The Compound and Friends - Jeremy Spoke on TCAF Today

Episode Date: June 28, 2024

On episode 148 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Professor Jeremy Siegel, the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania, and Jeremy Schwartz, CIO of Wisdom Tree, to discuss: Professor Siegel's legendary book Stocks for the Long Run, what the Fed should do next, the best way to beat inflation, the housing market, AI stocks vs the tech bubble, what happened to small caps, and much more! This episode is sponsored by Public. Make your savings work harder and earn an industry-leading 5.1% APY with a high-yield cash account on Public. Visit https://public.com/ to learn more! Sign up for The Compound Newsletter and never miss out! https://www.thecompoundnews.com/subscribe Instagram: https://instagram.com/thecompoundnews Twitter: https://twitter.com/thecompoundnews LinkedIn: https://www.linkedin.com/company/the-compound-media/ Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ A High-Yield Cash Account is a secondary brokerage account with Public Investing, member FINRA/SIPC. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. Learn more at public.com/disclosures/high-yield-account Learn more about your ad choices. Visit megaphone.fm/adchoices

Professor, last time I saw you, Jeremy, when was that? Maybe two, three months ago. Okay. Was, I forgot the venue. The John Williams New York Fed Cut. Oh, the John Williams New York thing. Was that the economic club?

Yes, that was that quote that Joe Kernan learned about and said, did you really say that? I said, absolutely. What was the quote? What was the? The quote, so, so the question is, should we give J-Pow all these plaudits and for pulling off potentially a no recession? Yeah, the immaculate disinflation, as it's sometimes called.

And I said, giving him awards and plaudits now is like giving an award to a drunk driver that ran into a pedestrian, but managed then to pick him up and get him to the hospital in time to save his life. So that didn't go over big. That was so good I wrote it down. The crowd loved it.

Of course. I don't know what John Williams loved it. You were talking to the president of the U.S.F. I don't know what John Williams loved it. You were talking to the president of the U.S.F. I don't know if John Williams loved it. He was calm. He took it very matter of fact. He took it very matter of fact. But I mean, he screwed up.

We shouldn't have been. He screwed up so badly at the beginning and now we say, oh, look at. So he's done a better job. He went from an F minus to a B. In fairness, John Williams was just the, he was in the passenger, John Williams was just, he was in the passenger seat. He was not the drunk driver. In fairness, John Williams. No, it was not him.

And John Williams also scored ET. And Star Wars. Star Wars, some of the most beloved. He deserves credit for that. Superman, Jurassic Park. That's right. Jurassic Park as well. Yes, that's right.

He didn't dissent though. What? He didn't dissent from the policy. He never, no one dissent from the policy. No one dissented from the policy. Well listen, I think they probably had a lot of soul searching internally and you're not the first person to point that out. That even if they get it right, quote unquote, in 2024, the damage has been done. We have a 40% cumulative rise in prices over three and a half years.

It's not good no matter what happens Oh, we pulled the audience on the compound the other day about like what price rises pissing them off the most and not surprisingly I wasn't surprised with this food Yesterday, I took my boys to get pizza and I had two slices and two drinks and it was $17 Yeah, like what the fuck? Yeah. Well two slices and two drinks. Yeah, cuz it's not just the pizza It's the people serving the pizza Have we really we have not had 40% too most since the pandemic? No, 20 20 plus 20 20 20 or something like that for some line items much for home prices

It's been 45 to 50. Yeah, and for financing homes. It's been a hundred and twenty. Yeah, that's that's that's who needs a house anyway, well for, that's. Who needs a house anyway? Well, for everyone that listens to our podcast has one or wants one. Fortunately, it hasn't been 40% economy wide, but in certain items, it's been egregious and it's not going back the other way. Well, of course not. So that's the, that's the real issue. You know, it's a matter of, I mean, we never, when we came down from all the post-war inflation,

so we never went back down any time to what the price level was before. Right, and that's the other thing is that consumers and the public are talking about the level, and economists are talking about the rate of change. And it's two different conversations. What, given the state of our education, the public doesn't understand the difference.

Or they don't care. They don't care about the difference. Well, they don't care about because- They care about their bill. I mean- They don't care about, yeah, the fact that you now got the rate of increase down to a good level, the fact is, now got the rate of increase down To a good level the fact is they've suffered through that increase Yeah, and and that's and that's why the feds not and that's what they go

So really when they talk about inflation, it's the cumulative of the past inflation. Yeah So you peg that at 20 some odd percent since the since the pandemic started. Yeah, it's March of 2020 Okay, so what is it normally through the course of a regular decade? It could be 20% for a whole decade, right? Well, I mean, it was 2.5% for four decades before. Per year. So over four years, that's a little over 10%. You know, it would be about 10% averaged in the four decades before, and you know, now we're at 25%.

We squeezed a decade into three years. It sucked. What? We squeezed a decade's worth of inflation into three and a half years, four years. That's correct. But arguably, the people that, there are people that would look at lackluster wage growth for decades, and they would say, this is a long time due for rank and file workers to get now the order of magnitude in such a short period of time is what made business owners hate it but they really went a long time before getting those kind of price

hikes those wage hikes. Real wages just about been unchanged over the spirit. Which is not good given that real wages usually go up by about 1% a year. That's what increases our standard of living. So the fact that wages have kept up with prices is not a good situation for the average. And then you have what's called the illusion. I got my pay raise because I did good work. The government screwed me with the inflation.

You see? Yeah, you deserve a raise. When they don't understand that a lot of the reason that wages went up was because product prices went up and the demand went up and there was a labor shortage and they got the wages. It wasn't that they were more productive. Somebody did that magazine article, You Are the Inflation, and it didn't go over. It didn't go over, it didn't go over on Twitter.

Because no one likes to think about I got my raise because of the fact that commodity prices went up and they could afford to pay me more. Right. I mean, it's just, you know, so you have that, that's like called money illusion. That's a, you know, if everyone understood real wages, they would not think that way,

but it's not the way people think. You're not getting a damn word in. It's okay. Is this all being recorded? Yes, Jeremy, keep the car warm. No, I'm sorry, go ahead, Jeremy. Has it started? Yeah, sorta.

We do a weird thing. We start recording. It's the pre-show. John, are we ready? We're ready to go though, I think. Right? Yeah. Yes?

Alright. Alright. Hey John, what episode is this? This is The Compound of Friends, episode 148. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only

and should not be relied upon for any investment decisions. Clients of Ridholtz Wealth Management may maintain positions in the securities discussed in this podcast. Today's show is brought to you by Public. Make your savings work harder and earn an industry-leading 5.1% APY with a high-yield cash count on Public. There are zero fees, no subscription required, leading 5.1% APY with a high-yield cash count on public. There are zero fees, no subscription required,

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This is a paid endorsement for public investing, 5.1% APY as of March 26th, 2024, and is subject to change. Full disclosures and terms and conditions can be found in the podcast description. ["The Daily Show"] ["The Daily Show"] ["The Daily Show"]

["The Daily Show"] ["The Daily Show"] Who would have thought we would have done 148 episodes? We've had Jeremy Schwartz on two of those episodes and we went back and listened to them. You sounded so young. So young. You really did.

He is. How have you known Jeremy? How old was he when you first met him? Well, he was an undergraduate. He was an undergraduate. Undergraduate. So I guess he was 19 graduate student. He was an undergraduate. Undergraduate. So I guess he was 19 or 20. Is that right?

Exactly. 23 years we've been working together. Professor, what was it about this young gentleman? Was it the twinkle in his eye? Or maybe he just wouldn't leave the classroom until you gave him something to do? I'll tell you. There were two things.

First of all, how nice a person. And I'll tell you why. I promised to talk before a group that he had of undergraduates, and it just totally slipped my mind, and I felt so embarrassed, and he was so positive. Professors, he goes, don't worry about it. We can reschedule it.

Please don't feel, I thought, wow, this is a really nice person. But most importantly was when I gave him a real difficult assignment on a Friday afternoon, and I said, this is what I want to do, Monday we'll talk about how to do it. And he came in Monday morning, and I started to say, well, let's talk about how to do it.

