The Compound and Friends - Trump Is Winning His Trade War, Michael Cembalest on 20 Years Running Research at Jpmorgan, Earnings Reactions Galore

Episode Date: July 29, 2025

On this TCAF Tuesday, Michael Cembalest, Chairman of Market and Investment Strategy at J.P. Morgan Asset & Wealth Management joins Josh and Michael to mark the 20th anniversary of Eye on the Market, his influential research note that’s become must-read material for investors around the world. We’ll talk about some of the most memorable charts, boldest calls, and enduring themes from his archive—and what they can teach us about the markets today. Then at 01:10:08, hear an all-new episode of What Are Your Thoughts with ⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠ and ⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠! This episode is sponsored by Public. Fund your account in five minutes or less by visiting https://public.com/WAYT   Sign up for ⁠⁠⁠⁠The Compound Newsletter⁠⁠⁠⁠ and never miss out! Instagram: ⁠⁠⁠⁠https://instagram.com/thecompoundnews⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠https://twitter.com/thecompoundnews⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠https://www.linkedin.com/company/the-compound-media/⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠https://www.tiktok.com/@thecompoundnews⁠⁠⁠⁠ Public Disclosure: All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Cryptocurrency trading services are offered by Bakkt Crypto Solutions, LLC (NMLS ID 1890144), which is licensed to engage in virtual currency business activity by the NYSDFS. Cryptocurrency is highly speculative, involves a high degree of risk, and has the potential for loss of the entire amount of an investment. Cryptocurrency holdings are not protected by the FDIC or SIPC. Alpha is an experimental AI tool powered by GPT-4. Its output may be inaccurate and is not investment advice. Public makes no guarantees about its accuracy or reliability—verify independently before use. *Rate as of 6/24/25. APY is variable and subject to change. 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

Ladies and gentlemen, welcome to The Compound and friends. Today's show is sponsored by Public, the investing platform for those who take it seriously. Build a multi-asset portfolio of stocks, bonds, options, crypto, and more on public.com or using the Public Trading app. You can also access industry-leading yields like the 4.1% APY you can earn on your cash with no fees or minimums. What else sets Public apart? AI isn't just a feature.

It's woven into the entire experience. And who doesn't love AI? From portfolio insights to earnings call recaps, Public gives you smarter context at every touch point. Find out more at public.com slash W A Y T. Tonight's show is a monster of an episode. We started the week with Michael Sembalist, legendary researcher strategist, just all around giant of the field. Michael is celebrating 20 years of his eye on the market research piece, which is probably the most important, continuously running piece of research that goes out to individual investors, wealth managers, financial advisors,

family offices, hedge funds, institutional clients of JP Morgan, you name it, everybody reads Sembilist and Michael does not do media. I think we're the only podcast he does. I think he jumped on with Joe and Tracy once on odd lots, but that's pretty much it. If you're going to hear from Michael, either you have insane access at JP Morgan or you're going to hear him on the compound and friends and we we really appreciate him joining us and sharing some of the biggest lessons that he's learned over the last 20 years last 35 years actually since he's been at at

the bank so Michael is brilliant and we really enjoyed our session with him if you haven't watched the video already on YouTube, which came out yesterday, you're in for a treat because we're going to play the audio now. Following that, it's an all new edition of What Are Your Thoughts? It's Michael Batnick and I, and we are right in the heart of earnings season. So we'll tackle some of the reactions in stocks like Starbucks, Chipotle, some previews of Microsoft and Meta and Apple, and we'll dig deep into some of the other things happening in the markets.

Stick around, the boys will send you into the show. Thanks for coming. Hope you love it. 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 Live From The Compound. I'm your host, Downtown Josh Brown, here with my co-host as always, Mr. Michael Batnik. On today's very special episode, we are joined by one of the most popular and the most requested and re-requested guests in compound history, Mr. Michael Semblist. Michael's work has shaped how professionals and institutions think about markets for decades. He is the chairman of Market and Investment Strategy at JPMorgan Asset and Wealth Management.

He authors the widely followed Eye on the Market, a research publication known for its sharp analysis, irreverent tone, and deep dives into the market, the economy, geopolitical issues, etc. Over 35 years of experience, Michael is one of the most respected investment strategists on the street. Welcome back to the show. We're so happy to have you. Thanks very much. How's that for a buildup? That's a lot. That's all off the dome. Very impressive. There's more. So we invited you here to celebrate the 20th anniversary of a publication. Michael never misses.

