The Compound and Friends - Michael Cembalest Takes Us to School

Episode Date: July 14, 2023

On episode 101 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Michael Cembalest to discuss the economy, AI stocks, the worst experiment in capital markets, the biggest risks to the market, the 2024 election, and much more! Michael Cembalest is the Chairman of Market and Investment Strategy for J.P. Morgan Asset Management. This episode is sponsored by Horizon kinetics Medical ETF, which primarily invests in pharmaceuticals and biologics. To learn more, visit: https://horizonkinetics.com/app/uploads/Kinetics-Medical-ETF-1Q23.pdf 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. Wealthcast Media, 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/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Does he have to wear it? We wear it. We wear it. We all wear it. We all wear it. So people are used to seeing you on a podcast. Hello, hello. They're watching people who are wearing headphones?

Right. Yeah, yeah, yeah. Yeah, yeah. You know what? I don't know anything about- It's kind of like the podcast aesthetic, honestly. I don't know anything about this whole thing. Michael, you know what I learned about you this morning?

What? You guys are through it. That you and I are Jeep EV guys. Regrettably. So I- 19 miles on a full charge. Our Jeep EV guys. Regrettably. So, I... 19 miles on a full charge. I got 26, not to brag. No, it's probably closer to 19.

You're right. So, I got a Cherokee, like, during the pandemic. I said, I'm not paying 700 bucks for a Cherokee. So, for a Wrangler. Remember when Wrangler prices went totally nuts? So, I got a Cherokee. But this time, I got the Wrangler. And the only thing that I cared about, the only thing thing was the power roof. That was my only requirement. And that only comes

in the hybrid. So my broker goes, you want a hybrid? I don't care. I'll take a, sure, give me a hybrid. But you're right. I saw a leak under my car and I put my finger in and I smelled it. And my son starts cracking up. He's like, what are you doing? I'm like, I don't know, making sure it's not like, anyway, now I know, it was, it's a coolant. Yeah. What do I do? Well, you have, you gotta take a dealership to have a service call.

What else don't you like about it? Well, I mean, first of all, I've had a bunch of issues with it. So I've had the, over the winter, if you don't use it for more than a couple of weeks, the battery might die. Okay, that's an issue. And you cannot jump it.

It's not a jumpable car because of the EV battery. It did shut off on me yesterday on a main road. My wife's like, what did you just do? I was like, nothing. Yeah, it's according to the Jeep dealership. It is in park. According to the Jeep dealership, these are very much a work in progress. Jeep is known for a lot of things.

You know, electrification of vehicles is not one. Right? The other companies are doing it better. Yeah. But I do like the power top. The Rivians look really cool. I saw an R1S the other day. Is there only one Rivian model?

Should I go ahead and do this? Yeah, there's two. There's a truck. You promise I'm not going to look foolish? I promise. No guarantees. Oh, I look like a total clown. There's a truck and an SUV version of the Riven.

Hold on. Wait. You hear me? To hear yourself more importantly, talk. Okay. Right? Yeah, there we go. So, Micah, you probably don't know this, but we are humongous fans of yours.

Okay. We use your charts. Every time you write something, we use it. All right. Sounds good. Thank you. I don't want to pay royalties. Take it easy. Where do you use it?

How do you use it? Usually with my wife. I'm like, did he see the new symbol? Did he see it? We put your stuff on our blogs and we put your stuff on social and we talk about the stuff that you write on this show and others. All the time. You're very influential in this room

for sure. We really appreciate you coming. Are you going to see Barbie or Oppenheimer first? Oppenheimer. Okay. We're going to see Oppenheimer too. That looks something about that. It looks like it's going to be a big, big film. Can I out myself as a complete moron, but before I do that, I just want to say we got a new hat. Look at this. Yeah. It looks good. So a It's different than the one up there. No, and different than this, the one that I usually wear. Okay. My friend said, hey, can I get a TCAF hat?

I didn't even know that they were in the works, but here we are. So last night, so I go to the movie theater all the time. By the way, is this the beginning of the- Oh, yeah. We started recording the moment you stepped off the elevator. So, Michael, I go to the movies frequently. Yes. I guess on average once a month. Okay. And I go to the local theater, which is, Josh and I live in the same town.

It's 10 minutes from our house. And I go because I like to see movies, right? As one does. Last night, I went to see Mission Impossible. But I said, I'm not seeing, because local theater, how big is the screen? 10 feet?

It's not that big. 20 feet? Yeah. I didn't even know. It's a small screen. So I said, I want to see the big screen. So I went to Limbrook. Yeah.

Huge screens. Yeah. And the Oppenheimer preview, the theater was shaking from the sound. Yeah. And it dawned on me, big screen movies, not bad. Wait, what dawned on you? I'm an idiot. There's a big difference.

That the screen size matters. There's a big difference between the local theater and the professional one. Well, wait till you see where I'm taking you to see Oppenheimer. Where are we going? We're going to Lincoln Center. The director, Chris Nolan, said he wants his film to be seen 70 millimeters. Give Michael a word, please. Well, it was shot on IMAX.

He wants, right. So he wants the audience to experience the movie in the largest format possible. And so there's only two theaters in Manhattan that have IMAX 70 millimeter. One is Lincoln Center. What's the other? I don't know. I used to be a movie projectionist. And there's a really big difference, right?

Yeah. Well, and with this, this IMAX is huge. I feel like I'm watching an improv group. No, not at all. No, this is real talk. This is real talk. We are going. Michael, this is what matters. All right. We are actually going. We're going to get to the meat once we start recording. All right. Where's John?

Michael, just so you know, this is episode number 101. Okay. We've done this a hundred times, so you're in good hands. I trust you guys. You're in good hands. Let me switch you out with a cold one. Great.

A little bit more enjoyable. Thank you. All right. Josh, you still think Schwab was a bad buy? No. What do you say now, tough guy? Where is it? Look at the stock.

Michael, I bought Schwab and Josh was busting my chops. What is it, 60? Look, look. Just take a look. All right, you won. Congratulations. Thank you. Schwab had a lot of controversy around the time of the Silicon Bank failure.

Yeah. Because they also have a large book of long-duration assets that has technical mark-to-market losses on it. Yeah. has technical mark-to-market losses on it. Yeah. But it's such a small part of the overall business enterprise value of the firm that I didn't write about it when I wrote about the problems with the other banks.

So would you say an astute investor such as myself, modeling myself after the modern-day Warren Buffett, I swooped in? I would say that you may... Your words, not mine. Right. You accidentally made a great purchase. Well, one of the things about... I was surprised to see Schwab get caught up with the regional bank equity stocks.

They treated it like it was a regional bank. It has a banking operation, but it is not a regional bank. It's a bank. Yes. Technically speaking, if there had been a run on the deposits that backed those long-duration assets that they they could have suffered real damage But that wasn't gonna happen to Schwab didn't I I didn't think so at the time Which is why I deliberately that their statistics were worse than all the banks are on that chart that you used of mine But I didn't show it because I felt that the flight risk wasn't comparable because of the nature of the business

So I agree with you and actually I thought that the part of the story that people got wrong with Schwab, and I should have bought the stock too. I did buy it. I sold it too quickly. I thought that the part that people said they're going to be pressured to maintain deposit growth because Schwab's business model is what it is. And they are subsidizing trades, free trades, with earning more money for themselves on the deposits. It's like 60% of their business is the bank. But I really don't think that it had an impact in the way that it did for a traditional bank.

Well, hang on. We're going to get into all this. Okay. You're a true New Yorker. Born and raised? I am. There we go. Okay.

Respect. All right. How are we looking on time? Almost there. Just another minute. Okay. Are you All right. How are we looking on time? Almost there. Just another minute. Okay. Are you a Long Islander, Manhattanite? I was born in Kew Gardens.

Ah. Who was on your show today? Who was on my show today? We just talked about this. We had Ray Romano on CNBC with us. A neighbor. And he's from Forest Hills. Okay.

So I asked him a trick question. I said, which, you have one dinner you can plan in Queens. You have a bunch of people in from out of town who want the best Italian food. Do you take them to Parkside? Or do you take them to? Michael's shaking his head. Or do you take them to Don Pepe's? Neither.

Okay. I wouldn't have even been able to close to answer the question at all. He couldn't answer it. He said, I'll go to one for dinner, one for dessert. So he squirmed, Ray squirmed out of it. You don't know this. Everybody Loves Raymond took place in Linbrook, which is two times over from us. I was in Linbrook last night.

That's where I saw the movie. Pause. When they did the exterior shot of the house, the house they used was 135 Margaret Boulevard in Merrick. Really? Do you know what house I grew up in? 124 Margaret Boulevard. They literally took an exterior from a house,

five houses down from mine. So whenever you watch Everybody Loves Raymond, that's the house that they're showing. I used to walk past that house Where's Martin? Merrick Woods. Okay.

