The Compound and Friends - The Magnificent 7 Is a Bubble

Episode Date: February 16, 2024

On episode 130 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Richard Bernstein to discuss: the magnificent 7 compared to past bubbles, bitcoin as a sentiment indicator, the Fed's predicament, the case for international stocks, and much more! Thanks to Carta for sponsoring this episode. See how Carta can simplify your equity plan management today by going to carta.com/compound. Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

America's most expensive home for sale hit the market this week. How much do you think it is? Most expensive home for sale? Yeah, knowing nothing about where it is, what it looks like. How much do you think? This is not a quiz show, by the way. How about $275 million? Oh my God, it's pretty close.

Is it? $295 million. This is a nine-acre compound in Naples, Florida. Imagine. million this is a nine acre compound in naples florida imagine uh it was like um it was built by it was built in the wait this is the this is the part that this guy found it whoa john donahue his uh his family's like a big investment banking family i I guess. And in the 1980s, he was in a helicopter or on a flight, and they were flying over Naples, Florida. And he saw this peninsula jutting into the Gulf of Mexico that had nothing on it. And it's called Gordon Point. And he said to his wife, I want to go and see what that is.

1985. He bought it for a million dollars. It's now – they've amassed 60 acres. They have 13 children, 84 grandchildren. That whole thing? Yeah. Or what? Yeah.

All this. That whole thing is one property that they're selling for $295 million. That's not my style. It's not your – yeah. Oh, Rich, but this is the family that owns Federated Investors. Oh, yeah, yeah, yeah. So it's the Donahue

family. So it's kind of a cool story because he used it to keep the family together. And so there are hundreds of members of this family that have fond memories growing up at this compound. That's cool.

Outside of Naples. So I'm interested. Do they take credit cards? Yeah. Take a look. Go kick the – I think there's an open house on Sunday. Exactly. Have fun doing that.

I have been wanting to have you here for so long because you're – so I know a lot of former Merrill guys. long because you're so I know a lot of former Merrill guys and within 10 minutes of talking to any I used to be a retail broker within 10 minutes of talking to any Merrill broker back in the day or Merrill financial advisor now your name usually comes up and that's nice yeah and I know you know that but you still have this huge following from people that you were influential toward for your whole tenure there. His name has come up here a few times. Your name comes up here all the time. Really?

Belsky? Was Belsky? You were with Belsky? Sure. He was in my group for a while. Sure. He's a good guy. How long were you – but you weren't at Merrill for like a million years.

How long were you there? A little over 20. Okay. Oh, so you were there for like a million. Like a good cop. I put in my 20 and that was it. Last week we did a thing about how – or two weeks ago we did a thing about how Mike Wilson at Morgan Stanley stepped away from the chief strategist role. And it prompted me to look up Chuck Clow, that story.

And then – so he steps down at the peak of the dot-com mania. Right. And he looks right in hindsight. They had put a young woman into this slot. I forgot her name just now, but then you end up coming in after her. Right. Okay. Christine Kelly's.

So she was like more of a growth manager, which is what the bank wanted at the time. Yep. And then it blew up through no fault of hers. Nope. And then you're the value guy. They put you in an O2. through no fault of hers. Nope.

And then you're the value guy. They put you in an O2. And I remember saying to myself, almost anybody would have crushed it coming in an O2. The S&P is down 50%. Right. We had Enron, WorldCom, 9-11, dot-com blow up,

like all within 18 months. You basically stepped into a smoking crater. But then there was a really nice five-year run for stocks into the next crater. But that was a fortuitous time for you to start as the strategist at Merrill. Yeah, it was good. It was a good time to start. Although I have to admit that 2003 was probably the worst year of my career. I don't think I got anything right in 2003.

What didn't work for you? What didn't work? Everything. Didn't get the call on the market right. Didn't call on sectors, didn't get a call. I mean like nothing. It's rare that that happens. What I remember about 03 is that the first thing to start working were like the biotechs and the really speculative small caps. Those were racing higher before the S&P.

Yeah. Okay. So you got that backwards? Got that backwards. Oh, bigP. Yeah, that's right. So you got that backwards? Got that backwards. Oh, big deal. Yeah, it's all right. It worked out okay. It worked out fine. Everything worked out great.

It worked out great. And when did you step away from Merrill and start your own thing? So left Merrill in the spring of 2009. Okay. Started RBA legally the end of 2009. Wait, hold on. Also amazing timing. Oh, that was a little bit more on purpose than –

Yeah, okay. No, I understand that. Because the first one, you don't get to choose when you step into these positions. Yeah. But this one was a combination. Merrill wasn't Merrill anymore. Yeah, I know. Which was fine.

I mean it just – and I was kind of burnt out. Right. Needed a change. And 2009, I remember exactly where I was. I was sitting there in our den and I was watching CNBC and weekly initial jobless claims came out. And they were like massively positive. Yeah. And I sat there and I said, this doesn't happen if everything's falling apart.

Yeah. I said, this is it. if everything's falling apart. Yeah. I said, this is it. This is the beginning. Yeah. So we were talking about starting a firm, but then it was definite. We were going to start a firm. Okay. And we're going to talk more about the firm that you started.

But the decision was we want to do asset management. And I think that was a brilliant decision in hindsight because you had a lot of people leave Merrill. Right. But they wanted your insight on their assets. And that's how, that was a way to do it. It was like, hey, you believe in my research. I think I can help you and your clients. I'm your new asset manager. We don't, we disintermediate mother Merrill and we're back together again. It was, it was great. I mean, and if you remember a lot of management from Merrill left and went to other firms.

Yeah. So some of them went to UBS, some went to Morgan Stanley. So the good thing about that, we had a foot in the door. Yeah. Right? And, you know,

they still went through the due diligence process. It's not like we just walked in, but it was clearly a leg up. Yeah. That's awesome. I love that story. It was great.

All right. So are we getting around the way? All right. I'm so happy we're doing the show today. Hey, John, what episode is this? Compound Friends, episode 130. Welcome to The Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management.

This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Welcome to today's episode brought to you by Carta, the all-in-one platform transforming how financial advisors and asset management firms manage their equity plans. No matter your ownership structure, Carta provides the expertise to handle your equity plan, valuation, and distributions. That's right, Michael. With Carta, you have a single source of truth for your firm's equity plan and can easily share K-1s and statements with equity owners. Carta also provides audit defensible valuations at a fraction of the cost of other providers and can help you distribute capital to your investors and owners. So if you're thinking about issuing shares to your employees, preparing for M&A, or just tired of managing your cap table in Excel, join the over 40,000 private companies that have chosen Carta. See how Carta

can simplify your equity management today by going to carta.com slash compound. That's carta.com slash compound for more. Oh my God. 130. Ladies and gentlemen, welcome to the hottest investing podcast literally in America. This past episode we did with Michael Semblist is on the verge of breaking 100,000 downloads. In podcast terms, guys, that's like a lot of downloads in investing, right? It's a ton, right? It's a lot. I think we're about to top that, though. No, I'm just kidding.

We have a guest here today that I've been looking forward to having on the show for such a long time. I've been a fan of his and a reader of his research for as long as I can remember. If you've ever worked in financial advice or wealth management, if you've ever spent any time at any of the wire houses, if you've ever read Barron's, watched CNBC, you know his name, you respect the brand. Ladies and gentlemen, the one and only Mr. Rich Bernstein. Welcome to the show. Thank you. Your crowd is going crazy.

You're used to that though, right? You're accustomed to that? No, no. Melissa, does he get that everywhere you guys go? Yes? All right. All right. Rich is the CEO and CIO of Richard Bernstein Advisors, otherwise known as RBA, an investment manager with more than $15 billion in assets.

Rich has appeared on CNBC, Bloomberg, The Wall Street Journal, and others. Prior to RBA, Richard was the chief investment strategist at Merrill Lynch. Welcome to the show. Thank you. Thanks for having me. strategist at Merrill Lynch. Welcome to the show. Thank you. Thanks for having me. What's your year-end price target? No, I'm just kidding. So we're going to start where I think we have to start. It was yet another week during which Magnificent 7 Bubble Talk dominated the headlines and with good reason. We've had all of the earnings from these companies and they were pretty darn good. Not in video. Well, I'm going, I'm going there. Um, the last one to report is, uh, next Wednesday after the close on the 21st, expectations are high. They've been high. The company somehow continues to find a way to shock us to the upside. It's really been incredible. Um, but you are now openly referring to this group of stocks, not each of them individually, but as a theme, as a bubble.

