The Compound and Friends - Nasdaq Euphoria is Hitting its Limit with Kai Wu and Ben Carlson

Episode Date: May 15, 2026

On episode 242 of The Compound and Friends, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ are joined by Ben Carlson and Kai Wu⁠ to discuss: Nvidia, Anthropic, software disruption, intangible assets, faster market cycles, and Ben’s new book Risk and Reward and much more! This episode is sponsored by: Betterment Advisor Solutions and ClearBridge To learn more, visit https://www.betterment.com/advisors Rising geopolitical tensions, continued market uncertainty, stocks backed by can offer more predictable cash flows as volatility increases. To learn more, go to https://www.clearbridge.com/ Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

All right. Josh, didn't you read your own audiobook? It's making an amazing show. Yeah, of course. Can you imagine somebody else reading my book? Didn't your brain feel like mush after doing that, though? I did it. It took me six weeks?

Six weeks? Yeah. See, I did it in two days. Because I, uh... I don't know if you heard any of my audio book, but I really... I performed that fucking thing like Mick Jagger. Like, I was like... I'm like yelling into the microphone.

It takes a like it's a performance. It takes a lot. Yeah, I was dead afterwards. Mine is so autobiographical. It could never be read by somebody else. It would sound ridiculous. You know what I mean? I actually enjoyed the process, but it was a lot.

I hated it. After it was done. After it came out. Yeah, I enjoyed it after it was done. I'm happy with the products, but I don't know if I want to do it again. You working on your next book yet? I need a break. Kind of notebooks for you?

For myself. Not yet, but I kind of want to do one now. Well, all your white papers put them all together. That's a book. Have you spoken to Harvard? I'm supposed to haven't reached out to you. I should have. They must have.

Yeah, yeah. Why do you want to, what? Devil's advocate. Why do you want to do a book? Because all the cool kids have one. Okay. Do you think people read books? No, but it's a cool thing that have done.

He just, his book got published yesterday. Why are you talking shit? No, I've written four books. I'm not talking shit. Dude, I'm reading his book right now. Do you think people read books? I don't think people read books anymore. I don't know.

So you did a lot of podcasts for yours. The percentage of people who... I did not. I did not do. The percentage of people who I'm on a podcast with it read my book is probably 10%. I can tell if they read the book or not. Yeah, I don't think anybody reads. And I don't, I don't like fault them for that.

I don't even think people read articles. I think people read headlines. And soon, they're only going to watch videos about articles. I read so many headlines today. I'm exhausted. I mean, look, I look, I, I, I, I, love reading. I just, I don't know how many people are reading books these days. I'm not sure. I've seen surveys on it. But people buy books. It's not the same thing. Yes. People buy books

because they want to read them. They truly want to. But I think our brains have been rewired by algorithms. This is why audiobooks are so great. Yes. I agree. You can have them on in the background. Well, he's an audio book. Michael's an audio book. I love it. I've never seen a bigger audio book either man. You know what? I should listen to your book. What if I listen to your book? Yes. It's like I'm talking to you. We'll put you to sleep at night. I'm going to press pause and interrupt you. Put your sleeping mask on. By the way, Michael's got a nice shirt on.

Someone last night said, Hey, I've been able to sing Michael's dressing better. Did you start dressing him? He's so rich now. That's what's going on. Wow. Appreciate that. He is dressing better.

He is. That's a compliment to say that. I dress you? It's not just that he's dressing better. His taste is improving. It's good. Because you could have bad taste and buy a lot of expensive clothes that don't look good.

He's like put together. Like when you see him at an event I'm extremely fashionable No he is Who is this guy? I know He is Who is this guy?

He's so liquid right now It's a bull market He's so liquid He can't trust nuts In the bold market Right Kai? That's right All right

So guys This isn't gonna be a good one The market is So horny right now Full on I mean the market is just Did you watch DTF? Yes

How It's I liked it It's slow though It's so good No, it's a slow burn. I did like it. I didn't dislike it. You got the full-on reference?

Yeah, yeah. I just... You watch it, Ben? Weirdest show ever. That little smirk of yours makes me feel like you watched it. I liked that. It was weird. It's not what I expected.

It's definitely not what I expected to be. When they're just talking to each other, just signing, like just... Yeah. What's that actor's name? The Stranger Things guy? David Harbor. David Harbor. Big Knicks fan.

It's good. Yeah. All right. You like that. I watched the Hulk Hogan documentary. phenomenal. This week. That's what, I mean.

That was a very good one. Netflix, four episodes. It was so good. Because I think because it's like, so my childhood, I was like, I don't know, eight years old for WrestleMania. So, like, that was it for us. That's the only thing we cared about. Is that the Silver Dominique, Detroit? How many guys or how many people in the last 75 years do you think were on the top 10

globally most famous, like most recognized name list. 10. There's only been 10 for the last 75 years. You said how many people are in the top 10? I'm saying it's a shut up, asshole. It's a small list. It's a list that doesn't turn over a lot.

No, no, no, no, no. He's one of the most famous athletes who ever lived. People 100%. People. Yeah, maybe people. One of the most instantly recognizable people. On the globe. Right.

So there's that part of it. Also, he had not like a rise, and fall, he had a rise, a fall, a rise, a fall. It's like maybe four or five cycles of everyone loves him, everyone hates him. It was cinema. I mean, it's a really great doc, and it was very well done. He was in Rocky 3. And he inspired me to get some exercise equipment.

Vince McMahon told him, if you go to Rocky 3, you're fired. Like, he's like, no, no, no, you have to be in an autograph signing somewhere. And Hulk Hogan's like, no. Oh, yeah, brother. Yeah. Let me tell you some of the brother. He's like, no, I have to go to. L.A., Sylvester Stallone called me and said I could be in the movie.

Thunderlips. Vince said if you go, you're fired. Can you imagine? Good luck. Yeah. Good luck with that. So I thought it was really well done. Big, big recommendation.

So, what else you watch? Kai, run a podcast. Yeah. Wait, what else are you watching right now? I need a new one. Playoffs. I'm watching basketball. I know.

Shows. There's a new show on Apple. with the guy from Matt Reese. What's it called? Anybody else watching that? Oh, the guy from the Americans. Yeah. Yeah, I'm watching.

What is it called? Widows Bay. What is it about? It's hard to... It's basically they're on a... They're on a Nantucket, like, island off the coast of Massachusetts. And if you leave the island, it's like stupid. Is Hulk Hogan in it?

It's a little shutter island. It's Shutter Island. It's not. I'm totally out. No Hulk. No Hulk. No Hulk. Oh, Margot's got money troubles. Did you try that? I watched the first one. It's, it's, uh,

don't watch it with kids. Oh, I won't. I've been telling this to Ben. Uh, I've been trying to watch your friends and neighbors on my episode two. My kids are, because Kobe's going to sleep later. He's like going to be like 9, 915. Can't watch that with kids. That's not, no.

The point is, I'm sleeping by 945. I just don't have the bandwidth. I just go straight to sleep. Can't stay up. That's a good one. That's a good one. Did you watch that? Yeah.

It's rich people in Connecticut. Yeah. And now they're on season two. That's a good one. John Hammond, Amanda Pee. The reason why I like this show, I was telling Ben, even though these characters are obviously so unrelatable in terms of the way that they live their life, like, I don't know anybody like that.

The characters themselves are relatable, just in terms of, like, the human element of these people. Even though they're, you know, gazillionaires or whatever, they talk about real shit. Goddammit, Kai, say something. Michael's trying to get you to try them. I have a non-TV person. I have a one-year-old at home. I watch two shows, Cocoa Melon. and Sesame Street.

There we go. So unless you want to talk about Elmo, I got nothing to talk about. Oh my God. It goes in your head over and over and over again. Every day, right? Every day.

Because they want to see the same thing over and over again. At one point, I got my daughter into K-pop Demon Hunter, which actually has decent music. Oh, yeah. My kids are called.

That was a fad, and she kind of got over it. Now she's back into Cocoa. So is she walking? She is, yeah. She's a very good walker. Oh, that song from K-pop Demon Hunters could drive a grown man to the brink of insanity.

I like it. Like Golden? Let's talk intangibles. Yeah. All right, now you got me. Let's turn Kayad. Now I'm here. Powering up.

All right, let's go, Johnny. All right. Do it. Compa de Friends. Episode 2.42. All right. Whoa, whoa, whoa. Stop the clock.

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All opinions expressed by Josh Brown, Michael Batnik, and their castmates are solely their own opinions and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. Episode 242 of the number one investing podcast on Planet Earth. My name is downtown Josh Brown.

