The Compound and Friends - Real Men Don't Panic Over Bonds

Episode Date: May 23, 2025

On episode 193 of The Compound and Friends, ⁠⁠Michael Batnick⁠⁠ and ⁠⁠Downtown Josh Brown⁠⁠ are joined by Richard Bernstein to discuss: the Big Beautiful Bill, the bond market, the Fed, the next recession, international stocks, the best uncertainty hedge, and much more! This episode is sponsored by Kraneshares. Read their recent article on the future of AI at: https://KraneShares.com/ai 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

Alright. I know you're a Rangers fan. You're a Knicks fan? I was there last night. Me too. So was Michael. Where were your seats? Way upstairs. Um, why...

I saw Danny Moses was there. You know what? So I left with 30 seconds to go because I had a train to catch and also we were up by 8. So... Did you really? So I'm on... What? Well, I wanted to avoid the mayhem and I had a train to catch.

The game was over. We were up by eight. Oh, also, so I left when OG got fouled and they reviewed it. That was a foul. I can't believe they overturned it. It was a f***ing foul. Excuse my language. So I'm leaving, I'm on the train, on the phone, and I'm like, oh my God.

So it was... I'm very glad I left, by the way. I would have thrown up. It was very anti-climatic because there was a guy on the train who was like three seconds ahead of me. He was on Max and I was on thrown up. It was very anti-climatic because there was a guy on the train who was like three seconds ahead of me. He was on Max and I was on TNT. So when Halliburton hit that shot, he went, oh no! I'm like, I just, I melted.

But it was horrible because then I saw a second and a half later, and debacle. That shot, the way it bounced off the back of the rim, 10 feet in the air. I thought it was over. It looked like a movie. Yeah. It looked like a, right?

It looked fake. Yeah, I thought it was over because while the ball was in the air, the red light went on. And then it went through. Do you blame Tibbs for last night the way that I do? There's no blame. There's no blame.

It was a one in a zillion what had to happen. It's never happened before an NBA history but it also didn't have to happen dude they everything that had to happen happened Naismith was on that it just shit happens that you kid that you can't control I blame cat if anything and og was bad and Josh Hart was terrible Josh Hart was it was bad just Harker caught back it was bad it was awful Josh Hart though that two and a half minute stretch, he fell down like twice. Alright, let's also, let's not go into a dark place and overreact. It's one game.

I don't want to start playing. But now they have to, they have got to win. I was the number one, like get Tibbs the F out of here, like thank you for your service. You've taken us as far as, I love you, you've taken us as far as you can. This is before the playoff, so it's done with him. But, let's see it out. before we throw him out of the building. Look, worse things have happened. I don't know about that. Not much.

But you know, that's never happened before in NBA history. Never happened, yeah. Yeah, it's great to be on the other side of something like that. Up by 14 with 2.45 to go. Yeah, that was fun. Never happened before. So Friday night, if we go down 10 early, you're going to hear a pin drop.

It's going to get bad. So it's good you weren't there, because people got really nasty. I'm sure I probably would have been one of them like in the stands people Yeah, yeah going down. It's good thing. There were no Pacer fans. Yeah, right because people were like really angry. Yeah. Yeah Drunk and angry Brian Wintour's was in hiding. Yeah, if I were that guy would have dropped down a manhole To last night. Hi, Nicole. It's good timing that we have you here. The Bond Man.

The Bond Man, yeah. It's always great timing, which is here. So, and my soccer team won the Europa League yesterday, which you guys probably know nothing about. Who's your soccer team? Tottenham Hotspur. Oh, yeah. I've heard of it I don't know anything about it won the Europa League championship yesterday. What is that? It's club teams or it's yeah

It's professional. There's like two levels of European competition one is the Champions League and then there's the Europa League Okay, and they won the Europa League championship. That's a big one to win big one They play team teams from other countries. Yeah, yeah. But the final was against Man United. How do you become a Spurs fan? Weak mind. Come on. What's the original? The original story goes back to the late 90s. One of my best friends grew up in London. North London. He was a Tottenham Hotspur fan,

and he turned me into a Tottenham Hotspur fan, and I've been 30, 30 odd years. One point I had a season ticket. When I worked at Merrill, I was in London so often that I would try to plan my trips around in. Were you a hooligan? Full on? I was not, but I have been in hooligan situations.

I bet. Yeah. I bet. That always looks like fun to me. I would have been a good soccer hooligan pretty pretty scary. Yeah, it's pretty scary I've been way too close for comfort like Michael's uh Michael's and Nick's hooligan though They make Nick's fans look like our pussycats they do All right, let's get the show on the road it's an important man here Alright, let's get the show on the road. It's an important man here. Whoa, whoa, whoa, stop the clock. Here's a word from our sponsor.

Today's show is brought to you by CraneShares. Artificial intelligence has become the world's defining growth catalyst. On the show today, we spoke about Sam Altman's open AI, bought Johnny Ive's AI startup, IO, for $6.5 billion. And there are two clear winners that have emerged here. It's the US, obviously, but it's also China. Both the US and China have companies that are defined AI leaders.

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All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ridholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Episode 193, ladies and gentlemen, welcome to America's favorite investing podcast. Some would say the world.

My name is Downtown Josh Brown. First-time listeners, welcome. I'm here with my co-host, Mr. Michael Batnick. Make some noise. What's up, everybody? Nicole, more enthusiasm. Yeah, seriously, Nicole. My God.

Did you just roll your eyes? She literally got an eye roll. Daniel got loud, though. I just want to point that out. Daniel's in the Batcave. Alright, guys, we are here with a legend, Wall Street legend. He needs no introduction, but he's going to get one anyway. He is the CEO and CIO of Richard Bernstein Advisors,

investment manager with more than $15 billion in assets. Richard has appeared on CNBC, Bloomberg, The Wall Street Journal, Bravo, and many other reputable financial media outlets. Prior to RBA, Richard was the chief investment strategist at Merrill Lynch. Ladies and gentlemen, welcome back returning champion, Mr. Richard Bernstein. Much louder round of applause than Michael got. All right, so let's start here.

We got a big beautiful bill. Looks like it's some of the lockjam has been broken. There were some disagreements on the Republican side because that's really all that matters right now. Correct. And they had to do with the cap on the salt tax, the deduction, and various things. But that stuff looks like it's going

to be cleared out of the way. Our in-house CFO, Bill Sweet, who runs our tax practice, and he's also chief financial officer at Ritholtz, has a couple of highlights here. And then I want to get your reaction. The Tax Cuts and Jobs Act tax brackets have been extended permanently with tax bracket decreases for all brackets except the 37%. Standard deduction increase $1,000 for single filers, $2,000 for joint filers. There's an

enhanced senior standard deduction $4,000 for a single, $8,000 for joint. The child tax credit, $2,500 expires in 2028. $2,000 future credit index to inflation. Estate and gift unified exemption increased to $15 million and made permanent. $40,000 salt cap with $500, dollar AGI phase out, adjusted gross income phase out and tax exemptions for tips and overtime. This is interesting to me. I didn't know anybody actually paid taxes on tips.

Did you? Do you think anyone does? Not cash tips. I don't think so. No, I don't think so. All right. Anyway, this is where we are and we could talk about some of the projections, what this does for the deficit and for economic growth, et cetera.

But just like on the surface, what are your thoughts about how important this is to investing markets the economy? Well, I think it's great that there's a senior citizen discount. That's right. As a senior citizen, I think that's great that they were thinking about me. That's good. I think, look, it's going to be stimulative. We could argue how much. I mean, I'm not smart enough to tell you how stimulative it's going to be, but net-net, it'll be stimulative. And I think that's fine. I think it's a little inconsistent with some of the other policies

that we've seen. Like, why would you want to stimulate consumption and make the trade deficit worse when you're trying to remove the trade deficit, but that's another story for later. So you know, by itself, I think it's stimulative. Great. That's fine. The White House Council of Economic Advisers projected the bill would boost GDP by 4.2% to 5.2% in the short run.