Yeah. Most of your peers are not – they're afraid to go there. But you're saying it. You're saying it out loud. Yeah. Respect. Why? I think – look, there's – we could argue all day long whether they deserve the valuations that they're getting and all the hype and everything else.

argue all day long whether they deserve the valuations that they're getting and all the hype and everything else. But the way I look at it is very simply, are there really only seven growth stories in the entire global equity market? No. Clearly, clearly there's more. That's what you think people think? No, I think that they don't appreciate that. They think there's something unique and special about these seven companies. Okay. There is. Well, but they're not. I would say maybe they're, I would argue whether they're special or not, but let's assume they're special for a second.

They're not unique. We've done studies where we've looked for growth companies around the world and four of the Magnificent Seven don't even pass the screens. 130 or 140 other companies pass the screens. And the fastest growing of the Magnificent Seven ranks like number 25 or 27 or something like that.

So when you've got more than, you've got the majority of the Magnificent Seven not even qualifying in a growth screen, but you've got all this hype and the valuations, everything else. My argument is simply there's got to be something else that people are missing. What if the screen is not growth? What if the screen is growth plus moat plus balance sheet strength plus profit margins? Then they're pretty special. Well, I think moat's an interesting question because there's no way you can really measure moat.

It's a subjective type of discussion. And moats are good, but most moats are not deep enough or wide enough or don't have the crocodiles enough to keep out the competition. Forever. Right. And I think that's when they forget. In certain cases, people are underestimating the cyclicality in some of these companies. I mean, I don't want to name names, but for somebody to say that a semiconductor company isn't cyclical is kind of wild. That amazes me, given that two years ago when the economy was in trouble, their earnings went down.

Now their earnings, the economy is getting better, which nobody agrees with. Everybody thinks the economy is terrible, but the same company is doing tremendously well. Wait, semiconductors aren't recession-proof? No. But can it also be true that there are cyclical companies that encounter a secular phase of growth that overwhelms the meaning of the cycle and that NVIDIA in the AI revolution could just be that story? So for that, I think you have to go back and you have to look at the tech bubble. And I think there are many analogies to the tech bubble that I think are accurate and correct. And our main story has been you have to separate out the economic story from the investment story. Okay. So let's go back to 2000.

The story back then was the internet and the internet was going to be change the economy. And the internet did change the economy, change the economies and change the economy in ways that we could never have anticipated, you know, during that period. I mean, you know, look at the whole notion of what we're doing right here. Nobody envisioned that. And so the internet did change the economy. But if you bought NASDAQ at the peak of the bubble, it took you 14 years to break even. If you were smart and you bought it a year before the peak of the bubble, it still took you 11 years to break even. And all the predictions about the revolution were true? They all came true.

The price you paid was more important than the predictions? Exactly. Yeah. Is this really comparable to that? I think it is. Okay. I do think it is because now it's take out the internet, put in AI. Sure.

I think you've got a very similar type of story going on where I don't doubt for a second that AI is going to change the economy. Not for a nanosecond do I believe that. Of course it's going to change the economy in ways that we can't envision today. That will happen. It doesn't necessarily mean buying companies at lofty valuations is suddenly going to be profitable. Is Alphabet 18 times earnings comparable to Cisco at 80 times earnings? No, that may not be the best one, but maybe, I don't want to name names. I cherry picked those perfectly, though. Yeah, yeah, yeah.

But some of those. But I mean if you think about back then, way, way back then, I was on – if you remember Wall Street Week, I was on Rukeyser's panel. I sure do. And Rukeyser loved that I would do Cisco versus Cisco, CSCO versus SYY. Food service versus – Right. The most boring company in the world. Yeah.

company in the world. And CSCO, I think, has just broken even from its bubble peak, you know, sort of like the Japan of stocks. It's just come back. All right. But so Microsoft has broken even a long time ago and Apple. Yeah, they all did. Some of them have. Yeah. So we say, is it comparable to the dot-com bubble? Certainly, maybe NVIDIA is the one to talk about it being bigger than the entire S&P 500 energy. I mean, this is kind of, not kind of, this is madness.

Yeah, I think that's crazy. I think that's crazy. I mean, you know, first of all, we already know- It's 4.5% of the S&P. Yeah. I mean, to me, that's kind of nutty because we already know that they're inviting competition, right? You're seeing some of the other semiconductor stocks are now starting to talk about AI, semiconductor companies, rather, talking about AI. The competition is starting to build. And, you know, competition puts pressure on margins and everything else. So Wang's argument is the more of them that are building, the better because they're all standardizing in our ecosystem and we might be the software provider to the companies that are buying their chips.

So he's almost looking at it like the fact that everyone is building AI, yes, there might be the software provider to the companies that are buying their chips. So he's almost looking at it like the fact that everyone is building AI. Yes, there might be some head-to-head competition, but the truth is the monitorization of these data centers is going to require more than just our chips. So that is very similar to the argument that EMC made back in – if you remember EMC. I'll never forget. EMC was the storage company, and everybody said, oh, the internet's going to create all this data, and we're going to have to store the data.

They were right about the data. What they didn't see was the cloud. Yeah. And EMC doesn't exist anymore. There's a guy that, the CEO of Databricks made some waves this week. He gave an interview to the information, and he basically drew the parallel between

one minute there wasn't enough broadband to go around. Six months later, there was so much broadband, it was called dark fiber and they were burying it. And he thinks that GPUs are going to have a similar demand curve. Like one day, people are double and triple ordering just to make sure they're in line. And then the next day, there were GPUs spilling out of the sky and nobody has a place to put them. That might be like an extreme, but we saw that with broadband. Right, but the economic principle is pretty sound, right?

I mean, old time, if you go back through time, old recessions used to be inventory cycles, right? I mean, the whole economy would build too much and then it would collapse. And then nobody needed it anymore. And so what you're describing is kind of a microeconomic version of an inventory cycle. Okay. All right. Listen, I love that you're saying the bubble part out loud, but you would stipulate even amongst that Magnificent Seven, the valuations are elevated for Apple and Microsoft.

They don't look like 1999 large cap stocks. They don't look like 1999 large cap stocks. They might in terms of their popularity, but they're not really being valued the way that we were valuing JDS Uniface. No, true. True, true, true. But I think one of the things that people have to remember is a common thread right now is that these are real companies. And back in 1999, 2000, they weren't real companies. But if you look at the real companies in 99, 2000, they suffered. They suffered

big time. I agree with that. I'm on the record this week saying I own these stocks and I think things are out of control. Buffett's 13G came out from, I should say Berkshire's 13F came out from Q4 this morning. Looks like he sold about 10 million shares of Apple, which is no big deal, but he hasn't done it before. Right. He's only added. So maybe we've reached the tipping point when it's like, yes, it's the best stock in the world,

and it's their biggest winner ever, we now know in dollar terms. But there's even a limit for, you know, there might be too much of a good thing there. Yeah. And again, I just think about it in terms of, look, profitability in the United States is starting to rev up again. Historically, what happens is investors start becoming comparative shoppers, right? If growth is scarce, you pay anything you can for growth. But if growth is becoming more and more abundant, you become a comparative shopper. I think that's what's starting to happen. So when you say bubble, this is not like a crash prediction.

This is a case to be made for the other 493 stocks. Yeah. And more than that, I would say every other stock around the world for practical purposes. Okay. The equal weight S&P is almost at a new all-time high, at a 52-week high today. So I'd like to see that.

So I wanted to ask you, actually, if you think about that period from, let's say, the summer of 99 into March of 2000. Okay. Do I have to think about it? Well, as they were putting the finishing touches on like a Nikkei-esque blow-off top, right? One of the things that was happening in parallel

was that every other type of stock that wasn't internet-related was selling off. Yes. Which set up a huge opportunity for your style of investing. To Michael's point, if we're seeing simultaneous highs in the equal weight, this is not the same setup as that.

No, it's different. I would agree with that. No, no, no. It's, you 1999, 2000. I don't think it's identical at all. And I don't want to lead people to believe that we're saying it's the exact same thing. Rich, look at this chart. Sorry to cut you off, but this is the three-month rate of change for internet services. This is from Sentiment Trader. I mean, you could say that things are elevated and extreme today, but this is a baby compared to... This is the three-month rate of change for all internet stocks. But what are the dates? I'm sorry.

I'm sorry. This is 1999. Oh, yeah, yeah, yeah. And that's today. Right, right. And that's... What's the group? I'm sorry. It's all-cap internet. Okay. All-cap internet. Okay. Yeah, no, it's not... I'm not making the argument that this is identical. I think that there's an opportunity cost involved in this as there is in any bubble type scenario where you start misallocating capital and too much capital starts running towards a select group. But I will – at the risk of maybe stepping where we don't want to go, I don't know. But my divining rod for speculation is Bitcoin. Okay. Because to me, it's the ultimate speculative instrument.

There's absolutely nothing there. It's pure price. It's pure price. And people claim it's a currency, but there's never been a currency in history that hasn't served an economic purpose first and then was traded second. This would be a currency. Marlboro miles. I'm sorry? Marlboro miles.