First-time listeners, first-time viewers. Thank you for joining us. His handsome gentleman, well-dressed gentleman to my left, is Mr. Michael Batnik, co-host of the show. Say hello, Michael. Hello, hello. All right. We have two returning guests,

and I'm super excited for this episode because we are in a market that is literally, on fire right now. We have so much to talk about. Ben Carlson needs almost no introduction. Ben is the head of... You do this. Yeah, do the stupid point.

I don't do it turkey, neck, you all? Come on. All right. Ben needs almost no introduction, but we'll give him one. Ben is the head of institutional asset management at Riddle's wealth. He is the co-host of the wildly popular

animal spirits podcast with Michael Baddick. How long has that been running? We started in November. 10 years? November 2017. Oh, my God. Coming up on 9 years.

The time flies. And he is the author of a wealth of common sense, which is a blog that for more than a decade has been required reading for anyone serious about investing. Ben is a CFA. He spent his entire career managing money for endowments, foundations,

and long-term investors. He is also the author of the brand-new book, Risk and Reward, which we're going to dig into today. Congratulations, Ben. No one will read it. No, I'm kidding. This is a huge accomplishment for you

not just because of how prolific you are in terms of publishing books, but the blog, three days a week, ish? The blog helps me write the book. So that I totally understand as a blogger term author, but still, it's a lot of work.

It's very impressive. Congratulations. All right. And another returning guest, Kai Wu, Kai is the founding. Founder and chief... Founder and chief investment officer of Sparkline Capital and investment management firm applying state-of-the-art machine learning and computing to uncover alpha in large, unstructured data sets.

You have two ETFs? We're allowed to say. I don't know what the rules are. We're a lot to say. We can say it, but you can't confirm or deny that they exist. Is that how it works? Somebody told me the ETF rule of compliance rules. It's literally the most insane shit I've ever seen.

So you can't talk about your own ETF on your own podcasts or blogs. But if somebody interviews you for their magazine or website or whatever, then you can engage. So I can ask your question. I can respond to your question. So, Kai, you are the founder of Sparkline Capital and you have two ETFs. I tan and detain. Can you confirm or deny? Do not say anything until I check if you can.

Okay. Okay. And you must answer in the form of interpretive dance. So I don't know if you want to say it. All right. The AI trade came back to the front burner very quickly after Liberation Day. It basically became the only game in town. I said on TV today, I really don't think there's anything good going on in the economy other than the AI CapEx boom.

I think it's basically taken over. Anywhere that you see economic growth, you could trace it back to something that has to do with a trade. billion dollars in CAPEX spending directly related to this AI buildout and everything else is kind of boring and or bad. But I don't want to gloss over the fact that the AI trade was dying. Like the Oracle blowup as a result of what Sam Altman said on Brad's podcast was, wait a minute, people got super spooked and there was a lot of questions about, hey, wait a minute, how are they paying that five-year, $300 billion contract to Oracle?

Oracle stock fell 60%. And then time passed a little bit and the model's improved a lot. And every other day we're hearing that Claude is at a new milestone in terms of the revenue. So I think the market is reacting to changing fundamentals. Yeah, I think what happened was Claude Coe stayed

the market. Yeah. Right? I mean, people say there's two chat chip bitty moments. There's a release in November 22 of the consumer product. And then there is Claude Code and the Opus model that came out November, December, last year. And it just kind of sparked a whole wave of developer. Sonnet 4.6. That's right. Yeah. And yeah, I mean, just massive adoption by by software developers. And that's just, you know, kind of completely changed the narrative.

The revenue growth that Anthropic announced was like the most insane people's jaws dropped. Because we all understand it's growing. But I don't think people really processed the sheer tens of billions of dollars that are, it's, I don't want to say out of thin air. No, it is. It feels like it's, I mean, it's not even. a public company. So listen, do the numbers. So, John, you have chart for a second? So Oracle stock is trading at a multi-month high because there is. Look at Oracle. Because, hey, wait a minute. The numbers that we're hearing from these LLMs are actually pretty insane.

And maybe the contracts are money good. So this morning, I listened to Patrick O'Shaughnessy interview Krishna Rao, the CFO of Anthropic. And Patrick tweeted a list of surprising a mind-buy. We're talking about. This conversation. Here we go. Net dollar retention is over 500% on an annualized basis. Anthropics.

What's net dollar retention? Basically, how much money you are retaining and growing from your customers. This is for Anthropics. So 100% is like, all right, great. Nobody canceled in the aggregate, but you're not growing that, that, those contracts. 500% on an annualized basis. Anthropics' first dollar of revenue came in March of 2023, March of 2023. Yeah.

Over 90% of code inside and, Anthropic is written by Claude Codode. The head of tax is the heaviest token user on the finance team. Run rate revenue went from $9 billion to $30 billion in one quarter. Sequentially. Quarter of a quarter. Reportedly on pace for $50 billion by the end of next month. Co-work is growing faster than Claude did at the same point in its life and signed,

he said this on the podcast, signed two double-digit million dollar commits and a 20-minute Uber ride to the podcast. We've never seen the ship before. What do you think? Are we like overly excited about this or is just like... You can't possibly be overly excited. It's insane. I mean, here's the thing, though.

If you annualize at that rate for the next two years, Anthropics is the biggest company in the world. You love the Fed's balance. Yeah, it's got to slow down. And it's, but it's impressive. Yeah, I mean, certainly impressive. Cudder to them. Where is this money coming from?

It's got to be coming... It's got to be spending that would otherwise have gone somewhere else. It's not like new money is materialized to contribute to a $50 billion revenue run rate for this company. Is the answer everywhere? Yeah, everywhere. I mean, tech startups, enterprise companies, industrials, everywhere. Other hedge funds, you know, multimillion dollars. There's a lot of big financial firms that are now totally on.

But like, I've talked to some huge BlackRock in those kind of places are all in on this stuff. BlackRock launched, I was at the New York Stock Exchange today. This the cerebrous IPO, which we're going to talk about in a second, was going public on the NASDAQ. but on the New York, I think Black Rock had a digital realty trust IPO. I think that either they were celebrating it today or it actually happened today. I don't even know, but like to that point, everybody is, everybody is all in on this. And again, it's the only economic growth story that there is right now. It's not a second one, unfortunately.

Cerebris raised $5.5.5 billion. They sold 30 million shares plus four and a half million. more, which I'm sure they'll do the green show. Valuation out of the gates. What was it? We don't know the close. The bankers priced it at 185, I think, right? That's a number.

Yeah. It opened at 350. It's now 326. So is this $100 billion market cap? I think that's what it would be. And they did, they did a, I think they did a billion dollars or they're on a billion dollars AR. Now, obviously we could all do the math.

That's absurd. Why can't it trade 300 times revenue? But, uh, so I don't know if the, I don't, I don't, anything about this business. I'm not going to come into the valuation. Their revenue is growing rapidly. Order book was oversubscribed 20X. They said at the open of trade, they had five orders, five orders to buy for every share available.

Like, and- So who are those orders coming from? Retail. Everyone is in already. This is so, every, every institution already owns it. Because now we have IPOs before we have IPOs. They did a series H round. You know how much fun rate?

Fidelity is in the stock. Sounds fake. How many letters do we have? Fidelity is in the stock in size prior to the IPO. So everyone's already in it. So it's only retail. This is the biggest U.S. tech IPO since Snowflake. They raised $3.8 billion in September of 2020.

It didn't go well after the first day. The stock promptly collapsed. But whatever, it's still, you know, the company's fine. Um, the story, hold on. Snowflake also went public at 100 plus times revenue. Yeah.

So the story here is they have a master agreement with OpenAI for 750 megawatts of inference capacity, which the only person in the room that knows what that is is Kai. Expandable to two gigawatts by 2030. Um, they actually were trying to go public a year and a half ago. They pulled the S1. The concern was customer concentration. People didn't want to buy a semiconductor company

that effectively had like two or three really giant companies. Nobody cares about that anymore. So that's the biggest risk in the S-1 is that OpenAI contract. And I think they have a big deal with the UAE. Risk. So, yeah, I don't even know why people are worried about that. What does the company do?

They're trying to compete with them video. Infringencing. So they're not doing tiny little nanochips. They're doing big f***ing wafers. There's a technical term. The idea is that the memory sits right next to the compute so that there's no latency. And this is what they say is the ultimate chip for inferencing. So can you explain it any better or what did I miss?

I mean, look, that's the high level. I mean, I think this is this is got exactly what you'd expect to happen in a time like today. Right. Invidia has these huge profit margins grown like a weed at huge scale. What are you going to do? You're going to compete with them. Right. Their margin is just so attractive.