I never miss. And it's called Eye on the Market. If you work in finance, it's very likely you get this sent to your inbox. And the 20th anniversary is a really big deal. And I think what we want to do today is really talk about some of the most memorable charts and some of the biggest insights that you've produced over the years putting this out. I just want to say thank you so much for joining us in studio. It was so much fun for me to go back and read some of these because I read them in the moment.

One of the questions I kept asking myself was, did I pay enough attention to this at the time that it came out? What was your experience like going back through your own work? Let's see. Well, our chart formatting was pretty crappy when we started. Okay, fair.

The pieces were shorter, particularly before the financial crisis, when the world was simpler. But then once the financial were shorter, particularly before the financial crisis when the world was simpler. But then once the financial crisis hit, the cadence of it went up. At one point, we had to publish it like every week. The week that Lehman went into defaulted and then the GSEs were put into conservatorship, we published three times. So we wrote a lot more often back then because there was a lot of things to plow through. So I want to go back to the beginning. You've done 4,500 pages worth of Eye on the Market.

But that's the page count. Yeah, we have this file called the Eye on the Monster. And every Eye on the Market has ever been written. And there's 584 of them. Was it always Eye on the Market? Was that the first name? Before that I wrote a semi-annual publication called On My Mind, but it was, you know, for a few years before that. But Eye on the Market started in 2005. Okay, so Mary Callahan-Urtos comes to you and says, so you're doing a lot of research for the in-house client call,

which is like an 8 a.m. or 7 a.m. Right? And I was the Chief Investment Officer in the private bank at the time. And she wanted me to start sharing externally to the extent that we could disclose what we were thinking about different portfolio strategies. So this is 2005, did it start as an email product

or were you physically sending it? It started as an email except a lot of our clients didn't have email. Right. So we had to print them and then snail mail them at times. Okay. All right. So people were still using Palm Pilots. So this is how Mary puts it. She refers to Eye on the Market as quote,

one of the most widely respected pieces of thought leadership in our industry. I think most people would agree with that. Jamie Dimon has referred to your Eye on the Market series as quote, required reading. I'm guessing the success of the series has surpassed your wildest expectations from when you were 35 years old

and they came to you and said, hey, how would you like to put this out on a regular basis? 35 years old? 35. How old were you when you started? Your math sucks. All right, sorry.

I was 45. 45, okay, my bad. But I'm guessing from the day you started, Right. they must've, like this must've gone so much bigger than you ever thought it would've. Yeah, I mean, it took a while, right? I mean, you have to compete for space.

There's a lot of, people get a lot of stuff in their inbox and you know, you have to get some calls right. You have to get for space. There's a lot of people get a lot of stuff in their inbox and you know, you have to get some calls right. You have to get some important calls right. You have to make it clear when you make the wrong call what you learned and how you're going to try to avoid the same thing. But yeah, over time it started to pick up speed. What do you think was your best call? I mean, a few things kind of jump out. The subprime stuff.

The subprime stuff. The subprime. I mean, not that you peeked early, but like you had really fortuitous time. I saved an email that I sent to Jamie in the fall of 2006 saying, I've heard rumblings that the bank is about to start up a subprime effort. I think that would be a huge mistake. Let me tell you what we see going on underneath the hood in terms of leading indicators, delinquencies, defaults and recoveries. Yeah, I think so. I think I had not read that, but that's 06.

You're talking about Subprime 18 months before it becomes the linchpin of something really monstrous for the market. And I know you stuck with it. You didn't just write about it once. But I noticed that you started right there with this particular compilation. Why was it important to do that? Was that like setting the table to just show like, look, we said some really important stuff? I didn't want to start the compilation with a 2020 hindsight piece after the financial crisis that already happened.

I wanted to make it clear that we did see some of the elements coming. I had absolutely no idea that the GSEs were in such bad shape that they were going to be put into conservatorship. But we did start the year underweight credit, high yield specifically, and equities in 2008 because of these kind of concerns. And, you know, I actually thought the Lehman bankruptcy was going to be the bottom. And then we got a whole other bottom after that. It was six months before the bottom. Right. Right. It was a bottom.