Marlboro miles. Yeah. That was a currency in the 90s. Marlboro, what the heck? If you smoked enough Marlboros, you collected, you could get a kayak. All right. I don't want to derail you. Well, beanie babies.

I think Bitcoin-Nasdaq is maybe a little bit correlated, but you think like that's like really the – I think it's the same effect. I think what you're seeing is excess liquidity that's not getting mopped up in the economy, that is looking for a place to go, and naturally what happens is it starts speculating. And Bitcoin, I think, is a divining rod to figure out how much water there is running around. That's how much liquidity is there. Well, it's at 52,000 today. It's, to me, my argument is that that should tell the Fed that they haven't tightened enough.

You think that should be in their basket of observations? I don't think it should. I think they should be looking at it and wondering, like, what's going on here. Where's all the speculation coming from? And the reason that's important is because speculative activity, the misallocation of resources, is ultimately inflationary. So they can constantly say, we don't care about the markets, we don't care about this and that. But if they're causing a misallocation of resources, inevitably that causes inflation. Let me throw a hypothetical at you. What would

you say if the economy entered a recession and risk assets declined and Bitcoin went up? What would I say if that, I would say, wow. In a nutshell, that's what I would say. I actually don't think that could possibly happen because the people with the highest propensity to sell Bitcoin would most likely be young people who have been laid off from their job and just need to use the cash on something more important. That would be, I mean, maybe that would be, if that could happen, maybe that would be kind of-

It seems unlikely. It seems unlikely. But if it did happen, I think, you know, somebody like me would have to do an awful lot of thinking, rethinking about what's going on. What if we were to say that Bitcoin is not a currency? I agree with you there. Yeah. I don't know who's using it for a slice of pizza. Yeah. But it's an asset class. And we got four, we got a lot of ETFs, four of them already have over a billion dollars. Are you more comfortable saying that, that Bitcoin is not a currency? That's not what it is? Maybe that's its intended case, but that's not it? It's an asset class?

I think of it more as a collectible. And so collectibles are generally, some people think of them as an asset class. So whether it's art or something like that, I don't think that's what's spurring Bitcoin. I don't think. And because remember, it's not just Bitcoin. There's like, what, 7,000 cryptocurrencies or something. There's more going on here. Right. An ETF is not a use case. No, it's just – it's providing a new avenue of growth for speculation. Yeah.

There was – I would agree that for Bitcoin to – and just crypto more broadly, in order for it to grow beyond an asset class and speculation, there needs to be a real use case, like a real, real use case, other than just the asset class. So- Right. Give it time. We're 16 years and counting. So hold on. Citigroup actually put out a paper bringing traditional assets to digital networks.

And they said, across financial services, there was a growing recognition that the use of distributed ledger technology presents a significant opportunity to re-architect capital markets. I'm not going to read the whole thing, but I think this is probably a pretty obvious use case for blockchains or financial services. Yeah, and no problem with that.

I think technology, the financial markets have always been a center of technology, right? Now we have a name for it, fintech and everything else. But that's always been true. And go back in the early days of markets, it was as simple as just getting the fastest runner, right? Because people were actually, so you had the fastest runner to do it. Now it's who has the fastest computer, right? I mean, but it's the same principle, the same economic principle. So I don't think the technology, or rather I should say the technology side, 100%. That's true. I don't think that has anything to do with Bitcoin being a $50,000 a coin. So the Bitcoin maxis would, not that we want to do much more on this because I'd rather kill myself. The Bitcoin maxis would say, it's a tautology. You can't say you believe in the blockchain, but not the price of Bitcoin rising,

because if the blockchain is truly transformational and functional, it has to be large enough to accommodate full-scale commerce. Therefore, there's only a limited number of Bitcoins. The price would have to be higher. So there is actually no way you can believe in the technology and not the price rising if you think of it from that prism. And I don't think of it at all. But I understand that. I understand that rationale. I would disagree with that statement. But the other thing I think is that the scarcity argument, I think, actually shows a lack of understanding of monetary theory. It's very broad.

Everybody believes that because we're not printing Bitcoin, that therefore it's going to be more stable than most currencies and it won't inflate and everything else. I think that shows a lack of understanding of monetary theory and money multipliers and everything else. If it's really going to become a dominant force in the economy, then it will be lent and you will create, create in quotes, Bitcoin. Fractional reserve banking. Yeah, exactly. Okay.

My argument was always, well, if Bitcoin's great, here's Bitcoin 2, here's Bitcoin 3. Yeah, well, exactly. If we're all in on this for the technology, well, then more blockchains is better than less. Yeah. And so that's why I've always had an issue with the scarcity argument. Absolutely. But your point was not that. Your point was, for right now, pre-use case, we're in a situation where when you see Bitcoin

rising, it's probably a pretty good signal that investors are excited again. Yeah. And I agree with that. And there's a chart that we have that shows financial conditions in Bitcoin and they go hand in hand. Is that right? Yeah. So when financial conditions are easing, Bitcoin goes up.

Financial conditions are heightened, Bitcoin goes down. It's pretty much speculation. Away from Bitcoin and the MAG7, there's this whole other category of stock. And I own a bunch of these and you do too. And we all, like when you do an eye test on your brokerage account these days, everyone has those four-letter tickers that are like NASDAQ-y kind of like, not mega caps, but maybe large caps, software. Like what? CrowdStrike is a recent example.

Yeah, these are stocks that have doubled, tripled in the last year or so off those lows. They're not MAG7. they're not mag seven. They might not all necessarily be like in the bubble category, maybe, or maybe they all are just like ripples of a bigger bubble. I don't, how do you think about that? So let's separate out. I mean, there's always been growth investing and value investing and, and we're kind of a little garpy, I would say, cause we go back and forth between the two. So there's nothing wrong with growth investing and that, kind of stuff. I'm not sure that's exactly what's going on in the markets today. It does seem to have a little bit of a speculative fervor to it. Yeah, I agree.

You know, and again, I don't want to name names, but a well-known individual investor. Barry Redholtz. Yeah. No, no, no. He-known individual investor. Barry Redholz. Yeah. No, no, no. He doesn't do it. No, no. But the well-known individual investor brokerage firm that just reported this week had a blowout quarter.

Yeah. Right? That tells you individual investors are in. They're in big time. They're trading. Robinhood. Yeah. Yeah.

You said it. Yeah. Well, Robinhood is doing well. That means their flock came back in their transaction. Rich, just because Supermicrocomputer is up 300% over the last 48 hours doesn't mean that there's a speculative fervor. Right. But here's the way I think about it. My former employer, Merrill, who you were kind enough to mention before.

Merrill keeps statistics on their entire private client system. Yeah. So millions of accounts. That's like Savita's research. Yeah. Well, it's actually Michael Hartnett. Michael Hartnett. Michael Hartnett puts this out. Oh, the Flow Show.

The Flow Show, right. And one of the charts in the Flow Show that he puts out is the Merrill Lynch private client beta of their portfolio. What's it at right now? So let's scale it appropriately. At the beginning of the bull market, 2009, the beta of the entire Merrill Lynch system was 0.75. People are under their desks. They're in the fetal position. They don't want equities.

So looking at the entirety of their portfolios, they have less volatility than the S&P. Yeah. Okay. Yeah. Okay. Now it's a whopping 1.2. We are so back.

For the entire system. Yeah, yeah, yeah. That means that- Is that good? Well, it means- Yeah. Some people are- I mean, people are really bulled up.

Yeah, no, I know. I mean, that to me is incredible. But you know what's funny? You're not wrong. People are definitely optimistic right now and enthusiastic, but the second we get anything coming, they freak out. Yeah, exactly right. I said on TV yesterday about Supermicro Computer,

I said it sounds like a fake company that Christopher Moltisanti made up and started pitching on The Sopranos. Mr. Jones, the name of the company is Supermicrocomputer. We got one hot print in CPI and the VIX spiked up to 18, the 10-year rip, then we're mostly giving it all back or we're taking it all back. All the volatility is abated. So it's interesting you brought up the CPI. I think one of the ways that we differ from a lot of other people you may talk to is that our feeling continues to be that the risk to inflation is on the upside, not the downside.

That's interesting. You're out of consensus there. Yeah, yeah. I think we really are. The rest of us are all arguing about March versus May. Right. You're like, actually. Okay.

So, and there's a – the economy itself is – there's also a general conception that the economy itself is weakening and weakening dramatically. But yet somehow the leading indicators of the economy are troughing. And I think that's, you know, what I try to point out, not being I'm smart and they're dumb, don't misunderstand the comment. But there's never been a time in my entire career where the consensus economic forecast has correctly forecasted a recession. Yeah. It's never – 40 years, never happened. Yeah, it's amazing. Right?