He said, well, Professor Siegel, I have finished it, and I've done it. Yeah, that's on brand. Yeah, I mean, that was, then I knew that Jeremy was someone special. This guy's special. So this is like all those movies where the student arrives at college

and gets inspired by an authority figure, a professor, a headmaster, somebody, a coach, but you actually lived it in real life and you got the pleasure of not just having that four year or six year period academically, but you guys were able to go into business together and that's like a truly special, very rare situation. Yeah, I thought it might be just two months, a summer abroad before I went to Australia. And I was able to take his class after I met him that during that program. And I needed

something to do. So I said, Hey, I'll work for free. You can't work for free anymore as an intern. But you know but it was a big investment. I felt like I was probably working investment, banking hours, staying there till midnight, seven days a week. The first day I see him was a Friday. He's like, I'll see you tomorrow, and it was that kind of culture.

We worked seven days a week in the office. I came in every day. What year did you guys meet? It was 2001. So it was right after his big. Oh, so he was famous, Roddy. He was big, famous on TV all the time. When did Stocks for the Long Run...

The first edition of Stocks for the Long Run came out in May of 1994. First edition. Okay. So Jeremy joined me third, was it? The third edition. Third edition and the Future for Investors book, which you really participated in on third, fourth, fifth, and then of course sixth. But as the 90s went on, your fame grew largely because you were right, first of all, the

thesis of the book was being proved extremely right in those amazing years. And then you did something that nobody does. So this is, all right, this is the best, this is my opinion, the best thing I ever saw you do. You've done a lot of great things. You changed the lyrics to the song. And people were mad about it at first. So you said stocks for the long run, but then in 1999, you cleared your throat.

And you said, guys, yes, I'm still optimistic about the long run, but this is f***ing stupid. Look at the cash burn, look at the valuation. It's insane how much we're paying up for innovation without earnings. You did it as an op-ed in the Wall Street Journal. March 14th, 2000, exactly four days after the peak of Nasdaq. Nobody knew it. Nobody knew it. Okay, Jack, let me tell you. People say, how did you get it right? And I said, it was just dumb luck.

Yes. Actually, a week before, Wall Street Journal calls me and says, Professor Seco, have you been watching the market? Ha ha, well, that's what I do. And then he said, do you believe, do you think what's going on is rational? I said, it's totally crazy. Can you have an op-ed piece for me on that? I would be Can you have an op-ed piece for me on that? I'd

love to have an op-ed piece for me. And right, big cap tech stocks are a sucker's bed. Actually, they told me later became the most read op-ed piece, I think, of not only that year, but of that decade. I give that link to people and then they change the URL so I download it as a PDF. But I've included that over the years in talks I've given like turning points in markets and there's a lot of mystery around 1929 why it topped when it did. I think 2000 it was a series of events and your op-ed is one of them. The other one was the Barron's Cash Burning cover story.

And then the other one was MicroStrategy having a accounting issue where the stock went down $400 after the close or something. And then Bill Gates saying Microsoft is overvalued. These things all happen within a week. And you ask yourself what are the conditions to end a major bubble? All of those things, and so your op-ed was part of that, and I show people that as an example.

But my point is, you change the lyrics. Michael and I talk about this a lot. There are people who have become famous for a certain type of market call, and then for the rest of their careers, they're chasing that high, and so they keep making the same call. This is no disrespect to anyone personally,

but like David Rosenberg was really, really keep making the same call. This is no disrespect to anyone personally. But like David Rosenberg was really, really right about the housing recession. He's been praying for another one ever since and not getting it. I know. They stayed. They stayed the same way. We could keep on going. Harry Dent. Well, Ghazarelli with the... Elaine Ghazarelli and then she disappeared. October, you know, she called that crash and then never called anything right after. And

before you were born Grandville so Kathy would want to another one Kathy would wants 2020 to come back Meredith Whitney wanted to relive the great financial crisis only this time in muni bonds You you did something that most famous pundits have not done You're like super bullish and you make one of the big bear calls of all time. So for that, I just salute. Salute. Thank you.

What have you done? It accords me, I didn't introduce you guys. Professor Jeremy Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania. Professor Siegel authored Stocks for the Long, one of the best-selling financial books ever. He appears regularly on networks including CNN, CNBC, and NPR, making his first appearance here on the show, Professor Jeremy Siegel. And driving Mr. Siegel to the show, Jeremy Schwartz is the CIO of Wisdom Tree and leads the investment strategy team in index construction. Jeremy was Professor Siegel's research assistant at the University of Pennsylvania

and co-authored the sixth edition of Stocks for the Long Run. Jeremy Schwartz, fan favorite. Welcome back to the show. So happy to have you guys here. I want to talk about the book. So like just as a starting point and then we'll go Fed and we'll get to more current stuff. This is my take. One of the great investing books ever written, still undefeated, as the Dow, Nasdaq, and S&P 500 as we're sitting here today are near record highs. They don't have to be in order for the book to be true, but it helps, right?

Yes? Okay. The main idea of the book is that the enemy is inflation. And nothing outperforms inflation as reliably as the stock market. And that's why it's the best asset class over long stretches of time. We're fighting one of the all-time toughest inflation battles of all time right now. Two years and counting. Cycle high CPI

print of 9%. But stocks are still winning in real time. So I guess the first thing I wanted to ask you, are you as surprised by the last couple of years as so many other market watchers seem to be? Like stocks are doing what you said they would do. They're fighting inflation every day. Yeah, well, one of the main theses from the very beginning is the recognition that stocks are real asset. Real assets are claims on property, plant, equipment, copyrights, trademarks, intellectual property. These are real assets. So real assets over time. Listen, I was trained as an economist. My PhD was in economics and macroeconomics. So this study of inflation and monetary policy and all that was the sine qua non.

It was what I did. And I said, well, stocks are real assets. Bonds are paper assets. They don't promise to pay dollars. Stocks are claims on real assets. That doesn't mean that perfect hedge is year after year. Nothing is a perfect hedge. Year after year. When you say real assets, you are comparing them to people consider commodities real assets.

Because you could pick them up, they're tangible. Correct. Real estate is another real asset. Real estate, okay. You're saying stocks are too. And stocks are a real asset. That's why they will totally overtake inflation. One of the main things in the book, because I went all the way back to the beginning of the 19th century, all the inflation the US has suffered in the last 220 years has come really since 1940. It's a 2,500% increase in the price.

Well, 25 times. And so actually 25 times. So the current dollar buys less than four cents of what it bought at the beginning of World War Two. The real return to stocks compound annual real return to stocks after inflation was 6.8% during the 140 years when we had no inflation, we were on the gold standard, and it's been 6.8% since then when we've had a cumulative of 2,500% inflation on a paper money standard. So you don't like comparing their earnings yield to the nominal yield of bonds for the reasons

that you mentioned. No, for exactly that reason, because bonds, yeah, you have to compare them to tips. If you want a really comparison, you want, you need to go to inflation protected securities, not the nominal bond, because the nominal bond doesn't give you any inflation protection. I mean, people demand a higher yield to try to protect themselves, but if there's unanticipated inflation, stocks will compensate you for that eventually, bonds cannot. That's one of the the doom Doomers always put out this chart saying the Fed funds now five and three eights and you got in You can take no risk in in cash basically getting these fed funds rates and the stocks earnings yields is below that So you have a negative equity risk premium people say and we point out all the time that and you push back and say stocks

Why is that wrong? It's cash, first of all. You're comparing apples and oranges. You're comparing a nominal return on treasuries. Which is, let's say it's 5% for a big, random number. No, the real return on stocks. So what do you want to give me as a P-E ratio? 20-21? Let's use 20.

On stocks, let's use 20. Let's make it very simple. That's 5% real. So that's 5% real. So that's 5% real. The other is 5% nominal. And then there's inflation. And then the inflation is the wedge. Let's say it's 3.5%.

So if you want to, the right comparison is to take the 5% real on the stock market and the 2% on the tips. That gives you a three percentage point per year advantage of stocks over bonds right now. So why do so many people are people getting this deliberately wrong so they can say something provocative?