A bottom. That's right. OK. When you started to get feedback for this and coming from people outside of JP Morgan. So the first, so you start publishing, it starts going out. Is the early feedback like super encouraging and makes you want to keep going? Or are there people taking issue with what you're saying?

Or what was that like? Well, you know, the more opinionated you are, the more people have issues with it. You know, people send in things and then legal people deal with them. And, you know, usually you get the strongest reaction to things that don't have to do with markets. I mean, market outcomes speak for themselves.

And there's not a lot to debate after the fact about what a market outcome was. People tend to get themselves all twisted up when it comes to policy issues, energy, vaccines, you know, and things like that. Penguins. Penguins, people and politics in particular. And that's when people kind of get very opinionated about things.

But you can't write something that's strongly opinionated and not have a high tolerance for people to disagree with some of the things that you say. I actually would take that further. There are a lot of people who have decades long careers on Wall Street and their primary skill set is saying absolutely nothing at all times. For a lot of investment firms, a lot of banks, a lot of asset management firms, that's actually all they want. They want someone who's the face of the firm, who never disagrees with anyone vehemently, never offends, never pisses off a client, and just right down the middle, here's the most plain vanilla version of events. And you very obviously

have staked out opinions, and you've gone the other way, and the bank has stood with you for the most part. I think you said only twice has content been shelved that you've done for Eye on the Market. Are we allowed to reveal? It's in the past. We could say what they were, can I guess? Is that where you wanna go? Let's start there.

In the beginning of the podcast? Let's start there. You probably said jet fuel doesn't melt steel beams. Wow. No? Okay. Oh my gosh. No, what did you say that was so crazy?

Is he's not like a truther? No, no, no, no, no, no, not at all. What did you say that was like so controversial that they didn't put it out? In March, 2021, I wrote a piece on the mountian scientific evidence that COVID was an accidental lab leak. Yeah. And I talked to a wide number of hematologists. And the sad thing was that a lot of them felt this way, but didn't want to go public with

it. But I had the piece written and the firm decided that it would be too problematic for China and could negatively affect our business in China. And the firm has been trying to do business in China for a long time. And so that piece got shelved. Not a lot of upsides to publishing that. I was going to say, were you relieved when they said, thank you for doing this work, but we don't think it's...

No, I thought it was pretty... Given all of the competing narratives at the time, I thought it was important for people to understand that the paper that was written in February 2020 in the Lancet, talking about how, you know, it's definitely a zoonotic jump and there's no debate about it, was really bad science and irresponsible.

And so I wanted to publish the piece, but it got shelved. I understand why it got shelved, but it got shelved. The piece would have been used for political purposes in the news. It would have become, it would have taken on a life of its own far beyond the perfectly legitimate research purpose of why you wrote it. Okay, what was the other instance?

The other one happened this year. There's certain details I'm going to sanitize. But a couple of our operating committee members wanted me to write a piece on the executive orders against the law firms when they first started happening and how it was corrosive to good government and negative for the markets and negative in terms of a signal of how the administration was going to be dealing with individual companies

and firms and issues. So I wrote this piece. And I started out by saying that defending corporate lawyers was a rather unpleasant task. And I wrote about, the piece was called The Plumbing Snake, because I wrote about how in my family, I'm the one that has to unclog toilets and pick up dead animals from the yard and which is kind of like

defending lawyers is on the same level as those unpleasant things to do. It's quite an analogy. Right, but now that I'm gonna do it, here are the reasons, you know, whether looking back at 200 years of history as to why this is bad for investors and bad for the United States. These are the law firms that had launched lawsuits against Trump in the first term?

Or simply had people working at them who, in some years prior, were involved with some litigation against the president. And this is different than, like you may, some people may not agree with the president's policy this is different than, like you may, some people may not agree with the president's policy with respect to cutting NIH funding or CDC funding, but he ran on that.

Some people, and people liked him for it. Some people don't like his immigration policy. Some people don't like his policy with respect to the Supreme Court. But all of those things he ran on and voters voted. The law firm thing was different. That was something that was very personal to the president and I think not in a very kind of constructive way

for the investment community. But other operating committee members felt that it would just put a target on the firm's back and it was inappropriate to publish and that was the only one that was killed. Okay, so I guess I guess I would take it a little bit further and then we can move on. Sure. I'm sure there are some interests JP Morgan and Wall Street firms

engaged in a lot of M&A and now there are a lot of personal issues with particular companies that want to do deals and it seems that the market is not really particularly concerned right now. They think deals will get done. You just have to do and say the right things. Is that something that you think you might be writing about or? I don't know. We'll see.