Does that sound, does that sound possible or likely to you? Possible. What's the likelihood? Probably, probably. Joint committee on taxation projects this version of the house reconciliation bill would increase deficits by 3.8 trillion through 2034. Well, that's, that's the other side. I mean, nothing comes free, right? You can't stimulate the economy when you're not generating enough revenue to support your own plans.

So it will be more deficit. It will be more debt. No way around that. And I mean, we could argue whether that's good or bad, but there's no way it's going to pay for itself. That's silly. I noticed this week that they stopped saying the tariffs are gonna pay for that. Have you noticed that also? I have noticed that, absolutely.

So I thought Mexico was just gonna take care of it, like grab the check. Yeah, maybe not. I don't think that's gonna happen. Rich, you've been in this industry for a long time. Are you the type of person that has been worried or concerned about the deficit for the course of your career? Are you getting concerned now or is it not?

Oh, I think it's, you know, I think I sent you guys a chart somewhere along the line that showed the spread between US treasuries and I think the version I gave you was German Bunds, but there's one version we have that's against AAA rated sovereign debt and we got initially down gated. Is this your chart? That's the chart. What does this show? So? So that shows you the spread between the US 10-year and the German 10-year. Why is this notable to you? So it's important because when we were rated AAA, which is to the left of this chart, you can see that

the yield spread goes back and forth and back and forth and back and forth. Sometimes we have a higher yield than Germany. Sometimes Germany has a higher yield than us, but we're all AAA rated. And you can see German reunification all the way in the left. Yeah. You know, if you're my age, you remember that. So this flipped when? At the end of 2008, 2009 era? So where that vertical line is, is 2011. 2011 is when US dip was the first downgrade.

And look what happens. The US starts selling at a yield premium to a AAA rated other, in this case, Germany. Germany started there. Isn't that strange? Because you would think the opposite. Yeah, exactly. And everybody thinks that's true.

Now, why didn't anybody care about this? Nobody cared about it because the absolute rate of interest in the United States was so low. Everybody said, oh, look, interest rates are so low. This is great. Nobody realized that they should have been lower. And they weren't. And so what this chart shows you is that there's no day of reckoning, right?

Everybody kind of says, oh, we're going to wake up tomorrow, we're going to be Botswana, right? All of a sudden people are going to be puking treasuries. That's not reality. This is more reality that it's a slow bleed that through time we're penalized with higher interest rates and more and more cashflow in the economy goes to supporting debt. But it's a push and pull because you say we're penalized, but our penalty is an asset for all of the citizens that are Treasury holders.

Well, true, true, true, true. Absolutely. And a lot of these are non-US holders, of course. But yeah, if you're holding it, it's fine. That's great. But I'm just saying, if you think about, here's a good, I always come up with kind of tangible examples. Okay. We might not be having the air traffic control problems if we invested this much

money into infrastructure like air traffic control. Right. That's the way to think about it. That's the trade off. So the spread between the 10 year yield, US versus Germany, is positive 200 basis points? Yeah, in other words, our interest rate cost is about 200 basis points, 190 to be precise,

right now versus Germany. We pay 190 basis points more for our debt than Germany does. And that's negative because- It's just like a junk bond. You would think we're the United States. We should at least be a parody with the best credit in Europe. And we're definitely not. We're not. Do you think, do you think that when you say bleed though, do you think, you think people are selling the treasury to buy the German war bonds?

No, that's not exactly what happens because, because remember there's kind of de facto and de jour, right? De facto is what's happening de jure is by law So de facto the US Treasury is still the safe haven asset Because there's no other market that's as big or as deep that can support the world that way like German buns can't do that Right Swiss Swiss buns can't do that Australian bonds. They can't do that. That's that's silly So there's kind of this de facto, yes, we are the safe haven asset, but in reality, we're not. And so if you think about that chart and how we're paying that premium for US treasuries, remember everything in the United States is priced off the tenure. So mortgages have been higher,

corporate bonds have been higher, munis have been higher. Everybody's been paying this higher rate than they had to. But this is not in a vacuum. Europeans are cutting rates and we're not. Isn't that? Yeah, yeah, yeah. Well, this has nothing to do with growth or anything. It's just a simple question of credit and credit quality. Right?

Yeah, but like surely you have to factor in the actions of the central bank when you're like this yield versus that yield. Absolutely. Absolutely. But the question still would be, even though they were buying lots of bonds in Europe and they had negative interest rates, if you remember that, which is part of what's going on here, no doubt, we didn't have negative interest rates. And you'd think that if it was such a bargain, people would have been buying our bonds and driving our rate down and their rate up, and they would have met. That didn't happen. So I want to read you this quote from Fed Governor Christopher Waller This is a quote from today the markets are watching the fiscal policy

Everybody I've talked to in the financial markets They're staring at the bill and I thought it was going to be much more in terms of fiscal restraint And they're not necessarily seeing it Nick Tamareo says the upshot is that the US Treasury will have to sell more debt to investors and in order and this is Waller In order to buy them the in order for them to buy these things, they want it at a lower price and therefore a higher yield. There you go. That's exactly what I was showing in that chart. So it's not quite bond vigilantes, but it's bond vigilante adjacent. It's a buyer strike to some extent.

Yeah, yeah, yeah. It's a hesitancy on the margin, right? And all I'm trying to say is it's not like we wake up one day and people refuse to buy treasury. So you're not worried about a real buyer strike where the 30 year goes from 5% to 5.5% to 6% in three weeks? Probably not. I mean, it could happen. What happens if that happens? What happens if that happens? We will have a lot of trouble in the short term.

The markets won't behave very well. And if that happens, look, anything can happen in a short term. Something could go wild, right? And I think all we have to do is get one bad CPI PPI or import price number and the bonds gonna sell off like there's no tomorrow That's a different issue. But I think from the point of view of The credit worthiness and all the things that people worried about with debt and deficits and everything else It's not a new issue. The markets have been onto this for a decade. John, chart two, if you please. This is a 30-year US Treasury rate. This was the

big story this week. Highest level since 2007. It's about, I don't know if we're close today, 5 spot 08, 5 spot 09 in that region. Is that a notable level beyond just the psychological 5% big fat round number? So let me tell you, if you take this back to my lifetime, which as I said, I'm a senior citizen, go back, goes back. Is that like civil war era? Just about, just after the civil war.

All right, reconstruction. And this is the fastest and most meaningful backup in rates in my lifetime. Are you serious? Yeah, I'm pretty sure that's right. So maybe the question is, should this be getting more attention than it's getting? I think so. You do think so?

Oh, I think, I mean, we... Because Michael asked you, like, have you been a deficit person throughout your career? Oh, I have been, but I'm just not panicked about it. You know what I mean? I'm not like wigged out. So it's a big deal, but it's not worth panicking over because- For days. It's something that if you're investing for one year, three year, five years, 10 years,

you have to incorporate that. If you're a trader, like who cares? I'm sorry, I just want to get to the 10 year. This one looks way less nerve wracking to me. We're right smack in the middle of this range we've been in since 2023. This is the 10-year treasury. And it's middle of the range. Yeah, it's elevated.

It went up 22 basis points in May. It's a pretty notable one-month run-up. But it's not breaking through the top of the range, at least not yet. Thank God. If this was a stock, you'd buy it. I know it's not a stock, but...'s not breaking through the top of the range, at least not yet. Thank God. If this was a stock, you'd buy it. I know it's not a stock, but. It's an interest rate.

Yeah. I know. This is what I was saying about before. If we get one bad inflation number. This could really go. This could go. That's exactly right. Do you foresee a world, if rates were to spiral, would we, could we see some sort of yield

curve control? Would the government get involved? Well, I mean, they've done that, haven't they? I mean, you're talking about, like, if you think about QE, QE was playing with the long end of the yield curve, right? I mean, could they do that again? Yeah, I suppose. I'm not sure they'd want to. I'm not sure the Fed would want it. QE, the Fed is buying longer dated bonds in order to push down the rest of the curve to fall in line with it. So what happened was that normally the Fed plays around

at the short end of the yield curve. They're buying treasury bills or selling treasury bills to manipulate the short end of the yield curve, which is really kind of their domain. When treasury rates got to zero, they couldn't do anything anymore. So they began to move out the curve. Pushing on a string.