And so what we try to do is we look for gaps between perception and reality. So where a recession occurs is when the leading indicators start to fall over, but the economists say nothing's wrong. What's happening now? Leading indicators are troughing and economists are talking about slowdown and or recession. That says there's room for positive surprises, right? I mean, the city surprise index is putting up its longest weekly streak of positive surprises outside of the pandemic, like in the history of the indicators. Do you feel like some of these indicators are just irreparably broken because of the events of 2020 to 2022? We just had such distortion that they almost like they don't tell you what they used to

tell you. Or do you think they're normalizing? I'm going to say something that I hate when people say it to me. It's it's different. It's a great question. No, I mean, because like, what are all the other questions, right? The other questions stink, but this is a great question. Yeah. I think there is, I think if you look at the volatility of economic indicators, it has gone up dramatically post 2000 or post 2020, rather post the pandemic, it's gone up dramatically. That has ruined every economist's model. Yeah.

Because they're not used to that. The model's broken. What about the rate at which these things are now disagreeing with each other on a regular basis? It's crazy. They're not lining up. No, they're not. How do you square retail sales with unemployment with, like, every day you're getting an entirely different story? Absolutely.

Every day, you're getting an entirely different story. Absolutely. And I think, you know, before I used the word leading indicator, and I think that's really crucial right now because the Fed has always been a lagging indicator. But I think they're becoming a more lagging, lagging indicator because of what we were just talking about with the volatility. I think it makes them incredibly uncertain. They don't know what to do. And so they're like deer in the headlights. They're hoping for this, but then this, and so they're not doing anything. Data dependent forever.

Forever. Yeah. No more proactive anything. So where do you think the inflation reacceleration is going to come from? So I think it's coming from a number of different places. Inside the house? Super micro computers. That's my leading indicator. Number one, the labor markets are still pretty tight, right? I mean, we could talk about whether they're easing or whether they're still quite tight.

And the easing that we've seen in the labor market happened during a profits recession. And that's normal, right? Profits go down. Companies lay people off. Labor market eases. And all it eased to was like 3.7% or 3.8% unemployment. Yeah, it eased. Now profits are starting to rev up.

But wage growth has gone the right direction now. Well, it'll lag. But yes, my point is that what's going to start happening is we're going to see some of the – as profits start revving up, you will start seeing hiring start picking up again. So I don't know because the reason the profits are ramping up is more likely than not the ongoing waves of layoffs that never seem to end. And if you just look at the last 20 earnings reports from this week, right, like in 15 of them, it'll say something like such and such beats earnings, announces another 5% workforce reduction, announces new buyback. Absolutely. So why do we think there's going to be this re-acceleration in hiring? Again, leading indicators. Look at jobless claims,

right? If people are getting laid off and they're not getting absorbed, we would see jobless claims rising pretty dramatically. It's not happening. It's not happening. So if jobless claims start going up, yeah, I think we have to change the story pretty dramatically. But I think that's number one. Number two is that I think that companies are anticipating, it's being worked into their corporate planning now, price increases. That was not done before. And you see this in like the NFIB small business survey. NFIB small business has, what are your pricing intentions over the next three months or six months? I can't remember that. And that actually leads the CPI. And that troughed about four months ago, six months ago, something like that. And it started to head up. And sure enough, the CPI is now troughed,

or appears, the rate of change appears to be troughing. So there's all these little things that suggest that corporate behavior is changing. So how does that view influence how you construct portfolios in the stock market? So my argument is that if profits really are revving up, right, and if the cycle is revving up, as I described, this sounds stupid, I know, but the cycle is always affected by

cyclicals, right? Stable companies are just that, they're stable companies. That doesn't sound stupid. They don't cause the cycle. More semiconductors. Yeah, more semis. There's something outside of the high-flying couple of semiconductor companies. Yeah, basic commodity semiconductors. Yeah, if you think that if people are going to buy more refrigerators, there's going to be more semiconductors in those refrigerators. If they're going to buy more cars, there's going to be semiconductors in the cars. That's not very sexy stuff, but it is going to happen.

And so, you know, we like things like energy and materials. Materials look good. I have that on my screen right now. Yeah, materials are doing okay. I mean, industrials have been short. But they never quite do it. But it's right there. I know, but they never go. But maybe this time. But industrials have been a huge story.

And it's like, nobody talks about industrials. No this time. Yeah. But industrials have been a huge story. And it's like nobody talks about industrials. Yeah. No AI. Holy shit. I've always said this is the problem. Look, this looks like an SMCI. This is XLI. I didn't realize it was doing that.

Yeah. Yeah. Yeah, that's my point. Well, there's a robotic story. There's an autonomous story. So there's no recession. There's automation stories in those stocks. Wow.

Battery technology. And I believe industrials are the most diverse sector in terms of – There's no large – nothing dominates. You do get a couple of big – you get a bunch of big companies. But in terms of the industry representation, massively broad. Yeah, that's what I mean. I had no idea it looked like that. Yeah, massively broad.

That's really bullish chart. The other bullish chart, and we can go here now. XLV. Well, I was going to say international stocks going into the start of this year. I know it's been six weeks already of 2024. But one of the coolest stories was at the end of 2023, Europe exploded. Japan had been doing well all year. Other than China, pretty much every country stock market you could look at was trending higher.

And I know the dollar maybe put a little bit of a cap on that short term. But you think that's intact too, it seems like. I do. I think that we've described the stock market as a seesaw. Yeah. Right? One side of the seesaw, we have seven companies. Other side of the seesaw, we have everything else in the world.

And I think everybody remembers 2022 is a bad year for the sexy side of the seesaw. It did really badly. What people don't realize is that something like 70% or 75% of non-US markets outperformed the US during that year, too. Yeah, but they outperformed by going down less. It wasn't fun. We own all that shit. You can take my word for it. But they still outperform. John, can you do these charts or this chart, PE ratios showing MAG-7 versus the rest of the world? So I want to dive into this.

So, and we're going to segue into the lost decade comments that you made. And not a lot of investors who are listening to this, maybe remember the lost decade. I do. Obviously you do. But that 2000 to 2009 period, a lot of investors don't realize the S&P didn't just go, quote, go nowhere. It went down. It had two 50% corrections and went nowhere. So you got the worst that the stock market gives you, volatility, and none of the upside. Correct. But you made money, a little bit of money in small caps and REITs, US. You made a lot of money in emerging markets for most of that period of time. You made

money improbably in commodities, which nobody ever really seems to do. Like there were other things. Okay. From my perspective now, it's a really long time ago. I feel like it's seems to do. Like there were other things. Okay. From my perspective now, it's a really long time ago. I feel like it's impossible to envision a multi-year period where European and Asian stocks do well and the US sucks. So I know it can happen. I'm just trying to, in my head, concoct the story as to how that goes on for more than eight months at a time. So first let's talk sentiment for a second. And here's valuations as a backdrop. Right.

Exactly. So I think that the valuations are good, but I don't think that's new. No. It's been 15 years. Europe is cheap. Right. I mean there's like zero value added in saying that. Europe has been cheap and will be cheap.

Yeah. And I don't think we should – that's not the story. Okay. And I'm not sure Europe is the place. But if you think about historically, there is a remarkable inverse relationship by decade between venture capital and emerging markets. So if venture capital works in a decade, emerging markets don't. Is that true? Yeah. I just made it up.

No, of course. Of course it's true. I mean it may not be true to December. What do you think that's about, vaccines? I'm not – well, it goes back a long way. It's not new. If you go back like I think 80s, 90s, zeros, and now, I mean this is what – the last decade, you see it back and forth and back and forth. So if you go through the lost decade where venture capital did really poorly,

emerging markets did really well. Think about what we've just gone through, a period where venture capital was like the be-all, the end-all. Everybody loves venture capital. Yeah, go dark. Yeah. Everybody's like, you know, come in public, you know, all that kind of stuff. Emerging markets stunk, right? So just from a sentiment point of view, one could argue if that's going to continue, if that relationship continues, it might be a time to look at emerging markets instead of venture capital. Why that works, I can only guess at. I can't tell you that I have a very sound theory. I think it has to do with risk capital and where risk capital gets allocated in the global equity markets.

So funny. Like right now, India is the hottest trade on Wall Street. Oh, yeah. Every hedge fund is in it. But you can't do an IPO if you prayed to God you couldn't get an IPO done right now. So it's actually happening in real time. It's starting to happen. It is starting. And so I think from that point of view, maybe there's that to go on. The other thing is that I grew up in a world where people used to look at relative price and relative earnings and all

these kinds of things. And the relative earnings have favored the United States for quite some time. That's starting to change. If you look at things like the percentage of companies reporting negative surprises and all those kinds of things, go back over the last 10 years, emerging markets were basically leading the world in negative earnings surprises. It made sense that the stocks sucked, right? But that's starting to change. And if that does change, I think you'll start seeing positive surprises. You'll start seeing the stocks do a lot better. So how do you express that view in a portfolio context?