There was a lot of excitement about Lena Conn leaving, you know, her post and how the DOJ and the FTC would have a more pro-merger approach to policy. Interestingly Vance has misgivings about about business consolidation and so do some other people in the administration who are not necessarily in favor of the kind of classic Sherman Act approach to M&A approvals. But so far, the business community is able to operate with a little bit more free rein than it did under Biden, right?

Yeah. You and I have talked about this before. But you know that hold my beer thing that people say? The Obama administration, the first term of the Obama administration set an all time record for the pace of substantial government regulation. And then Biden said, hold my beer.

And the Biden administration's regulatory track record blew past what Obama did in his first term. So, you know, as we're sitting here thinking about M&A and business activity and things like that, that's the deregulatory stuff that CEOs in general at the business roundtable are hoping eventually become the dominant narrative of this administration. It's horse trading and it's not Trump's not the first president to engage in horse trading with corporations.

Read any biography of Lyndon Johnson. So now US deal was able to be acquired and the government kind of got like warrants on the deal or something. Yeah. CBS will be able to be, Viacom will be able to be sold to the Ellison's but there is a settlement. Let's see what happens. The language last night in the Japan trade deal talked about about $550 billion of investment in the United States from Japan at the president's discretion. Now, I don't think he really means that,

but those were the words that he used to describe it. So, we have to kind of be on the lookout for some kind of Latin American approach to business dealings, But before overreacting, I'm gonna wait to see what happens in practice. All right, let's dive in to some of the greatest hits from I On The Market. Michael, why don't you take over?

So I know you pulled out some of your favorite charts that we revisited over the last week or two. Yeah, let's start with this. As investors, we all know that a lot of the errors that we make are self-inflicted. Greed, fear, rash decisions. One of the big ones that you said our clients were quite concerned by was Meredith Whitney. And a lot of times these unforced errors are because we see it on the TV or in the newspaper.

Like we have people of authority are saying things that sound intelligent and smart and scary and we panic. So you pulled out Meredith Whitney's 60 minutes interview. What do you remember about that time? Well first I remember people telling me you must not want to make any friends in this industry which was true. What I remember was my email inbox is a direct reflection of the things that people are hearing because the more our clients get scared about something, no matter how successful and knowledgeable they are in their fields, for many of them, their municipal investments are their safe harbor. So when they start hearing things negative about the

municipal bond market, whether it's credit risk, or maybe if Obama had a proposed federal tax of 5 to 7% on municipal bonds for people with AGI over 250, I start, oh my God, what's going to happen? I get all these questions. And Meredith Whitney, like a lot of other people in the wake of the financial crisis, was looking to stake out here's the next Armageddon thing that's going to happen, you know, look at me and she staked out the territory that you were going to have massive defaults in the municipal bond market and then it was going to become the biggest single issue in the entire U.S. economy. We got a million questions about that. This was the scariest thing in the world. It was, and again, this is the safe harbor bedrock

for a lot of client portfolio. Yes, this is the risk off piece. And now you're telling people the default rate could be 20% or something. She had some massive number. Some insane number. 50 to 100 large municipal defaults. And it didn't ring true to us 50 to 100 large municipal defaults.

And it didn't ring true to us because when you dug through the details, it just wasn't there. So the next thing that happens of course is Detroit files. But Detroit was so different in ways people may never be able to appreciate than the other large municipal issuers, even places like Cleveland, Baltimore, and Pittsburgh. Detroit was so different.

So we went and we pulled reams of data across all 350 MSAs, which are the metropolitan statistical areas in the country from the BEA. And we looked at the size of the labor force and labor income, tax payments. Violent crime. Violent crime.

We looked at everything. And Detroit consistently ranked below the fifth percentile in almost every metric. And in a way, Detroit just was not in any way a bellwether for most of the rest of the municipal issuers. And it took that level of detailed research and a long report that we wrote called How Different Is Detroit that we had to send out to all the clients to get them to be comfortable with the fact that we were going to kind of have a business as usual approach in the municipal portfolio.