Somebody has to. Yeah, exactly. So whether it's this company or the next one or, you know, even Nvidia's customers, right, Google and Amazon, everyone's trying to get into the chip game because that's where the money is. So this is, you know, very, very much in line with where I think we are in the cycle. So how do you talk about something like this without sounding like a cheerleader? Someone asked me yesterday, like how, what's the difference between now in the dot-com bubble? And I said the biggest difference now is probably that the financial media was a bigger cheerleader back then. But I don't know how you as an analyst can talk about what's going on in these growth rates and what these companies are doing without sounding.

like a permable and a cheerleader. It's impossible. Well, the earnings growth is there. So that's how you do it. Sean put this together for me for the show today. I'm not saying like the semis are cheap, but they're 27 times forward earnings. And that is inclusive of the fact that the SMH is up 220% since Liberation Day.

So, yeah, the stocks are up huge, but so is the earnings growth. And a 27 multiple does not rhyme with 1999. All right. I have another side, the other side of that. Not anything, what you said is correct. So, InVIDIA, the stock has gone sideways from August of 2025 to today. So that's like a long sideways digestion, considering that the market's been generally pretty positive. And then, of course, it broke out, as we're speaking, had a massive move over the last couple of weeks. Put the chart up.

Over the last seven days, Nvidia has added $900 billion in market cash. which is as large as McDonald's, Disney, Boeing, Uber, Starbucks, and Royal Caribbean combined. This is seven trading days. What are these numbers? These numbers almost don't mean anything anymore. All right. So in terms of thinking about Nvidia and the valuation that it should trade at, Nvidia is too big to get a market premium.

Next chart, please. It's one thing for Nvidia to trade at 50 times forward earnings or 60 times forward earnings when it's earning $20 billion in net income. So you could look at the chart on the right and say, oh, the 4P has gone down. It's gotten cheaper. It's like, dude, come on, give me a break. It's $223 billion are what they're expected to earn a net income over the next 12 months.

It can't possibly trade at a premium. It is too large. What would the valuation be if it traded 30 times earnings? I'm so glad you asked, Josh. Look at the next chart. So chart code, Matt. Chart kid is working hard today. This is awesome.

All right. So check this out. So right now, at a forward PE of 25, Nvidia is at a $6 trillion market cap, give or take, a little bit less. And it's 8.5% of the index. The reason why I say it can't possibly trade at such a large premium is because it would swallow the index. If it was still trading at 45 times forward earnings,

it would be $10 trillion and it would be 15% of the market. It has to have a size discount. Yeah, there'll be two companies, Nvidia and Anthropic. Right. Right. So I think, I think, I think the way that the market has been treating Nvidia, letting it digest

even though the revenue and the net income and the margins keep going up to the right, I think it makes total sense. Perfect sense. So last week or two weeks ago it was like, Google almost reached Nvidia's market cap. Now Nvidia has a trillion dollar lead on them. Because there's enough shares more than Google. There's enough shares outstanding plus

the game. You know what's so crazy though? This stock, to Michael's earlier point, sat at 180 for six months. Like any, you could have bought as much as you. Now, where's it now, 230? So you were saying this to Brad. I thought you made a really good point. It was, so it's 235. It was there for almost a year. You could have picked it up. But I guess it was under 200. You could bought as much as you want. But you know what? I understand

why investors didn't because in October when we were in Austin, it reported a monster beat. A monster, monster, monster, be like an LOL type beat. The stock popped up 4%. And it ended up closing down 4%. And it was very understandable for investors to say, all right, I guess the trade's over. And it was until it wasn't. Is it irrational to have Nvidia be a 10% position in a in a, in a, uh, in a portfolio? Seems like a big position. But is it irrational given the size and scale of the business and how important it is to everything else.

Kai, last week at a park, we're saying invidia is a sector. So back to Josh's question. The category of accelerated competing is a sector, but they have competition, right? As we discussed, Cerebus just IPO today to, to compete against them. We have their biggest customers, Google and Amazon, also competing against them. So, like, the history of this stuff is cyclical, right? NVIDIA was one of the most cyclical, you know, companies for a long time until more recently. I think you have to take that new account.

I mean, this goes to the question of, like, yeah, obviously the market's up big. And so it's up big on the back of fundamentals, earnings that have increased. The question is not so much, you know, are valuations extended relative, prices extended relative to earnings? It's more, how sustainable are these earnings? to the extent that they're all kind of downstream of one phenomenon, which is massive CAP-X by the hyperscalers into building a data centers, which feeds the chip companies and feeds the power companies. It's all one trade. It's all one trade. And so that's the, that's the big question, right? Which is like, at the end of the day, what matters is will the enterprise adopt AI? Will, you know,

right now all the, all these CEOs? We know the answer is yes. I think the answer is yes. No, you know the answer is yes. We know the answer is yes. Well, otherwise, where does $30 billion in quarterly revenue in revenue run rate for Anthropa come from. That's not. Well, it comes from, you know, folks fomoing in, right? Some from like business leaders being told, hey, by their board, hey, if you don't adopt AI, you don't digitally transform, then you're fired. Yeah. So I think right now, there's, you know, obviously an arms race by corporate America to say, hey, we're on top of the ball. We're doing stuff. Now the question is, if they, will they actually generate meaningful, like, revenue boosts from this adoption? If so, then they'll keep paying. And if not, they'll pair back and say,

hey, that was, you know, that was an interesting experiment. We're on to the next thing. We had the company that's built our data lake here yesterday. They're called Invent. They're geniuses. And I wasn't like there for the whole meeting. You know me. I just pop in and say the most outrageous thing.

So I walk in and he's sitting there with my president, with like, you know, my vice president, like going through all. And I'm just like, guys, let's cut to the chase. Are we doing AI? They're like, yeah, we're doing AI. I said, all right, awesome. That was my contribution. But it's sort of a joke, but it's sort of not.

Like every business leader in every segment of the economy at every company, just make sure we're doing some AI shit. Like, that's what we have to do. Everyone else is doing it. Not just do it, but like, let's do it in a way where I can go back to my board of directors or I can go to my shareholders and say, we made X dollars because we're doing this or we saved X dollars because we're doing that. That's the pressure that every leader feels right now,

which is why none of this seems like optional spending. Right. It seems like they're all compelled. I think like people talk about this AI bottleneck and this kind of fact that, you know, Anthropics compute constrained. But I think that there's this, as you point out, kind of FOMO, you know, in corporate America. And then you couple that with this idea that, you know, these businesses,

Anthropic and Open AI are in a competition with each other as well, they try to lock the market up, right? This is the kind of classic Uber playbook. We think it's winner takes all, winner takes most. We want to win market share. And so therefore, they subsidize token costs. Like, token costs are below what it will low what they should be. These companies are not profitable.

Yet they're willing to run into the loss because they want to capture market share. Right. So it's not a true price signal. The fact that we are, you know, compute constrained now doesn't really mean anything. So I think like we should kind of look past that and ask the question of, Do we actually think that technology will be useful of driving ROI for businesses? And if the answer is yes, you know, how much can the labs and the hyperscalers capture of that versus their customers? What do you think?

I think the answer is yes. I think that, you know, having, you know, I was an early adopter of a lot of these tools. I mean, you know, I trained my own LMs starting in 2019, 2020. I think this stuff is for real. I think the technology is tremendously useful. Obviously, it's not perfect. You know, certain things I wouldn't trust AI for. But in terms of like, you know, kind of.

lower level stuff, you know, basically the history of disruption is this, that whenever new technology comes out, you want to start by giving it kind of the low end tasks where mistakes are forgivable. And I think, you know, at first, AI was a good analyst. Now, you know, I'll give you an example as a quant. So I'm a quant. I, you know, do, I code a lot. I run models. We still accept you in this room. Yeah, you can tell him a quant, right? I mean, I threw a blazer on to try to disguise it, but. No, we know. He's like a, like, the bun with a quant. That's a, that's a first thing, right? I'm a Brooklyn Quant.

There's a broken quant. See? No, so I used to employ analysts whose job was to, you know, I'd give them as a research director tasks. Hey, I want you to go, you know, run this experiment. See how this factor would have performed in this market. You know, cloud code is, or

Codex as well are, you know, perfectly capable of doing, you know, a lot of that analysis. Hey, codex, here's the API key. You know, go to this database. Here's a schema. Here's a script. Can you mimic this? I want you to study X. And it'll come back and, you know, we can iterate together. So I think, like, It's starting to climb up the ladder.

That's taking the place of you having a back and forth with another quant, who you're assigning things to. Now you're talking directly, like, the user interface is like, it's call and response. That's right. You're saying things to it. It's saying things back. That prompts you to say the next thing.