Or is there a reason that they don't understand what you're saying? It's money illusion again. A lot of people. More money illusion. It's probably money illusion. And I mean, listen, stocks have all you know, this and stocks are expected to give a higher return. Because they're more volatile.

Because they're more volatile in the short run, not necessarily the long run. That's another thesis. Well, as an asset class, they're not as volatile in the long run. But individual stocks in the long run can be as volatile. Oh, well, that's why you need to be diversified. But it makes more sense to compare the real yield to maybe the 10-year, certainly not the overnight rate. Well, you've got to go into the 10-year tips to maybe the 10 year, certainly not the overnight rate. Well, you got to go to the 10 year tips. Okay. Not the 10 year nominal.

I mean, the 10 year tips is to say a 20 P E you got a 5% real yield because it's a claim on a real asset. That's a 3% wedge. That's, you know, we economists call that the equity. Why do you guys think stocks weathered inflation better in the 2020 to 2024 period than they did in the 1970s? Are corporations just better equipped to fight inflation with their pricing and their efficiency? It was the labor market. The labor market was still strong and so therefore they were able to pass through price increases

and consumers were able to swallow it is that is it that Simple well there were a couple things first of all we had much worse inflation in the seven sure I mean we were having eight to ten percent per year rather than the peak of one year Well, I guess we would do a stimulus. We also had fighting it We also had the you know we had the ten year at what 16 percent Yeah, I mean so even if you subtract inflation, you were getting an incredible real yield on there. And then, since this was the first major inflation

of the post-war period where people did have money illusion, and they said, oh, I'm comparing 16% with the stock market. Oh, I don't want that. I mean, one of my professors at MIT, Frank O'Meally-Gliani, kept on writing about it. He said the stock market's getting it all wrong. As soon as, you know, it's being depressed by people making comparisons between that nominal yield

and the real yield. I mean, you know, and I mean, that's when Warren Buffett came in and said, you know, these were crazy low and everyone said, this is a crazy low. They're being priced like, you know, paper assets instead of real assets. And then from 1982 onward, what did we have?

One of the greatest booms in history in the stock market once that inflation was brought under control. I guess what I'm asking is, you had two 50% declines in the 1970s. One of them was 73, 74. Nixon's gone. And then later in the decade, it happens again with the oil embargo. But it happened in 74 was the embargo too. I mean, 74 was when oil went from five to 30.

Okay. And that shocked everyone. I mean, don't forget the first oil crisis was that early 70s. I guess my point is we didn't have that this time. No, we have no oil crisis. Now we didn't have a 16%. No. We have no oil presence. Now we didn't have a 16% 10-year. That was another reason.

But tell me why the... Because if I just went by history and if you told me we're going to see 9% inflation at some point in 21, 22 in those two years, I would have expected much worse than a peak to trough 27% decline in the S&P. Yeah, but you put your finger on it. Don't forget that the first impulse of inflation, 74, and even a second impulse was due to the OPEC oil embargo restrictions. And we were importing what 35, 40% of our energy back then. We were importing no net energy now. I mean, we're self-sufficient. And not only are we self-sufficient,

the energy intensity of our economy, which means how much energy do we need to produce a dollar's worth of GDP, is down about 75% from what it was back then. So this blow, we had to import it. We were so dependent on energy that really did hurt margins and profits and everything. This one was a wash on that issue. But wait, isn't it, it's a bit, not revisionist history, but stocks didn't protect you during

the inflation. Stocks did get crushed in 2022. It's after the inflation started to settle in. Stocks are up more than the cumulative inflation that we've experienced. Yeah, yeah, yeah. Because, so, over the whole period they make up inflation. At the beginning, when the Fed is feeding money and they do better, then when the Fed fights it, that was 22, that's when they, then it underperforms. Right.

And then when they finally begin to ease off and stop, it goes back up, and over that whole period, you totally make up the inflation. Was the right analog for the battle against COVID and all of the stimulus and Fed policy, is the right analog really the post-World War II, where you did have elevated inflation, but actually it fed the economy.

And as a result, you got good stock prices in the 1940s, 1950s. I don't think you had a recession until 57. Was that the right type of inflationary environment versus the 70s, which clearly had exogenous supply shops? They had the oil problems that were going on over there. But we also, as Jeremy and I verified, because we have a 150- year chart on monetary growth,

the monetary growth that J-PAL put out there in 2020 after the pandemic was an all time record. I read it was two World War IIs. I read it was two World War IIs. Even greater than what happened in any single year in World War II, World War I. Basically, J-PAL handed the government all the money it needed for the, you know, the seven and a quarter trillion dollars worth of stimulus programs that started under Trump and ended in, well, didn't end, but kept on going under Biden, which was the greatest stimulus that, you know, we'd ever, I mean, we had much more stimulus with government spending in World War II. It was much bigger

part. But even then, the Fed didn't hand them as much money as they handed them in 2020. So this is a great segue. We'll talk about the Fed a little bit. So then knowing those numbers and knowing that we had outdone the World War II era stimulus inside of a two year period, you have to, your mind has to leap to this is going to lead to a lot of inflation because there isn't actually a war. Everyone is now back on airplanes traveling back at their office, maybe three days a week instead of five, but this is not fighting Japan and Germany simultaneously. There is nowhere for this money to go other than good services, leisure, etc.

So, the Fed, how could they, they have a dual mandate. There's only two things they have to worry about, employment and price stability. They missed on both. Yeah, they missed, first of all, they were under the illusion that it was quote, temporary, that it was totally supply induced. I wrote as early as April, one month after COVID hit, when I looked at what was going on with the money supply,

I said, we're just gonna have a lot of, and it kept on going for two years, at totally excessive rates. And I mean, look, I started learning from Professor Milton Friedman I remember he said if there's a monetary explosion within 12 to 18 months you're gonna have inflation It's and it's first gonna be in financial assets gonna be real estate real assets It's a craziness of speculation the NFTs and all that and then it'll spread right out into into the commodities

Within 12 to 18 months. I you know, I wrote a lot lot of articles that have been posted on that when people were saying temporary and it exactly happened that way. What are they looking at if not the record level of money supply and fiscal stimulus coming from Congress and the White House? If they're not looking at those things and tabulating them, what are they looking at? Well, they finally did, but just two years too late. What are they looking at for two years? But they're also still not looking at it now, right?

Because that picture has changed. Well, now it's almost too tight. I mean, there's been almost no money growth over the last two years. So we're going to go there now. I wanted to ask you, I tell you, Professor Siegel, the country needs you. You are the chairman of the Federal Reserve. Limited term. Get us out. Finish the inflation fight.

Give us back the stability. We don't need zero percent. We don't need disinflation. We don't need negative bond yields. But just like get us back to normal. What are you doing that the current Fed is not doing and why? Well, first of all, I think, as we've argued, as I've argued for two years, and now has been talked about a lot, the very bad shelter price index that the Fed uses in its consumer price index, its PCE and all that, is very distorted, it's very lagged. You know, we've done a lot. If you put actually what's happening to

housing price, see, if they had actually used current rental and housing prices in their index rather than the lag way that they put it in over a two-year period, we would have had 10 to 15 percent inflation in 2021. And believe it or not, we're down to the 2 percent inflation right now. Because don't forget, shelter is 41 percent of the core rate of the CPI. So if you get that wrong, you're getting the inflation wrong. They have the shelter index going up at over five, five and a half percent a year. If you put in actual rentals, which soared early on,

but actually, if you look at apartment list, there has been zero increase in rentals over the last two years after an explosion in 2021 and 2022. If they do that right now, Twitter explodes. Well, what it means is that... The Republicans, they say you're moving the goalposts. Everyone freaks out for a different reason.

If they make a huge change like that, how do they calculate? You mean changing the way they do the index? They said we're going to adopt the apartments.com monthly rental. That's our new data. Actually, in response to criticism, the BLS, the Bureau of Labor Statistics itself has now put out what's called a new rental index that's showing exactly what apartment list is showing, but it is not incorporated into the official statistics. So, shortly they have access to this data.