Near Merrick Avenue. All right, we're ready to go? Ready to go. All right, let's do it. Oh, wow. All right, let's see. Bombs away. The Coppola Friends,

episode 101. 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 Red Holtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Today's show is brought to you by Horizon Kinetics and their medical ETF. The ticker for that is MedX, that's M-E-D-X, which invests primarily in pharmaceuticals and biologics. On today's show, we spoke a lot about how AI is going to impact all areas of the economy. Certainly, drug manufacturing is one of them. If you're looking for a way to participate in the market, this might be of interest to you.

To learn more about how you could invest in this fund, please visit horizonkinetics.com. Oh, my God. We've done this 101 times. It's hard to believe. Ladies and gentlemen, welcome to the compound and friends. I'm your host downtown Josh Brown here with my cohost, Michael Batnick as always. John is here. Duncan is here. Nicole is here. George is here. Hey George, thanks for joining us today. We have a very special guest on the show today, someone that is highly influential for Michael and I, and I believe one of the most well-regarded research people in the industry. Every financial advisor who is in the know is getting his stuff on a regular basis. His name is Michael Semelist. Michael, say hello to the crowd. Hello, crowd. All right. Michael is the chairman of Market and Investment Strategy

for J.P. Morgan Asset Management and the author of Eye on the Market since 2005. Michael is also a member of the J.P. Morgan Asset Management Investment Committee. Michael has spent 36 years at J.P. Morgan, having joined the firm in 1987. Michael, welcome to the show. Thanks. We're so happy to have you. That's a long time to have been at one bank. That's actually very rare. There's a few people left. Okay, so what is it about J.P. Morgan that has kept you in that building. I know it's a new building right now,

lots of different buildings. Yeah. Yeah. Uh, what is it, what is it about that particular firm? Um, and, and, and why have you been there for this long and, and what do you love about it? Well, you know, there's, um, you accrue so many relationships, uh, over the course of time. So many relationships over the course of time. I have three analysts on my team. That's it. Really? Yeah, that's it.

But I don't need more than that because if I need to talk to somebody in the investment bank or the commercial bank, I mean, I've accrued a lot of goodwill with those guys. I've done a lot of stuff for them over the years. I would lose all – I don't want my boss to hear this, but I would lose all of those accrued relationships and networks if I went to some other firm. Okay. And I've also done a lot of work for the board. I do a lot of stuff for Jamie directly, and I get a lot out of that, and I learn a lot from doing that. So I like it there. Okay. Very cool.

Well, we read your stuff all the time. And before we dive deeply into some of your more recent charts and insights, I do want to get into inflation because the CPI report this week, it's just one of those moments, at least this is my take. I don't want to hear yours. It's one of those moments where the stock market had been defying the economic data pretty much since January 1st, almost in a straight line for the Nasdaq. And this week seemed like a watershed moment where a lot of people who had been either fighting it or waiting it out or only sort of getting comfortable with more equity exposure or sort of getting comfortable with the possibility of soft landing. This report seemed to me a moment where a lot of those people said, I'm wrong.

Let me do something about it. And they probably bought futures on the Qs or something. But I'd love to hear your take on this week's CPI report and the reaction to it, more importantly. importantly. I mean, the amazing thing about it was that a basic set of leading indicators of producer prices and consumer prices has been screaming this result for months. And you guys read my stuff. Yes. I mean, the, the stalest statistic in the entire universe of statistics is owner's equivalent rent, which is a huge part of CPI, right? So the way that the BLS and the government computes housing inflation is entirely backward looking. And for the last year and a half, we've been looking at Redfin and Zillow and other kind of more high

frequency indicators about what's going on in the real estate market. So I mean, this was kind of, we didn't know exactly which month it was going to kick in. But we saw this building for months. The supply chain delays were telling us what was going to happen to goods prices months ago. We still have a tight labor market. And if there's any big surprise, it's how quickly we're seeing normalization of CPI when you still have a pretty tight labor market and high wage inflation. John, can you throw up this chart of wage growth, please, as Michael's discussing? But Josh, you mentioned that the stock market was defying economic data. I'd say it was defying sentiment more than – because the data has been fine.

But to Michael's point about the strong labor market, wages are – the growth in wages are trending in the right direction, meaning down. Yeah, the first derivative on this is moving the right way. And a lot of people got too caught up in the JOLTS data. And one of the interesting things about the JOLTS data is the quality of it is deteriorating.

And people don't look at that. Before COVID, they used to get a 70% response rate. Now it's like 30. And who is responding? But wasn't Jolt's data? Wait, Jolt's data was not bullshit entirely, but I think, were you writing a lot

about the warehousing of this, that people were just, companies were just leaving the jobs up, the job openings up and not filling them? There's a lot of staleness in the data and there's a lot of staleness in the responses. It's not like the PMI survey, which they're more rigorous about.

And so, I don't know. But the pig in the python issue for goods inflation and for housing inflation has been evident for some time. I'm going to hit you with another aspect of this that I don't know if it's material or not, but I'd love to hear what you think. If you were collecting jobs data in 1983 or 1993 and not 2023, you could reliably look at posted jobs and count them as one for one for one. In the modern era, and my firm is an example of this, we have 63 employees. Most of them are not in New York. We have a lot of variability in where we'll hire people.

We just want the best person. That person could be in Ohio. They could be in Florida. They could be in California, preferably not California for tax reasons. But my point is we could post a job. It's one job. We could post it in seven different states. I'm only going to fill it once. I'm going to interview people in all seven places. Is that seven jobs based on the way they're capturing this data or is it one job? They would say it starts with seven jobs and then they run algorithms to distill it down to the true one job that it is. Do you think they're able to do that?

And I think that's hard. I think that's hard too. I think it's hard to do on a high-frequency basis. Algorithms don't know what's in my heart. Right. Okay. All right. I wanted to get into that because I think that's an aspect of this is the nature of being hired has changed.

And it's more remote now. And it's got to make it harder to count available job openings, for example. Right. And it's also flattering real estate vacancy statistics, which look bad but are worse once you look at the underutilization of that space. So that's the flip side of the same coin. Michael, you mentioned the way that the government calculates inflation and with shelter specifically, I'm sorry. And that's, is that a third of the basket? Around. Could you explain to the audience what is the difference between what they're calculating versus what is actually happening? Well, they're computing something called owner's equivalent rent. And so they're trying to figure out for

somebody that owns a home, how much would they rent it for? So it's a very- It's a nonsense stat, right? It's not. They would say that there's too much variability and uncertainty in Shiller home price indices to use those as an index because you'd have to use something called like a same store price thing. You'd have to look at the same home. And there's such a long period of time over which the same home will sell that they won't have high frequency contemporaneous day on housing inflation. So they came up with this owner's equivalent rent, and typically with inflation statistics, they'll come up with an approach. It'll work for a while. Then it'll stop working.

They'll defend it for 15 to 20 years, and then they make a change. I remember when you have bad information to release as a company, you do it in the week between Christmas and New Year's. Yes. When you're a government agency and you want to announce that your old methodology wasn't so good but you're going to change it, you do it in the last two weeks in August. Okay. And for years, a lot of people were saying that the productivity numbers for the technology sector were underestimated because they weren't capturing the cloud and various software enhancements. And the government fought it for a while and then basically conceded a few years ago that technology deflation was twice the level that they had been recording it at,

which therefore was underestimating both real GDP growth and productivity. And so, look, these things happen. They change over time. The nature of the economy changes. And I don't think we should be surprised that inflation computing agencies tend to respond to that kind of thing with a lag. Assuming that inflation stays at its current pace and or drops over the second half of the year, my best guess is that CPI, PPI, PCE will be less Super Bowl-esque in terms of like when they're released. The market's now going to move on to something new. Like there's always this stat of the moment. Unless we get surprises in the other direction.

Right. So assuming we don't, maybe it's a little bit lumpy and you get a little bit of an uptick and a downtick. Where do you think the puck is going next? What is the investment market margins? Corporate profit margins. Yes. More so than delinquencies or credit card reserves. Yeah. I mean, you're seeing some weakness in subprime auto and the usual suspects and the lower tier credit card companies and things like that. But back to 2019 levels. High yield default rates have picked up a little. Bankruptcies have picked up a little. Should margins improve if inflation is coming down? Yeah, but if inflation goes down, top line revenue goes down.

But if the labor markets stay tight, I mean, more than interest rates, more than commodity prices, labor is 70% of cost inputs in the US corporate sector. I didn't get into Pepsi's report today, but I saw somebody tweet something about their prices are up 30% over the last couple of years, and their volume has not really budged at all. Yeah.