It's conversational. Yeah, it's an iterative process. The question I have for you, and I have, like, the cognitive dissonance in my brain has been firing for months. Like, I know the history of this stuff, but I also know that sometimes these things are different. So, like, your background fascinates me because you worked at GMO with Gransom and Chancellor. And so I listened to your recent, so you got a great new podcast called The Intangible Economy. You talked to Edward Chancellor, who's the author of one of my favorite history books of all time,

Devil Take the Hindmost. I love that book. I recommend it all the time. And you were talking to him about capital cycles. And you're a very forward-looking person. You're also a quantum who knows market history. How do you deal with this understanding history that, hey, in Chancellor, was basically saying, listen, every time this happens, we spend too much money, these

CAPX cycles, they follow a pattern, this is going to end in tears. Versus, I think Templeton one time said, listen, 20% of the time it really is different this time. So how do you, how do you have, because I have those competing thoughts my brain all the time. Yeah. That nagging suspicion that this is going to look like every other CAPX boom that's ever happened where they'll go way overboard with spending and we're all going to pay the price for it in the form of stock prices. How do you handle that? Make us feel better about it.

Yeah, what's your secret, Kai? Look, I think two things can be true at once. I think, you know, a technology can be transformative, and it may also be a bad investment. The question is, as an investor is for us, right, is less, you know, is less will AI, is AI a bubble or not? It's, that's too simplistic.

It should be, where will the value accrue through the value chain? Will it, will it be the model providers? Will it be the chip makers? Will it be the users? You know, chance of those frameworks, really interesting. So he's a capital cycle theorist. He studied, you know, the booms and busts around, you know, electricity, the railroad, the canals, the dot-com boom, you know, and in every case,

aside from one, telephone being the one example, one exception because it consolidated into monopoly, but in every single other case, what's happened is all the capital comes into the sector on the supply side to build out, you know, the infrastructure needed to run the new technology. But, you know, they kind of get over the skis, too much money comes in, demand, you know, may materialize, but perhaps too slowly, so there's an air pocket. And, you know, and then there's a shakeout where prices fall, capacity is unused, and ironically, the guys who invented and built out the infrastructure end up going bust, right? Hundreds of railroads, hundreds of auto companies, all the telecoms.

What we just said to this, that companies know so much more about how to run a business than they did 100 years ago. We have such throughsight into how much what the supply demand and balance might look like. it seems hard to believe that one day we're going to wake up like, whoops. I think the problem is it's behavioral. I think it's companies can't help themselves. You have like Zuckerberg, you have, you know, the CEO is all these companies saying,

I'd rather than lose this race. Like it's, it's like pure pressure. They have to, right? Because, you know, if you're running company X and, you know, you're like, well, actually, if Sam Altman in Open Eye get AGI, and I'm not even doing anything, I'm done, right? Like, that's the end of my business.

So I have to compete. And so once Sam goes all in, everyone else has to go in all into it. It's this game theory, the prisoner's dilemma. Is he the horse? He's the ringleader, yeah. It's still him. I think so. Okay.

I heard Bezos makes some sort of a comment where he thinks AI will be transformative and beneficial for society, but he also sees it as an industrial bubble. And most of the spent, I forget if he said most or a lot of the money being spent will end up being wasted. How about this? Won't surprise you more. this is a huge bubble that pops and AI is still successful. Like the dot-com bubble.

Everything we wanted out of the technology dot-com bubble, everything they wanted to more happen, but we had to live through the dot-com bubble to get there. That's option one. Option two is, no, this is a perfect handoff. The baton goes from spending to ROI and we're off to the races. Which one would surprise you more of those two options?

I just think so many things have to happen, right, for the baton to be handed off perfectly. What a hater? Yeah, I mean... Why are you so bearish? At this scale, it's never happened before, ever. We've never managed to perfectly execute the handoff. I also think that this cycle, this 15, whatever year cycle has had so many things that have never happened before,

that I'm willing to at least have an open mind that it could. Yeah. Right. Look, I think there's a chance that this all works out. I think the downside risk is probably not favorable if you're an investor in the infrastructure side. All right, you want to get nuts? Let's get nuts. John, short six. All right, Jason Gavford tweeted, look, I know none of this stuff matters anymore, but God, this will be the fourth time the SEP 500 has hit a record high, while 5% of its members fall to 52-week lows. Here are the other three dates. July 1929.

Not great. January, 1973, December, 1999. Yeah. So we have a lot of stocks on the 52-week low list for a market that's for a Dow 50,000 party. And, you know, without even looking, you already know it's anything housing-related. and then it's a lot of software shit and a lot of consumer restaurants a lot of consumer stuff

Home Builders, Home Depot Is that bother? The K-shaped economy But like on steroids now Does that bother you about the tech rally That it's not as broad as you'd like to see it Or do you not get worked up about that stuff? In a way it's kind of two sides to the same coin

Right? Semi is rally and software sells off Right, it's almost the same trade these days I don't think it should be We can get into why that is the case but, you know, that is a narrative today. That the more powerful is AI, the more disrupted is software. Can I tell you something? Yesterday, I was looking at software charts.

I think they're going to zero. I really do. I know they won't all. But I am starting to believe that they are newspapers. Hold on. This is an absurd claim. So when you say they're going to zero, be specific. Like a lot of publicly traded software companies are going to be zeros.

Like, not like zero, zero. but never never coming back. And I'm hoping it doesn't happen to the big ones. But I looked at like 20 software company charts. Every single one of them is either

out of 52 week low or close. There aren't even like up weeks. Some of these charts, it's like 25 straight weeks lower clothes on Friday than the open Monday. Yeah. It's actually unbelievable.

there have also been zero takeovers. So, Kai, does a company like Adobe, let's use them as an avatar, do those companies make it? I think so. I think so. I mean, I don't know about Adobe in particular. I mean, here's the question, right, which is, so why are these companies down so big? They're down so big because people assume that their moat is code. And with Codex and ClaudeCode, code's basically free, right? Any one of us here can effectively vibe code and replace Adobe, Salesforce, these products on our own. Okay, so if they have no moat, then they, should go down. I guess the question I would ask is whether code was ever the moat for these companies, right? Like,

I think distribution was the moat? Yeah, I would argue distribution. So why can't, right? But so then why can't Open AI and Anthropic mimic that distribution? They certainly have the capital. They're trying to,

right? So that we saw the Open AI development company, this announcement this week, they're partnering with a bunch of P. Ph. firms to essentially launch like a army of four deployed engineers, basically consultants to go into your company and help. And recommend you use the,

yeah, Yeah, you use our product and here's how you use it, et cetera. They're certainly trying. I think it's interesting because, you know, I had this view for a long time that the luminaries on AI were kind of like these naive people that they kind of thought, if we build it, they will come. Let's just build a really cool product and then the enterprise will buy it. I think what they're, what they've learned correctly is that you have to sell too. You have to push this into the enterprise. Like businesses are very slow to move.

They're very slow to change. I think this is an important recognition. They've also done partnerships with, you know, the old school consulting firms, the extantures of the world. And then we saw Google is hiring a bunch, like a thousand or something. Yeah, you have to get to the decision maker and you have to push them over. But the market seems so convinced of it that these companies are, to Josh's points, metaphorical zeros. Like, Adobe is the earnings per share in the 40PS are still at all-time highs. I'm guessing that Salesforce has not seen any material contraction.

But the market is like, all right, we don't care. You're down 60% anyway. Yeah, I think Adobe is trading in a period of like, nine and a half. It was up to ten yesterday. Yeah, and like Salesforce is 13. That's an automaker PE. What we're saying is that what we're saying is that those earnings are not going to show up next year. That's the only answer. A software company was high margins training below 10. So this, the stock market is like the economy. We've had these rolling recessions and parts of the economy. Yeah. But it hasn't brought the whole economy down. And the stock market is

the same thing where we're having these these losers get separated. So the question is, could we have this whole thing with AI without bringing the whole market down? Well, the semis, the semis are gaining more in market capital. than the software companies are losing. So it's a net positive for the NASDAQ. It's a net positive for the S&P to that question. Like, yeah, we're sort of seeing 25 fairly large companies disappear before our eyes. But then there's 25 other very large companies that have just become gigantic.

Like top 20 S&P market caps. This chart here shows that the SOX index, a semiconductor index, these companies are now 23% of the S&P. Right. Out of nowhere. That's a baton being handed off. 23. Yeah. 23 coming up.

So the market, so the overall market is not suffering, but there are gigantic companies whose market cap is literally vanishing. So I say like zeroes. I don't mean like there's no more earnings and revenue. I just mean like these are stocks that might never come back again. They could just, and I, those are take privates at some point. But that's what I'm asking. Where are the deals?