And they must know what you're saying is right. Now, but they didn't know back then. What do you say back then? What do you mean back then? Two years ago? Two years ago. 21. Two years ago.

They, I was thumping my head. They seemed to have no recognition of it. I remember one of the Fed conferences afterwards, AP reporter Glauber, Ron Glauber, I forget his first name. Jay, Powell, are you aware that there's really a terrible lag in your housing index and really it went way up and now it's way much lower. Listen to the answer. Go back and listen to the answer to the question. It appears like he had virtually no. He said, well, we look at the official index and then shoved it away to the next one. Now everybody, including Jay Powell, including Janet Yellen, who even commented about the rental index,

including the Bureau of Labor Statistics, who now put in a new rental index, but not into the BLS that everyone's talking about. But no one talked about it when it was really important two years ago. So you're the chairman at the next July meeting. What do you do? I think the fed funds should be rapidly moved down to about three and a half. How rapidly?

You don't want to alarm people? No, no, all right. So you have a, you know, let's see, you know, we're gonna get some indices. We may get a very good index on Friday. We'll see on the PCE, the rentals are, these lag rentals are beginning to come in. I think he should

tee it up at the July meeting for a September increase and we should decrease it in November and December. I'm saying 25-25 it and that depends on the economy staying strong. I mean if we get slippage in the economy, I'm not saying we will, I'm just saying if we will, don't forget he has dual mandate, he should be thinking of lowering it by 50 basis points. But that depends on slippage. Where do you think that will show up first?

If the Fed was too tight for too long, how are we going to know? Is credit cards? You're going to see the slowdown. You're going to see jobless claims. I mean, that's one of my favorite early early and commodity prices and jobless claims tip over. Where are jobless claims now? Quarter million a month?

A week? Well, I call the sweet period 200 to sweet range 200 to 240. We jumped up from 200 to 240. And we're just around there right now. But if we should see a 255 and continuing or initial That's that's initial to continue is a week lagged Yeah, so, you know, it doesn't it's a week later. It gives a confirmation of what what you have So for the listeners general professor Siegel is saying

anywhere below 250,000 weekly initial unemployment claims. That's like the first time somebody goes to the window and says, I'm out of work. Yeah, I mean, that's the first time when you've been fired or leased or something and- The Fed will know they were too tight if that breaks out to the upside.

If that breaks out on the upside and again, or I mean, this is a little bit more leg, we're gonna get monthly, of course, a payroll slippage that isn't, you know, suddenly we get a 50 instead of a 150 or 250. We see commodities going down. Looks like they peaked. Oil, there's an article, oil off its peak.

Aluminum is off its peak. Oil is, oil is most important, is off its peak. They're all off its peak. All the commodity indices are off their peak. Now, they're not crashing, which is good good because if they're crashing means that worldwide economic activity is really going down But they're definitely off their peak. They've definitely cooled off Do you write it like just conceptually is? Data dependent such a great thing to be if you run monetary policy for a country like the United States

Or is the time to start making some predictions instead? Well... Data-dependent means they will be too late. Yeah, but Josh, how have the predictions of the Fed been through history? Okay, so do you want them to make them? I don't know. But your major complaint seems to be how late they are. Well, they were late because they weren't looking at a major indicator...

That I was taught and learned about in my, you know, I mean, let me tell you, I was shocked. I mean, there's 19 members of the Federal Open Market Committee. I thought, you know, three or four of them would have said, listen, I studied monetary theory and policy. This is crazy.

This caused inflation. I'm dissenting. No, no. It's a chairman's board. They don't tend to dissent. You know why? Because J-PAL goes around to everyone there and he talks to them and he says, would you go aboard? What do we need for you to be on board? Well, if I were on, I would have never been on board. Ever. He couldn't do anything to get me on board. Would Bernanke or Greenspan have done things much or Yellen have done things much differently than the Powell I'll tell you I'll tell you why don't forget Jay Powell does not have a background in economics He's a dancer. I think no he's I know private equity

And he's a smart man. He's a well-meaning man. He's a you know, I And he's a smart man, he's a well-meaning man, he's a, you know, but he doesn't have a background in it. So if he isn't, if someone doesn't prompt him and teach him and all that, don't, but Bernanke was a professor of economics. Yellen was a professor of economics. Greenspan wasn't quite a professor of economics, but got a PhD in economics.

He was a blogger. Finally. He read a lot of Iron Man. We can talk about Greenspan, but that's another thing. So it's a different situation. One area of the market that they did bludgeon, it's not so small of a market, is the housing market. First time home buyers are completely screwed. Correct.

So I'm curious to ask you, do you think that lowering rates would improve housing affordability? Of course it has to. Of course, why? But by definition. Why? Prices rise? Well, not as much.

Okay. Prices have risen by 45% since the pandemic on the K-Show or index, but mortgage rates have tripled. Okay. I mean, and so, you know, we've done a graph of the cost of 80% finance mortgage has gone up, what is it, 120% or something. I think you finally have somebody on the Federal Open Market Committee, I think she's a voting member, Mary Daly, who is saying what you're saying. She's not saying it quite as eloquently

as you are. No, I agree. I agree with you. So she's talking about the beverage curve. Yeah. So I want to put this on screen just for myself and others who don't traffic in economics. What is the beverage curve? Let's put up Mary's... Oh, I was thinking a soft drink beverage.

Let's put up the first chart first. So okay. So just very, very simply, let's just get to this first, because this is basically, the question is what did the pandemic do to the beverage curve? It doesn't work the way it's supposed to. So this is- Or the Phillips curve. Can you use either one?

None of them. Right. I mean, the Phillips curve is a little bit more familiar to most people. The trade-off between unemployment and inflation. Beverage curve is between openings and inflation. All right, so next chart. They both have not behaved the way they have historically. Labor versus inflation? Yes, the tightness of the labor market,

measured by unemployment versus inflation, has not behaved. That's why people like Larry Summers and Olivier Blanchard and other well-known economist, Larry Summers, the Secretary of Treasury. Barry Redholtz. Totally wrong. He said there is zero way that we're going to, you're going to be able to reduce inflation without causing a lot of recession and a lot of unemployment. So let's look at this very quickly. Okay.

So this is what I want to ask you. So the Y axis is the job openings rate and the X axis is the unemployment rate. And it would make sense that these would fit on the curve the way that they do. Oh, what a chart. Except when you look at these purple dots. This is just like, it's like Alice in Wonderland. Right. It's like Lewis Carroll designed the economy where you could have 10 jobs for

every person looking and we really get into a weird place. This is what Mary Daly said. Let's put up her chart, the one with the red dots. So she, here we go. This is progress, but maybe too much progress is her point. So this is her. Looking at the top of the red dots, you can see that in the aftermath of the lockdowns, firms posted historically large numbers of job vacancies. They were scrambling. In beverage curve terms, we moved up the steep portion of the curve. That as rates rose and things became less frenzied, vacancies reversed. Firms settled down, posted fewer jobs, and we moved back down the beverage curve.

All this occurred without a significant increase in unemployment, which to your point, Jeremy, this is the success so far. And by the way, there's a couple things one has to say is that there's a lot of precautionary. They list jobs I hear that they don't really are not offering because they were so short of labor, so long. Hey, we'll list the jobs. They list the same jobs in multiple places places and something else one should know about. Everyone talks about the Joltz report.

Joltz report wasn't very important when I started back in, you know, years ago and all of a sudden the Joltz report because Jay Powell mentioned it. Do you know what's happened to the response rate on the Joltz report? No. Oh, yeah, it's gone down the tubes in terms of firms actually reporting it. We think the government, in some of these reports, get 100% compliant. Well, the Joltz report is the worst of all of them.

It's gone down from something like 60% compliance down to something like 20%. Now, I'm giving you approximate numbers. So the variability of that JOLTS, that's one reason why I like to look at inflation unemployment, because that unemployment rate comes from the government's household survey that is better surveyed than the JOLTS report. We talked about these alt inflation data points

where we're substituting our real-time inflation data. It's like you need this alt jobs report because of some of this craziness in the survey responses. To actually get what's happening. But one of the reasons why Austin Goolsbee who is now you know on the Fed and he's a good economist in Chicago and everything and he said how are we even able to bring down inflation as much as we have? Without a recession.