Right, that was called quantitative easing, meaning that they're buying treasury bonds and notes instead of treasury bills. And they artificially lowered long-term interest rates. And could they do that again? I suppose, I'm not sure they'd want to, because it'd be hugely inflationary at that point. Because all you're doing is exchanging the bonds that banks own and handing them back cash.

And what are they going to do with that cash that's going to go into the economy? I mean, in that environment, the Fed, if you really have an inflation issue that's driving up the 10-year, the Fed should be tightening hand over fist. Yeah. Can I tell you something? Yeah, sure. Just let the tariffs stay and you won't have to worry about bond yields because you're going to get demand destruction in every segment of the economy. Absolutely. The solution is right in front of us. Let Trump keep doing what he's doing on the tariff

side. Cut off all negotiations. You'll have other problems but you won't have a problem with the 10-year Treasury yield. You'll have no inflation. You'll have a very short-term inflation problem. You'll have a million layoffs. And then you'll just kill demand. You'll kill demand But rates aren't going up because of inflation are they well, that's the debate that the debate now The White House would like you to believe the backup in the 20-year Treasury Because people are so bullish about the Trump economic boom because of the tax cuts right right sure So and and the Democrats would like you to believe

Actually what Trump is about to do with trade is going to make inflation worse. A bond investor, apolitical, what do you think? So here's the way I would think about it. The 10-year and 30-year basically move through time with nominal GDP. Nominal GDP is real GDP plus inflation, right? Nominal GDP. Now it's not a perfect relationship, but they move pretty closely together. So rates are going up because people think that nominal GDP will be higher. The

administration would like you to believe real GDP will be higher. The question is, is it going to be real GDP or is it going to be inflation that's going to cause nominal GDP to be higher? And honestly, I'm not sure anybody could answer that with any true conviction right now. Carolyn Levitt probably could. Well, of course she could. I mean, she's 27-ish. I think she was a lawyer.

Tons of economic experience. She's been through many a cycle. You want to do this stock market reaction chart? So this is actually the bond market. So Bespoke tweeted, and this is this is actually the bond market so bespoke bespoke tweeted and this is this is very important Yesterday was the third worst. Oh my bad my bad. You're right Josh Yes, it is was was the third worst stock market reaction to a bond auction in history So this was this is not this is causal you saw the bond auction puke and stocks immediately sold off

Heavy, so the the bond market is now affecting the stock market. Now, it's very short term. The Dow went down 800 points yesterday. And the market is back up today, so whatever. It's noisy. But nevertheless, the market was responding. What do you make of this? Overreaction? Undereaction? First of all, I'm not smart enough to tell you about auctions and auctions and what they mean and everything else. Um, but I will tell you that, that, as I said, anything where I think we're in the stock market, we're in an environment where anything that could cause the Fed

to tighten will be viewed negatively. Yeah. With good reason. Yeah. Right. Okay. And that's, I think that's, so if you had a bad auction and the fear would be that it's because of inflation and maybe inflation is going to be higher, nominal growth is going

to be higher than people think, right? Forget inflation. Let's just say nominal growth is going to be higher than people think. That would cause the Fed to raise rates. That may be why you got the sell off. The last inflation report we got, the market exploded higher. Yeah, absolutely. Because it was incredibly tame.

Yep. And one of the things we talked about on this show is, is that the final tame inflation report? Is it, is it, does it just get wilder and, and more aberrations from here? What do you think? I think if, as a, as a betting man taking the over under, yeah, I take the over on inflation. I think I would too, because it's just going to be weird things, pull forwards and a lot of weird things. Pull forwards and supply chain stuff. Yep, absolutely. Are you surprised that the market doesn't seem to agree with that? I'm very surprised the market.

I'm very surprised a lot of things are going on in the market right now. The tranquility is remarkable. Yeah, the confidence is mind boggling to me. I'm very surprised that rates are as high as they are. The stock market is 3% from an all-time high. Gold is mooning because I think of fiscal deficit concerns. The VIX is a teenager. The VIX is a teenager.

And I think Bitcoin, and there's never one reason for why any asset does one thing, but I think Bitcoin is also following gold. It could be a risk on, but I think it's following gold higher into the fiscal irresponsibility and the stock market just doesn't care. No, no. I think, look, I'll try and link a lot of what you just said there. A lot of the things that people have been very enthusiastic about, whether it's the mag seven, whether it's Bitcoin, you know, even credit to a large extent, credit spreads are very, very narrow,

are all predicated on a continuation of liquidity, that liquidity does not get dried up. I would argue, not everybody would agree with this, but I would argue they all have a speculative flavor to them and speculation thrives on liquidity. So- When you say liquidity, it's hard to interrupt, but what does that mean to you?

Liquidity to me means capital that is available to invest or speculate or trade, whichever word you want to put into there. Lower interest rates will make the cost of money cheaper. So if the cost of money is cheaper, you can borrow that money and go trade in the stock market. Leverage, leverage is cheaper. That's the way to think of it.

Is the 2021 is the peak liquidity we'll probably ever see in our lifetime. Yeah, absolutely. But the liquidity today is not even close to that. So that was Michael's question and that's what I wanted to zero in on. So I think if you look overall at financial conditions, financial conditions are still,

have gotten back to being relatively easy. Credit spreads are pretty narrow. Bank lending standards have tightened, but not like meaningfully so. The Fed is not raising rates. The stock market is up, right? You're seeing all these different things that argue. And my dividing rod for liquidity, if you get that thing, dividing rod liquidity, follow along with me here. That's what Moses used to find water in the desert? The dividing rod? Exactly. I was a reformed jail. The divining rod. Exactly. I was a reformed geowheel, we didn't go into it.

Yeah, exactly. Surface level knowledge. Yeah, okay. So, but anyhow, my divining rod for liquidity is Bitcoin. The Bitcoin thrives on easy financial conditions. I think you're... I get the concept. I really feel that Bitcoin lives its own existence outside of the traditional financial markets,

even though it's been welcomed in. I would agree with you. I still think it's the strangest asset. It's very strange. I would agree with you if other cryptocurrencies didn't have like an 80% correlation to Bitcoin. Ethereum just went up a lot. Yeah, Ethereum and... Fartcoin.

Fartcoin. But Rich, this is the question though. So in 2022, the rising rates and the threat of much higher rates acted as a governor on everything, from SPACs to tech stocks to Bitcoin. And they're not right now. And they're not right now. And they're not anymore. They don't seem to have threatened these earnings-free companies. These stocks are rallying.

You saw the quantum computer stocks had a massive day today. It's very bizarre. I would argue that there's not a lot of financial easing in the system. The housing market is frozen. The Fed funds rate is above inflation. This is not a free for all, and yet in the market it feels to be. Well, what it's saying is that there's still too much,

whether it's residual, I don't know what the right word is, there's still a lot of residual liquidity hanging around here. There's too much money. Yeah, there's just too much money. You know what's interesting about that? I agree with you. I think it's like sitting in private equity,

private credit, and companies that would have normally been struggling by now because of 4 and 5% rates leading to 8% borrowing costs. They're just like getting checks written to them. Correct. Exactly. By Blue Owl Capital and JP Morgan. 100%. And private credit underwriting data center build outs.

So what could change that? There's just too much money. The overnight lending rate is not affecting it. No. So what it says to me is that the overnight lending rate is still not high enough. Right? We haven't disintermediated a lot of these things. Now it's interesting that you brought up the private debt thing. Because private debt is something I'm not sure the Fed totally understands, right? Normally, and that's a big statement, right?

I'm not, they're smart guys, don't misunderstand, but I don't think they understand this completely. Normally when the Fed raises rates, they do so explicitly to disintermediate the banking system. In other words, they wanna suck capital. Slow down. They want them to slow down. They want them to slow down. That's right. They wanna suck capital out of the banking system. In other words, they want to suck capital. Slow down. They want them to slow down.