Do you say, normally, emerging markets would be 5% of our portfolio, but given these dynamics, we're going to cheat and overweight them and there'll be 8%. Like, is that, that's the way you would express that? Yeah, for us, for us as a long-only manager. Yeah, a non-hedge fund. That's basically what we have to do. So emerging markets are, what are they, like 13% of the global market? Something like that. I may be off by a decimal point on that, but you get the, whatever it is. And so we have, I don't know, 15, 16% emerging, something like that. But how does deglobalization factor into all of this? Well, I, I actually think that is the long-term story.

We actually prefer to call it friend-shoring. Yes. We'll talk about it in a second. But anyhow, but, but, but I think that's the real story, the long-term growth story. I don't think it's AI because what we spoke about before, you know, in terms of the real story, the long-term growth story. I don't think it's AI because what we spoke about before in terms of the economic story versus the investment story. I think deglobalization, globalization contracting, friend-shoring, re-shoring infrastructure. Friend-shoring is stuff we used to get from China we're going to get from Vietnam. Stuff we used to get from Russia we're going to get from Mexico. That's all.

We got stuff from Russia? Well, yeah, commodities. We like the free world. No, no, no, of course. So, friend shoring is kind of like a shorthand for, it's not that it'll all come back to the United States. It's that we're going to move supply chains around. Okay, but that's fine. But here's the point that I want to make. What I would argue that globalization was the number one reason, not the sole reason, but the number one reason we had secular disinflation.

Yeah, NAFTA. We started in 1992 with NAFTA. Because what we kept doing was expanding and opening markets and, importantly, increasing competition. And when you increase competition, you get downward pressure on prices. And so what happened was the production went to where it was most efficient. Unfortunately, that was not in the United States. And so the end result was that we now run a massive trade deficit, which people have argued about for decades.

It doesn't make any difference because as long as we were opening more and more markets, we're getting better and better quality goods for cheaper and cheaper prices. Who cares, right? Well, now globalization is starting to contract. And when you're dependent on the rest of the world for everything and globalization is contracting, that's kind of inflationary. So even if we start friend-shoring or re-shoring or whatever, we're going to less productive centers. As we go to less productive centers, you start getting more inflation pressures rather than less.

So that would argue for higher for longer, maybe not necessarily rate hikes, but like, you know, not a lot of cutting. Yeah, I mean, the Greenspans of the world were able to repeatedly cut and save the financial markets, the whole Greenspan put, the Fed put type notion. They could do that. Because of this globalization.

Because globalization is exerting this massive deflationary force. But what if the counterbalance to that reshoring inflationary impulse is AI? Because yes, it costs more if NVIDIA is going to – if Taiwan Semi is going to start making GPUs in Arizona instead of the Far East. Yeah, that will cost more money. However, they can do it with less employees or they can do their R&D process at a lower cost. I don't know. I think it helps.

Oh, yeah, it does help, but I don't think it alleviates the situation. Not enough. Yeah, it's not enough. Automation, robotics. Yeah, you know, robotics have been – that story has been around for a long time. When I was at EF Hutton, for those of you who remember EF Hutton, that was the story way back then for a company called – They had the best commercials. Cincinnati Millicron was supposed

to be the big robotics play. And they were bigger than Walmart back then. So the market cap was bigger than Walmart, which is crazy. What sectors or industries would be the biggest winners or losers? So I think getting back to what we were talking before, I think industrials are right at the heart of that. I think, you know, there's nothing sexy about this. We're talking about things like wire companies and cable companies and construction companies. I mean there's nothing sexy about this at all. But if you are – my goal – my utter conclusion is that the United States economy is going to have to become more self-sufficient. And if you think that's true, you could call it reindustrialization.

You could call it infrastructure, call it anything you want. That's going to have to happen. Now, we could argue to what extent that happens. That would be the friend shoring versus reshoring type stuff, and I get that. But on the margin, I think the US economy is going to have to become more self-sufficient. That's great for the industrial sector. I was going to say, but that doesn't sound like a negative story for investing. great for the industrial sector. I was going to say, but that doesn't sound like a negative story for investing. It just may sound like a story that would keep rates higher and maybe would

somewhat pressure profit margins, but help revenue. Yeah. I'm very bullish about this thing. I think this is the long-term theme that people are kind of missing. Wouldn't that be a great world to live in where we have more normal rates, where fixed income investors can earn a return, where it's not just the mag seven keeping the market high? Wouldn't that be like preferable than what we've experienced? Yes. Well, it's broadening of the market is what we're basically arguing for. Oh yeah. I think that's, I think that's much healthier than where we are right now with, you know, seven or 10 or 20 stocks leading the market. Can we talk about like politics versus fundamentals and just where you think things stand with the

u.s economy and how big of a threat the political situation is to what i think most people would argue right now is a pretty good economy with maybe some high restaurant and health care costs thrown in the mix but like overall right like from my perspective like people are working yeah they're they're not you know it's not it's not like a methamphetamine post-GFC nightmare with 8% unemployment and young men playing video games this is not that

so we like the situation of course there's room for it to improve we made it through the rain hiking cycle okay, fine, but so now what? that's the big question isn't it always, fine. But so now what? Like that's, that's the, that's the big question. Right. Isn't it always, yeah, but so now what? We did that, but so now what? Well, that's what we do. Okay. So how does politics influence all this? Yeah. And because that's going to be the next thing. Like you could already Super Tuesday. Right. And then they'll have the convention.

And then it's like, we're right back in 2020 again. So let me give you my line that I always get before I start talking politics, and that is – Make America. I didn't know you were a MAGA guy, Rich. Well, let's not go there. We're going to let people email you later and they can know. Exactly. Politics is about what should be, right? It's always been true.

Think about Herbert Hoover in the 1930s, a chicken in every pot. I always thought that was the best campaign slogan I've ever heard, a chicken in every pot. But that was his campaign slogan, chicken in every pot, car in every garage, about what should be. Investing is about what is. And so as an investor, you have to separate that out. We're going to hear a lot of noise, as you point out, Josh, over the next six months, nine months, whatever it is. As an investor, you're going to have to put on your blinders. I think investors are pretty good at that. Yeah, I hope so. I'm not sure everybody is, but I get that. Okay, so that's number one.

Number two is that not just in the United States, but around the world, there are nationalistic movements that are growing, right? We all know this. This is part of the reason why we have to deglobalize. Exactly. Yeah. It's all related. So I think it's true. So I think if you are a nationalist, I'm not passing judgment, right? Maybe good, maybe bad. But if you're a nationalist, you have to think there's going to be more inflation rather than less. You have to think there's going to be higher interest rates and

lower interest rates because you're effectively going to say, we're going to reduce competition around the world. We're not going to let we're going to reduce competition around the world. We're not going to let people into these markets. And I don't think that's something that people have thought about completely. So in hindsight, the Cold War was not negative for the stock market for the most part. We had economic cycles up and down. The 70s were bad. The 60s were good.

The 80s were good. So yeah, I think people are OK. I think people are OK at that part of it. I think it's the more acute thing of I don't want to take any risk ahead of the election next week, like that kind of thing. So here's the other thing that I point out to people is that whatever party loses the election, the presidential election, members of that party will say that the stock market is doomed. Of course.

Right? This has happened throughout my entire career. Somehow we had bull markets under, I think, every president. Yeah. Right? And so, you know, we should all kind of chill out. You think politics are the biggest distraction to investing? Yeah, I think. You know, I had a boss many, many years ago who said that politicians always want to be the star of the show. It's a shame that investors watch that show.

Yeah. You know, that they'll, if allowed to, they will dominate. Although you would, although you, although you would stipulate, we had a massive rally from 16 into 17, 2017 S&P did 30%. Yeah.

And the reason was the Tax Cuts and Jobs Act, Trump's tax cut was massively favorable to the investor class and to corporations. And so it's not all noise. There's signal too. And that's the hard part. My point simply is, is that there's basic economics. Forget the politics for a second, right? There's signal too, and that's the hard part. My point simply is that there's basic economics. Forget the politics for a second. There's basic economics.

If you're stimulating the economy, the odds are the stock market's going up. We could then argue about how we're stimulating the economy, who's benefiting and what are the appropriate stocks to take advantage of that. But if fiscal policy is stimulative, the odds are the market's going up. So you don't worry so much about who's going to win, what does it mean from a policy standpoint? Because that's almost more like trader talk than it is allocator talk. I think that's right. I think there's certain – as we get through the next six to nine months, there will be more things that will become evident. And I think certain sectors will begin to respond to that and certain industries will start to respond to that.