Without a recession. Is that inflationary expectations never got out of control. Yes, they did go up a bit. But if you compare what inflationary expectations by any survey, or you take a look at the difference between tips in the nominal bonds or anything like that, was in the 1970s and 80s. It's unbelievable. I mean, their inflationary expectations was 10, 12, 13, 14 percent for five to 10 years. And they were behind. Well they were right at the beginning of the 70s where we had almost 10% inflation, eight, 10% inflation for seven, eight, nine years,

but at the end they kept on having them. To break that inflationary expectation, then you need to cause a recession. But when inflationary expectations don't get out of control like they weren't this time, they did, if you just take a look at the inflationary, they were up on maybe 1% or something. So when he said-

So therefore, you don't need to slaughter the labor market the way you used to, to bring about the type of, well, you know, immaculate disinflation that we've had. When he said transitory, obviously it looked ridiculous, both at the time and in hindsight. And it totally did not jive with the national mood. People were angry and they didn't want to hear that. But part of this was the supply chains and the ports and those and not getting semiconductors into cars because China's workers are being welded shut in their buildings.

Okay, that part was transitory. Yeah. It wasn't the whole story though. Because he poured out some money. See, there was a supply factor Yes, but by pushing out all that money you made sure that the inflation would be permanent But I mean is the higher prices would be permanent and then when supply chains got back to normal you wouldn't see the prices go back Down that's exactly what happened by pushing all that money and everyone all that money

You're never gonna get the prices back down Even when the supply chain normalizes so Mary Daly finished her speech by saying All this is to say at this point inflation is not the only risk we face We will need to keep our eyes on both sides of our mandate Yes inflation and full employment as we work towards you. Okay. This is what the market wants to hear Yeah, but he hears it from power policies. It's power said the same thing at the FOMC pressers afterwards He said we have a dual magna we have to look at both which means which is good Which means as I said before how fast you're gonna move it down depends not just on how fast inflation moves down

But what is the state of the labor market and unemployment rate and the real economy. You think he'd rather be late and potentially cause something in the economy than do it too early and have inflation reaccelerate? But they're not going to have, because if you take a look at the money supply, it's had no growth for two years. It's a totally different world from where he was in 22.

This idea that we go back to the 70s, so I looked at the 70s. In the whole decade, we had 120 months, right? 12 times to 10 years. In no month did the money supply ever go down. Burns just kept on pushing more and more money and hoping to offset the contractionary effect of the oil embargo and all those increases and poured more and more money and fuel on the fire. Never. So the idea that oh my god if I lower the rates down from five to four or three, I'm going to reignite it is a totally false narrative not based on historical facts. By the way that's such an important point that you

just made because if it were so simple that we could reignite the economy by lowering rates then why didn't it work for the almost the entirety of the post-grade financial crisis period yeah they couldn't get 2% of GDP growth right if they tried for more than a couple of quarters well our inflation rate they fell short of the target during most of... Disinflation, global. Well, we didn't actually have negative inflation. We just had inflation that was somewhat below the Fed's 2% target, and that's why they revised, they finally did a revision and said,

now we're gonna spend a little time above Newton. I mean, they didn't dream of this. They were talking about two and a half, two and three quarters. Of course, they got eight or 10, probably measured 10, 11, 12. But so that was sort of laughable here. We're gonna go a little bit above to give an average.

Of course, they just blew the top out. So the overnight rates might have a bigger impact on asset market pricing than it does directly on the economy. You're saying like money supply and velocity of money, these things are more relevant. They will, I mean, it definitely, I mean, if the Fed, I mean, it's definitely, no, let's be very careful here. People say if, oh, if they get it down to 3%, is that going to be, isn't that going to be fantastic for the stock market? Yes, if it's because inflation is coming way down. No, if it's because the economy is tanking.

So let's talk about the stock market. So you've got that's what you've got to worry about. Professor, I want to ask you a question and I want a yes or no answer. I'll show a chart then we can come back and add some meat here. Don't you point that finger at Professor Segal. Hold on. Professor. Okay. Okay. That's OK. OK.

Are we in a stock market bubble? No. Good answer. OK. Moving on. So, no, no, no. So, John, chart on. So Torsten Slack has a chart showing the current AI bubble

is bigger than the 1990s tech bubble. And. But that's such a stupid chart. Thank you. That's an in. Thank you. That's an in... I mean... Shout to Torsten.

Listen, I know Torsten Schlock. He's a real bright guy. I love him. All right. So let me just from the audience. But that's just... It's a bad joke, I agree. For the audience, the chart that we're looking at

is he's showing the 12 month forward PE for the top 10 stocks for the S&P and if you exclude the top 10. Go ahead. All right, first of all, and that's going back to the article that, the op-ed piece I did in 2000. The average PE of the magnificent seven of its time, of the magnificent seven of its time.

JDS, Unisysco, Oracle, Sun Microsystem. You could always find those leadership stocks. Nortel, you can go back. What was it, like 80? It's in the chart there. No, 200. The average PE of the S&P tech sector was 80. Tech sector, these are the stocks that are making money. You can't go in the S&P unless you make money.

People were moving to IBM, a lot of people said, I want a more conservative portfolio. I'll move you to IBM, which was selling at 50 times earnings. So to try to say that this is like that, it's just absolutely insane. Do Cisco, NVIDIA comparisons rub you the wrong way?

If NVIDIA, all right, so I've often been asked that question. The real question you wanna ask, Josh, is this like 1997, not is this like 2000? Okay, say more. Okay. It could be. It could be it could be now but but just a minute but I'm gonna say the following thing all right for Nvidia to be priced like you know Cisco and those other stocks it would have to be at around 300. 300 times earnings. No, 300.

And what is that, what, it's 140? It's 130 something. Yeah, it would be at 3,350 approximately. So six trillion. Yeah, and then it's getting up to that level. So is that your current price target? You know someone's gonna tweet that. No, no, we won't let that happen.

Professor Siegel has now predicted in a video. I said, if we get into a bubble of that magnitude, we would be 100 to 200 and even 300% higher on these prices. Now, am I saying, what is the forward on Nvidia P50 now? I think it's 39. John, throw the cash yield up. Oh, that's 39. It's almost a value stock.

So this is the free cash flow for the tech sector. So yeah, nobody's saying that these stocks are cheap. But there's bubbles and then there's bubbles. This is free cash flow yields. Free cash flow yields. For the tech sector is the lowest it's been. 2.3. Since the dot com bubble.

Okay, yes. But the growth rate of the earnings have been the fastest ever. So, you know, it's not just the free cash flow yield, that's a static measure. That's not a dynamic, you have to take the yield. It's like saying, oh, I'm not going to pay any more for growth stock than a value stock

because it doesn't matter that the earnings are growing faster. That's very misleading. So Jeremy Schwartz, the last time you were on or maybe the time before that we had a conversation about becoming the number one stock in the market and what happens afterward and I think you concluded something to the effect in your research. There's nothing wrong with becoming the best stock in the market or the biggest stock in the market. And actually, you can go on for another year and continue to outperform. But we're getting to the point now where these stocks are bigger than asset classes.

And the returns that have gotten them there, in the case of Nvidia, it's so fast. It's so rapid that I feel like there isn't any research historically that we could look at that this would even be an apt comparison to yeah One of the things we did is we it became the highest price of sales stock in the SP 500 we went back the last like 70 years and there's about a hundred companies that got that honor and The odds of outperformance from that it wasn't zero It was it was like nine to ten maybe like ten percent of the companies But actually one of the interesting things we had found

was over the next 12 months, the median had outperformed. So this, it became the highest multiple stock last March. So that 12 months is, you know, we're sort of just getting past the 12 month period. And so, you know, it wasn't surprising to see it actually continued outperforming. Has a stock ever, there's no precedent for this. I don't think a stock has ever gone from, say, the 50th biggest in the S&P, whatever it was

two years ago, to the biggest in a two year window. That's never happened before. No way. How fast did Cisco go up? I don't know. I'm asking you to remember. So this is a quote from you and I thought this was really interesting. You said that Cisco is like the classic 2000 stock that was at very similar multiple.