They want them to slow down. They want to suck capital out of the banking system. Yes. So the T-bills become very, very attractive relative to everything else. Like when I was in college, the same, you know, when was it? When we talk about reconstruction? The 1870s. Yeah, 1870s. When I was in college, I was taught that when the Fed raised rates, they did so because of regulation D, I think it was, which said that savings and loans could not offer passbook accounts higher than 5%.

And so when the rate, when the Fed funds rate got above 5%, money would come out of the savings and loans. Yes. And it would go into treasuries. Yeah. And therefore, its savings and loans could make mortgages, and you'd slow down the economy. Think about that example in a much grander scale.

That's kind of what the Fed's role is in the economy. The problem is, for private debt, their deposits, if you will, mean the commitments from investors, basically give them free money. Insensitive to the Fed funds rate. Completely insensitive to the Fed. Right. And once you commit, you're stuck.

Right. So the Fed is screwing around with the rates that impact the cost of borrowing for banks. Correct. What if the economy is not reliant on banks to the extent that it used to be? Exactly. And you've got KKR, Blackstone, all these firms sitting there with a trillion dollars in dry powder. What the hell is an interest rate change going to do?

It's basically a negative interest rate for those firms. Another push on the strings. But hang on. I also don't want to lose sight of the fact that in 2022, when interest rates were going up dramatically with inflation, all of these growth stocks got destroyed. They did. All of the growth stocks got destroyed. They did. All of the growth funds got destroyed. And all of that liquidity dried up immediately.

And it's not this time. And it was dead dry for like two years. And now finally, we're starting to see a lot of liquidity. But it's bizarre. So it's not like higher interest rates didn't impact that space because it crushed it. Right. So here's a way to think about what we're talking about.

How many Fed Fund cuts are priced in for this year? What is it like? Two, right? 200%. Yeah. And I would say it's zero and it could be a rate hike. Really? So that's the difference.

He will be fired so fast. If he raised rates. How would he possibly do a rate hike and then get out of the country in time? Anyway, seriously. He'd put on glasses and a mustache. Let me tell you something. If Jerry Powell decides to hike rates, he has to join MS-13 that day because he's going

to f***ing El Salvador. There's no way that's happening. I'm just saying from a pure economic point of view. But I think where the market really is wrong is that he's going to cut two times. That I think is what's propelling part of the market here. Let me ask you, not like a prediction. So you think the Fed is not going to have the opportunity to cut twice? I don't think so.

Okay. You're way smarter than me. My gut instinct tells me demand destruction is coming. Yes. I don't care that private equity is able to keep a lot of liquidity going in the system. I think the combination of a four and a half, what is it? Four and a half percent now, Fed funds. That's high. Four and a half percent Fed funds rate, deceleration in hiring. Eventually that will flip over. Yes. There'll be job loss. Yes.

And I think the Fed is going to have no choice. Correct. But to cut at least twice. Correct. So we're sort of on the opposite side of this. Let me tell you what you can watch. Just watch weekly jobless claims. Because that's the leading indicator of employment.

I have a leading, leading indicator. You have a leading, leading indicator. Yeah. I have some of the biggest hires and growth engines in America now very cleverly coming up with ways to say we're hiring way less people this year because of AI. I have commentary from Mark Zuckerberg,

from Metta where Mark Zuckerberg is telling managers, I want you to make more people fit into the poor performers bucket. Okay? So they bucket everybody. That's a prelude to more layoffs at Metta. Got layoffs at Microsoft last week. Got the CEO of Shopify saying if a manager wants to hire someone, they have to demonstrate why AI can't do the role that they're about to hire people for.

Look, these are anecdotes. This is not data. But directionally, this is happening now. Correct. But I'm just saying, if you want to follow hard data, follow- I want to follow stories. You want to follow stories.

But what's the hard data telling you? The hard data is saying that the labor market's fine. It's fine. It's okay. And that's going to handcuff the Fed a little bit. All right, let me show you what's not okay. This is Bank of America's, this is your old post. Well, you aren't the chief economist. No, I wasn't.

Okay, this is the chief economist of Bank of America. Mortgages are the elephant in the room. At 70% of all US household debt, by contrast, mortgages dominate the liability side of the balance sheet. 70% of household debt is a mortgage. At 0.9%, mortgage delinquencies are still below pre-pandemic levels, but they have been picking up steadily since the second half of 2022. That's already three years ago. New 30-day delinquencies are also rising, suggesting further increases in the pipeline. Even a modest further increase in mortgage delinquencies, like just to the levels we

saw in 2017, would have a bigger impact on total delinquent debt than the combined effect of credit cards and autos. That's how big mortgages are. So while other categories got a lot of attention, mortgages are clearly the elephant in the room. Our sanguine view on household debt has been premised on low mortgage delinquencies. If the facts change, we will change our minds.

You can see the uptick now. It's not a microscopic spec on the chart. The dark blue. The dark blue just below the green. I'm not suggesting like, here comes the next financial crisis, but most of the earnings, if they're not AI related in the S&P are thanks to the consumer.

Yeah, without doubt, of course. So if this is where we're headed, where all of a sudden the biggest category of the consumer balance sheet starting to sour, again, it's another reason why the Fed might have to be doing more than two cuts. They might not have a choice. It may be a question of timing between our, when we're talking about cuts.

Yeah, we agree. But let me give you, since you're already kind of swimming in the deep end of the pool here. Okay. Let me give you a little other thing to make you concerned. I think the next recession, whenever it occurs, I have no idea when it's going to occur. Next recession, whenever it occurs, is gonna be a doozy.

Why? Because consumer confidence is already pretty shaky. Yeah, with no problems. With really no problems going on, right? Now here's the thing to consider. You could now be 38 years old, roughly your age. I wish. And 38 years old and never have experienced

a real recession. Yeah. Right? So you now could be head of household, kids, mortgage, the whole thing, and now your neighbors get laid off, which you've never seen before. Do you react?

How do you react? I think you react worse than you would have if you had seen recessions along the way. Michael and I were arguing this exact point, but as it pertains to bear markets. Yeah, absolutely. You have 30 million account holders at Robinhood, none of whom have ever invested through a recession. We had a two month recession in 2020 and nothing prior to that until back to 2008. Yeah, exactly. So you have a whole generation that knows

only one thing works and it's by the dip and it's right every time, including this time. And the gratification is coming faster and faster. This time it was 10, it took you 10 days to not feel like an idiot for staying long. Do you think that's, do you think when you say the next recession could be a doozy, that same psychological situation could play into it? 100%. Right. Absolutely.

Because if you think about what's offsetting some of that mortgage debt right now is that on the household balance sheet, the equity side of their debt equity is still appreciating. So what happens if they have a mortgage and their equity side starts depreciating? Equity of the home price. Equity home, equity, just the equity of their balance sheet, their overall balance sheet starts depreciating, right? Let's just say the stock market goes down 20 or 25 percent like in a normal recession type thing.

How do they react to that on top of everything else? Rich, there are people who say just ignore every economic data point and focus only on the labor market. If the labor market stays good, you can skip the conversations about used cars and whatever. To some extent, that's absolutely true. Because it's household cash flow. And what's the source of household cash flow? It's a job.

It's a job. Right. Okay. So if you only did that right now, you'd be pretty okay with where we are. So 229,000 initial claims, almost nothing? It's nothing. Okay. And I don't actually think that, I think people are spending too much time worrying about

the economy, not enough worried about corporate profits. So I think that's the bigger issue. The profit cycle is starting to peak out. And I think that's the more important thing to focus on right now, not whether the market's going up or down. We were blown away by corporate, like my theory is that earning season is what saved the stock market in April and May. Yeah.

These reports were fantastic. They were great. Were you as surprised as Michael and I were? We were a little surprised, but it is towards the peak of the cycle, and at the peak of the cycle is when you get the best news. How can you be sure it's the peak of the cycle? We do a lot of modeling of corporate profits that involve all kinds of different macro variables and estimate revisions and all kinds of things like that.