I mean, in the last quarter, I think revenues were up 4%, roughly below the rate of inflation. So in real terms, revenue growth has been a little weak. So I think the next thing we have to watch for is the next two quarters of what happens to market. So how do you watch that during the earnings season company by company, or is there a catch-all data point that people could follow that? Well, I like to look at the difference in the ISM survey. Okay. I spend time looking at lots of numbers. I'm a numbers guy. You read this stuff. Yeah. If I only had one thing I could look at, it would be new orders minus inventories in the ISM. If I had to pick one thing and you wouldn't tell me anything else and you made me invest. Okay, why? What's in there? Well, you're basically looking at, on a leading indicator

basis, the difference between new orders and inventories, right? But what does that tell you as an investor or somebody trying to understand what's happening in the economy? That's a driver of the business cycle right there because the Goldilocks situation is when you're seeing orders picking up and inventories are low. That's a recipe for non-inflationary growth and margin expansion. Over the last few months, we've had the opposite, which is that new orders were falling and we had an inventory surplus. Is it too early for you to say that they did it, they achieved a soft landing? Is it too early? The immaculate disinflation. And what would you need to say if it is? Meaning disinflation without job loss. Without a recession. Without a recession. Without a recession. And without meaningful job loss.

I mean, employment rates ticked up a little bit. Yeah, one quarter doesn't get you there, but boy, you know, people in the CPI report, people do look at things like sticky CPI, median CPI. They rip the CPI data

to shreds. I prefer Core X Shelter. Right. They slice it to pieces. And all of those sliced pieces, there's a Cleveland median. Like, why would you ever bother those sliced pieces, there's a Cleveland median. Like, why would you ever bother, right?

But there's a Cleveland median CPI. All of these little slices improved markedly with the report yesterday. I want to see at least one more before I get carried away. All right. So one more quarter of— Yeah, I want to see another month. Another month. Okay.

I want to see another month. I want to make sure that the disinflation in the good sector, auto prices, auto parts, health care services. It's interesting, though. You have another Fed meeting this month before we get the next CPI. And then August, there is no Fed meeting. They're all in Wyoming doing whatever they do. And then so you don't have another meeting until September. Is it possible that they think they're doing more rate hikes?

Well, the market does. Why? Well, I think the more telling thing is that the markets are pricing in 150 basis points of easing over the next 12 to 18 months. That's where I think the markets may be offsides. Are those markets wrong? So I'm looking at the CME FedWatch tool, for example. Right.

And that shifts all the time. So right now there's a 92% probability of them going another 25 basis points during the next meeting. But I was saying to Josh on this week, if Powell is explaining to people who are listening to the press conference that the full effects of their interest rate hikes have yet to be felt, it takes a while for it to filter through the economy. Why would he say that and then continue to go? One pause and then go? I think the Fed generally in most cycles, when inflation surprises on the upside,

the Fed has two basic choices. Do you follow it all the way up and then follow it down? Or do you follow it up and then stop, but the tradeoff is afterwards you don't ease as much? I think the Fed is going to take the latter path, which is they're not going to tighten as much as any kind of Taylor rule or traditional Volcker approach would have dictated, which would argue for another hike or two. And I think the tradeoff is they don't ease as much as what the markets are pricing it. But remember, there's been a lot of tightening. The San Francisco Fed computes this estimate of true Fed tightening, which is the basis points of tightening plus the impact of the declining balance sheet.

We've had something closer to 700 basis points of tightening than 500, if you look at that. And they have now Fed funds rate above year-over-year inflation. So if you believe core inflation is 5.1 or whatever they say it if we give up too early, it's going to bounce right back. That must be what they're worried about. I think so. You also have to remember something, which is Labor Day 2021, the Fed was projecting one Fed hike over the next 12 months. Hang on. So then what happened? Everything blows up in their face. Ironically, somebody gets a Nobel Prize for all of this during that time, which is amazing. But

anyway, then the whole experiment blows up on them. And Bill Dudley, of all people, writes a journal op-ed saying, you know what? We better reexamine what we did because we got it wrong. And I think that experience weighs heavily on the Fed here, which the last thing you ever want to die and have your epitaph be, you know, this guy was another Arthur Burns, right? That's the nightmare of everybody that works at the Fed. Nobody wants that. Which is being accused of kind of stoking another great inflation the way Arthur Burns did

when Nixon basically forced him. There's a great book that talks about some of the things that Nixon did to Arthur Burns to convince him to ease during- He shoved him against the wall or is that something else? And that's LBJ. No, no, no. Nixon basically did a bunch of dirty tricks. They threatened to expand the number of governors on the Fed board. And William Saffer wrote a book and at one point,

Nixon told his aides, we have Arthur Burns by the balls on the money supply. That's funny. Which was amazing to me because I didn Burns by the balls on the money supply. That's funny. Which was amazing to me because I didn't know that Nixon knew what money supply actually was. Right. And by the way, remember, he did all of this to manipulate an election. He won 49 states to one. Right. But yeah.

So I think the Fed, Dudley's article kind of really pushed the Fed into being a little bit defensive about how it got to where it got to. So on the margin, the Fed doesn't want to make them under-tighten here. I was going to say the irony of the stock market reaction this week – I don't know how many trillion dollars we just added in market cap over the last three months. But it's mostly predicated on we're winning the battle against inflation. The Fed is almost done. Could that wealth effect actually serve to keep inflation high if this market keeps going higher? I think the wealth effect is bullshit. You know, the propensity to spend in the upper incomes goes up with the market.

Yes, but the propensity to spend of the wealthy is much lower than at lower income brackets. So if you tell me that there's a lot of wealth creation, I don't think that that necessarily translates into consuming. They'll just keep it in T-bills. They don't have to spend it. Do you think Bezos is getting another yacht because his stock went up?

No, but why do you have to use the richest person in the world as your example? To make my point. Is there anyone in between you and Bezos that we could consider might spend more money? I agree with his general point, which is that the wealthier cohorts have a- Yeah, they don't have to spend it.

They don't feel like it's on fire if they've made it. I understand that. Speaking of the Fed, did you see, I mean, it's kind of interesting that they were trying to break the economy and they couldn't. Just, I don't know what that says about our propensity to spend money when we have it.

James Bullard just resigned. Did you see that? No, I hadn't. And he was among the most hawkish members. Yeah. So interest rates took a nosedive today. Is PPI as important as CPI? I think for margins it is.

John, try it on, please. Let's throw this up. This is like in a straight line. Next one, please. Thank you. So producer prices have increased at a slower rate for 12 consecutive months. Yeah. Which is a great thing.

Yeah. And by the way, this stuff was visible before the CPI. So if you were to look at this and CPI at the same time, the PPI was sending you some of those disinflation signals earlier. Where are you seeing it? In like manufacturing data? Yeah. Okay. You know, and specifically,

if you look by industry, computers, furniture, you know, medical devices, you were seeing this in a number of different places. We're going to get to your stuff in a second. Just last question for me on this topic, because I really want to know your take.

A lot of people on Wall Street were screaming, what is the Fed doing waiting? Inflation had been above 5% for seven months or whatever. And you just said that producer prices are a leading indicator. Why do you think they waited as long as they did?

Oh, well, they were convinced. Just wait. They kept stimulating. Right. No, no, no. This part is really interesting, which is they were convinced that the labor market effects

of COVID were temporary. And they were waiting as inflation was going up. They believed, I think rightly so, that it was a wage-driven, a wage price inflation spiral, the first one we seen since the 70s. And because remember, what happened during COVID was you had this collapse in the available labor supply, a collapse in immigration, and a doubling of the retirement rate, right? So the rate of retiring people over age 55 or 64, depending on what you look at, doubled. They were convinced that as COVID restrictions were lifted, you'd get a normalization in

the labor force participation rate and a normalization in immigration. Neither of those happened. They were waiting for it. And they kept talking about, gee, where are all the workers coming? But we lost about 1.5 million. So let's start here. Private sector workforce is about 130 million people. So when I talk about a million here, a million there, on the margin, those are big numbers. So we lost about a million people, million and a half people, undocumented workers based on the immigration shutdown and the politics around it, right? And the Biden administration ran on reversing Trump era immigration policy and hasn't really been able to do it until very recently. So you're

missing those undocumented workers. And then on top of that, the labor force participation rate is now completely back to normal, age 55 and under. Age 55 and over. What they call prime age workers. Right, but age 55 and over, it has collapsed, right?

It's almost close to the COVID lows. Because of that, you've had a reasonably important chunk of the labor market taken away on the older end and on the immigration. You also had a million people die. Yeah, that happened too. And then you had women that had for long periods of time couldn't get proper child care. So how are they supposed to, quote, return to the workforce? So that's one of the reasons.

But the Fed was expecting a rapid labor force normalization that didn't happen. That's why they waited. That was great. Thank you. Now it's finally normalizing. Remember the wage gains of people that were switching jobs versus people that were staying in jobs?

That was an amazing premium that you got. And that's come back. That's mostly normalized. It's come back down. I saw that labor force participation rate for prime age workers is closing in on the year 2000 high. It's very high. So it's 83.5% and the old high was 84% in change. That's right.

So we're back in participation terms. We are so back. For that cohort. 18 to 50 or 49 or whatever it is. Right. Okay. You don't think that there's going to be any change above 50? A lot of people just said, I don't work anymore.

It's, you know, when you had soaring home values and 401k values. Why do they need to work? And you had a disease that empirically affected older people more. I mean, you know, three strikes and you're out. There were few reasons for people who had retired to come back to the labor force. Three reasons not to work. I'm more in danger of getting very sick. Right.