But right now, I think it's mostly noise. Right, so you said that investing is about what is, or what exactly did you say? Yeah, yeah, politics is about what should be, investing is about what is. Okay, and investing is also about what is versus what people think would have happened. So we had this really interesting scenario

for the last couple of years, certainly 22 leading into 23, where everybody that you spoke to, individual investor, economist, hedge fund manager, asset, whatever it was, recession. They all thought that was a recession, that a recession was coming. We're now in the opposite situation. Bank of America does this fund manager survey expectations, and that is just totally crashing. Does the reverse worry you at all? That nobody is, because I guess when you're bracing. So this is showing the net percentage of people in this survey, according to B of A, who are saying recession is likely in the next 12 months. Right. And it's now a negative number.

It was a positive number from 22 up until, I don't know, two months ago. What I would say is that when everybody, everybody is expecting a recession, that changes the dynamics of the economy because everyone braces for impact. They prepare. And that can in some ways help to prevent a recession. When everybody is not expecting a recession, it's not as if companies are acting irresponsibly now and levering up or anything like that. No. The basic company is not. No way.

No way. I mean, and you can see that in your chart here. If you look at from, what, 13 to 18? Yeah. That was a pretty good period in the market. Yeah. I would argue it was one of the better five-year stretches. We had just made a new five-year stretches. Yeah. Yeah. So.

We had just made a new all-time high in 13. And then up until the trade war, like, other than the election, there wasn't really a lot of noisy stuff to worry about. Right. In that stretch. Yep. Exactly. You had earnings growth. But interesting in this chart that what we were talking about before, the volatility

and economic statistics. Yeah. Look at the, look at 2020 and how it's bouncing up and down and up and down. It's so much more extreme. Isn't it? It's just ridiculous. And I think that reflects some of what we were talking about before. You know, a lot of people are pining for, a lot of our listeners maybe who are, let's say, in their 40s, 50s.

Right about now, I guess we'll talk about the Gen Xers. They might be pining for this period of time that they sort of remember from their childhoods i promise i'm not just speaking autobiographically but a time in the 80s the 90s where they were 100 pounds lighter well certainly at least uh but where it was like normal times that's how we remember them now i know they weren't right um but like are these extremes are just like with us, like the weather, like, is it just like, this is the new normal and there, there's no going back to the, the, the pre, you know, the, the age of innocence that we all

remember that period of time. I think we will return to an age of some sort of innocence. I don't know. It'll be the exact same thing that we saw then. Of course. But it's going to take a while. Yeah. And the reason I say that is that money growth, forgetting fiscal policy for a second. Let's just forget that because that's obviously a political monkey wrench.

But monetary policy, post-pandemic, it's clear that the Fed sort of panicked and we had 27% M2 growth, the highest in modern US history, rivaled us with Peru. It was a beautiful panic though. Yeah, exactly. But rivaled us with Peru. I mean, is that something we should be proud of? And I think, you know, economists like to talk about what they call variable lags of monetary policy, unpredictable variable lags of monetary, whatever they say. I think they're going to be more unpredictable and more variable. The lags. The lags than anybody could have imagined.

Why? 27% money growth. Okay. It takes a long time to wash out 27% money growth. Such a great point. And it shows up everywhere. Valuations. Yeah.

Consumer behavior. Yeah. Just it seems like. It seems endless. I know it's not. Nothing is. And you look at, like I said before, you look at the Bloomberg or the Goldman Sachs financial conditions indices. They're not showing an awful lot of tightness given that the Fed raised rates 525 basis points. Right?

That makes no sense. Every model says you're raising – It's almost as if they did a quarter of a basis point. Yeah. Like if you try to measure, I actually think financial conditions are loosening this year. They are. Right.

So it's almost as if they did nothing. I know that's not true in reality, but yeah. But I mean, but if you think about, um, you know what we're seeing and I'm not dissing these asset classes at all. Don't misunderstand the point, but you know,

private debt is still doing what they're doing. Um, you're still, you know, uh, credit spreads are still remarkably narrow. I was asking somebody like who is in the real economy screaming out for interest rate cuts? I don't – other than Barry Sternlicht at Starwood Lodging, I don't know anyone that's going on TV and being like, get us these rate cuts.

It's amazing and I never would have guessed that this would be the way it is. But we're like weathering it just weight cuts. It's amazing. And I never would have guessed that this would be the way it is. But we're like weathering it just fine. That's my point. Is that there's so much liquidity rippling through the system that it's making up for that. And I think it's going to take a while

for that 27% to get washed out. That's a bad word to use. What 27%? The 20% money growth, M2 growth, right? To get that 27% M2 growth to be negated through time, it's going to take a long time. To worry about things like the debt maturity cliff coming for corporates that are going to have to refinance at higher rates, that reset. To worry about CRE. These seem to be the big scary things right now.

And for as many people as you can find with an extremely negative opinion on them, you can find an equal number of experts who would say, dude, you're worried about something crashing that I'm already raising an opportunity fund to capitalize on. If Goldman Sachs is raising a commercial real estate opportunity fund, it's going to be really hard to get a panic going there. Exactly. Okay. That's exactly the point.

But also, what are those bonds? Those bonds are trading. If I'm making up 40 cents on the dollar, we know. Right. Well, what's going to happen is that commercial real estate is asking for lower rates because they want to save their own businesses. Yeah. It doesn't mean, it means that those businesses may have trouble. The banks that have lent to them or the entities that have lent to

them may have some write-offs that are going to happen, but it's not like the economy is going to crash because it can be somebody waiting to catch this thing. There's a story in the journal a couple of days ago about this kid. I say kid, he's like a year younger than me. He comes from a storied Canadian real estate dynasty. He interned for Warren Buffett famously when he was in his 20s. He offered to pay Buffett for the internship. And I guess Buffett said, oh, shucks. Come on, I'll let you do it.

Anyway, he's raising, I think it said 600 million from among other wealthy families to buy up all of San Francisco. So if that's where the mentality already is. Next. It's almost like, how are you going to get a crash here if we're already rescuing it? That's exactly my point. 27% money growth is going to take a while to get through that.

Okay. I'm glad to hear you reinforce that. You have some China, US stuff. John, can we go there? What do you do with China as an investor? Second largest economy in the world. Worst stock market I've ever seen in my life. What are we to make of this situation? So I'm sure everybody comes on your show and they say all the things they did right. Here's something we didn't get to right. We're very early in China, very early in China. And

so people say, well, why were you there? And the answer was because our- The food. The food. Say what you're going to say. Chinese food here is very different from Chinese food in China. No, true, true. But- I'm sorry. No, I lost my train of thought. But- Szechuan, Szechuan. Why were you in China early?

Right, right. And the answer was the fundamentals were actually starting to improve. And we're fundamentally based and everything else. And talk about politics now, politics and influence. I think this is an example where politics really did influence investor behavior. Because if you look on those charts, what we're trying to show you is earnings growth, real GDP growth, leading indicators, and industrial production, China versus the United States. And I think it's every one, China's as strong, if not stronger than the United States. If you were to say which label is which country, you would have gotten each of these backwards.

Yeah, exactly. So you're telling me that China's GDP is still significantly growing faster than this? So what happens is that people look at it, and I may not have this exactly right. If there's some detail-oriented Chinese economist out there, they're probably going to send you a note saying he doesn't know what he's talking about. I get that. But a lot of economists look at Chinese growth, and they don't realize that some of the numbers aren't annualized. Wait, what do you mean? So everybody says Chinese economy is growing at 1%. That's because on a quarter, it grew 1%, but they don't annualize that number. Oh, that's a sequential growth number?

Yeah, but it's not annualized. Rich, keep that chart on. Isn't really the problem here is that you're showing me everything but earnings and stock multiples and that the reality is investors can't buy Chinese industrial production. They can only buy stocks. Upper left corner is earnings growth. That's earnings growth for the Chinese stock market. Okay, so that looks pretty good. Yeah, it does. But you can't buy

earnings growth. You have to buy the stock. Well, that's the problem. And that's my point. That's the crux of the issue. That's exactly, yeah. So we're fundamental investors, macro fundamental investors. The macro fundamentals, we're basically saying you should invest in China. The fundamentals have come through, but yet the stock market sucks. It's the legal structure that's the problem. Well, but realistically, I mean, for a US investor investing in a Chinese ETF, many of which we own, I should disclose, the legal issues are not that big a deal. You can get in and out in a second. Maybe I didn't mean legal. Maybe I meant political. The treatment of foreign investors and I don't want to say disdain, but just the lack of interest that China currently seems to show toward whether or not foreign flows will ever improve.

Like they just – Oh, I think that's fair. They almost seem to not care at all anymore. I think that's fair. But I think you could – Do you remember even 10 years ago, there was this really intense lobbying effort to get MSCI to raise the amount of China in their international indices? Absolutely. And this was a really big story. And they took China from like a 2% weighting in emerging markets to I want to say 15 or 20.