And we're kind of reaching peak momentum. It doesn't mean that the dollar value is going to go down. It means the growth rate is going to go down. So right now, I think through first quarter, I think reported earnings were up about 14%. I think our forecast is like one or 2% by the end of the year. Oh, wow. So, you know, we're heading in that direction. That's meaningful.

I mean, that's meaningful. Doesn't mean the market has to go down. It just means you should see a more defensive flavor in the stock market. Which, not yet. Not yet, not at all. Pretty remarkable. Do you want to do this diversification stuff?

Where are we at? I think we're, no, we're higher. You wrote about, Rich, you wrote about diversification versus the siren song. I'll set this up with your own words. Because this is a pretty important topic always, but right now it seems really

apropos. You said 25 years ago I wrote a book called Navigate the Noise that posited people have difficulty building wealth because they follow a siren's song of high returning yet quote, riskless assets instead of following time tested wealth building principles. Continuing the Greek mythology theme, investors' portfolios just steer toward the hauntingly attractive story of riskless high returning assets eventually

crash on the rocks. So it's, it's, is it Jason and the Argonauts or is it Odysseus? That's Odysseus. That's Odysseus. Okay. So the beautiful women are like standing on the island calling to them and he puts wax in his ears and they lash him to the mast. Correct.

And that's how he gets past the hazard of the sirens who would otherwise have him crash his ship onto the rocks. Absolutely. And men are driven mad by that. So it's a great metaphor. I never thought of the sexist implications of that one, but that's okay. No, we're going to give you a pass on that. But yet, like all of that's true.

Look what the best stocks are off of the lows. Yeah. Yeah. It's incredible. Meta, Tesla. I mean, it's the same thing over and over and over again. Nvidia is going to report next week. I wouldn't bet against that being a great.

Yeah. Right. So here's what's interesting. It's not, I think when you talk about the magnificent set, well, first of all, let's get to the diversification issue for a second, the wealth building. I think in the last six months to a year, people have said to me, when I talk about our diversified portfolios,

they say to me, oh, you mean it's not diversification, it's de-worsification. Well, last 15 years, pretty much. That's basically, but I haven't heard that as much as I've heard it in the last year. Let's say everybody. And I get the point that you could have bought the MAG-7, you could have bought an index fund.

I get all that. But to put all your eggs in one basket, whether it's an index fund or a MAG-7, has never been a good idea for an extended period of time. I mean, we all know that, but... But this period of extended time has extended way longer than most people myself and Clay would have thought. I think the mags were coined in 2017. Or no, the fang, my bad, it was fang. But that was, it's been eight years.

The cloud computing era kicked off in 2015. Amazon reported some like insane quarterly report. And after that, these gigantic cloud computing stocks just, and like how long did the nifty 50 period go on? For two years? And they still talk about it. I don't think for most individual investors, they were up to their schnoz in like mag seven stocks.

Until maybe four years ago. Two, three, four years ago, somewhere in there. Right, and I think that's really the period that I would focus on because yeah, there was a change. There was a real fundamental change and everything. And I'm not disputing that at all. And, but I guess my point is that the data pretty much show that individual investors are now shunning diversification.

They don't want it. They don't care about it. If you talk to financial advisors, they're having very frustrating discussions with some of their clients about the financial plans they all set up and all this kind of stuff because everybody wants to punt their financial plan. The good news is that peaked at the end of 2024 because in early 2025, these things had a 30% drawdown. Absolutely. Absolutely.

But the problem now is, in the last couple weeks... They came all the way back. Yeah, they're right back. And so now everybody's... That makes it worse. Look at this. So Rich, this is the Mag-7 from the last time that you were on with us. It's up 42% since then.

But it had a massive fall and a massive comeback. Yeah, the volatility is pretty big. The problem is if you put the diversifiers up next to this. They look like shit. Like put the Russell 2000 up. People are like, why the hell would I do that? Yeah, exactly. Merging markets?

You can put anything up there. Almost anything. Put the equal weight of S&P. Yeah. Right? I mean, you can put anything up and it'll look terrible. I agree with you. Advisors, if they're still allocating to these other asset classes, Yeah, right. I mean if you put anything up and it'll it'll look terrible. I agree with you advisors

Advisors if they're still allocating to these other asset classes, they're not talking about it Yeah, and some of them are not at all. But this is important part rich So this is from Michael Semblis He said an astonishing sign of the success of tech and interactive media stocks They now account for 35 percent of market-wide earnings versus 19 percent a decade ago, which is wild So the accompanying chart that we're looking at is the price to book on one axis and you've got the consensus forward ROE for the S&P 500 industries or sectors versus the rest of the world and look how much better in terms of profitability and quality and specifically return on equity these companies are.

But here's the thing. It's in the upper right hand corner. But not only. better in terms of profitability and quality and specifically returning equity these companies are. But here's the thing. It's in the upper right-hand corner. But not only. So that, well, wait, let me finish. So that says that the price to book is high as well as the growth rate. That means the market is aware of it. This is not like something that the market is unaware of.

If it was sitting at, wait, I got to make sure I get the, if it were sitting on the bottom floor of that elevator that it's on right there, that'd be a huge story. I guess that'd be a great opportunity. Now here's the point. Here's the point. Right. Here's the point that I want to make. Look at the third one down is consumer staples.

Wild. Like who gives a rat's petoo about consumer staples? Nobody. But if you take a stock like Apple, which I have to, I have to full disclosure, we own in some of our portfolios, blah,ples, nobody. But if you take a stock like Apple, which I have to, full disclosure, we own in some of our portfolios, blah, blah, blah. Don't apologize for it. I'm just saying, no, I'm just saying, full disclosure, right?

We have in some of our portfolios and some of the ETFs we hold hold it, just in case for the lawyers. Right now, Apple's growth trajectory and growth history looks very much like that of another company that we may own, blah, blah, blah, everything else. It looks like Campbell's Soup. Yeah, it's not growing. I mean, if I had told you about Campbell's Soup and not told you anything, would anybody

who's listening to this have said, oh, wow, Campbell's Soup sounds so interesting? No. No. And that's my point. I think the opportunity here is in things like consumer staples. So I want to get to your consumer staples, but just a little bit of pushback on why is that Apple has the ability to change the world again.

Obviously Campbell's soup will not. We got the interesting announcement yesterday between OpenAI and John Eyve. Like these companies continue to push the ball forward. It's unbelievable. I'm not disputing that, but all I'm saying is, in that chart, how much of that is unknown?

Zero. Yeah, that's my point. Yeah. Investors are paying for Apple more than they're paying for Campbell's Soup because Apple has 40% gross margins or whatever. Yeah, but their earnings growth is roughly the same. Campbell's Soup because Apple has 40% gross margins or whatever. And Campbell's Soup is- Yeah, but their earnings growth is roughly the same.

I think investors think that Apple can have another spurt to Michael's point. Oh, of course they do. The next time they reinvent something and it'll be too late to buy it. But if you were to compare Apple to Coke or Philip Morris or all these other companies, which we may own in our portfolios just in case. There is a lot of weird things happening in the market like the premium on Walmart, on Costco. Yeah, yeah, yeah.

Some bizarre things going on. I think people are allocating, so it doesn't seem bizarre to me. I think people are allocating to quality and reliability and people worry about the economy or the dollar or the political situation. Like the one thing you feel like you can count on is that Apple's got this replacement cycle thing on smash. Anybody who needs a phone is just going to go to the Apple store, get another one. So Verizon and AT&T started to act better than they had for awhile. Well, Verizon and AT&T are kind of defensive stocks, right?

Yeah. Well, I think, I think they all, all of these companies demonstrate something in the eyes of an allocator who's buying stocks. And I think that thing is like like you'll wake up tomorrow and they're gonna be here. Yeah. I think they're getting like that benefit and that's what's in those multiples. So I think I'm gonna send you a chart and I don't know if you want to get down this rabbit hole about international quality. Oh, I don't know if we have that. Go ahead, talk on it. So anyhow, the story is that if you look at the growth expectations for the MAG-7. John chart 11.