And the subsequent 12 to 15 year default rate in the municipal market is 0.1%. Yeah so what people need to understand about how meaningful your piece was in that moment in 2011 Meredith Whitney is three years four years removed from having made a huge call she was a sell-side analyst covering Citigroup. Where did she work? Merrill or Oppenheimer or somewhere. I don't remember. But she basically called Citigroup on their balance sheet, on their solvency, and I think she predicted the demise of Citigroup, which of course, like many other banks, ends up getting bailed out. So she's a cause celebre. Celebre. Celebre. Cause celebre.

She's everywhere. She's like right up there with Rubini and all the other people that got credit for quote-unquote calling the crisis. So her then saying here's the next crisis has a lot of weight. It did. It did. And but you know in the same as the music industry a lot of a lot of your listeners probably love watching TV shows or reading blogs about one-hit wonders in the music industry, a lot of your listeners probably love watching TV shows or reading blogs about one hit wonders in the music industry. There's a lot of one hit wonders as investors

and there's one hit wonders as strategists and they have this amazing call, right place, right time. And then they spend the rest of their careers trying to create another one. That's what happened after the GFC. You famously made this chart. There were 15 of those. The consequences of listening to the Armageddonists.

And a lot of these people have, they're still saying the same thing, but the market seems to- Are you going to show the chart? The market seems to not really care about them anymore. They don't get a lot of air time. They did, they used to. Oh, oh, for sure.

Even at five years ago, they were still getting air time. Do you want me to explain what this is? Please. Okay, so what we did was we took, we took the date, the actual date on which people said an Armageddonist type thing, which is 100% chance of recession next year, I think people should have a zero weight to equities, all of those kinds of things. And then from that moment, we went long, long duration bonds and short the equity market. And this is what happened if you had if you had listened to those

Recommendations and then not adjusted your portfolio since right other people have done this kind of thing similarly I just felt like doing it myself in defense of some of the people on there that wasn't the last thing they ever said That's right, right some of them died Some of the best so do you think that because you don't hear from these people too often David Stockman ones last time He's been on TV So do you think that, because you don't hear from these people too often, David Stockman once last time he's been on TV. Do you think that investors have gotten much better at staying invested, at holding through the ups and downs, or is their extinction more reflection of not better behavior, but the market environment?

Well, you know, to their credit, we lived through this period of financial repression that essentially put real rates below zero that changed the reaction function in the markets. And so a lot of those people might have been right if the Fed had insisted on maintaining positive real rates like they had for the prior 50 years. But the fact is they didn't and they were they were kind of flooding the system with money. And I think from our perspective, because remember I'm covering both our private clients and our institutional asset management clients, whether it's

endowments, foundations, insurance companies, and sovereign wealth funds and ERISA plans, yes there's more tolerance to hold through volatility than there used to be. And there's also less liquidity. And I think people have learned as asset allocators, it's very hard to kind of, okay, I'm going to sell here, I'm going to wait till it goes down, I'm going to buy it back again. And the market liquidity after the financial crisis is not there. After Silicon Valley Bank failed, I don't want to go into too much detail, but we tried to acquire a substantial, meaningful position

in the preferreds of some of the other banks, and it was almost impossible to do, in spite of what the Bloomberg screens were telling you they were available at. So in a world where the market depth isn't there, you can't kind of do that as much horse trading at the asset class level as you might have done in the past. So yes, people are kind of more willing to stick with positions through good and bad.

Yeah, I also think the retail component of the market, I think the retail of this current generation, they're bolder, tend to want to take more risks and do crazier things. And by the way, ETFs also are a big part of that. Right. And that's the other component to it is just the reflex of, okay, rebalancing into stocks, they're down, buying my ETFs. Okay.

Let's talk about geopolitical risk. One of the takeaways, geopolitical risk is a generally poor signal for investors. We obviously agree, we do tons of content. Anytime something is going on geopolitically, people get nervous. Of course they should because something is volatile in the world and you know, maybe this means I should take less risk. And of course it very rarely works out that way. But you specifically looked at this in

2014 looking at two major conflicts in the post-World War II era and tell us what you found. Well, you know there's the counterpart to Meredith Whitney in this space is a guy named Ian Bremmer. And Ian Bremmer, a lot of times will say things, this is the biggest year of geopolitical risk in the post-war era, maybe, but that doesn't necessarily translate into market risk. And I think sometimes investors don't try to think about that

in a systematic way. So we looked at all of the post-war geopolitical events and with the exception of the Arab-Israeli War of 73, none of them really had a lasting impact on the financial markets. And this was something that we did in 2014. You think Middle East episodes don't impact the market because energy is such a smaller component,

both in terms of us producing and just the sector is tiny? Well, first of all, if I had told you two years ago what was going to happen in Israel and Gaza and Iran, I think you would have guessed in the old days. Crude oil 150. That's right. Yeah. 100%. Remember Arjun Murthy at Goldman had a $200 price target for crude.