My retirement fund is as high as it's ever been. My home value is shooting up. Exactly. Okay. So it makes a lot of sense in that context. Let's do some of your stuff from Eye on the Market. Can you tell the listeners who aren't familiar with what you put out and why, what is Eye on the Market, like in your own words, and what do you try to do with this research product? Okay. I started writing it in 2005. Before that, I wrote something else. And, you know, my day job is,

I'm the chairman of market investment strategy. Basically, I'm the chief investment officer for our asset management business, which is- How many trillions of dollars are in JP Morgan asset management? Assets under supervision, somewhere between three and four trillion. It's huge.

It's one of the biggest, this is one of the biggest pots there is. That's right. In the world. That's right. Okay. Now, you know. No pressure. Look, a bunch of all of the numbers for the big firms are money market funds and cash equivalents.

So let's not get carried away about what that number really means. Okay. Fair. So our institutional business is essentially state and corporate pension plans, endowments, foundations, insurance companies, and sovereign wealth funds. And annuitization funds in places like Canada and Australia. And then we have a private bank, which is all the way from upper, upper, upper high net worth, all the way down to people that kind of come into the branch and invest in the branch. And so my job spans all of those different kinds of investors. And the eye of the market is meant to share with them our thoughts that influence how we're investing money when they give us discretion to do so on their behalf, which is a big chunk of what we do.

And so I write about what's going on. I wrote recently about the barbell strategy, which had worked so well for 20 years to overweight the United States in emerging markets and underweight Europe and Japan. It was probably one of the most successful investment strategies I've ever implemented. So I write about stuff like that. And then I also write about, you know, once more than 10 or 15 clients ask about something, it's probably time for me to work out. I was going to say, where do you, like, so Michael and I are bloggers and it's always like, where do you get, how do you know what to write? You know. We have, you know, 20 or 30 financial advisors working here and they get questions from clients and that helps. Yeah. Because those are things that we have to do research on in order to answer. That's right. And so I was going to ask you, you must be having like

high level conversations all over the bank, clients of the bank. That's probably a great font of ideas. It is. And I also work with, you know, more these days, I do a lot of work with the CEOs of the investment bank and the commercial bank. So I interface with a lot of that. And that's why I do so much work on energy. So it's both for our investment clients, but also our CEO clients.

There's a lot of work on the energy transition and energy-related stuff. And we can talk about that too. So this month you wrote about the Magnificent Seven. Who didn't? I mean, it's momentous. You've got seven stocks that are effectively 50-some-odd percent of the NASDAQ, maybe 40% of the S&P, something in that. It has happened historically. A couple of times.

But it's rare. The industrial companies at the end of the 1960s. AT&T and, I don't know, maybe GM or GE, one of the Gs. There have been moments, but this is a big deal right now.

Can I quote the gentleman sitting across the table from us? Go ahead. So Michael wrote, so we're talking about NVIDIA, Meta, Amazon, Google, Microsoft, Apple, and Tesla. And Michael says, quote, for NVIDIA and Meta, sharply increased earnings expectations also explain their rise this year. For the other five stocks, earnings expectations are either flat or in the case of Tesla, down substantially.

This is super interesting. And yet Tesla up 110% year to date. That's six months. Apple up 41. Microsoft up 40. Google up 40. Amazon up 51. Meta up 125. NVIDIA up 181. And as of mid-June, they're all higher. Right. And at the time, the rest of the market was flat. Right. Okay. So what is driving that level of multiple expansion? I have theories, but you're smarter than me. I mean, they are the ultimate momentum trades for quant funds, hedge funds, long-only growth equity funds. Okay. Tremendous amounts of liquidity.

Yeah. Easy to borrow against. In the shares. You can get in and out. That's right. With a large hedge fund. You can buy and sell quickly. OK.

You can leverage them easily and quickly if you want to take leverage bets on them. And the kind of storm clouds of antitrust review that started forming during the second Trump – I'm sorry, the second Obama administration didn't materialize. There have been these kind of moments. Well, she's losing it quite now. From a judiciary – in the judiciary, in the Justice Department of different kinds of efforts to rein these companies in and they haven't gotten out of the committee phase in Congress. And I think the reason why is right at the cusp of when they were really going to start to crack down on the ability of these companies to acquire other companies. And there are stories about how Amazon has done some very non-competitive things of the companies they've acquired to crush

them and things like that. Then all of a sudden, the China thing happened. And let's not miss this important point. For most of our lives, and I'm older than you, the United States has not had an industrial policy. We criticized other countries for having favored national champions in industrial policy. Then what happened? First, the Europeans started to pick on our tech firms. And they started doing this thing called digital service taxes. And GDPR. Which basically, the Europeans don't have European equivalents of Amazon and Google and things like that. So they started making up extra taxes they were going to impose on these companies overseas.

And then you had the China thing come along. And all of a sudden, the focus has shifted away from antitrust domestically to securing domestic supply chains and semiconductor independence and energy independence. And so all that antitrust stuff went out the window, which is allowing these companies you mentioned to increase their market share almost on an unimpeded basis. So politically, the appetite to bust Mark Zuckerberg's chops is diminished if we're going to be in a world now, a bipolar world where there's Chinese tech companies and there's Western tech companies, and they're now going to compete in a much more existential way than maybe even 10 years ago. You know, Trump's anti-China policy was a five and Biden took it to a nine.

Yeah. Right? I mean, if you read the innards of what they've done to put the squeeze on China as it relates to not just semiconductors themselves, but software and equipment and marketing and operations, to not just semiconductors themselves, but software and equipment and marketing and operations, they are really trying to cut off China from any kind of advanced chip technology that might be used in anything related to global positioning, artificial intelligence, self-driving vehicles, rocketry, everything.

But that has not hurt U.S. tech companies. And in fact, the stocks have gone up a lot because I guess they're not under that same microscope that they were under anymore. Nope. And the rest of the world is their oyster, right? Without a lot of competition. Well, you can make a good case for two of these stocks to get re-rating. One is Nvidia, who took their guidance from, I don't know, $7 billion to $11 billion overnight.

Okay, that clearly deserved to be re-rated. And then Facebook, which is trading at, according to you, in January, 13 times forward earnings, max pessimism. And they've been on a tear year of efficiency, all that sort of stuff. All right. So that got re-rated to 18 times, which is still, according to you, in only the 17th percentile of their historical forward PE. So it's still reasonably priced. But the other five, what fundamentally changed with, I don't know, Apple's business or Microsoft? I don't think, I'm not sure anything really. So maybe we could say this. Sometimes you could just say, I don't know.

And maybe there's not a good reason other than it's momentum. If you look at these stocks of Microsoft, not Google, but Apple, I haven't done the work on this, but it seems like they haven't had a 3% drawdown in three quarters. I haven't done the work on this, but it seems like they haven't had a 3% drawdown in three quarters. The purpose of the way that we laid out the data, as you mentioned, was other than those two stocks, the other five, the entire gains this year have been multiple expansion and two levels that are at the high end of their historical range. They are certainly not running true. I offer two ideas that other people have floated as to why those stocks should have been re-rated higher. Number one, there aren't 30 pure plays on AI in the stock market.

And it's very unlikely we're going to have an AI revolution that these companies don't find a way to make a lot of money from. That's valid. Is that one fair? Okay, but there are AI baskets out there. I mean, I know the stocks.

There's like five of them and two of them are penny stocks. And then NVIDIA. There's like five of them and two of them are penny stocks. And then NVIDIA. Actually, there's 32 or 33 stocks in the AI ETF. Is it chat? Is it simple? Yes. The problem is, George,

I think we looked at this. A third of them don't have a P-E because they have no E. That's right. That's what I mean. No, no, no. But let's say C3 AI. It's a penny stock. You have AMD. You have NVIDIA. And then you have to say to yourself, wait a minute. Obviously,

Alphabet is going to be a player in AI. Obviously, Amazon. Amazon's making its own AI chips. And they have their own AI environment. And AWS will be one of the biggest facilitators of AI in the world. So that's the answer, I think, for those. Apple is not saying anything about AI. I don't know if you've noticed that.

I find that really interesting. They never say it in press releases. He was asked, and he said, we don't talk about that. They don't even talk about it. Yeah, I think it's kind of ironic to see this AI frenzy taking place 18 months after the last frenzy imploded of its own weight. USA. Well, no. Like I remember equally passionate arguments about the metaverse and about hydrogen and about crypto and about other things.