And you compare that to other, oh, no, not that one. That one shows the Magnificent 7 aren't unique. Its stocks going 25% or more. No, not that one. That's showing you the US is in trouble. Maybe we didn't send it. We might not have sent it. But basically what we try to show you is that international quality, which are big names, they're going to be here tomorrow, are selling at a fraction of the price of the Mag-7, have a dividend yield that's really meaningful, and their growth trajectory is better.

Give me some examples. So it would be, um, I don't want to, I don't, and this one, I don't want to name these are not endorsements, which is just speaking, uh, temporaneously. We know them all, whether it's, whether it's the, the big food companies in Europe, the big drug companies in Europe, the big luxury goods companies, there's tons of companies. They're typically traded a discount to their us counterpart. Okay. It's an amazing discount. Do you think that discount ever closes? I think it will. You do? I think it will. Why? Well, look, if we had been here

15 years ago, we would have been talking about the outstanding growth of non-US markets and of emerging markets. Yeah, that's true. Right? And at that point, developed markets ex-US were a larger part of the world market than was the United States. Yeah. Today, nobody wanted to be in the US. The US was a crappy market. Nobody wanted to be in it. Today, we're talking about US exceptionalism.

So you think it's a pendulum and we've already hit the far end for the US exceptionalism and it's going to swing back. What's the story where European stocks get a higher multiple or is it just US multiples fall? I think it's a combination of two. I think if you think about the European stock market, let's say, what do we have the European stock market doesn't have? 401ks.

Well, besides 401ks. It's a big one for me. No, no, no. But I'm saying we don't have, Europe doesn't have a big tech sector in their market, right? They have some tech. How about risk-application risk? No, Rich, I think my story is better. They don't have a captive investor every two weeks contributing money to the equity market. But they don't speculate the way we do either. Well, they don't. Right, right, right. But I'm just saying, if you just look at the characteristics of the markets, their stock market does not have this big tech sector that attracts a lot of, a lot of investors, growth investors, primarily.

And so if, if that everybody's going to say, it's going to happen. If technology retraces, if growth retraces, a lot of these other markets are going to start looking pretty attractive because now we're talking about an, you know, even keel and, um, attractive, because now we're talking about an even keel. Germany has an ETF savings mechanism now for their retirement system. Okay, step in the right direction. All of these, Larry Fink has written extensively about this, capital markets being the strength of the US.

I will stipulate that point that we have these tech giants and Europe doesn't, and they would love to and they don't. Therefore, we have companies with 20% growth, 40% profit margins, companies like CrowdStrike and they just do it every single year. There's nothing in Europe even remotely close to that. Okay, they do have the fat loss stuff. They do have lithography.

They have one company, ASML. It's Dutch. Freaky. Alright, fine. But I stipulate that. But I also- A country, by the way. Yeah, but we have 200 million US adults whose money is either going into a 401k or a pension. And there is guaranteed buying of stock happening that the Europeans aren't doing. But why can't those retirees or the pension funds or whatever buy European stocks?

They won't. They will until they underperform and then they stop. They were buying emerging markets when we started our firm. Yeah. I mean, I remember people would not invest with us because we were so bullish on the United States. Yeah, they wanted to buy the bricks. They wanted to buy, they wanted exposure

to the middle class of Brazil. That was a big thing. Yeah. Okay. And there was the phrase that people came up with at the time, the bricks were passe. Now it was the mints. I remember the mints. Mexico.

Yes. India, Nigeria. Nonsense land. And what was the tea? Was it Taiwan? Yeah. I don't care. I agree with you. I was selling, I was selling Nigerian mid caps for a couple of years in that 06, 07 period.

Didn't go well. It is foolish to say that business cycles, that market cycles are dead. I will never say that. Oh, I don't think they're dead. But my God, this has gone on for so long, and you have to be open-minded to the fact that the Apples and the Googles of the world

are fundamentally different. They've proven it. They are different than companies of previous bubbles. I'm not saying that this will go on forever, but what if we're in a world four years from now where we're having the same conversation, where Google is four trillion, Nvidia is six trillion, Apple is seven trillion.

At some point, I know I'm making make believe, but at one point you say, holy shit, maybe this is just different. I'll take, let, I'll take away. Let's, let's assume you're right. I'm not saying that for the, I'm just hypothetical. No, no, no. Let's assume you're right. I'm fine with that. Let's assume you're right. What are the economic consequences of that happening? Remember the stock market is not separated from the real economy. It's an, it's a capital formation tool. So let's say that the mag seven becomes the mag five.

I don't know. Let's make this up and keep going. It becomes the mag five. Everything else is left behind. I would tell you that is hugely inflationary. Why? Because you're denying capital to all these other industries and all these other things that we need in life.

Okay. But here's the problem. There are hundreds of other stocks, not thousands, but hundreds, that are up three and four X in the last four years, and they're not being starved with capital. No, no, no, no. They're just not as big as Apple. I'm not saying that's where we are right now.

I'm saying if you take Michael's example and we keep going in this direction, I mean companies will be, they'll have a very tough time raising capital. Let's do the small cap example. Small caps historically were the first to lead the market out of economic downturns. Like that was the, the upcycle would start with a big bang small cap rally. Small caps historically, they were thought to be higher beta because they would like they had higher growth some of them and okay here's the problem they're just not being born anymore. The most successful IPOs that come along, these are

companies that in a prior era would have been Russell 2000 holdings for 10 years Yes, then graduate to the mid cap 400 then if they were lucky gets the S&P 500 now They come public as Airbnb and snowflake and they're in the S&P 500 within 18 months. They skipped a small cap life Lifecycle and then you're in this Russell 2000 like why aren't small caps acting the way they have historically? Well, because the only small caps left are fallen angels. Formerly good companies that are now bad and too small for the S&P. I was at the New York Stock Exchange today, there were two IPOs, MNST, it's a billion dollar valuation right out of the gates.

God forbid they have a good earnings report, it'll be three billion. It'll never be in the Russell. The other one is something called Hinge Health. I kid you not, this is digital physical therapy. They use their finger. No, I don't know, what is digital physical therapy? Do you know? Duncan, are you enrolled?

Never heard of it. I'm guessing it's like Peloton, but for physical therapy. Yeah. So a chiropractor pops on your screen, tells you to slam yourself into the wall. I don't even know. Fine. Whatever it is. Okay. My point is, it's great to see that. We had two IPOs happen within a half an hour of each other.

But like over the last five years, we've had a drought. And then you get a core weave. When the core weave come public? January? Month ago. How big is core weave's market cap? 50 billion. Okay. It's never gonna be in the Russell and if it is, it's got real problems. This is why I say I understand it's a cycle of things come back and forth. The Russell might be permanently f**ked because they're not getting that newborn inflow that they used to get.

Right. I agree with you that you said I would take out the word permanently. And the reason I say that is that I think that this shows the strength of the venture capital community that they have decided we need to return capital to our investors. If we skip over this point in the life cycle, we tell everybody it belongs here and this is the valuation, people are going to swallow it and we're off and running. And they skip that whole life cycle, if you will, and they go right there. The interesting thing is that people tell me

that it's not a speculative environment because we're not getting pets.com. We are, but it's not trading. It's not pets.com, it's digital physical therapy. Well, that one I'm bullish on. It's this, let me give you another one. I think this is important just to continue the conversation of like just tech won't stop.

So yesterday, so this is from the Wall Street Journal. Altman and Ive, right, so OpenAI merge or purchase Johnny Ive's company for six billion or something like that. Altman and Ive offered a few hints at the secret project they have been working on. The product will be capable of being fully aware of a user's surrounding and life will be unobtrusive, able to rest in one's pocket or on one's desk,

and will be a third core device a person would put on a desk after a MacBook Pro and an iPhone. I've referred to a new design movement. So what if it just keeps going and now it's AI, and now whatever's coming you can't even imagine? So here's the way I would answer your question. I think investors in general have a very tough time separating out an economic story, or in this case a technological story, from an investment story.