And so, you know, so people tend to overestimate the impact of some of these geopolitical risks. And second, I do agree, if you look at a chart of oil consumption per unit of global GDP, right, there's, that's, the world gets more energy efficient every year. There's also some substitution going on slowly for, whether it's gas or electrification for for oil consumption But in general there's just not a lot of evidence that geopolitics drives markets for more than a few weeks Yeah, no matter what the events happen to be I think saying Middle-east also is like probably not helpful from an investing standpoint Iranian oil is technically not even on the market.

If there were a conflict that involved Saudi Arabia, crude oil might react very differently. That's right. Yeah, I mean, there is this issue that the vast majority of Saudi oil is located in the Eastern province, and the vast majority of the people that live there are Shiites.

Yeah. And that piece of territory happens to be in close proximity to Iran, right? Those are real issues. But look, I'm much more concerned, if I had to pick one geopolitical issue, if I wake up one day and I find out that China has imposed a naval blockade on Taiwan,

which I expect them to do before the decade is out, I'm much more worried about the market reaction to that than anything that would take place in the Middle East. You expect them to do that within the next five years? I think so. I mean, that's a personal opinion. That's not the opinion of the firm or JP Morgan or its employees or it's anything.

So there are some cases where geopolitical risk would have an enormous impact on the stock market. In my opinion, that would be one of those. That would be one of them. Why? I don't know, like why? Well, first, there's only four months a year where this can be done for-

You like iPhones? You know, for weather and tidal reasons, there's only four months a year when this could happen. Taiwan used to get 50, like 50% of its electricity from nuclear. And they decided to unilaterally reduce that to 5%. So they have effectively abandoned a lot of their energy self-sufficiency

because now they're big importers of LNG. And I think I read that they have something like 12 or 18 days of coverage for natural gas. So it wouldn't take very long for a naval blockade to kind of bring Taiwan to a screeching halt. What happens there, I don't know. But, you know, I don't think that the Chinese government has infinite, endless patience with the status quo. That's the signals that they're sending.

This is one of those things where the hardest hit sector would probably be technology, at least initially. And then you'd have to see, like, where does it go from there? Right? What would happen to export policies and import policies for semiconductors? We don't know. Think about this. There's so much discussion about Europe and its pre-Ukraine war exposure to Russian energy. So about 25% of European energy came from Russia before the invasion. The world is 70 to 80% reliant on Taiwan for advanced chips. So it's in another league of dependence. And so now, you know, there are scenarios

where naval blockade or not, Taiwan is still able to supply the world with advanced chips. But, you know, that's the question. Okay. Do you want to get to how markets bottom or do you want to do your indicator stuff? Let's do the indicators. I think people want to hear about that. Alright, so.

Which are kind of, oh, that one. Yeah. This one was interesting. Go ahead. And for all the right reasons, the markets were really focused, and you remember this, it was just two years ago. In the summer of 2023, yield curve is inverted,

and the yield curve since 1966 has a perfect papal infallibility record, eight for eight in predicting recessions. We've had Campbell Harvey on the show a bunch. Okay. And I think the Simon rule was flashing then too, or was that the next year? Either one.

Shortly thereafter. And by the way, even Claudia came out and said, ah, people are misreading it. So eight for eight, inverted yield curves predict recession within nine, 12, 18 months. And, but we went back and we looked at what was going on at the time of those recessions. this predict recession within nine, 12, 18 months. But we went back and we looked at what was going on at the time of those recessions. And this time just looked different.

And so dangerous to say this time is different, but I had no choice. This time looked different. 23. In the fall of 22, in August, 2023, we wrote this Rasputin piece, because it was evocative of how higher interest rates were not killing the US economy, right? Because remember Rasputin piece because it was evocative of how higher interest rates were not killing the US economy, right?