No, no, no. Oh, in emerging markets. In emerging markets. Not in IFA. No, that's right. It went high. And that had to be done really judiciously. The Chinese authorities had to play along with MSCI and they had meetings and there were press releases, audits.

And then they got it and they were like, you know, whatever. We do what we want here. That was the weirdest thing. It was the weirdest thing and it almost seems like there was an about face on just the whole concept of do we care if there's foreign flows into or out of this market? They were lobbying to try to get the renminbi to be like a shadow reserve currency. They don't seem to care about that either anymore. So what is that? I think they're actually – They're nihilist, dude.

What is that? I think they're actually – They're nihilist, dude. I think if you look at some of the policies they're putting into place right now, I think they appreciate – if they didn't before, they certainly appreciate now the problems or the need for foreign capital at a time where some of the – You think that's changing? I think it's changing. Then these stocks are all screaming buys. That's my argument. Because if that really is changing, you don't have to be a China bull. You just have to be not completely pitch black pessimistic on China.

Correct. Okay. Rich, is most of what you're doing at RBA ETFs or are you picking individual stocks as well? So we don't – even when we have – we do have portfolios mostly for institutional investors and we have a couple of mutual funds we sub-advise for Eaton Vance. Actually, Morgan Stanley now, not Eaton Vance. And in those, we use baskets of stocks. So it's sort of like we're forming our own ETFs. So we can get a little more precise in doing that.

In our separately managed accounts, it's all ETFs. All right. So on the individual stocks that I'd be curious to hear your take, David Einhorn was on Barrett Holtz's podcast talking about how markets are broken because indices and not enough, not enough, not enough, excuse me, analyst coverage and lack of value and price discovery and all that sort of thing. Do you, do you share that take or are you finding that value is actually accruing to fundamentals? So let me share something. When I started in the industry, 1980, whatever it was,

79, 80, 81, senior analysts followed small cap stocks and junior analysts followed large cap stocks because there was a major- Wait, wait, say that one more time. Senior analysts followed small caps. Ooh, that's backwards the way I would have thought it would be. Yeah. Well, today that's, of course, like the junior people follow these little tiny little companies that nobody cares about. And I think that's Einhorn's point is that you don't have good coverage. There's not adequate coverage.

Back then, there was a major bull market going on in small cap stocks through the mid-70s all the way to like 83, I think, somewhere there. And so it was very sexy to be a small cap analyst. Okay. Now that's like completely different. and that supports Einhorn's comment. Can I tell you why that happened or do you know? Well, you can tell me. What do you think?

Why it changed? I have a really strong story for why that happened. I have to be careful what I say because my former employer, I will guess. Nobody cares. Everyone's dead. I will guess. Nobody cares. Everyone's dead. I will guess. You can say all the things. That it is related to investment banking.

Oh, look at you. Yeah. Yeah, you know. So there used to be a very healthy, baked-in vested interest in writing research on small caps. Yeah. And that vested interest was based on market making, which was an amazing business, pre-decimalization. Yeah. And that vested interest was based on market making. Yeah. Which was an amazing business pre-decimalization. Yep.

And so you can get a quarter, you can get an eighth to a quarter on a listed small cap stock just buying and selling it for clients. Absolutely. How do you get clients to want to buy and sell

a small cap stock with you? Yeah, tell a story. And pay you that quarter, you have to have upgrade, downgrade. So that's one business. Business two, not only are we writing research and getting that market maker, now we're also going to do secondaries, pipes, shelf offerings. We're going to do debt financing.

So now you have a whole investment banking complex tied to writing that research. All of those things were either legislated out or decimalized away. And now what is the fucking purpose of covering a $300 million stock? What are you going to do with that? Yeah. Like what value will anyone derive from it? Right. So you could post on Seeking Alpha.

So I mean now I would not argue go so far as to say decimalization is negative for investors. No. Because we know it ended up with free commission trading and better bid aspirates. But this is one of the consequences. I think the real question for you though is like, from an Einhorn view, why is that bad? Oh, I think it's actually quite good. Right. I mean, I'm not a stock picker. I mean, we're a macro firm. Of course. But if you're a stock picker. Yeah. No competition, no analysts. Exactly. Right. His point is not that though. His point is what if I recognize value in 2024? But nobody else does. And then I, it's 2034 and nobody's picked up on how cheap the stock has been. Yeah. That seems entirely valid. But that's almost like a Schrodinger's cat argument. Like,

do we know the cat's dead or alive? We have to open the box to find out. Like, you've discovered value, but it's a company that makes dresses and nobody gives a shit about dressmakers. Yeah, you could say this company's trading at six times earnings and they're growing at mid to high single digits, but if nobody cares about it,

it's not going to get re-rated higher. Right, well then, but then what, I mean, if you own substantial amount of that company, you should be trying to- Private equity. Private and real estate to start consolidating the industry. I mean that's what really should be happening. Yeah, I think he has a point. I just don't know that I would reach the same conclusion from that point for that reason. It's not like there are no exits for public market companies that are getting no attention.

No. companies that are getting no attention. No. And I think, you know, I think that in certain industries, I would argue private equity is just beginning. Yeah. You know, if you think about some of the industries we were talking about before, you know, small, mid-cap industrial companies, things like that. I think this whole story is just beginning. Yeah. All right. So maybe he'll be in a better mood in a couple of years. I wanted to ask you career-wise, so you've built a very successful years. Uh, I wanted to ask you career wise, you, so you've built a very successful front. When, when did you guys launch from? Oh nine. Oh nine. Okay. So it's, uh, it's been, it's been a while. Yeah. Okay. Uh, what, like what, what do you think is the

biggest growth driver for what you're doing? Is it like asset management as a third party for other advisors or is it like directly with directly with family offices? Like, where are you putting your energy in the coming year to build what you do? So I think our biggest engine of growth has been the financial advisors are no longer really compensating, can't differentiate themselves by saying, we're going to move 5% from growth to value. I mean, that's ridiculous. And so they're compensated in doing the really difficult things, whether that's estate planning, all that kind of stuff. Real life stuff with the client. Real life stuff. And they're compensated for,

honestly, raising assets, getting more assets in. So what they've done is they've turned over the basic core stuff to a firm like us. Yep. Right? We're dirt cheap. We don't charge an arm and a leg. We don't lock people up. We don't do anything like that. It's just really cheap stuff. And so we do those decisions about growth and value, large and small, US, non-US, stocks, bonds, cash, all that stuff. And we do that for financial advisors so that they don't have to. And they know that we're not going to take them over the waterfall. We're not a high risk firm, nothing like that. Well, that's key because in the end, they have to answer for what the asset manager they select does with the portfolio. Exactly. So that's really key that there's that trust there. Yeah, exactly. Okay. So you see that as being like the driver going

forward? That's been the bread and butter of our business for quite a long time. I think now what we're starting to do is we're starting to get interest from outside the United States. I think financial advisors in Europe are starting to pay attention to us a little bit because we had no name brand recognition. Europe is a weird wealth market. It is. It is. And we partnered with a French firm that has taken a minority stake in our firm that understands that market. So we're starting to get some interest there and things like that.

I think we've also, on the institutional side, pensions, endowments, and foundations, it took a long time. They're finally starting to warm up to ETFs and the active management of ETFs. I don't quite know why they've been so hesitant, but they have been. You were very early to ETFs relative to people coming out of the wire house world. The wire houses did not like ETFs, did not include them on their platforms, actively were biased against their even existing. You embraced ETFs 15 years ago. Do you talk to people that are now talking about direct and custom indexing?

Do you hear a lot of that stuff? Yeah, we do. I mean, that's not something that we do, but we do hear that. And of course, that's, you know, look, if you can get a little extra by tax alpha or something like that, why not? I mean, you know. Absolutely. Well, I want to tell you that it's been an absolute honor and pleasure to have you here.

Really appreciate it. Thanks for the invitation. Can we do some Rangers and Jets stuff? Sure. Okay. Why? Okay. I get the Rangers thing.

Why in God's name are you a Jets fan? Tell us what you're getting out of it. I know what they get out of it. What are you getting out of this association? I enjoy self-flagellation. That's, you know, I can't stop hitting myself. I know you can't really change what you are. I know.

Yeah, it's... I'm a Knicks fan, so it's okay. Yeah, well, me too. I didn't put that on the thing, but yeah, I've been a Knicks fan. I remember when the Knicks were actually really good, 69, 70, 72. I thought you were going to say 96. Oh, yeah. No, that's difference in age between the two of us.

Yeah. Do you like this team better than any team you've seen since the 90s? Absolutely. Not just because of their record this season. If they can stay healthy. But don't you, like, love the guys? Oh, absolutely. I love these guys.