Got to 40 times sales and then it only grew only 20% a year and it still got killed. So for 23 years Cisco has grown sales 10% a year which is three times the weight of the S&P. So the bulls were right about the story but still lost money for 20 years. I mean, to me, that's a bigger risk for Nvidia shareholders than like Nvidia messes up on a chip. The competition's gonna come.

They won't be the only AI stock forever. Everybody's gonna be working on chips. The question is how long will that competitive moat last? For now, this goes back to the broader tech sector in general. Like one of the things we show is the S&P expanded tech. So that'll include Amazon, it'll include Meta, Google. You know, that's now well over 50%. The tech sector is about 40% plus of the market, maybe 45%. That's at 30 times earnings versus sort of 10 points less for the non. But they're growing much faster.

So going back to is it a bubble? You're paying 10 points more but their growth rates are worthy of it. If the video's earnings start slowing down, you know, it becomes much harder to justify. But should a company of that size no longer get the premium multiple just because it's so damn big? Well, they've been growing, they've been able to deliver. So it's a matter of, it's even gotten cheaper in some respects because the earnings have grown more.

But yeah, I think the expectations keep going up though. So yes, they have delivered. But just the idea that this company is going to grow earnings 50% a year as far as the eye can see and that the stock price will keep up with that because it deserves it I mean, this will be a 10 trillion dollar market. So professor here's a couple here You got to be careful. Yeah, not as far as the eye can see because then it's an infinite price I mean, but you know, I say suppose you say it's an infinite price. I mean, yeah. Which is impossible. But, you know, I'd say, suppose you say it's selling for,

I'd say twice the market now, you're saying twice the market now. So what you need is it to grow earnings to a level that is twice as high as the regular market will grow to bring it back down And that's not forever if you're growing it 40 or 50 percent a year How many years of that growth do you need to bring it to double is it four years? So that's great question this year. They're expected to do a hundred percent earnings growth and change

Yeah, next year 33 percent right if they deliver the 33 next year, it's not going to look as great as the 100 this year looked. No. Won't the multiple shrink, like, almost guaranteed? So the question is, how much will the multiple shrink? It's not going to stay at 40 times earnings if the growth rate is 33. But don't you think people realize it's not going to grow?

Because really, if it's going to grow at 100 a year, the stock is worth, you know, much more than it is right now. So people expect it to go down. The question is, is it gonna go down more than the 30%? I mean, if it goes from 100 to 30 and stays at 30 for five to 10 years, it's worth it now. I think it's, if you do the math,

with that, I think you're gonna get it underpriced. I'm not saying you can do the math I would with that I think you're gonna get an underpriced I'm not saying you can do it I'm just saying Nvidia has earned six dollars and twelve cents EPS a year ago a year ago it was a dollar nine yeah yeah six and a quick six twelve versus a dollar nine a year ago it's unbelievable and we're talking about the largest market cap in the world we're not talking about a small cap, you know, that's just like a biotech company. And it's not a special situation. I mean, I don't know what the threats are.

John, can we put this rainbow chart up? March 14th article in the Wall Street Journal. This is, I mean, this is so apropos, not that there are 10 NVIDIAs, but there are probably three or four But here's Cisco Current market value. This is this is March of 2000 You took the projected PE ratios of stocks with more than an 85 billion dollar market cap correct very simple and you said Cisco

Cisco right now at its current earnings is 148 times earnings for 1999 for last year and then five year expected earnings per share growth 29%, PE in five years at it, what's the 15%? So he was assuming a 15% annual return for the earnings. In five years it would have been trading at 74 times earnings. Yeah. Even if they did 15%, which they would not go on to do. Correct.

It would still be an expensive stock. So they would still be expensive, and if you go out 10 years, so the average of those would be 88 and go off 10 years, and of course, none of those stocks met the IBEs estimates. You have Qualcomm, JDSU, EMC, Sun Micro, Nortel, Oracle. I can proudly tell you I've lost money in all of these stocks. But the average of all of these, you basically concluded, even

if they hit these targets, which are like really audacious targets, people would be excited if they did it. They're still way too expensive. Exactly. But I think Cisco actually did exceed those earnings and it didn't matter. It still got killed. It got killed because it couldn't stay at the... That's what I mean.

Even if it got to those earnings, it was overpriced. You know, well, I don't think it kept at 29% for 20 years. No, no, no, no, no, no. I'm saying, but I think it did do 15% for the next decade or something crazy like that. Okay, but that's not enough. And if you bring you back down to a 25 times earnings, this shows you that if you had done 29.5% for 10 years,

you would have gone down to 41. So the fact, and that was 10 years. More important though to what Cisco did is the fact that the rest of this list, these stocks seemed bulletproof in the moment. We were referring to them as blue chips and none of them were here other than Qualcomm. Like Yahoo is gone. JDSU is gone. EMC got folded into Dell.

Sun Micro was acquired. Nortel went bankrupt. Oracle's still around. AOL Time Warner. Whatever is left of that is now a shadow of its former self. And for me, that's the bigger lesson because I was selling these stocks to retail investors in March of 2000. I would call people and confidently refer to Sun Microsystems as an internet blue chip. And in that day and age, it was. But the impermanence of these companies is really remarkable. And you've got, you know, you've documented hundreds of years of that sort of thing.

So is the right answer for people to not worry about if Nvidia is Cisco, but to worry more about the tech sector in general Because right now if they're trying to race the S&P, they're like 25 30 percent tech. I Mean is that wild the way the way the people are allocated right now judge the whole thing is what time frame? Are we talking about for these investors? Yeah, I mean, we know that momentum is a big factor. And the momentum has been with these stocks and it's hard to break a strong momentum. You need several disappointments and turnabouts

before that momentum is broken. And by the way, being right in 10 years doesn't get you a lot of awards if you're wrong in one year. You could be out of the business. In other words, you're out of business. If the stock you'd say get out of it and it triples in a year,

and then five years from now it goes to one half. Wrong. Right. You're out. Right. Right. You're not there to collect the award. Yeah.

You're not there. Okay. So the rest of the market, I saw a stat today, the equal weight S&P has underperformed the market cap weight to the largest degree over the first six months of a year, maybe ever. Yes. Does that concern you or do you get optimistic? Well, that's the same thing's value stocks underperforming growth. Equal weight is a value.

So this whole idea of equal weight, it's a value index. Do you get optimistic that the rest of the market can catch up in the event that there is large cap weakness? Or how do you think about that? Oh, I think it can catch up because I think if you take out those, what are you at the PE once you take out the tech? We have this. Much more reasonable.

Let's put this chart up. Oh, they're yours. These are your charts. This is the S&P 500 expanded tech forward PE ratio and then the ex-tech forward PE. John, I'm sorry. I think we're looking for the next one. There we go. There it is.

Thank you. This is what I was talking to you. So the top chart is 30 times earnings for the expanded tech forward PE ratio. The middle pane is ex tech, which is 17.9. Yeah, that's really reasonable. Because I mean, 17 and I like a 6% real yield on on those stocks. And if you go to small stocks, it's of course even more. I guess they have a probably a PE of what?