Because remember Rasputin, he was kind of stabbed, shot, drowned, and poisoned before he died. Couldn't get rid of him. Couldn't get rid of him. Like Nordberg. So what we did was we said, well, wait a minute. In the past, when the inverted yield curve caused a recession, it was because the front end real rates went very high. or caused a recession, it was because the front end, real rates went very high. Whereas in 2022, they were barely above zero.

So yes, they raised them, but raised them from minus six to plus 0.2. The base that they came from had never been the base for a prior episode. Then chart at the lower left. In the past, every time the funds rate went up, you saw evidence that corporate interest payments were rising. This was the craziest chart of all.

But during a decade of financial repression, who didn't know that they were supposed to term out their liabilities? We finally turned it out. Here's the funny part. Who did it? The Fed, corporations and households. Who didn't do it? Banks. Banks.

Banks, right? So the banks in general were the worst asset liability managers during this period of financial repression. But as you can see here, yes, it's bad that the policy rate was shooting up, but corporate interest payments as a percentage of profits were still falling. So the transmission mechanism from rising policy rates to recession wasn't there.

And maybe the most important one of all is the chart at the lower right, which is in the past, why did rising policy rates cause recessions? It's because at the time the Fed raised rates, it was a shock to the system and the corporate sector was off sides. A negative number means that the corporate sector has a negative financial balance, which means they're spending a lot more than they're earning. In 2020, the corporate sector was in surplus.

So in the past, Fed raises rates, companies were offside, radically retrenched capital spending and higher. Because they have to borrow and they have to pay more for borrowing, which would raise the hurdle rate. You would say, ah, maybe we don't need to do this expansion of our business. This time around, they weren't worried about that because in aggregate, the corporate sector was in surplus. So we felt that there wasn't going to be a recession. And then we had the eye on the market the next January was the pillow talk one about the bears falling into the pillow. Yeah, and not only that turned out to be the right call.

And you had corporations like Apple and Berkshire Hathaway with hundreds of billions of dollars in cash, where actually higher rates was more net income. Right. And we have never seen anything like that before. That was very out of consensus at the time. Everybody expected a recession. Everybody was saying that. Alright, so what indicators do matter? You have another chart that shows

some of your favorites. Let's talk about these. Yes. Now these shift around depending upon what time period you're looking at. But we try to run these here. We did this one over like almost 30 years and we run these over a long period of time. And we're trying to figure out like if you didn't know what was going on, but you just invested based on these indicators, would you make or lose money? So for example, when the leading indicator index is above average, you make 1.6% a month investing in the S&P compared to when it's below average,

you only make 0.4% of the spread. That's a good indicator. It's the spread. That's a good indicator. It's big. So it's a good indicator. Yeah. What I love about the geopolitical risk index is the sign is negative, right? You actually would lose money

if you didn't invest when the index was high. So it sends- High meaning more risk. More risk. It's sending you in the wrong direction. Yeah. And it doesn't mean that it would never work. But over long periods of time, there's just no benefit to the signals.

So for the people listening to this, not watching it, some of these other quote unquote good indicators, CEO confidence, payroll growth, GDP growth, forward 12 month profits growth, expectations, small business optimism. Most of these are intuitive. Yeah, that's right. Most of these are intuitive. Like most of these, you just assume if I invest during a period of time where this indicator is rising, things are good.

Isn't that most of the time? Most of the time this works. Most of the time these things are positive, not negative. And this is the thing that feeds into that semiconductor looking chart with all the symbols on it. So we just mentioned that no indicator's infallible, nothing works forever. Right. To me, one feature of the market that I would say is permanent works today, worked

a hundred years ago, will work a hundred years from now, is that the stock market will bottom well in advance of everything else. The stock market will bottom and rebound and the news will get blacker and blacker and blacker. And you'll say say what the f**k is going on? Why is the Dow of 300 points today? They'll say disconnect. Stock rallies on terrible news. Well, yeah, that's what happens.

So talk about this. I think my favorite one of all. This is a great group of charts. We have charts here that go back to the Great Depression in the compilation, which people can find online if they look for it. We included a whole bunch of charts from the Depression. Same thing. But look at the chart at the upper right, okay?

So if you look at the S&P Bank Index, right? Whether it's the S&P Bank Index, or you remember you can look at the KBW, same signal. That index bottoms in early 2009, at a time when only 8% of the eventual bank failures had taken place. It's the most bizarre anticipatory signal in the equity market that I've ever seen.