Nobody thinks these are. cheap enough to LBO. It's way too quick for deals. Don't you think? At this point, it's so... But if we think there's $3 trillion in dry powder amongst private equity, private debt, whatever, like, we know there's a lot of money they want to put to work. Take one.

But they're already over-subscribed in software. They're full. Right. Here, buy our private credit fund and also we're buying Adobe. Yeah. Yeah, why not? You imagine the media coverage of that? So, wait, so you mentioned like the earning side of this. thing. And we've got a million charts in here that shows how great earnings are doing. Michael,

why don't you like pull up some of the NASDAQ ones that we, Michael and I talked to a guy from NASDAQ for animal spirits the other day. All right. Let's let's do chart 14. And like when you look at the earnings, this is the thing that like I said this is the most logical meltup of all time because it really doesn't look as much like 99 when you think about like the way that these companies are. So in 1999, in the fourth, so at the top, at the top of the bubble, 10 and a half percent of the NASDAQ 100 had negative margins. There was no companies that had margins between 50 and 100 percent. And it's just completely lopsided.

So today, today, 20 percent of the NASDAQ 100 has margins between 50 percent and 100 percent. 50 percent of the index is between 25 and 50. That compares with just 24 percent from 1999. Back then, most of the companies had a margin between 10 and 25 percent or zero to 10 percent. These were not the same businesses. Now, Dan Greenhouse made a fair point. Dan basically said the biggest myth is that the tech companies today are real. And in the 90s, these were like just food gasey companies.

And he said, that's not true. We had Cisco, Microsoft Oracle. And at the time, Cisco was doing $19 billion in revenue. Microsoft is 22. I think if you inflation adjusts this. So Microsoft was doing 23. Inflation adjustment, that's $44 billion. Cisco with 19, $38 billion inflation adjusted.

So Cisco is doing what Open AI is doing. Like these were massive companies. It's just that a lot of the rest of the index was pure shit. Well, that's the thing. We had, forget about profit margins. We had pre-revenue companies. We had thousands of IPOs that we don't have right now. Like, that's not what's happening.

John, give me 16.2. So I have 16.2. Holy shit. Holy shit. Are you sure you want to whip this out? Charcot did this for me. So this is NASDAQ 100 earnings growth. For 20 years, this thing has printed 14% annual earnings growth.

So you had Mobeson on your podcast. You always talked about baselines. I can't back this up. I'm just guessing. There's no way we've ever had a period like this with earnings growth this high for this long before. So in terms of baselines, the question is, could this continue? Could we see earnings? So yes.

How? The NASDAQ is up 20% per year or something over this period. is is AI again back to the baton handoff thing can AI keep this kind of Ernie's growth going robotics could do it you want another decade you want another decade of 15% revenue growth how about 10 million robots how about a million humanoid robots and automating literally every inanimate object in the in the entire world plausible that's what's coming now golden era of biotech yeah well that could do it too we live live to 120. Yeah, that'll move the needle. So that's how you get 50. I think, I was talking to my friends who are

not professional investors. I said, maybe the worst thing you could do is have too much cash at too young of an age. Not that the market won't at some point have a horrific event where you wish you had more cash, but like, that's going to get bought really fast all over again. Because if we have another, if we have like anything non-recession, any kind of market crash, right, that'll get bought up in two seconds. We'll get another V. We get another V. We get another V.

You know why? Because people see the degree of change happening and the speed and the acceleration of automation. And I think they realize they can't not own the chips, the robots, the AI. So I'm not saying like the market's not going to fall. It definitely will. I'm just not convinced we're going to have like a two-year

bare market with this much innovation happening. So I remember back in March of, oh, this year, this was two months ago. Micron was at 470, had another earnings report that we all laughed at. The numbers were like, wait, what? And then Micron swiftly went from 470 down to 310. In March, in like 10 sessions, it fell 30%. It went from 310 to 800. Yeah.

in a month or two. Right. If this cycle turns for whatever reason, it's going to fast. John, give me chart 16 real quick. So, 0.3.

This is the meltup, Matt, did this for me. So the NASDAQ in the 90s, like we're, the NASDAQ 100 over the past 10 years. It's kind of approaching that. But after the 90s, the NASDAQ fell 83%

and it took like 12 years to break even. That's the kind of thing we're not going to get again. I don't think so. I don't think so. There's no way you can, I don't think we can have that kind of fall for that long again.

Here's why. Chart 15.9. So, in the dot-com bubble, 32% of the index constituents were trading between 60 and 100 times earnings. 34% of the index was trading over 100 times earnings and 10% of it was unprofitable.

Today, 60% of the index is trading between 20 and 40 times, between 20 and 40 and 40 and 20 and 20. We have 10% of the index that's trading at stupid levels. But we're not, we're just not valued the way that we were in the 1999. So yeah, the market can get cut in half. It always can. But is it going to fall 80%. That would be very hard to believe at this point.

What do you worry about in the midst of like everything that's going on? What do you think is the big risk? Maybe even if it's an obvious risk, what do you think is the thing that we should be focused on? I still think that AI is a risk if only because it's the entire market. Right? Like the S&P's, you know, 33% Mag 7. You add in these chip stocks, checking 50, 60% of the passive index, which rolls. told that, oh, that's like diversified is one thing. And so like, so like, yes, I mean,

as things, things continue to be going well as they have today and the past month, that's, that's fantastic. But I just think there's a lot of concentration. It's also such a big part of the economy now that if this turns, Michael and I were trying to figure out what that mean, like, what would, how far would they have to pull back on the spending? But you'd, you'd probably get a recession and a bear market together. It wouldn't just be one. Yeah. There's a different answer to that, though. We all assume that this ends badly because of the hiccup in the KAPX story. And people have been saying that now for three years.

Yeah. I've said it. All right. So everyone, everyone, but like the other risk is that this works really, really well. And the job displacement just hits harder and faster than any of us expect. And that becomes an economic risk, which I don't know if that affects the NASDAQ. I don't even know if the NASDAQ and the actual economy have any relationship whatsoever left. But to me, that's the thing.

It depends. Because if anthropic and open AI are in the NASDAQ at that point. Yeah. I had a family member who said, I'm worried about my job because of AI. You know what I said? Buy stocks. Well, I've been saying that for 10 years. Right?

Just only the damn robots. I mean, I don't know what your alternative. But like, do you think that that is an underappreciated risk that the job loss, like, materializes and it's bigger than people thought? I think it's a possible risk. But I actually think that that's an overrated risk. I think, you know, the average person, you know, because they've been watching sci-fi movies, you know, over indexes on that as a possible future, and relative to what I think is actually attainable.

Now, never say never, things can happen that, you know, we can't predict. But I'd say that that is, you know, probably not the first thing I'd be worried about. Electricity, you worry about that? Not having enough of it. Yeah. In the short term... Could that stop this KAPX boom from booming? Yeah.

Could that be the fundamental constraint? So we've heard about chip shortages. You understand what short compute. could the strain on the grid be the thing that diminishes our chance of hitting these earnings expectations? Yeah, look, there are a lot of bottlenecks potentially in the value chain. And it's weird because if you step back, I almost feel like it's a good thing. Right. So like talking about the job loss scenario.

It's a governor. It's a governor. It kind of slows down the build. I like that. Like if things happen too fast, the government, you know, regulations are too slow to adapt. The job market, you know, retraining employees and restructuring companies happens too slowly. So in a way, the best case scenario is one in which AI ends up delivering abundance, but it takes, like, many years for that to happen. The scenario that we worry about is one in

which that happens overnight, and then everyone's laid off, and it creates a doom loop. So how about, like, getting, again, everyone knows at risk. So you got a chart in here, John Doe 28. So you have to talk about how the Mag 7 is going from intangible asset light to asset heavy. What if it's just a re-rating? And they go, all this spending and you becoming more of data centers and it's physical. It's not intangible anymore. What if we just get a re-rating that way of valuations?

That is my base case, actually. So I don't think these companies are going to go bus? Sorry, are we rating lower? Yeah, if we get a rear, just valuations have to be lower because you're more capital-intensive. So like, let's use an example.

Let's take an alphabet. We love this business for so long because of how uncapital intensive it was. Right? Basically, they invented search 25 years ago and they've been eating, they've been dining out on that. innovation and the margins were crazy.

And then cloud computing, amazing margins. Now, obviously, nobody's calling AWS an alphabet overall, or Microsoft. Nobody is calling these companies cap light. They're the opposite. So because of your research on intangible, you're saying that's your baseline now. John, throw that chart back on. Can I speak to what we're looking at here, please? So we're looking at the Mag 7, CapEx to revenue.