Now, I think obviously there's way more to AI than those kind of invisible ghosts which have since departed. But let's make no mistake. There's an AI frenzy going on right now. It's going to be very interesting to sort out after the fact what it actually did. We have a guy who used to work at the events department who runs all the AI projects within JP Morgan. It's like Morgan Freeman in Batman. I met with him because I wanted

to learn more about the 300 AI projects that he was working on. And what was really notable was just how unsexy they were. Right? Name matching, form signing, errors and omissions. It wasn't the

kindest. Now, banks have income statement line items for errors and omissions that are huge. And so this stuff is real. I just think that people should start to focus on the audit business, the audit business, document drafting. Where this stuff is going to really benefit the company bottom lines is the basic blocking and tackling of managing tons of information and data. Right. On the other end of the spectrum,

let's remember, before we get carried away with what the markets are saying and what management is saying, in 2017- Blockchain. Worse than that. In 2017, the auto companies all told us, all the famous CEOs, that somewhere between 30% to 50% of the vehicles delivered this year would have self-driving capabilities. And I'm going to round it. Zero. Zero, right? So the LIDAR stocks have gotten absolutely destroyed. So what's going on here? It turns out that the higher the cost of a mistake is, the worse the AI does. So it doesn't work analyzing your radiology. It doesn't work if you really need it for kind of safely driving vehicles. There's a great video on YouTube of a guy standing in the middle of the road with a stop sign and an orange cone on his head.

And he almost gets run over by the self-driving car because it can't figure out what to do. It's not in the data training set. Oh, it thinks it doesn't know if it's a Kona or a person. It gets confused and thrown into a confusion loop because the guy's in the middle of the road. He's got a Kona on his head. He's holding the stop sign. And there's an enormous amount of work that has to get done before this higher value-added stuff becomes real. So that enormous amount of work, though, is the profit center because it's – let's say we're starting with word calculators or large language models. Fine. Not that sexy. It's very sexy if you're a student who has a paper due tomorrow.

But let's say we're starting there. That large amount of work that has to get done is all of that GPU usage. And that's, I think, what's getting baked into the share prices of these companies. Maybe. Yes. Training. They're training these systems. Okay. So let's establish a timeline

where today law firms can already use these large language models to replace some of their associates, right? They can draft legal documents, proceedings, summary judgments, and things like that. And they're not perfect, but then you have some associates just clean them up the last 20%.

So today, that can be done. Legal, auditing, basic paperwork, all sorts of industrial logistics in terms of how goods are moved around without mistakes. At the other end of the extreme, let's take something like commercialized fusion, which I think is 2050, okay? I'm increasingly suspicious that some of the advanced AI applications are 2040, not 2030,

as it relates to things like- What about drug discovery? Drug discovery, it's already happening. I wrote in the last Eye on the Market about a fascinating project where they used artificial intelligence to identify potential pathways for treating liver cancer, and

within 30 days, using another AI program, developed a molecular compound to treat it. Which is now in the kind of trial phase. But it's kind of, that stuff is happening. What about hair replacement? I'm asking for a friend.

But he's the guy with the hat. What are we doing with this cell signal? Oh, so getting back to, I mean, just a year ago, people were screaming that we were in a recession, right? Two consecutive quarters of negative GDP growth. We're obviously far removed from that. But I want to get your take on this tweet. I don't know if you do a lot of like intermarket analysis type stuff, if you put any credence in here.

But Ren Mac tweeted, they got a sell signal in food, beverage, and tobacco. Not exactly what we see historically going into a recession. John, throw the chart up, please, if you would. This is a technical sell signal? Yeah. Okay. This is the Russell 1000 Equal Weight Food, Beverage, and Tobacco Index. And they're heavy.

And if you look at just consumer discretionary divided by consumer staples, it's going vertical. Yeah. So how much credence do you put into the stock market and what that's telling us? Do you care about price-based signals of securities as much as we seem to? Valuation-based. I'm more interested in looking at what PEs are doing than what P is doing. Okay. And the PEs right now, even if you strip out the Magnificent Seven, are at the high end of the range.

Okay. So, you know, we're – That's not it. I can summarize our – I've seen that chart. We're going to get to that. I can summarize our investment views. We're probably in the neighborhood of normal equity risk-taking allocations, but we'd be looking to reduce them into the fall.

This is what we're talking about, by the way. So the top, again, it's just the Russell 1000 equal weight food, beverage, and tobacco, and it's heavy. Yeah, it looks like it wants to roll over, but that's what you would see in an economic, in an early stage of an economic expansion. You'd see these stocks underperform. Yeah, you certainly see them underperform

some of the bigger cyclical names. But conversely, if the market, and again, it's not all knowing, it's not always perfect, but if the market was worried about an economic slowdown, you would see defensive names rallying, and they're not. They're doing the opposite.

That's right. Okay, can we talk about your IPO piece? Yes, you can. Okay. JP Morgan makes a lot of money from the underwriting calendar being healthy. I think it's going to be healthy again in a sec. I'm a share Okay. JP Morgan makes a lot of money from the underwriting calendar being healthy. I think it's going to be healthy again. I'm a shareholder in JP Morgan.

Me too. I know you are. I think the capital markets are going to come back now. I mean, it's not a great prediction. Everyone – all right. Deal count is not up year over year in Q2, but the dollar amounts are going up. in Q2, but the dollar amounts are going up. And the stock market is probably a great leading indicator for how many deals we'll see, just because risk appetite writ large.

You wrote a piece about the IPO market, SPACs in particular, you were covering from 2020 and 2021. It seemed like just a classic IPO bubble all over again, like we've had in the past. What was different about the 2020 and 2021 vintage of new companies? Every two years, I write a piece on private equity and venture.

And it's only worth writing every couple of years because it takes that long to be able to kind of aggregate the performance of all the funds and look at the LP data and get the custodial data and put it all together. So I didn't do that this year. And I said, you know what? Let's look at the companies that these sponsors and financial entities are bringing public, particularly now that we can look in retrospect at what happened in 2020 and 2021. And OK, what was different? Well, the big irony here was, if you remember, in 2014, 2015, 2017, there was a lot of hand-wringing in the industry

and by academics who cover the business sector about the collapse in IPO activity. Yeah, where are all the new companies? Where are the new companies? The death-birth index is collapsing. They're staying private for too long. Staying private for too long. Part of which was the fact that accredited invest – what qualifies as accredited investor is a definition that doesn't rise with inflation.

So every year, more and more people were being qualified as accredited investors, blah, blah, blah. Let's do something desperately to bring back public listings. Let's have a pandemic. Right. Well, and then my tagline is be careful what you wish for in life, you may get it because we got a tsunami

of horrible IPO and SPAC activity. I think we got a thousand IPOs in 2021. So the IPOs, even excluding SPACs, the IPO activity

either doubled or tripled compared to the prior trend. And here, and then- This is your chart. This is enormous. This is the shocker. The SPACs, which kind of came out of nowhere, all of a sudden grew to be the same size

as the overall market 2020, 2021. And I'm saying- Wait, is this in dollar terms? This is dollars. There were as many dollars raised for SPACs as there were for traditional IPOs- In like the last decade, in any year. In 2020 and 2021. That's right. Unbelievable. And now, I'm saying this with 36 years of experience in this industry. Yeah. SPACs have been the worst experiment in capital markets and corporate finance that I've ever seen.

The notion that you can bring companies public, not through the IPO channel, where they have to report earnings in a certain way. They can't make earnings projections. All of a sudden, this kind of sieve opened up, and you cut a hole in the sieve, and all of these terrible companies went through it. It was an adverse selection exercise of terrible companies. And the performance has been absolutely awful. So like most bubbles, it started with a kernel of truth, which is stock market's doing great, can't do a roadshow. Like physically, you cannot go on the road and take meetings with institutional investors to bring a deal out.

But they had to do it anyway because they had to bring some of the institutional guys over the wall to get $200 million or $300 million of committed financing at close to make those happen. You know what else happened? Because it was so retail-driven, the rally in early 2020, Virgin Galactic caught fire. And that was a former SPAC. in early 2020, Virgin Galactic caught fire. And that was a former SPAC. And it just so happened to have Chamath as its spokesmodel. And Chamath was very popular on the internet. And then DraftKings.

And then you had a few other big consumer brands like DraftKings. Opendoor. And that was like the genesis of do a SPAC. Oh, I'll do a SPACesis of do a SPAC. Oh, I'll do a SPAC. You do a SPAC. And then when the economics, the sponsor economics got – Let me tell you about the sponsor economics. Let me tell you – They're hideous.

Let me tell you about the economics here. That's what you're here for. Please. I couldn't believe it when I started looking at this thing because what happens is – You almost quit and became a sponsor. looking at this thing. Because what happens is- You almost quit and became a sponsor. If you're a SPAC sponsor,

in the beginning, you were getting 20% of the shares of the merged company. Yeah. And all you had to put in was like $3 or $5 million for underwriting and closing fees. Paying lawyers.

Right? Right. Now, you had an incentive to find a merger partner, and you broke even, in most cases, even if the merged stock dropped 80%. Right.

Because they handed you the company. That's a recipe for a disaster. It's a good deal. And the sponsors kind of printed money. And then once you started seeing kind of celebrities and other kinds of people get involved in promoting them, I mean, at that point, that should have been like a red alarm fire for everybody to get away. I think – was Virgin Galactic IPOA?