And this is something we update on a daily basis, a daily dashboard that we have. And you can see that we call it expanded tech. There you see that 45% number that the tech sector, which is 31 times. That's why the overall P is pushed higher. If today was the first day, though, that you were allocating the portfolio, would you just say, yeah, I love tech, we'll buy it eventually. Here's what we're going to do. 100% X tech. And then judge me, judge me over the next two years. You're fired. Let's see if, let's see if you're wrong. And you're, you're fired, especially with the new clients. If you had a client for a

while, he may stay with you. Yeah. Not a new client. New client. We do build model portfolios with the professor and we, you know, I think if we were wrong on something to come into this year we said it wasn't important that the Fed delivered the cuts, it was that they showed the flexibility to cut so we thought there'd be a lower probability of recession and so we were overweight some of the mid and small caps saying, hey, less probability of recession, these things are priced for a recession. Small caps at 12 to 13. Why can't they catch a bit? We're now saying you need rates to be cut. I think I've been saying that you need rates to be cut. Because let's face it, the earnings

haven't been great on those companies, right? The small caps are cheap, but their earnings, they're almost priced for a recession. Their earnings haven't been great. They're also in the wrong industries. And they're all neglected as a result. And everyone wants to go with the momentum in the wrong industries. They're all neglected as a result and everyone wants to go with the momentum in the short run. Really hard. Again, it's really hard to break a momentum trade. My theory on the small cap underperformance, which has now gone from being cyclical to secular, let's call it what it is. The types of companies that used to be in the small cap index go public when they're

already mid or large caps. You're not getting the earnings growth from Uber in its first 10 years because they're not public. That should Uber, Airbnb, these things should have been part of the story of the Russell 2000 and they never were. You know what's interesting? It came public at $40 billion. The last go back to all that long-term data, the Fama French factor data, you go back 70 years,

small cap growth, some of those companies you're talking about would have been these unprofitable companies that were actually the worst segment of the market for most of history. Yeah, except for the ones that work. Yeah, but as a group. But as a collective that people tend to overpay. Jeremy's right.

If you actually go large, small, you know, make a A stock box. A stock box with quintiles on large, small, quintiles on value growth. Yeah. The absolute, if you go over the whole hundred years that we have it, 1926 at the present.

Small growth is the worst. The worst. Small growth is the worst and small value is the best. Yes. Now, except for the last 10 years. Okay. 15 years. So you think the mean reversion is just delayed

but coming, it sounds like. Well, we talk about AI being a real thing that we, and this goes back to sort of when the professor talks about three and a half percent as the neutral interest rate, which is higher than where the Fed says. We talk about productivity increasing that AI is going to be a real thing that benefits more than just the chip companies. So we're all going to get benefits. It hasn't shown up in the earnings yet of those men in small

caps because they're borrowing from the Fed. They're the only one paying the higher rates. But that eventually we're all going to benefit from this new technology. You're in so early phases when you talk about you know, I know you have Dan eyes here a lot, the 94, 95, 97. In terms of using AI, we're so early. We're only starting to use that. So companies that comprise the Russell 2000 or the small cap 600, maybe a year from now, we're going to start telling analysts, hey, instead of earning the dollar 10, we earn the dollar 30. Why? Efficiency. Thanks to all this AI shit we just put in place. Not hiring as many people,

a lot of it won't be firing people, you just don't hire as many new people. So that will be how the small caps join the party, is through cost savings. And what Jeremy said, when you have small caps having to finance a six, seven, eight, they're above the Fed funds, and all the big caps, they're above the Fed funds. And you know, all the big caps,

they're on equity or they're all locked in their long-term debt because they could do it back when it was 3%. And it's totally different. So once you get, starting to get the cuts, I think people will begin to see a turn of those profits. And at that particular point, I think people will begin to see a turn of those profits and at that particular point I think and until then I don't it's gonna be really hard to break the momentum Could we jump to international with you guys in the time that we have left? I think this is what people really want to hear from from you both

There have been some really good international markets this year Yeah, Japan is at I don't know three decade highs and I think a nominal all time high. Okay. We won't talk about an inflation adjusted, but still. They had deflation, so it's even better. True. Even better. Okay.

India. Yeah, great. It's, it's a huge bright spot amidst a lot of pain in emerging markets over the last 20 years. Finally, a thesis involving demography is actually paying off for investors. Broadly speaking, do you see a mean reversion for international stocks? What would you say to all the advisors

who have kept the faith and are allocating overseas and are taking the client calls every year? Why don't I just own 100% NASDAQ? Like, what would you tell the advisors who are listening? And there are probably dozens. Maybe I could start with a few points. I mean, one thing for the last decade, some of what has been international underperformance

has actually just been the dollar. So if you look at broader national equities in dollar terms versus in local currency terms, you lost three or four percent a year from these currencies being so weak that if you wouldn't have been taking that currency bet and we're hedging it, it would have been much better. So that's one point is just people have been doing international wrong in some degree by betting on these currencies.

But on Japan and India that you talked about, Japan is one of our favorite markets. It's one of your biggest ETFs, right? DXJ? Yes. We talked about that for a number of years. But four years ago, Buffett started buying Japan. We wrote pieces from the day he started buying. You should follow Buffett into Japan, saying it's one of the cheapest markets.

It took stakes in five of the biggest trading houses in Japan. In hindsight, what a great signal that was. But also, for somebody of his resource, he's been hedging his currency. He issued bonds in yen saying who knows what these currencies are going to do. I can't predict currencies. I'm going to neutralize that risk.

And it's still it's a 14 PE double the dividend yield of the S&P growing 20% dividends. They're trying to increase corporate governance. They're trying to get price to book ratios above one. And so you're seeing real strong dividend growth buybacks. It's got positive, it was trading like a value stock, but with better performance than the NASDAQ for the last few years. It's quite interesting. Did you see what Larry Fink wrote about how when he speaks with global politicians,

what did the US get right that a lot of these countries got wrong? Why has our post-crisis recovery been so much stronger? One of the key elements is our capital markets, which I think is shorthand for our stocks go up, therefore people make more money and spend more money. You believe in that? Let me, this relates to that, but I'm going to just, I think what Jeremy said is absolutely

right, but I want to say something else. One reason for the underperformance, except for recently, of international is because basically international is like a value shop. Yeah. No, it's actually, they haven't done that much worse than the value stocks in the US. Okay. That's interesting. So think of, you know, people tell me, they think of it as a separate category.

No, they're just value stocks. Drew Dixon just wrote a piece on this showing that the growth stocks in Europe have actually held their own against growth stocks here. The problem is there are so many more value stocks in Europe and the value stocks have sucked. Someone said that there's zero tech in the FTSE 100 for the... I mean it's unbelievable. The tech proportion is like this big, we're 30%.

So you're dealing with a value world. When you look at their growth stocks, ASML is their chip stock. Yeah, yeah. Arm Holdings is like a European chip company, now listed here. But it was amazing. LVMH. Some of their quality growth companies

aren't that much cheaper than US. We have some factories that sort the market by quality and dividend growth and earnings growth. And maybe it's an 18 to 19 P versus a 21 P for the S&P because they're the premium stocks are there are a basket Of high quality stocks that are growing and actually growing even better than the same companies in all Novo Nordisk. Yes, it's one of the best growth stories in history It's a European stock, but there are very few of them. It's just that person. comparison. I mean to the big movers. The guy in France seems to get that.

The guy in France seems to want to spark like a start. An AI, it looks like they're like cutting all the red tape to allow startups in France. Are you talking about like Macron? I thought you were talking about Wambi. Yes. Macron is, alright, some of the biggest financing announcements, venture financing announcements of the last month in AI have been French startups. There's Mistral, there's a few. I guess what I'm asking is, it seems like the rest of the world is looking at the S&P 500 and the Nasdaq and saying,

why can't we do that? And I'm not saying they can, but it's the right question, isn't it? Well, I think some of it, we had this culture of dividends and buybacks, buybacks in particular. And now those tech companies doing a lot of that. But you're seeing Japan took leadership in that. Korea is saying, look what Japan did with all these corporate governance things. And they're trying to get what they call their value up program and getting these corporates to actually return more cash. Even China is looking at that and they're now saying that you weren't, they're trying

to encourage dividends and the same dividends in buyback culture and trying to put programs in place. So they are competing over some of that. And so it's interesting. But I'd say India, when we talk about India, Japan, there's sort of two opposites. One is a slow growth Japan, cheap market. India with reforms with positive inflections. Japan there's sort of two opposites. One is a slow growth Japan, cheap market. India is reforms with positive inflections and India is the long-term secular grower, good populations

or the opposite of demographics, very fast GDP growth but a very pro-business government. Modi's put in a lot of positive change and there was questions on his election. Was he going to get enough seats? But the way it's worked out may be the best of all scenarios. You guys seeing inflows into its EPI? Yes. Okay, that's the India dividend. It's a dividend oriented in the stock market. So interestingly, we were the first firm to have local shares in India in 2008 when we launched it. It was not a dividend culture. We had a valuation-sensitive

approach where we're waiting by earnings to rebalance back to... Right, earnings, not dividends. There's almost 500 companies. It's rare that we can be the most diversified exposure when you're doing a non-cap weighted. This is like the... Most of the cap weight only has 120 stocks. We're over 400 stocks in this. It's large, minute, small caps, but at a much cheaper multiple than cap weighted India, which is like 26, 27, or like 18. Are people calling you about that fund though? It's been, there's been a lot of interest for sure. About a billion of inflows this year.