CapEx is a percentage of revenue. CapEx to sales ratio. Okay. Yeah. So this one. Yeah. To Josh's point, like the MAG 7, why are they the MAG 7? Why do they have their own acronym?

It's because they just have to deliver an amazing R. YC return and invested capital over the past, you know, 20 years, 15, 20 years. Unprecedented. Unprecedented. Never seen any of the level. Never been seen before at such scale. Right? Like, yeah, okay, it's possible to build asset like businesses that are small.

But at the trillion dollar scale, I mean, no one thought it was possible. And the way they've been able to do that is through these intangible assets, through leveraging brand, human capital. Network effects. Network effects in particular for Google. And that was a great thing while it lasted. And so here's the irony is that these guys are on the forefront. They invented, Google invented the transformer.

They're now kind of in a way engineering their own demise because they invent this new technology. What does it do? Well, it changes the rules of the game. Entering the AI revolution, the way it worked was there was a handful of digital services and these businesses kind of like carved it up into their own fiefdom.

You get searched, you get social, you get shopping, and it was a good, cozy little oligopoly to have. What happened is with AI, now, you know, the perception at least is that it collapses all the markets into one. That now it's all about who gets agents first and who wins that market. If you win AI, you win everything. And that's ignited this game theoretical prisoner's dilemma situation where you have all these companies saying, wait, this is an existential risk.

I need to do this. They're still spending. Therefore, I'm spending. If they're spending, I got to spend, right? Ideally, they would all moderate their investment, be incremental, continue to, you know, make AI not a disruptive, but a sustaining innovation. for the incumbents. In this case, though, however, if Altman's going to spend the trillion dollars, then you got to spend the trillion dollars too. And so I think what's happening is that they

are, again, they're better run companies, no doubt, than the companies than 90s. That being said, like, they just can't help themselves. Like, there's, it's just, it's rational based on game theory for them to be doing what they're doing individually. We have not seen the multiple de-rate yet, though. Max sevens are at an ultimai today, the group. So what caught, what's the catalyst for a re-rating? Well, I think the challenge, I think once the market catches up to the perception, wait, these are no longer the asset-like businesses of five years ago, these are utilities, right? And very tangible. Yeah, very capital-intensive with massive depreciation.

Right, that's the other thing, which is, you know, Chancellor talked about this on the podcast. He was saying, look, like, it's just mechanistically in any of these up cycles. What happens is you have companies spending on CAPX, but CAPX is an capital asset on a balance sheet that gets depreciated over time. So for a five-year depreciation, you're only spending, for each dollar that's been spent on buying data centers, you're only spending what, 20 cents each year hits your net income, whereas Nvidia gets to record the entire dollar as revenue. And so you end up with this kind of just, again, accounting-based inflation of net income.

So Michael and I had this discussion two days ago. We were talking about the CAP-X, just CAP-X in general, not really being great for shareholders. And this is, of course, like the biggest CAP-X cycle we've seen. And the example that I don't know if it's a good example or a bad example, so I want your opinion on this. The example that I used is like AT&T and Verizon, the amount of money that they spent from 1G to 5G, just 25 years of endless billions of dollars,

these fucking stocks are the same price they were in 1997. Right. For, I'm like I'm not even, not even exaggerating Verizon. Josh, you're being paid to wait with a dividend now. Yeah, the dividend is not even great. Verizon, I think it was still called Bell Atlantic. In 1998 was $45. It's $45.

And I know there's a yield on it, but like, I guess my question is, these companies won. The entire wireless business is three companies. It's T-Mobile. It's Verizon and it's AT&T. And that's it. Right. And what did we win?

These stocks don't go up. Great. Five percent dividend yields. All right. So it's not zero. it's a bond. So it's not clear to me that this is materially different. I'm pretty sure Amazon alphabet, Oracle, I'm sure they're going to win.

But what do we win as shareholders? So that's my question for you. What do you thoughts? Yeah, I mean, a couple things. So first of all, if you look at the CAPEX to sales ratios, for many of the hyperscalists, it's higher than AT&D at the height of the dot-com boom. Right. Right.

So they're certainly in the same category. And yeah, it's a Pyrick victory. You can win the market, but it's, is it a market you want to win? because if your margins are like 60% doing search, why do you want to get into this other business? I'll do you one better. You know who won? Apple.

Like, Apple is the beneficiary of the combined cap-ex spending of Sprint, which got sucked up into T-Mobile, 18-T, and Verizon. Apple doesn't own any of the networks. They built the best product on top of the network. Right. So it's not that cap-x bad, Kappex good. It's that who, what layer, where do the profits accrue? Now we know in wireless the profits accrued to the iPhone and the iOS ecosystem.

We don't know who's going to win, like really win this. So where are you looking for winners then? Yeah, it comes down to barriers to entry. It comes down to competition, right? If you're in a sector where it's easy for people to compete, if your only moat is, oh, I have more money to throw at the problem, well then, like, you know, I could call up Masayoshi or whatever and solve for that. So that's not really a true moat.

And that's why historically capital intensive businesses have not actually been like the best place to invest from an REOC standpoint. point, what are true modes are the network effects you mentioned, these intangible assets. You know, no amount of money could have replicated Google search at the time. Now, it's, you know, arguable that maybe AI will help obsolete that technology. A lot of my searches are starting on, Claude. Yeah, and I think that is a meaningful risk to that part of the business. But again, like, there's the question around the disruption of the existing business.

Microsoft is a good example of a company that's, you know, right in the crosshairs here. And then the question of they're going into this new business, will they win? And even so, do they want to win? There are people who think the profitability will accrue to the layer that Palantir sits on, where Palantir basically surfs atop all of these LLMs and is the company that gets paid by other companies to literally tell them how to make best use of all this technology. How about this? So you have this, so you have this quote here from Mubes, and I don't know what this is from.

You said, I think you would have to argue that almost all the profit ends up going to the consumer ultimately, and that's because of competition. So what would that look like if you're saying all the utility goes at consumer? Yeah, I mean, it'll look like the railroads where all the railroad companies went bust. And, you know, but that being said, a ton of GDP was created by the railroads. I have this chart here. It is chart. Let's see, hold on.

Just don't do 16.1 again. 36. This is from Azimazar Exponential View. This is a good one. Yeah, this is a good chart. So the blue line shows cost of railroad construction each year. The green line shows how much money, how much earnings the railroad companies earned. Oh, wow.

And the red line shows the contribution of railroad's GDP. How do they calculate that red, that red line? I don't know. What goes into that? You got to click on the link. Okay. Yeah. They made it up.

They made it up. But I mean, look, if you take this at face value, what you see is, you know, the costs above the earnings. You can see the little spikes. Those are the panics when all the real estate when bust. And then even after all that work at the end of the day, yeah, they were making some profits, but their utility like profits. The users made the money. Who made the money? It was, you know, the...

Yeah. manufacture furniture in North Carolina put it on a box car shipped to another city to California. That's right. So there'd be like AI is going to help

business formation or something. It's going to make it easy for people to do everything. Now, well, so here's what the hypers would argue. They would say,

well, we're invested in the LLM layer. Like, we have partnerships and like literal investments in some cases. So. And they would say

we're going to get a piece of that too. I actually happen to believe that the LLM layer is also at risk of of commoditization. Take a look at number 29. So what this chart shows

Oh my God, what's going on here? So what this chart shows is like the Y axis is like how good are the models, right? Go back to November 22 when Chad GPT was released. The underlying model was GPT 3.5. You can see that at that point, the OpenA had a huge lead over their competitors. In fact, they were like two orders of magnitude.

Now it's a horse race and the lead the leadership is switching back. Switching, yeah, it was Gemini, then it was Claude, then it was GPT 5.5. Siplamma is a donkey, apparently? Lama, that didn't work out too well. Yeah. Those efforts didn't work. Then you have Deep Seek and you have the Chinese models.

You don't think one of these players is going to break away in terms of capability. I don't think so. But one or two of them already have broken away in terms of critical mass, like the amount of users. Like, I think we have a Coke and Pepsi. That's like brand, essentially. I think we have a Coke and Pepsi and Dr. Pepper basically at this point. I think Gemini arguably is Coke, say Claude is Pepsi. Open AI is Dr. Pepper?

I think other way around, I think that Claude, Claude is Coke, maybe? Claude is Coke already? I think Claude is, or maybe Open AI is still Coke. Open AI still Coke. Open AI still Coke, yeah. Because the average person knows Chachabut. That's right.

The average person is doing more AI stuff with Google and doesn't even realize it. Every search is now an AI workload. So I think it's, I think Gemini is the number one, like, AI in terms of usage. People, they don't, they're not doing it on purpose. They're getting Gemini results instead of search results. I mean, they, so Google has a, has a special advantage is they have distribution, right?