Was that the first one that Chamath did? Remember he was going to do the entire alphabet? I think he got to like F maybe. I don't – no, but I don't – that was prior – F would have been the right place to stop. This is important. And no disrespect to Chamath. The Virgin Galactic SPAC took place pre-pandemic.

It wasn't part of that era. Yeah, if you look at that chart again, there were a few SPACs that started to gather momentum for this stuff. But remember, look, I married somebody that I met at J.P. Morgan, and she worked there for 20-something years in capital markets,

Latin American capital markets underwriting. Capital markets underwriting people, whether equity or debt, their job is to generate fee revenue for shareholders. That's right. I don't want to say they'll underwrite anything, but if all of a sudden an underwriting window opens up that investors are diving into, it's the investor's fault. All the underwriters are doing are saying, look, here's the company. The ducks are quacking. They're feeding the ducks. I would probably blame the Fed for this more than I would blame the underwriters.

The Fed were the ones that for the first time since the Civil War, for the first time in the United States history since the Civil War, when we weren't in a wartime, left interest rates below the rate of inflation for 10 years in a row. They were the ones that destroyed a generation of underwriting discipline. I was throwing the jobs out. I was throwing the jobs out. I was doing fiscal stimulus as well.

Oh, yeah. And then the massive amounts of stimulus. Promoting security. People promoting securities on Twitter is a new phenomenon. We haven't had that in prior bubbles. And the pandemic. There's a lot of things that go into this. So there was a lot and a collapse in risk appetite. Can I tell you one thing about SPACs?

I wrote a book in 2012 backstage Wall Street about my experiences as a retail broker. We sold SPACs all the time. It was the easiest story on earth to tell. It's $10. It was the easiest story on earth to tell. It's $10. If they don't do a deal, you get $10 per share back plus interest. The money's sitting in escrow.

If they do do a deal- You get a fill or kill because you can decide whether or not you want to participate. You have an option to say, I don't want this. And you get out before the merger is executed. Now, these were the worst. These were Chinese reverse merger SPACs. We sold the worst kind you could imagine until 2021. But in my book, I called them murder holes as a category. But then I was open-minded to the idea that, wait a minute, there are legitimate people now involved in SPACs like Goldman Sachs, for example, and Bill Ackman and people that I admire.

Sachs, for example, and Bill Ackman and people that I admire, how could they, if these are still murder holes, how could all of these reputable investors be diving into this market? Now, I should have stuck with my original gut, but I kind of was like open-minded to like, maybe SPACs have changed. You know what? They didn't change. They were pieces of shit in 2003 when I was selling them. They're pieces of shit now. I wish I had had more conviction in my own spiel. But I kind of, like most people, I was like, maybe these are good. One of the primary features of SPACs is that at the time that you're bringing this company public and you're talking to investors, you can use management projections. You cannot do that with a regular way IPO. In an S1, you can't do that.

That's right. And so that's a huge difference. I don't think that's a recoverable difference. I don't think you can build an industry on that. I love this chart. We're looking at annual IPO portfolio net cash flows for all sectors. And these are deeply- These are just the SPACs.

Just the SPACs. Deeply off the charts negative in 2020 and 2021. The bottom chart. So these are, to Michael's point and the one that Josh is making, these are shit companies. Yeah. I generally use different words in the eye on the market. We have a lot of AI programs that check my language. Okay.

So that wouldn't work. Okay. But I would probably use different language. But yeah. Well, isn't the simplest argument, if this was a good company, it doesn't need a SPAC to go public. Yeah, I think – Isn't that it? There may be some small subset of circumstances where a business development corporation or a SPAC bringing the company public makes sense.

or a SPAC bringing the company public makes sense. But it doesn't need to be more than 3% to 5% of all underwriting public listings. And it grew to be 50%. And so that doesn't make sense. Okay, however, in your piece, you did write that not all IPOs are bad and not all SPACs IPOs are bad. So for investors buying every non-SPAC, I'm sorry, non-SPAC IPO since 2010,

median and average net returns based on a seven-day holding period were substantially positive for every sector and subsector. Yes. And in the same way that the SPACs have been an empirical tar pit, I really haven't seen too many things where the risk-return benefits are as favorable as being an IPO flipper. Most of the paper I just wrote was written focused on longer-term IPO investors who buy and hold for two years, institutional people getting in the syndicate and holding. But we also looked at the IPO flipping industry, and the returns are spectacular.

What this table that you're showing shows is that the average returns, even net of the market, have been substantially positive by sector. They were from 2010 to 2019. And look what happens. The impact of those two terrible years, it didn't affect the numbers. It's the average net return by sector after seven days. So this is the initial IPO pop. You buy in the syndicate. Yeah.

You buy not on first day close. You buy in the syndicate. It works. And then you sell. Yeah. And I'm not the first one that's looked at this. There's a guy named Jay Ritter at the University of Florida that does a lot of work on this. He measures one-day returns.

Our results are very similar. Last thing on SPACs. Is there a legitimate argument that— He's kind of stuck on this. Well, we can move on. My two pieces were called SPACcine hesitancy and hydraulic SPACs, is there a legitimate argument that— He's kind of stuck on this. Well, we can move on. My two pieces were called SPACcine hesitancy and hydraulic SPACing. Okay. That tells you the answer I'm going to give.

I'm not going to tell you that Josh said that he thinks Chamath is the next Buffett. I'm not going to say that here. No, I was open-minded to the possibility at the time that it was being widely discussed. How about Nikola? That's my— I was going to say, in my defense, I'm Nikola? That's my, you know. I was going to say, in my defense, I'm an idiot. Here's my question.

Is there a legitimate argument to be made where certain industries would be starved of capital if there weren't a mechanism to come public while being a money-losing company with a really promising technology? And let's use EVs as an example. No. Well, don't get me started on EVs. But on EV startups.

I'm trying to be even-handed. Okay. No, but here's the reason why the answer to that question is no. Because as we showed and as Jay Ritter and other academics have showed, the vast majority of IPOs, even in good times, are companies that have no profits at the time of the IPO. Anyway. The IPO market is open to profitless companies. Okay.

Way open to profitless companies. Okay. So you don't need the SPAC market to accommodate profitless companies. They go public via IPOs in droves. Do you think there'll ever be another SPAC wave again? If there is, I will do everything in my personal power to stop it. And I'm going to team up with you on that. And I'm going to stick to my guns next time.

Let's skip this. I want to be respectful of Michael's time. And I just want to get your take on. So Wall Street strategists, pretty bearish. Their S&P 500 target points to the most bearish second half outlook on record. So on average, they're expecting roughly a 10% drop. They are digging in their heels, huh? They are.

I mean, a lot of them use – Who's the chief strategist at the bank right now? The target person. Probably – I don't want to spend – lot. We have Chinese walls, and they do excellent research. I think that's a hard point I wanted to make is I think that's a really hard job. Yeah, but you know what? My job is harder because I'm held responsible for the results. All right.

They're not, right? I like that. Oh, wait. Someone's clapping. No. Everyone listening to this podcast right now wants to high-five you. No, because sell-side people are rated based on eyeballs, but they are rarely really evaluated professionally based on the accuracy of their projections. In the money management industry, our compensation and our assets under management rise and fall with the quality of our performance relative to benchmark.

fall with the quality of our performance relative to benchmark. So what do you make of an environment where the first half of the year is a 40% NASDAQ rally, 20% S&P rally, and the average strategist is looking for a negative full year return? Is that what this is, full year? No, I think it's just the return in the second half, which would still put you up for the year. So all they're talking about is that you get a retracement of the multiple expansion. Okay. All right. I don't think – it's not as ridiculous as it looks on that chart because if you pull the chart up again – pull the chart up one more time instead of the subway thing. John, throw that up.

It doesn't show you the mid-'90s. Same thing happened in the mid-'90s. Because in the mid-'90s, you had a couple of those years where you had – markets were rocking and people thought there was going to be some Fed tightening or some commodity issues. And they thought that the back half of the year was going to be – Well, 99 is a great example. I think the NASDAQ doubled that year. Right. The strategists would have been right on a second-half pullback if they could have extended it three months.

That's right. So I have two possible guesses as to why the stock market would fall for the second half of the year. Neither of these are going to come true, obviously, if I'm guessing them. But one is earnings just do not come in where they need to be given the rally. Number two is inflation reaccelerates. Any other guesses? Of what would make – What would cause – stocks don't fall for no reason.

Yeah. I think the earnings and margin story is still going to be important to watch, particularly if we do not get meaningful further disinflation of wages because of just how much wages are 70% to 75% of overall input costs. What's the biggest risk to the equity markets then in your view for the second half of this year? Is it the usual China, Taiwan, whatever that everyone says? Or do you have something else in mind? I mean, I think that'll happen in my lifetime. I just don't think it's imminent. There's something that people should understand about China,

which is they get 80% to 90% of their semiconductors from Taiwan. And unless you had some kind of Anschluss moment where China was invited into Taiwan by a pro-China party, any kind of military confrontation would result in a crippling of the supply chain for semiconductors that China needs. So that's what, oh, you're saying that's what's forestalling something heavy-handed. This is my personal belief. I think within the next – there's a kind of a semiconductor dome of protection over Taiwan for the next three to five years because China's efforts historically to build its own high-quality semiconductor business has been mired in failure and corruption. So they're still really reliant on Taiwan and now even more so that the United States is trying to wall them off from Western technology. Okay, I want to get into the asset management industry.