Okay. Do you guys have fun on the show today? It's been awesome. Oh, I could, I love it. I could keep on going. Okay, good. We're going to keep on going. What we typically end the show with, Professor, is we ask people for favorites. Things that books they've read that they've loved or television shows they watch or really anything that comes to mind. I think people would love some recommendations from you. Reading, watching.

I think your favorite thing is the podcast you do with David Rosenberg. Shout out to Rosie. A listener said out to Rosie. Alissa said that to me. Did you hear that? I goes, listen at the 17 minute mark. Professor Singles starts going off the rails. I mean.

Did you hang up? No. Did he hang up? No, the thing is, he kept on talking. David keeps on talking. It doesn't matter how long he goes. And I only had 10 minutes. So I...

He has a lunch he likes to go to every... Yeah, I mean, I have important faculty. And so I said, okay, David, you said, I wanted to get it. And then he kept on talking. Well, as... I said, listen, you can talk for another 50 minutes with Jeremy Schwartz.

I need to tell you. As Barry Whitmore is his partner, I can't laugh at anyone who likes to keep on talking and even myself. Some of us don't know when to stop or don't know when we've set up. This Friday we're talking to a San Francisco Fed economist on rental inflation. So this will be an interesting one. You're going to tell him he's an asshole also? He gets it right.

Jeremy, what should we be reading? What are some of the things that have been most influential that you've read for people that want to genuinely dig in? Of course, they've read stocks for the long run. If they haven't, they'll do that. What else? Oh, boy. I mean, I read so much. A lot of Grisham. A lot of Grisham. I'm trying to think about, I mean, I like to read biographies.

I mean, obviously I've read the Lewis biographies. I've read Glenn Lurie has one called late admissions, which I love because he was an MIT student. He was a PhD student and professor, and I found his insights to be really fascinating called Late Admissions. I mean, I could keep on going on and on. I do read an awful lot.

I read Simon's book, Zuckerberg, I think it was. Simon didn't cooperate, so we never found out much about how he did what he did, but it was an interesting life about how he found. Oh, Jim Simon's. Yeah, the Slickerman book. Jim Simon became better. I mean, what he didn't talk about,

he kept on saying better than Buffett, but you couldn't get into his thing. It wasn't publicly traded. Well, what he did, so the thing about that book is, I read it as a management book. It's not a math book. But it's also not a real finance book. No, no, no.

No, not at all. But what he has to do is keep replacing these geniuses because whatever edge they found and exploited goes away. So the story is 30 years of hiring new math geniuses to come up with new ways to beat the market Think about if like coca-cola had to come up with a new soft drink every three years. It's impossible Something else is really interesting because I was asked to do a review of Paul Samuelson was one of my professors thesis advisors And one of the greatest economists of all time in my opinion

I wrote a review of him, you you know he started a trading corporation also on futures just like Simon he killed and with it with a couple of others and they did terrible based on macroeconomic things about supply and the band then they started doing patterns and then they started doing momentum and then they started doing trends and all of a sudden they started making money. And if you read Simon, he started also in a macroeconomic thing, couldn't really do it, and then finally he started going, because this is short run, he started doing the trends, the mathematical trends, and his persistence was always there. It was a really interesting parallel to really unbelievably smart people and how they approach the idea of making money in the trading market. You know, I love to

watch the short run of the markets where the fascination is, even though of course, stocks in the long run is a long term perspective. Well, I think the business that's been built based on your ideas, it's not looking to put up hedge fund like returns, but arguably, in the end, you're going to impact millions of people. Thank you. And I think you're going to have as big or bigger of an impact as any hedge fund manager that they could possibly write about.

So I wanted to make sure I said that to you. Jeremy, any books, any movies, Netflix shows, what are you into these days? I see that you're at the beach. Tan as well as I do. We dropped off my daughter for camp, the camps. So I've been doing a lot of kid stuff with... I get it. We saw Hamilton here for my... My daughter's into the theater and arts. So the book I'm currently listening to is like 40 hours, the Hamilton biography. Okay. And so you'll be ready for the show. And she's now prepping for the show 13. So the show's not till next November, but she's already knows the whole the whole song. So

I know I know every song in 13 also. What is 13? It's a Broadway show? It's about a bar mitzvah kid who, you know, it's the he was it was on Broadway for a few years and she's going to be trying out for it school next year. Oh wow, okay. So she's a performer. All right, very cool. Michael, do you have a favorite for us today? I took the boys to see Inside Out 2 yesterday, and I saw something that I haven't seen

in many, many years. The show was at 5.30, and by the time we came out at around seven o'clock, there was a line of people waiting to get in to see the next showing. Wow. It's been a long, I can't. That's cool. The kids really responded to that movie.

Inside Out 2. It's a Pixar movie. Oh, I saw the one. It's on 700. And it had the two, was very well reviewed. It was very good. $750 million worldwide so far, not slowing down. But yeah, there was a line at the movie theater.

It was awesome, I love it. What was, did you see the first one? Uh-uh. So you just went in cold. You saw the first one. it. What was, did you see the first one? Uh-uh. So you just went in cold? You saw the first one? I saw the first one and I thought the first one was pretty good. I somewhat people said the second one was better. It was very well done.

I fell asleep a few times, but it's not for me, it was for the kids. It was good, it was good. Nicole, did you see Inside Out 2? I'm going this weekend. It was really well done. We watched Inside Out 1 on Friday night. After missing it, it was too late for us to go to the movie. My 18 year old daughter went with all her friends because the first one came out when they were in elementary school.

Oh, it's been that long? Yes. Or seventh grade. But they like, they had to go. And they were willing to go to the movie theater. Did they love it? Yeah. They were into it.

But what's funny is, she's 18. So she did that last weekend. You know what she did this week? She went to a boogie with the hoodie concert at MSG. And this is the cool part for me as a dad, something I did, I did something right. She, I said, what was the best part of the show? She goes, dad, 50 cent came out on Nice. Unannounced, surprise came out. He did all his songs and I knew the words to every song.

I said, I really am like maybe the father of the year for sure. So I did one thing good. All right. That's all we have for this week. I want to say a very, very, very special thanks to somebody who has been hugely influential, not only to Michael and I, but really to anyone who's a long term investor. If you have not read stocks for the long run, what edition are we up to now? Six.

Number six? Yes. When is seven coming? Should we wait or should we buy six? My wife said she'll cut me off if I write seven. So maybe I have to give it to Jeremy. Professor Siegel, you're a living legend, and all the reverence that we have for you is shared by literally everyone who's ever seen you speak, read your books, read your

articles. You've given our profession a lot, and you've given investors a lot, and we just want to say thank you so much on behalf of everybody who's watching and listening. So thank you. Jeremy, you're great too. Thanks for all you've done, Josh. No, but truly, thank you. Jeremy, you're great too. Thanks for all you've done. No, but truly.

Sorry, I kind of squeezed him. No, no, no, we expected it. I get going, but he could do all those answers. We expected it. Jeremy, we'll have you back, of course, and thank you so much for helping us make this happen. And thanks for all that you do, and we really appreciate it.

Thank you. Thank you. All right, John, Duncan, Nicole, Rob, Daniel, Sean, everyone who contributed to the show this week, Chart Kid, Matt, thank you guys so much. And to the listeners, make sure to leave us a rating and review. They go a long way.

We'll talk to you soon. All right, take us out. All right, so that's the warmup. I just wanted to kind of get you out of me.