They're a Gemini model. They're putting Gemini in my email. That's right. Whether I like it or not, it's in there. It's built into an installed base that is significantly larger than what OpenAI. We don't think that's bigger than Open AI right now? I do. Like, it could be measured.

Depends on how you measure it. Yeah. It is a question also of like, you know, also the quality of the model. I think right now it's, it's, it's, it's, it's, it's, it's, the Gemini's in third place, they will likely release a new model next week. And we'll see. Kai, I have a two part of you. Yeah.

So what first brought you to intangibles? Like, what attract you? Because your entire, your entire operation is built around this idea. And then part two, what does all of the spending do to the intangibles inside your portfolio? Yeah. So answer to the first question. So I used to work for a company called GMO.

We're kind of like AQR, one of the pioneers in quantitative investing. one of the bread and butter factors within, you know, GMO and other firms is the value factor. The idea that, you know, you buy, if you systematically buy stocks that are cheap relative to say book value and, you know, underweight those that are expensive, that that are historically has earned excess returns. Did Chancellor say that you help them update some of their models? Like, what did you say? Quality, you kind of helped them update it or bring up to speed to current day? Yeah, that was one of the things I worked on when I was analysts. Like modernized the way they're capturing that.

Yeah, look, and it's been many years. I'm sure they've done more upgrades over time. And again, not specific to them, but it's been a challenging time for value investors as defined via these systematic factors. Like the FAM, I had Mobeson on the podcast, he made like a cheeky point. He was like, look, the Fama French value factor is this like academic factor that basically is an index of cheap value stocks, shorting or underweight expensive stocks. It made money every year for like 80 years, and then it stopped making money in 1994 when

they published their paper, right? So, so that's the thing. Arguably like when America online came out, but you know what I mean? Like the internet changed the world. When we all got computers or, yeah. And so that was the big question, which is like, you know, we were in a tough place because you're sitting there and you're saying, all right, well, like this beautiful idea, you know, that Ben Graham coined, you know, 100 years ago with, your security analysis. Dude, it's by low, sell high. It makes perfect sense. It should work. No one is arguing that bio low cell high doesn't make sense. The question is against what intrinsic value, right? So that was always my contention is it's not that value investing doesn't make sense.

By definition, it should make sense if you know what true value is. The problem is that the way we were measuring value was just obsolete, right? Because so many of the traditional metrics are backward looking, they don't take into account accounting stuff. R&D, they don't take into account advertising and marketing, human capital. They're based on just tangible assets that, you know, at one time 100 years ago made a lot of sense. But as the economy has transformed from, you know, industrial to information-based asset light,

companies like Google and Nvidia have come to the forefront. So you consider yourself a value investor still? Absolutely, yes. Just valuing things differently. Yeah, exactly. Because look, it's, it's the challenge is that if we don't have an anchor of value, how are we going to invest? Right. I mean, there's different ways to invest, of course, but, you know, I do think that being able to kind marry the two schools, the idea of, you know, being a value investor, having some kind of price discipline, you know, buying, buying bargains and knowing when to kind of sell and take profits, you know, is a really important stabilizer for markets, a really important thing to be doing.

But we need to update our metrics, right? They think about Warren Buffett and Berkshire. I talk about the story a lot that, you know, he started off as Ben Graham's actual disciple. And he, you know, bought Berkshire Hathaway and a struggling, struggling mill. He was only buying struggling things. And yeah, and it worked okay.

But looking back, you know, after meeting Charlie Munger, he talks about this. He's like, look, I'm never going to do that again, you know? And then he bought Coca-Cola and then Apple, right? And I think the implicit lesson there is that he added intangible modes to his framework. And Graham would have done that, too. He used to buy stocks that were worth less than cash. Like, guess what?

That doesn't exist anymore. That's right. Although he would have updated his, I think by the end, he was saying like he's an indexer essentially in the 70s. But all those guys, they don't- They were tired of your own piece. He said like, yeah, shit doesn't work anymore. Yeah.

Yeah, I want to say that like 84% of Buffett's investments were purchased with a price to book above one. So, in other words, he was not a price-to-book investor. So he changed his mind over time, not just because he met Charlie monger, but also like the world also changed. Yeah, the world changed and he had to evolve his process with it because as you point out, Ben, there just weren't enough things to buy other ones.

He sort of also was an intangibles investor because he recognized the power of brand. Geico. Yeah. He recognized the power of things like American Express and Coca-Cola and what the brand meant to the consumer. Right.

Before anyone else was really talking about that. That's right. So there's like a lineage from Buffett to what you're doing with your intangibles portfolios. Yeah. So what I'm trying to do is to kind of do a systematic version of that. Yeah. Right. Like trying to say, I think, you know, anyone with common sense can sit there and be like,

yeah, I think brands matter. I think human capital matters. I think this company has a really interesting technology. The challenge is how do we quantify that? And so for the longest time, quants were in this tough place because we had, you know, crisp, compostat, the traditional databases, which were all structured data. Right. In your intro that you read for me, you mentioned unstructured data.

Unstructured data is everything else, right? The information in patents, in trademarks, in company filings, and news and analyst reports, and, you know, on Twitter, all this information contains obviously very valuable information on companies and on their intangible assets. If you can bring order to it. If you can parse it. And I think for the longest time, the challenge it was that quons, we had the new regression, we had a few tools in our tool belt, but they were all optimized for a world where

structured data was what we had available. Now, with large language models and natural language processing, we're finally able to kind of unlock this huge trope of information where I think the task, which at one time seemed unattainable of trying to codify a Warren Buffett-style approach is now on the table. Not saying that, you know, I've done it or, you know, anyone has done it yet, but I think that, you know, we're increasingly moving towards a point where through AI and all these tools, a lot of the, you know, kind of intuition that's baked into a fundamental investment strategy can be codified in quant.

So how do you quantify brand? Because we're in a market right now where I think the worst stock in the world is Nike. And Lulu Lemon is down to use too. Lulu might be following it down the drain. Is there a way to parse the things that might go into a calculation where you could say this,

forget about the stock price having lost value. The brand was not. losing value a year before. And like that was the signal to not be a Nike. Like can we do things like that? Is it effective? Is that part of your approach to? By the way,

these companies are both down 76% from our highs. Yeah. Equally. Yeah. Crazy. Those are apparel specific. But just generally like how do you say that a brand is either gaining or losing value? Yeah.

I mean, absolutely. If you were at Peter Lynch or someone, you'd say, hey, you know, talk to your friends who are Lulu customers. Are you still buying their products? Right. Not to brag. I'm friends of Peter Lynch. Oh, there you go. Nice. Yeah. You should ask him then what he would say.

I don't think he wants to see me again, but I interviewed him for an hour. That's awesome. He's a legend. And he was telling these great brand stories about walking into the supermarket and seeing like one brand being sold at the register and another being sold on a shelf. And, you know, like he was doing this in a very analog way. Right. Okay. Yeah. And I think increasingly you can start to systematize some of these things. Yeah. Like social media data is an obvious thing. You can go on Instagram.

Mentions, brand mentions. And like what's the tone of the mention? Is it positive or negative? Right? Like, is it amongst the right people? Like, there's a kind of in crowd of cool people. Are they, you know, again, you can buy influencers. So you got to be careful for manipulation as you do with all signals.

You know, companies can juice earnings, you know, whatever. But if you're careful about it, yeah, if you track all this information, in theory, you can certainly capture, you know, where the trends are headed before, you know, ideally the stock price. How to prediction markets factor into this? You must be really excited about that data. because that is, like, I mean, especially things that are very far afield from what would normally be in an 8K or, or, you know, some sort of like official viling. There's a lot of opinions being expressed there and you can quantify it. Yeah, I think it's a really important and interesting source of data.

I'm not using a ton of it, to be honest yet. I mean, I think because most of the stuff I'm doing is at the company level, right? So it's very useful if you're trying to do macro forecasting, who's going to win the election. Obviously, there's a lot of sports betting and crypto stuff, which is, you know, less relevant there. but, you know, is Nike going to make a comeback? I mean, I don't know if there's a contract on that. If there were probably not be a very liquid one. I don't even know how come, like, how would you even sign of how to what a comeback is?

Yeah, one thing I've used is Google, Google Trends. Google Trends is an interesting source of data. Okay. You can, like, look at what people are Googling, like, terms. Like, if they're Googling, you know, the Luliman align, like, pants or whatever, that's, like, a potentially good thing. And if that's going down, that's a little bit concerning. You have two ETFs.

What's the difference? between the two and which one should Ben Carlson buy. Um, pitch it. He's sitting right here. Get him to buy it. Um, so yeah,

the first ETF, um, is US based, the one I launched in 2021. Okay. Um, it buys a portfolio of stocks. I tan. The intangibles ETF.