In 36 years, you must have seen a lot of change or maybe not as much change as I would guess. There's a piece in the Financial Times talking about the asset management industry's potential consolidation. I'll just quote this very quickly. This is PricewaterhouseCoopers is estimating 16% of existing asset and wealth managers will go out of business or be bought up by bigger groups by 2027, which is four years

away. And that's based on a survey of 500 asset managers and institutional investors. So that is based on how the industry 500 asset managers and institutional investors. So that is based on how the industry itself feels about what it's seeing. I mean, it's a little solipsistic. We're all looking at our own shit and saying how we feel about it, but who else would you listen to, right? So do you feel that that number, 16% is overstated, understated? What's your take on the state of the asset management space? Well, if that happened, it would simply be the asset management industry following investment banking, right?

I mean, I looked the other day at the league tables for equity underwriting, and the top four underwriters control 60 to 70 firms. So four firms. That's what ETFs look like already. Yeah. But when you look at wealth management, it's a lot more balkanized than that. And increasingly, people are going to need economies of scale. And compliance costs continue to rise based on what's required. And so, yeah, I mean, that sounds reasonable to me.

Let's follow the trend of the rest of the world. The bigger, getting bigger. Do you know how many RIA firms there are like ours? I don't know. It's like 18,000. Yeah, that's a lot. Does that sound like there's going to be 18,000 in five years? No, but some of them serve very local communities. A new one starts every two days, a new RIA.

Yeah. Wow. When I started in the business, there were 10,000 brokerage firms. There's about 2,500 now. Yeah. So this sounds like it makes sense directionally. A lot of mutual fund consolidation probably too. Yes. Okay. All right. What does that mean for what you do per se?

I don't know that it means a lot. Okay. I don't, I don't, I mean, we have, we have a really broad client base, as I mentioned earlier, of institutional individual investors. And the big question for us is you could tell a reasonable story on an industry basis that you should hire money managers to outperform passive ETF benchmarks and then 2009 hit. And then the Fed cut rates to zero. And for the next decade, was pretty miserable for active managers, large cap, small cap, international. It was almost across the board. Across the board.

Yeah. Median manager underperforming the benchmark. It wasn't great. And the story was, well, the Fed kind of destroyed risk-based pricing. And distorted everything. Yes. I'll give you an example. In the municipal bond market, New Jersey and Illinois were basically insolvent. Their general obligation bonds, and irretrievably insolvent, I would add, their general obligation bonds really trade, what, 50 basis points or so wide to true AAA credits.

bonds really trade, what, 50 basis points or so wide to true AAA credits. And so what's happening is when you had this zero rate policy, they collapsed risk premium everywhere. And the story was, don't worry. You just watch. Once rates go up, we have positive real rates. We'll get a dispersion of returns. And active management will rise again. Well, here we are.

And it's bank stocks again. Balance sheet's shrinking. And by the way, banks, the average money manager is never going to outperform in an environment where you've got seven stocks. It's impossible. What are they going to be? 40% Apple?

No one's going to do that. So let's get through this AI craze. I think the active management industry has two to three years of normalized Fed policy, and then they're going to have a lot of difficulties with both individual and institutional investors who are like, look, I can't find the last time where I was seeing consistent industry. What if it's a marketing problem? What if instead of calling it active management, they call it concentrated management?

Because that is something they can do. They can say, buy the S&P 500 if you want, or these are our 50 favorite stocks. You're going to have, give or take, between 2% and 4% in each of these names. Don't worry about the active part. We trade when we want to trade. It's concentrated equity that we're selling. Yeah, but at the end of the day, at the end of the day, you're still going to be bound by

people measuring the performance of that versus an ETF benchmark for large cap stocks, which, what, get three basis points, right? So there's always the question of what you could have put your money in, and you can't escape the tyranny of benchmarking your performance. Okay, I wanted to do one other thing with you.

You wrote about the potential for a third-party candidate for the presidency emerging, which presumably would have to happen before January when the primaries and the caucuses and all that get started. The No Labels Party is making a lot of noise. They put Senator Manchin on a stage recently who's like this kind of maverick Democrat who really votes with the Republicans. But it's – I don't know. It's West Virginia. So I guess a centrist is a Democrat in West Virginia.

What should we as the investing public be thinking about the viability of this and whether or not it will matter to investors? the viability of this and whether or not it'll matter to investors? So I write about politics when they have the potential to influence asset prices. That's right. So I wrote a lot about what happened a couple of years ago, because depending on how things turned out, the Electoral Count Act and everything else, if rule of law gets violated in the United States, that's bad for risk premium. Yeah.

So I started paying attention to this no labels movement because they're saying something that's a little bit more aggressive than what you were just saying, which is they're saying after Super Tuesday, okay, if both parties nominate who they consider to be unpopular candidates based on whatever their different engine that happens to be, they may run a unity ticket that they have pre-registered in all 50 states. And so I think the chances of a unity ticket succeeding are low. For the first time, at least. I mean, third-party unity tickets are very unlikely to win.

The analysis that we did in the July, the June eye on the market was a little different because what I wanted to look at is what happens. First of all, what happens like a Ralph Nader situation? Yeah, Biden loses votes. If on the margin, you pull forward – or this is the really interesting one. It's first past the post-270. We came very close historically a couple of times, whether it was George Wallace, John Anderson, Ross Perot, to third-party candidates winning enough electoral votes to prevent both of the other candidates from reaching 270.

Chaos. What most people don't understand is, what then happens is what's called the 12th Amendment contingent election. Okay? How does that work? Every state congressional delegation gets one vote. So the guy in Alaska, or woman in Alaska,

the one congressperson in Alaska gets to vote for Alaska. California also gets one vote, and it's however that state delegation happens to pan out. Republicans control the majority of state delegations. Yeah, they would love that, right? So if the no labels movement runs a ticket that wins enough electoral votes to prevent, let's say, both Trump and Biden from hitting 270. Under my read of the way this all would work, you would have a 12th Amendment contingent election, and the GOP delegations, there's at least 26 of them, would control the outcome, and you would get a GOP president. So it's almost worse than the Electoral College.

The 12th Amendment contingent is less – If people don't like the democratic principles underneath the regular Electoral College, they will definitely not like the 12th Amendment contingent election. And the reason I wrote about this is that there are some former J.P. Morgan people that are very actively involved in the no labels movement. I respect the reasons for them trying to come up with a unity ticket. But I wrote about this because I wanted everybody to understand the risks of a failed unity ticket. Yes.

So you run the ticket. It succeeds enough to win 30 electoral votes. And those 30 electoral votes happen to be enough to prevent both other candidates from passing 270. And then I just want everybody to understand what happens. My best guess is that a third party ticket, whether it's a unity or not, is a net deficit for Biden and not for Trump. Well, that's another risk to think about. And one of the other, some of the charts that were in the June 9th in the market that you might have noticed looked at all the historical situations where third-party candidates, even just a small 3%, 4%, 5% of their votes moving to another candidate would have changed the outcome in that state. Right.

It's a spoiler for somebody either way. That's right. I have an idea for presidential candidate. Can I play something for you? Yeah. Either way. That's right. I have an idea for presidential candidate.

Can I play something for you? Yeah. America has the best hand ever dealt of any country on this planet today ever. I recognize that voice. And Americans don't fully appreciate what I'm about to say. We have peaceful, wonderful neighbors in Canada and Mexico. We've got the biggest military barriers ever built called the Atlantic and the Pacific. We have all the food, water, and energy we will ever need. We have the best military on the planet, and we will for as long as we have the best economy.

And if you're a liberal, listen closely to me in that one, because the Chinese would love to have our economy. We have the best universities on the planet. There are great ones elsewhere, but these are the best. We still educate most of the kids who start businesses around the world. We have a rule of law, which is exceptional, if you don't believe me. And we talk about Brazil, Russia, India,

Venezuela, Argentina, China, India. Believe me, it's not quite there. We have a magnificent work ethic. We have innovation from the core of our bones. You can ask anyone in this room, what can you do to be more productive? Ask your assistants, factory floors. We have SPACs.

It's not just a Steve Jobs. It's broad depth. We have the widest and deepest financial markets the world's ever seen. Okay? And I just made a list of these things, and maybe I missed something. It's extraordinary. It's extraordinary. And we have it today.