And I don't think they're the same. I think, you know, the economic story, will AI change the way we live? Will it change the economy? Of course it will. There's not a doubt in my mind about that. I don't care. But the important thing that people have to remember is that technology always changes the economy. Right?

I mean, the internet changed the economy. Look what you guys are doing here. How's that gonna be distributed through the internet? The automobile, my personal favorite, the light bulb. Monster at productivity enhancing technology because it turned the economy into a 24 hour economy. Right of a graveyard shift in the dark. So I wholeheartedly embrace the notion that AI is going to change the economy. I don't think that's the right issue. I think the way to think about this is to say, historically, how does that technology

permeate the economy? And one of the ways it does it is that investors over capitalize the sector. Let me cut it. You're gonna love this. Wait, wait, wait. Let me finish the thought for a second. Do you remember how when the internet came out, there were all these charts that showed the adoption of the internet and how quick it was relative to other technologies. Nobody put it together and said, why did that happen? The answer was we dramatically overcapitalized the sector,

which gave greater accessibility and greater new products and all these different things. And it's swamped the economy. But if you're an investor, you didn't make any money. Right. I kind of think that's where we are again. You're 100% right because OpenAI is currently valued at $300 billion.

And their most recent funding round was $40 billion. Led by SoftBank. So it might be the first company to open up as a Dow component. A new issue. Hey, we have some charts we should blaze through some of these, Mike. Let's do this top 10 GWIM stocks. This is a rich one. Yeah.

Tell us what's... So what are we looking at here? This is one of my favorites. This comes from Michael Hartnett, who is the chief strategist at Merrill Lynch or Bank of America Merrill Lynch. It shows you the beta of the top 10 holdings in the Merrill Lynch private client system. And so you go back to the beginning of the bull market, 08, 09, the beta was 0.75. People are under their desk in the fetal position, right?

They don't want the risk of the market, so it's less than one. We started writing about it when it hit about 1.2, 1.3 in there. That 1.2, 1.3 went to 1.4, which went to 1.7 at the beginning of the year. It then they got scared. They went to 1.3, oh my God, you know, like let's cut back. And now it's back to 1.4. So the average private clients brokerage account at Bank of America Merrill Lynch

has a higher beta than the S&P 500. Yeah, more risk than the S&P 500. Okay, so they're taking more risk than the market. Right, now in truth be told. They're doing that in like the Palantir's and the... Yeah. Okay. This is their top down holding.

Now, if you take their top 20 holdings, you don't get the 1.4, but you do get the highest still that they've ever had. Can I be so bold as to call it top? I mean, how much higher can you possibly go? I never expected to go to 1.7. Unless they're going to be holding levered ETFs or levered stocks. I mean this is nuts. It is nutty.

That's what I was saying before about diversification. They punted it. They punted it. It's crazy. Alright, here's a diversification. Here's a diversifier. This is one of my favorite charts of all time. Walk us through what this is.

Okay. This is the white line is the NFIB Uncertainty Index. NFIB, National Federation of Independent Businesses. That is the lobbying organization. the barbershops for small, yeah, restaurants, barbershops, all this kind of stuff. They have something they call the Uncertainty Index. What's the Uncertainty Index? They basically ask people, are things better, worse, or I don't know?

Good, bad, I don't know. This is a summation of all the I don't know. Oh, it's a survey. It's not components. It's not like the inflation rate and the, that's the misery in that. No, no, no. It's not components. It's not like the inflation rate and the that's the misery and that's enough It's it's I don't I have to admit I I the detailed paper I have I don't remember but it's basically I don't know got it if you're answering I don't know where I'm uncertain you get copied in this thing and

I overlaid that with the gold one the gold line being gold the year to year percent change in gold. It's pretty good It's a pretty good line. It's a pretty good line. That's actually great. And it's 10 years. I'm usually anti-tune lines, but this is pretty good. That is pretty good. Anti-tune lines. That's pretty good. So anyhow, the point that I'm trying to make here

is just that gold is a good hedge against uncertainty. That that's why we keep it in our portfolio. It works as uncertainty grows. As uncertainty grows, it is the ballast against uncertainty in your portfolio and lowers the volatility. I don't think people should treat gold as the next mag seven. Like what's the next momentum play?

I think that's very hard to do with gold. But if you hold it as part of a portfolio, I think it's very prudent. Paradoxically, my favorite thing about gold is that there's a such thing as certainty in gold. And when that peaks, that's probably because the stock market has just gotten killed. Gold has risen a lot. Wait, what do you mean? In 2011, GLD crossed above SPY as the highest market cap ETF. Really?

Do you know that? I did not. Is that not the mother of all buy signals for stocks? I would say so. That happened within two weeks of the generational top in gold we only now just surpassed. And I think the S&P at that point was probably 25% off the high. That's outstanding. That's outstanding.

I hope it happens again. Looks like it's on the way. Next we did the 10-year Germany. Let's do this initial unemployment claims. Rich, there's nothing here, right? Nothing here, that's exactly the point. All right. There's nothing there.

Okay, this is important. I think people need to hear that. What's the, oh, IPO, SPACs are, SPACs are not back, one guy, one guy's doing a SPAC, that's it. And we all know who he is. Yeah, well. And God bless him. But I mean, this is the performance of SPACs and-

Get the fuck out of here. All right, next chart. Next chart. You don't like that one. We're never doing, And God bless him. But I mean, this is the performance of SPACs and- Get the f*** out of here. All right, next chart. Next chart. You don't like that one. We're never doing that SPAC thing again. It's not going to happen. You like my gold chart.

You don't like my SPAC chart. I love your gold chart. This is good. I love this. This is next 12 months earnings growth, S&P 500 companies. Each bar represents a different company's growth forecast. One MEG-7 company passes that. NVIDIA? It is NVIDIA. Yeah, it would have to be. Yeah. For- into different companies growth forecast. One Mag 7 company passes. Nvidia?

It is Nvidia. Yeah, it would have to be. Yeah. For, for. Yeah, there is growth elsewhere. What's on the left? Consumer Disquest? It's a mix.

It's a mix. Hems and Hers? It's a mix. Hems and Hers is on the left. But I think the point of this is it's not, Mag 7 is not the only games in town. No. So they may be magnificent, but they're not unique. I love that.

That's the line. Okay. We did the Mag-7 total return. Is this trade chart worth getting into? I did this more tongue in cheek than anything else about how we had a trade pack with the United Kingdom, but we have a trade surplus with the United Kingdom. So what's the point of that? The red bar here is our trade deficit with China. That's the big elephant in the room. Yeah, I don't think that's getting resolved this summer. Okay. He wants to sign something

on July 4th or something. I don't know if it's going to happen. One year CDS spreads by country. Okay, CDS. What's the- Credit default swaps. Yeah, what's the probability of default? That know, that's really what this is looking at. This doesn't look good. It's the green line is the United States. Green line is the United States.

The other multicolored things down below are AAA rated sovereign countries. Is it the probability or is it the amount of betting? The amount of, I guess they're using this for hedging. Yeah, what's the measure? It's an insurance. They're buying insurance. Basically, if you want to insure against, I think this is one year, if I remember correctly,

it doesn't say, we didn't label it correctly. Pretty sure it's one year. You have to pay 60 basis points if you want to hedge against default in the next 12 months for the United States. That sounds, that looks mispriced. Yeah, who the hell is paying for this? Only because I'm looking at the rest of the countries.

Well, look at the others, right? Singapore is the nine, but the rest are all like three, four. Can I ask you a question? Do people trade this? Like nobody's actually... They trade it, but it's not the most liquid, not the deepest market. But so why would you buy it?

You buy it if you... Look, you buy it if you're a hedge fund, and you think people are going to wig out about the deficit. So you're buying it so that you can sell higher? Tail risk. Like you put like 2% of your portfolio into that. Yeah, do nothing. Cause it'll-

My point is, you know that's not going to pay off. So you're just trying to buy it to sell it higher in case. Yeah. Yeah. Yeah. It's basically, it's a very speculative market. There's nothing, but the interesting thing is you can do this versus AAA sovereignty go back in time. There was, although the, the CDS market was not what it is today. You know, you can see that the spreads are much narrower. You need an ISBN designation to trade these things though.