Yes, that one. Somebody else had to say it. Thanks, Josh. And Dant is detangibles. What's that one? Develop markets. Yep.

So international intangibles. That's right. Yeah. And so that, the second one follows the same exact strategy. Both of, which their goal is to buy stocks that are cheap relative to a expanded definition of intrinsic value that includes these intangible modes to it. So brand human capital IP network effects.

You know, you know about like how the IPOs are all going to join the major indices faster than ever. That's right. You're making plans for that new world where you get a SpaceX and it's in the S&P 10 days later. Probably similar thing will happen with Anthropic. Like, how does your work get affected by that? You kind of have to play along with it? Yeah, if it's in the index, it's in the investment universe. I don't have, it's an absolute return fund. So I don't need to have, I don't have a bench more per se.

I don't need to own anything, right? We're trying to make money over the long run. So to the extent SpaceX is added to the index, it's now investable, which is nice. I doubt it'll be in the portfolio day one, just given how. It's a quantity of any discretion. Are you rules-based completely? Completely rules-based. The idea would be if there's something that looks weird,

that doesn't accord with fundamental intuition. I'll ask the question of why the model is missing that and try to adjust the model in a way that solves a problem, not just for this one case, but also moving forward. Are companies like SpaceX and Anderol and some of the things that were, some of the more exciting companies coming, are they intangible assets, or are they tangible assets?

Or are they, obviously everything's a mixture? Definitely a mixture. I mean, some of these companies are a little bit more physical, right? They're not pure software companies. I mean, SpaceX, they launched rockets. but obviously, you know, most of their value is in their IP. And I do think that, you know, a lot of their value is just in Elon Musk in this case. No.

That's the ultimate intangible. That's like this is the ultimate intangible asset is Elon Musk's involvement. His aura, yeah. Right. Hard pivot. Ben's book. Can we, can we say some words about it? Are you allowed to speak about it?

It's not like an ETF, right? Yes, there's no compliance real soon. All right. I'll say, I told Michael the other day I'm not good at sales or self-promotion. Like, Josh, you're a salesman. Is that good? Yes. Okay.

Josh could take a ketchup popsicle in 90-degree weather and sell it to a woman wearing white gloves. You could do that. Thank you. That's not me. Okay. So I'll make one hard sell for the book. Okay. There's never been a better book for charts and tables than this book.

I counted because chart can bad help me. Wait, say it again. That's a bold claim. There's never been. There's 52 charts. You have charts in every chapter. There's 52 charts and tables in this book. It's got more charts and tables.

and data than any book. And chart can bet, help me, so I'm giving him all the credit. Yes. Way to not sell the audio version. What are you doing? The audio version comes... You describe the chart?

No, it comes with a PDF of all the charts. They send it to you. That's a good idea. Right? Whose idea was that? Is that Craig? Yeah. Okay.

So, anyway, that's my... And I got a couple charts. There's one chart I want to run by you guys. So chart 50, John. Let's do it. Okay, so I looked at the worst days, the worst months, the worst years in stock market history.

Okay? So I did one that looked at the worst months in stock market history, and most of them are in the 30s, 40s, the 1987 on there. This is in Chapter 1. Yeah, Chapter 1. I read this chapter this morning on the way into the city. I can't believe you asked Nick for a quote in Not Bay. The funny thing is Nick was actually on the cover and they bumped him for Morgan.

So I feel bad for me. Wow. Poor guy. Is Morgan's quote even hot? I'd say, has mastered the art of it. Ben Carlson has mastered the art. of exposing the few big topics that matter most to investors. Let me hear, what's Nick's quote?

Nick's not even on the back? Oh, man. Where did Nick go? I don't know. So, anyway, here's my point I want to be talking about faster cycles. So there's been six times where the stock market is down 20% or more in a single month. I think you could make the case. And again, a lot of these are in the 30s.

You could make the case that going forward, instead of having these massive, long, drawn-out crises, like, hey, we're down 60% over three years. we're going to have these more air pockets because information moves faster where we have these huge down one, two, three, four month periods where it's like, oh my God, the stock market was down

25% in a single month. That's where I think we're headed in terms of the speed of these things. I think there's going to be more air pockets. Speed running the correction. Because I wrote a chapter of the Great Depression and people keep asking me, do you think it could happen again?

And I think we've completely cut that left tail off. So the question is we've cut that tail off because of fiscal policy, monetary policy. Okay, you can't, The risk don't ever go away. What does that mean? I think it could mean we just get faster, more of these things.

So buy and hold gets harder? Nate, don't you think that these cycles just speed up? There's no way that this stuff is slowing down. And AI is going to just add more speed. That is literally what has happened. My contention is that's where we're going. It's just cycles are going to be super-tracking. Of course that's a contention.

Right? What do you think about that? Have I saw Goodwill hunting? I think that's right. Yeah. Thank you, John. Like, everything else is faster. Why wouldn't the market's ability to process bad news be faster?

Everything's happening faster. There's a lot more trading, 24-hour trading. Like, we're all, we're heading towards a world where, yeah, everything will be instant on your phone. Right. There's no rule that says how long a bear market has to be. I know the, I know the old heads like to say the average bear market is 13 months. We haven't had. We haven't had a true economic recession in a long time.

We really haven't. We haven't had his credit cycle. 18 years. We've had a credit cycle. We'll have another one. All right. I got one more chart. I want to spike the football on some people's heads.

John, throw up chart 53 on Japan. This is the question I get more than any other. Now show Japan. Meaning, meaning the implication is... Why are people so obsessed with Japan? Because Ben says it pays to be a long-term investor. And people like, oh, yeah, Japanese people sat in down stock market for three decades. So no one, I've never seen people show this.

From, yes, from 1990 to 2024, Japan did nothing. It was like one and a half percent per year. You wouldn't know... It was Japan peaked in 1989. In like December, 1988. It bottomed in March of 2009. which is crazy. Horrible.

But if you extend it, the returns were so good in the 1970s and 1980s that it was so compressed, it had to be bad. So from 1970 to 2024, you got almost 9% in Japan. Long-term investing did work in Japan.

It was just all those returns were compressed in the first... Yes. So you did 22% a year from 1970, 1989. Small cap socks in Japan did 30% per year for two decades. So then you do 1% a year

from 1990 to 2025. which is a lifetime. And guess what? The average worked out. You still did okay over the very long term in Japan. Over the full 60 year period. Yeah.

That's a cycle. Right? That's a good way of thinking about it. I think most people would have preferred if the returns were back and loaded rather than front of it. All right, dude, the book is called Risk and Reward. I know Kai is very excited to read it.

You're going to listen to it? Oh, I'm exhausted. Is Ben going to read it to you? Yeah. We're going to call it each other night. I'm going to listen to it 100%. I have the audiobook too. I'm going to listen to it in bed.

All right. So I'm reading because I'm old school, but I love it. So you know I'm like one of the biggest fans of your writing in the world. And I make it through the first two chapters and I'm just like, yeah, man, this is what I need. This is the medicine. Because it's all about things will probably be okay. It's unique. Most people writing financial books, it's the dollar is going to not be the reserve currency anymore.

or gold is going to replace. You're just saying like, no, no, no, things will be okay. The 10%... And here's how you know. The 10% per year over the last 100 years is inclusive of all the bad shit that's happened. Right. The Great Depression, that's part of it.

Yeah. Right. 1987, that's part of it. 70s, that's part of it. All the bad stuff that's happened is inclusive in the long-term return that are still good. We've been through a lot and things are still okay.

Yeah. That's a really great message. I love it. We should end there. Guys, did you have fun on the show today? Great time. Yeah. Kyle, you brought the...

Thank you. You're so smart. Why are you so smart? But we'll do it another time. I want to tell people where they can learn more about your research because your research is really spectacular. Your funds are great, but like you're a thinker, you're a philosopher, and you test your ideas with data. And I love when anytime you're stuck drops,

where do people go to learn more about Sparkline and your work? Well, thanks, Josh. Yeah, you can just go to my website, Sparklinecapital.com. Sparkline Capital.com. That's right. And you're active on your tweets? I tweet sometimes. I'll try to respond.

This guy's so smart, he doesn't blog. He white papers. He will. Right. He's writing white papers while we're doing blogs. Yeah, no doubt. All right. Guys, thank you so much for listening.

Great job to the crew. I know you guys worked your asses off this week. John Duncan. Rob. Amazing. Nicole. Daniel. Travis.

Happy birthday to Graham Thomas. I get everybody. Katie? All right. Guys, thank you so much for listening. We'll see you soon.