I have to admit, I was upset when IQ got traded. Yeah, me too. I loved IQ. But as long as these guys can stay healthy, they're probably going to be a pretty good team. RJ was so bad. I hated him. I mean, I like him.

Personally, I have nothing against him. But as a player, I couldn't stand him. Yeah. Yeah, sweet kid. You rooted for him, but after four years, it's five, this is five years. Not going to happen. Yeah. Uh, what do you think? What do you think for the jets? Are we at rock bottom with Aaron, Aaron Jones doing podcasts instead of quarterbacking this season? Could it possibly go lower? I don't know. Do you meangers. Rodgers. Right, right. Aaron Rodgers. My fear is that, well, my friends and I were all season ticket holders, right? Yeah.

My over-under for Aaron Rodgers this year was four games. It turned out to be four plays. Four plays. Yeah. They were good, though. They were great four plays. They were amazing. But wasn't it such, you know what made it worse?

Hard knocks was so good it was fantastic and America like fell in love with Aaron Rodgers again and I've never been I've never been in a stadium that was rocking

and on the fourth play the air just got you were there that day I was there the air got sucked out of the stadium it was an amazing thing to see

as a value investor you had to be nervous going into the season. The over-under was 10 and a half games. Or nine and a half. Yeah, I was. And as I said,

my over-under for Aaron Rodgers was four games. And I knew they had no backup. Yeah. So I was trying very hard not to get caught up in the enthusiasm. It was really hard not to.

The coach survived, right? They didn't fire him. I can't believe that he's coming back. He's coming back. Who's that? I'm sorry. Salah.

Salah. Oh, Salah. But the offensive coordinator. I mean, you have he's coming back. He's coming back. Who's that? I'm sorry. Salah. Salah. But the offensive coordinator. I mean, you have like the worst offense in the history of the NFL. Did Zach Wilson get a really raw deal? No, he stinks. He can't play. But what if he were just like an apprentice quarterback for his first three years instead of like pushed out into the field? No, rookie QBs start these days.

It's not. Not always. No, they do. They do. Mahomes didn't. No, now they start. Now they start. Look at they do. They do. The Holmes didn't. No, now they start. Now they start. Yeah, I mean, look at the Titans, right?

They all start. Yeah. I mean, they have some good quarterbacks out there, but I just think, you know, it hurt this year to watch Lamar Jackson be so successful when the Jets have passed on him twice. Yeah. Twice they passed on him.

That's one of those teams that should be sold, maybe. Like, Woody should just – With the Jets? Yeah. Oh, darn. I mean it never will. Every time Woody Johnson – now hopefully Woody Johnson isn't like the Dolans.

When I say something bad, he's going to like revoke my season ticket. Oh, no, no, no. We love Dolan now. Now we love him. No, the Dolans are great. Yeah, yeah. They're the best. Mike's a season ticket holder.

Woody Johnson, every time he posts on Twitter, if you look at the comments everybody says sell the team sell the team sell the team sell the team it's

I really wish he would alright so you're so you're successful at investing unsuccessful at football fandom that's okay everybody's got their everybody's got their at least the owner of the Jets

you can say what you want it's not it's not communist China that's true he'll still let you into the stadium that's true that's true oh fair enough.

We always end the show by doing favorites. We kind of like to give the audience maybe something that you're interested in these days, whether it's a book or a movie or a podcast or a TV show, whatever's on your mind. What do you think our audience should check out? What do you think our audience should check out? So great book written by a classmate of mine at Hamilton who's actually a pretty famous writer. And it's called The Last Green Valley by Mark Sullivan. He's written with James Patterson in the past and things like that. I don't want to make it sound like we were buddies in college.

We weren't. I don't think I said two words to him, but he happened to go to Hamilton, as did I. And it's a great book about refugees in World War II through Europe and what happened with the fall of Nazism and the invasion of Stalin's Russia into Eastern Europe. And great book. Is it fiction? It's kind of historical fiction. It's based on a real family. It's based on real events, but the story itself is. I read a lot of those types of books.

It's a great book. I find that's a more palatable way to read history or a more page-turning way. Exactly. So I love that stuff. Do you read a lot of novels? Do you read a lot of history? Actually, right now I'm reading a book I read like 30 years ago, 40 years ago, The Little Drummer Girl by John Le Carre.

What is that? Oh, John Le Carre. John Le Carre. It's that? Oh, John Le Carre. John Le Carre. It's a spy book. Yeah, yeah. And it's about a woman who basically gets recruited by the Mossad. Okay. An English woman who gets recruited by the Mossad.

I don't want to say too much because then it'll spoil the whole story, but it's kind of cool. It's a cool story. Very good. Very good. Michael, do you have a favorite for us this week? I have not watched it yet. However, I'm very excited to dive back into Tokyo Vice.

It's a show on Max. You saw the first season? I did see the first season. Did you watch it? I saw the first two episodes. I don't get it. Should I try harder? I thought it was excellent.

It's about, I think, the only American that ever wrote for, is this a true story? Yeah, it's based on a true story. I don't know if it's actually. Okay, about, I think the only American that ever wrote for, is this a true story? Yeah, it's based on a true story. I don't know if it's actually. Okay, so he wrote for a Japanese newspaper, covered the mafia,

and got into some shit and it's fantastic. The Yakuza? Yeah. Yeah, I saw the first two episodes four years ago when the first season came out

and I forgot about it. It's great. Excellent. You guys were nodding. You guys are both all in? It's good. Yeah. Yeah,

I'm watching my new season. How is it so far? It's good. It's quality. I'm into it. What did season. How is it so far? It's good. It's quality. What did you think of, are you still watching True Detective? Yeah.

I'm back in. Season five, episode five was okay. The finale is Sunday. Episode five was okay. Yeah, I'm back in. I was off for one week. I was like,

I don't know. Four was really bad. But I went back, I watched True Detective season one. I've never seen it. Start tonight. Matthew McConaughey and Woody Harrelson.

Really? It's excellent. It's now 10 years old, aged like fine wine. They're both incredible. The supporting cast is also amazing. It's a murder mystery. That's probably not doing it justice. In fact, that's not, but it's incredibly well done.

Are you guys Curb fans? Oh, yeah. But you know what? I don't love it. The first two episodes have not been great. No. I still love it, but it's just- There were some belly laughs.

The first episode, there were some belly laughs when he's at the house party. The guy pays him to come to the house. There were some belly laughs in there. The second episode wasn't good either. The second one was a lawn jockey. It was fine. Yeah, it was a second episode wasn't good either. The second one with the lawn jockey. It was fine. Yeah, it was a little uncomfortable. It was fine.

Yeah. I started listening to the soundtrack. It's not the soundtrack. So there's a Bob Marley movie coming out. Oh, yeah. Which we, I guess we kind of like, we've been expecting for a million years. Yeah. The family holds a lot of the cards.

Yeah, I saw it last night. Oh, how was it? Oh, you saw the movie? It was, it's a tribute movie. Yeah, of course. So, but if you like reggae music, you're going to love it. Who doesn't love Bob? Yeah.

Who doesn't love Bob? Like seriously. Yeah, it's a fun movie that way. So I was really excited about that. And then on Spotify popped up that they have a second album that's not the soundtrack to the movie. It's like music inspired by the film. So it's all cover songs of modern artists doing Bob Marley classics.

Oh, that's kind of cool. Yeah, it came out like two days ago, and it's awesome. It's like an eight-song EP, and I can't stop listening to it. It's pretty cool. So I want to give everyone one love which is music inspired by the Bob Marley film alright

that's it from us today I want to say thanks to the whole crew John Duncan great job this week Rob Sean

Nicole Daniel the crew is just the crew is just growing don't say that no but it is though we are no but last time

you gave me the tribute we conked out that's true we are we're an army now want to thank No, but it is, though. We are. No, but last time you gave me the tribute, we conked out. That's true. We are. We're an army now. I want to thank our very special guest, Rich Bernstein, the legendary Rich Bernstein. You mentioned Twitter.

What's your handle? How do people follow you? At RB Advisors. At RB Advisors. How active are you? A couple of times a day, three times a day. Okay. You like the feedback you're getting there, or is it mostly like just a broadcast or a little bit of both?

No, we get both. We get both. We get some snarky comments back. It's okay. Okay. Go on there with your Bitcoin takes. Those will be really popular. Clickbait.

All right. Michael Batnick, always a pleasure to sit with you today. Thank you so much. And hey, guys, don't forget, ratings and reviews go a long way. They trick the algorithms into believing this is a quality program and that helps us build our audience. So if you want to be in on the conspiracy with me, do a like, do a review, make sure to check out the YouTube channel as well. That's youtube.com slash the compound RWM.

All right. That's it from us. Thanks so much for listening. We'll talk to you soon.