Oh yeah. There's no retail in this market. No, no, no, no, no, no, no. There's no retail in this. Like you have to be like cleared to be a participant in that market. As far as I know, that's right. Alright. We don't trade in it. Okay.

Expected total return. This is great. This is very helpful for people to picture. What's the upside of the sector fundamentally relative to, I guess, what's on the Y axis? The dividend yield is like... All right. So walk us through what you're seeing here. Now this explains why earlier I was such a big bull on international quality, because you want to be northeast in this chart. If you're northeast in this chart.

Top right quadrant. Top right. It says you have a high dividend yield and you have a high projected growth rate. Those are the two main components of expected return. Evaluation too. I get that, but humor me for a second here. So you want to be top right. That's why we're such big fans of international quality because that's top right. Look at where the Meg 7 and Meg 7X and video are. Not exactly. I would buy into this if you could do shareholder yield

and not dividend yield. Could you throw buybacks in? Interesting point. I think that would mix this up a little bit. Why are some red and some green? Oh, red and green is what we're overweight and underweight. So like if you could take, Apple's going to buy back $100 billion worth of stock to say that they don't pay a high dividend. That's a fair point.

Probably not relevant. Who doesn't do big buybacks but does big dividends? Utilities? Utilities. It's probably like why they're there relative to... I'm with you. I like it. It's just an interesting comparison. We had one more thing to do, but I think we did it, Rich. The AI, just like we don't need data for this, just your general sense of how fast AI is, not the stock market, we know it's transforming the stock market, How fast it's about to transform

the labor market and by extension, just the way we do business in this country. I think it'll be fast, but slower than people think. Ah, okay. Right? If that was that for hedging, right? It's going to be fast, but slower than people think. But why? I just don't think capital spending can occur that quickly. So that's the constraint?

I think that's the constraint. Is the rate of the data center build out? The data center build out how companies, how comfortable they are to dedicate their cap backs and their cash flow to this big time and things like that. I think it's going to be a slow process that will build through time. Think about how the way companies adopted computers, you know, 30, 40 years ago. It was slow and then boom, then it took off. Do they seem to you as though they're going slowly

when they're spending, Metta's going to spend $80 billion this year? Well, that's Metta. But I mean, the ultimate story has to be that the non-technology corporations are starting to buy it. Elon Musk tweeted that he needs another Terawatt. Do you know what a Terawatt is? It's enough to power the United States, one.

Yeah, yeah. He wants one more. So just to give you an extent of... It's going to be an interesting... Whether or not they're going slowly. So here's one of the interesting things that I think is going on right now. That everybody's gaga over AI and automation and everything. I think one issue is the grid, as you correctly point out. And the other is that when I talk about reindustrialization in America,

people say we're going to have to have robots and everything else. Here's the irony. We're going to have to import the robots. Oh, for sure. Japan. Japan and Korea are going to supply the robots. So they're going to have to pay a tariff on the robots. Surely people understand we're not making robots in Midtown Manhattan.

I hope people understand. I own one robot stock. It's almost a penny stock, so I'm not going to say the name of it. And I thought I owned it because they were making robots Yeah, magna international makes the robots. It's a Canadian auto parts manufacturer. They contract with magna International to make these it's a bucket on wheels, right? And they just like buy the thing from them and but they're the robotic company that is hilarious. It's hilarious I just I do a lot of due diligence, as you can see. All right.

Rich, do you have fun on the show today? Yeah, great time. Thank you. We think the world of you and your research is always great. Well, thank you. And you have a huge following in the advisor community. And I think you're one of the people that, if you ask advisors, who do you read, who do you pay attention to?

Advisors who have broken away from Merrill Lynch will know you of course, because you were the guy at Merrill. But I just think generally, advisors care about your insights and what you have to say. Where do regular people go to hear more from you these days? They can go to our website, which is rbadvisors.com. And they can follow us on Twitter, at rbadvisors. Okay.

How frequently are you publishing, are you putting stuff out these days? We put out on Twitter, there's several things on a normal day. They prefer x.com to Twitter these days. Sorry, sorry. I don't use it at all. On x.

We kind of, we put out, on a good day, we'll put out several things a day. Little charts, like a lot of the ones we just showed here, those will appear on X, sorry. Okay. Very often. RB Advisors, she'll get our monthly commentary. If we're on something like this, this will be on our website.

Awesome. You know, TV appearances, our Deputy CIO, Mike Cantopoulos, when he writes his stuff, there's a whole bunch of stuff. And you guys are SMAs? We are SMAs. We sub-advise a couple of mutual funds. We have an ETF called the American Industrial Renaissance. That's a mouthful. I have a better name for an ETF for you. Ready? What's that? Granny Shots.

Granny Shots? Just think about it. Just think about it. Tom Lee raised a billion dollars in his in like five minutes. Exactly. The key is granny shots. Here's my thing. It's not AI. It's AIRR. That's the ticker. AIRR. What's the idea behind the Industrial Revolution ETF? Mid-cap and small-cap industrial companies that get 75% or more of their sales from inside the United States. Okay. So this is a domestic growth idea. Domestic industrial growth idea. Okay.

How long has that ETF been around? 10, 11 years. Oh, wow. Oh, yeah. Yeah, yeah, yeah. I'm telling you, we've been on this theme for a very, very long time. I would recommend my robotics stock, but Magna's from Canada. So, they didn't even make the robots in this country, let alone make them themselves.

We're going to have to pay a tariff for the robot. So, we always end the show asking people what they're looking forward to. I think Michael's looking forward to game two. We need a little redemption. I'm looking forward to the summer. I went to the beach club today. You went to Catalina? Did you move your stuff in?

I did. Okay. You got the cabana or the locker? So I was moving my stuff in and one of the ladies there who was also moving her stuff in she asked me for help and I said, I helped her, but I said, do you think I'm a Cabana boy? And she said, yeah. I said, I used to be.

Wait, I still got it. What beach club were you a Cabana boy? Sunny Atlantic for years. You're like the Flamingo Kid. Yeah. Yeah. Were you a waiter? I was a waiter too.

And a valet parker. Wait, that's where you met Robin? Yes. Sunny Atlantic, it really is 2002 maybe Yeah, it doesn't tell you really is like the movie your beach club guy. No, what are you doing this summer? Are you fish Beach? Sleep sleep. Oh, you're out east though. Yeah, we answer What are you looking forward to the most this summer? What am I looking most to this summer? Honestly, just plain old family time.

We love it. Can't get enough of it. Grandkids? No. Not yet. Stop prematurely aging him. Alright. I'm looking at, I'm going to Delmonico's tonight for the first time.

Do you know, do you know Delmonico's on, it's I guess Beaver Street? Yeah. It's right on that corner. It still exists. You've never been? No, I was at the original. They closed down for like five years. Oh, you're right. I've never been to this one either.

And these new guys reopened it a couple of years ago. Like we did the whole place. I haven't been there since the original. You know, because Bobby Vans on Wall Street, across from the exchange, is technically on broad closed. And there's like, there's a Capitol Grill there, right by the exchange is technically on broad closed and there's like there's a capital grill there right by the exchange and then that's really it for stakes in financial district yeah so they reopened Delmonico's home to the

famous Delmonico cut right so I'm going there tonight for the first time since it reopened and uh yeah I'm probably have a salad and anyway looking forward to that all right Rich Bernstein ladies and gentlemen please follow Rich Bernstein Yeah, I'm probably have a salad and... I'm so good at having salad. Anyway, looking forward to that. All right, Rich Bernstein, ladies and gentlemen, please follow Rich Bernstein and Rich Bernstein Advisors wherever you follow. Email, Twitter, x.com. Great job this week, John, Duncan, Rob, Nicole.

Daniel. Daniel, ChartKid, Matt, Keith, Sean Russo, all the compounders, we appreciate it. Please leave us a little waiting and with you, and we'll see you next time. Good night. I want to do it one more time.