'll see fresh inflation data from the personal

consumption expenditures index for July. We'll also see consumer confidence for August. And NVIDIA is reporting earnings on Wednesday night. Now, we're recording this just before the Jackson Hull summit where Jay Powell will be speaking, but a lot of stuff going on in Fedland. Specifically, Trump asking one of the Fed governors to resign. We're seeing more pressure on the Federal Reserve. Any thoughts on what's happening with the Fed right? now, Josh, and perhaps any predictions maybe on interest rates or what's going to happen in terms of the Fed governorship. What's going on here with the Fed? All right. On Wall Street, this is being characterized as Powell's last stand, meaning this

is conceivably his last Jackson Hole address. If you believe the president's rhetoric on Twitter, this guy's out of here when his term ends in May, if not sooner. So this is really his chance, I think, to cement his legacy rhetorically at the podium. There's a lot of people who think he's going to use this as an opportunity to reassert the need for there to be an independent Fed and to do something that's somewhat politically charged. I actually am predicting I would go the other way. I think this is going to be more of like, I don't want to say victory lap, but like I think he's going to signal. that September we're getting a rate cut

because the Fed has given it so long and has done what it had to do. The big debate in the Fed minutes that came out this week, some of the committee believe that the risk is to the upside, meaning higher inflation,

stickier inflation. And then some believe the risk is actually to the downside because the labor market by some metrics is weakening. So there's not agreement in the committee it's not like they all think one thing and you had two dissenters on the fed's last fomc where they chose not to cut rates you had two dissenters who thought they should have so uh and

that's you know it's not that rare but it's rare enough that it's worth mentioning so i think the fed is not going to give a politically i think uh powell is not going to give a politically charged speech i think he's going to give us a doveish hint and then in september he'll follow through with maybe 25 basis point rate cut and I actually think he's aiming to cool down the temperature not you know

stick his chin up and say come fuck with me cool down the temperature politically yeah I mean that that is what is interesting is I agree I think he does not want to get involved in a political spot by the way Scott takes the other side of this he thinks

oh Powell's he says Powell's not going to cut rates because he wants to sort of give the finger My view, this guy doesn't have an ego like that. Yeah, I don't think so. I don't think so. But what you're saying is he does want to turn down the temperature politically because it has become politicized. The more independently he tries to act as Fed chair, the more he's endangering.

He doesn't have a choice. But the more he's endangering the independence of the Fed. This is not the first president in history to have an opinion on where interest rates should be. This is not the first president in history to try to intimidate the chairman of the Federal Reserve. into acting on the administration's best interest. It's just not.

He has a style all his own. It's the first president to do this on Twitter. Important detail. Yeah. No, I get it. But I just, I don't think that Powell thinks what's in the best interest of the institution is to give the middle finger to Donald Trump. And I also don't think a rate cut would be so crazy.

Rates are too tight for a one to two percent GDP growth. environment. If you're basing your opinion on whether or not wage should be cut on the stock market, then you don't even understand how the Fed works. The Fed is not supposed to be paying attention to the stock market as its own variable. It's employment versus costs. I don't think we're in an inflationary emergency. And I think rates are too high given economic growth. The labor market is not as strong as it was last year. And they did a rate cut last year. So I don't think it's that hard for Powell to get to the place where he says, all right, here's your fucking 25 basis points. Enough already.

And that's what I think. Well, that's my prediction. I don't know anything more than anyone else. That's what I think. I like that prediction. Okay. Josh Brown is the co-founder and CEO of Ritt Holtz Wealth Management, a New York City-based investment advisory firm managing $6.5 billion in assets for individuals, corporate retirement plans and foundations. He also is a podcaster.

You should check out his podcast, The Compound and Friends. Am I missing anything, Josh? No, that's enough. It's enough already with me. It's enough. Okay. We really appreciate you standing in for Scott this week, and we hope to have you on again very soon. Love you guys.

Thank you so much for having me. Really appreciate it. Thank you for joining us. This was great. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Miel Saverio is our research lead. Our research associates are Isabella Kinsel and Dan Chalon.

Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Tune in tomorrow for a fresh take on markets. In kind, reunion As the waters And the dark flies In love, love, love, love.