Yes, we have problems. But, you know, when I hear people down, if you travel around the world, I mean, get an airplane, travel around the world and go to all these other countries and tell me what you think. All right. And that, of course, is Jamie Dimon and your boss. So I'm a Dimon fan girl. And when that so that that July 4th and week, that like went viral, that clip. And when I heard it, I said, well, a lot of people probably think that was impromptu. I've heard him do that before. This is one of the better versions, but that is a hell of a stump speech. And I know he's

not officially running. My theory is why would he leave JP Morgan before the headquarters is built? Like, like at least enjoy a year at the, all right. So here's what I want to ask you. Go ahead. And I already know your answer, but give it to me anyway. I know you don't want to lose him as the CEO of JP Morgan if you're going to stay there. But if you did lose him and you lost him to the White House, that would kind of be okay for you, right? Like, if that's what ended up happening, you'd be okay with that. A couple of things.

Okay. Jamie is so far above and beyond any chairman that I've worked for, and that includes some pretty amazing people. But you've only worked in one firm, but you've worked under several. Yes. I mean, I'm not talking about Dennis Weatherstone and Lou Preston and people that were the giants of their day. Right.

You know, Jamie is kind of remarkable in his ability to kind of see the big picture, the little picture, risk management, making people sure people do their jobs, making sure that we have defensible margins across a wide variety of businesses. I mean, he does an amazing job. Yeah. And one of the best parts of my job is my favorite is when he calls me and says, I need your help on something. That's the favorite part of my job. Okay. So he's incredible. I don't think calling out liberals is a successful way to win the Democratic primary. I think that avenue is cut off.

Yeah. So unless he is – Everybody will forget. I don't think it matters. Let me tell you a story. Please. About who votes in primaries. Okay.

So in 2016 – and by the way, I've never done media before. Like this is my first media experience. You did literally the best show there is. In 2016. I've never – I don't talk to Barrett. I don't talk to the Journal. before like this is my first media experience you did literally the best show there is in 36 i've never i don't i don't talk to barrett i don't talk to the journal i don't like so whatever reason yeah even though i hadn't met you i was like you know what i'll do this one yeah you know uh and somewhere someplace there are some uh compliance yeah yeah and people at jp morgan that are right now having an annuism no no i think we i think I think we did a good job. You don't give any advice.

Let him finish! All right, go ahead. So in the 2016 primary, on the day of the Republican convention, on the third day, they had like a business. It was like, let's talk about the business and the economy. And the speaker was the guy from Duck Dynasty, right? So that told you something about the seriousness of that. But then, to me, what was more disappointing was in Democratic Convention, historically,

the governor of the state hosting it speaks on the last day. So Tom Wolf, who was the governor of Pennsylvania, gets up and he says, you know, I served in the Peace Corps. I came back. I went to work for my family's cabinet business. And we were one of the biggest job creators in the state of Pennsylvania. And you could tell that his speechwriter said, pause for applause. There was none.

Absolutely none. And to me, this is personal, okay, you know? My father was a dyed-in-the-wool Democrat. We adopted a stray cat that was a son of a bitch, and my father named it Spiro after Spiro. So he was a hardcore Democrat. He would have been really sad to see what happened in the Democratic Convention. Not a single clap of applause for a guy that created private sector jobs. Now, you know, okay, it's an anecdote, but I just think it tells you something about the politics of what somebody like Jamie would be dealing with in a Democratic prime. What if he's on the right side of the social issues? All right, so fine. It's capitalism. It's big banks, blah, blah, blah.

Fine. But what if he's on the right side of all the social issues, starting with Roe v. Wade and ending with immigration reform? What if he does that part right? It's hard for me to comment for a lot of reasons here. But I think that there's four or five Democratic senators that would start out with a little radar gun on day one and then, you know, and it's a shame that a country as amazing as ours with people like this in it, like is it's just it's too hard for somebody to get through. I would love to be proven wrong. Yeah. I'll just let me just leave it at that. Me too. All right. Shout out to you. You answered

that really well. I had to I had to hit you with it because it's something that I think would be great. I don't know if it will ever happen. Did you have fun on the show today? I know you don't do a lot of these, so we really appreciate it so much. I had a great time. Okay. Even starting with the improv act and all the way through here. Yeah.

This is a unique thing. All right. Michael. But I'm willing to do this one time. All right. Michael, you were incredible on the show. We leave our audience with one last thing. All right, Michael. But I'm willing to do this one time. All right, Michael. We'll take it. Michael, you were incredible on the show. We leave our audience with one last thing. Right.

We leave them with a book or a blog post or a video or anything that you're watching or enjoying that you think more people should know about. Do you want to hit us with something? Well, you know, people enjoy different things. So I enjoy, like, for instance, on my honeymoon, I had a book on the history of the Protestant Reformation and things like that. So what's enjoyable to me may not be enjoyable. You're setting the baseline. I'm setting the baseline.

OK. Go ahead. Court judge okayed the Sackler family deal, $6 billion in exchange for immunity from individual lawsuits against families. Everything combined. So $6 billion for whatever, which is reportedly around half of what they own. Okay. Of what they own. And there's a book by Raymond Keefe called Empire of Pain about the Sackler family. And, you know, it came out 18 months or so ago. It's a great, it's a great thing to read to kind of understand how this all happened.

Because I, I did a lot of research on the other side of this, which is the opioid epidemic kicked in and directly coincides in counties that had the greatest degree of competition with China after China joined the World Trade Organization. You think there's a correlation there? Well, very directly. And there's a guy named David Autor, A-U-T-O-R at MIT, who's done a lot of work on this kind of thing. And when you look at the counties that had the highest degree of direct competition with China, that's where the job losses, the manufacturing losses, the decline in real wages, and the opioid addictions rose the most. Wow. So I historically always had my eye on China joining the WTO as the fuse that lit the opioid epidemic.

To what, 1999, 2000? To 2006. Yeah. When you read this book, you realize that that fuse would have been impossible to light without the really kind of horrifyingly malevolent activities of the people behind the OxyContin epidemic. And it reminds me, you also said something to me

about my favorite movie. And my favorite movie of all time is The Third Man with Orson Welles. And there's this scene where he's up with Joseph Cotton and he looks down and he says, come on, Holly. You mean you would not make money if all you had to do is just get rid of some of those little dots on the ground? Meaning the people?

The people. And it reminded me of some of the things in that book, Empire of Pain. And so I just – like for me, that's a really kind of interesting way to understand the origins and momentum behind the opioid crisis. Well, there's such a huge political fallout as a result of that as well. Like it's probably permanently changed politics in America. Just how many places were just willing to vote for volatility of any kind. Yeah. And I think the way that I think about it is China joins the WTO and is a massive windfall for consumers. Yeah. And it's a massive windfall for investors, right? Because margins kind of massively expand for all the reasons you can

imagine. And the U.S. manufacturing communities take it on the chin hard. Since 2018, that's been moving in reverse. So we are getting an unwinding of all this globalization. And I have some misgivings about some components of Biden's industrial policy, but I think it's going to revive some of those manufacturing communities that got hurt so hard. Reshoring and building semiconductors here is better than just a blanket trade war. Absolutely. I think so. Better for people. I love it. My favorite thing this week was this. I have been looking forward to this for so long.

You're one of the few people that every time it hits my inbox, I get excited to read it. So thank you for all the work that you do and be so generous with your time today. This was amazing. Good to meet you guys. Here's my favorite. I'm playing something else.

Isn't it weird how we made almost everything up and it still sucks? Isn't that crazy? Like, you know, they turn the stock market off Every night And they turn it back on every morning And they're like we're in a bubble It's gonna burst It's bound to happen

Any day now It's like then leave it off What is that? What the fuck are you doing? Turning it back off. Today might be the day. And idiots. They're like the dollar's down, the economy's...

It's like, why don't we just say it's not? How's that sound? That person's Canadian, right? Sounds good. Right? They're like, these people have all the money. These people have no money. How's that sound? That person's Canadian, right? Sounds good. They're like, these people have all the money. These people have no money. It's like, print more.

Give it to them. They go, we can't. It will devalue the currency. Just say it doesn't. Who is this? Hold on. Hold on. Do I know it?

Everything is made up. Let's make it more fun. Let's base interest rates on how interesting you are as an individual. So that is a comedian named Pat Burscher. Do you know him? No. You ever see him? No.

All right. I thought that was pretty funny. Michael, I want to echo what Michael Batnick said. We are huge fans of yours. Thank you so much for doing this. How do people get a hold of Eye on the Market if they're not currently receiving it? Do they have to have a relationship with JP Morgan?

Is that the best way for them to do it? Yeah, that will get it to you automatically. I do post lots of them on my LinkedIn account. You sure do? Oh, people can follow you on LinkedIn. That's right. I also have an Instagram account, but that's just my personal ph fishing. Well, let's not

tell anyone. Let's not tell anyone to go there. You know, I'm a big kayak fisherman. I know we had to pull you out of the kayak to do this. And so we really appreciate it. You're amazing. We've learned so much today. I think our audience has learned so much today. So thank you so much for joining us.

Much appreciated. All right, everybody. Thank you so much for listening to episode 101 of the compound and friends make sure to do all the liking and subscribing and we will see you later take us out all right so that was the warm-up and uh we just wanted to we just wanted to get the butterflies out was that good did you have fun? Yeah, I did. I did. Thank you. You were amazing.