Part of it was driven by the ESCAP program, which was the Geithner sponsored recapitalization of the banks and things like that. But you see this again and again at the lower left, it works in Europe too. In Europe, the European equities bottomed during the balance of payments crisis in 2012. And it took another two years before the unemployment rate,

which is a horribly lagging indicator, stopped rising. So you just see this again and again and again. And it's, oh, actually, the one on the left, on the upper left, that one's from the depression. So only half of the bank failures had taken place by the times that Dow Jones had actually bottomed. So you just see this again and again.

So with stocks, it's hard to know what amount of risk is pricing. It's hard to quantify that. But with credit markets, you can and you did. So this is from December 2008. And this is just math. So talk about, I'm sure you remember this very well. What did you see and what were you saying to investors about what sort of risk was being priced on? This was one of the only times that I can actually remember begging. So we were begging our clients to read this. Please read this Eye on the Market.

You don't have to do anything, but you have to promise me that you're going to read it. Because you're never going to see a piece of paper like this ever again. Okay? And I understand the level of shock. Okay? So let's not be too much 2020 hindsight. It's December 2008. We're now looking at the second 40% decline

in equity markets within a decade, something that hadn't happened since the depression. And I consider our firm to be pretty smart. Our firm bought $2 billion of Fannie Preferreds over the summer that eventually got wiped out. So even JP Morgan didn't understand the depths of the problems at the GSEs. Now that said, like you said, where were things priced? Look at that investment grade first row, investment grade corporate bonds. Implied default rate of 14%.

The implied default rate was 14%. And the worst ever. The worst ever was three. And we were assuming a 20% recovery rate. I mean, investment grade bonds rarely default, but when they do, the recovery rates are well north of 80%. Let's look at high yield. The implied default rate was 55%.

Which is like the end of the world. Right, end of the world. So now, there were some discussions. The worst ever for high-yield junk bonds, the worst ever default rate in reality was 34%. And this was pricing at 55%. And this was pricing at 55%. Okay. So now, if you invested then, you couldn't have any leverage at all because a lot of the pricing still deteriorated until March. So we made clear that when we were investing and when clients did it on their own, that you can't lever this at all. Also, wherever you got the leverage from,

they could pull it, which is another risk, a counterparty risk. So you have to have the discipline every time something blows up to say, what's the embedded pricing assumptions, particularly in credit, because they'll just kind of jump out at you. On equity markets, you had the thing on the right, which is that the markets were basically pricing in zero forward earnings growth after 26 years know, 26 years at 10 to 15%.

Jim Shano said in bull markets, people put a premium on promises, and in bear markets, they put a discount on reality. And that's what that is. I think so. That was a pretty remarkable time. It was. So as you were begging people

to read this particular piece, did they? Yeah, they read it. They all read it. And so, you know, and look, we are in our business. We have a combination of discretionary funds that we oversee, that we control. And then we have other funds that are self-directed. And so, you know, we did what we were going to do in our self-direct

in our discretionary business. And some of the self-directed people came along and for the ride as well. Another similar episode when Lula was first elected in Brazil, remember him? Yeah. He's back. But when he was first elected in Brazil, one year default protection, which is the equivalent of going along a corporate bond, you could sell one year default protection in Brazil for 30%. Really? Right. That's how much fear there was around Lula. We went out to all the clients. The only people that did it were Brazilian.

Okay. They weren't as worried. They weren't as worried. Okay. So let's assume at some point in the future, there will be another downturn. Yeah. The stock market will fall. The economy will contract.

Right. You wrote, bank equity injections had historically been much more successful in boosting real GDP growth and boosting equity markets than government purchases of bad loans from banks. So my question to you is, do you think that the next rescue plan will look more like 08, where we have all these programs and you have QE and monetary stimulus or will it look more like 2020 where there will be more physical stimulus which obviously had a much different and larger impact. Yeah. Depends on the nature of the crisis.

Yeah, but I understand the question. To me, I don't think you get an alphabet soup approach like 2008 again. Because think about all of the stuff that was taking place in the financial sector back then, with GE Capital and with Wachovia and WAMU. WAMU was underwriting mortgages, and they were making 3% on them at a time when the rest of the banking industry was making half a percent. Those are some pretty funky mortgages and they were making 3% on them at a time when the rest of the banking industry was

making half a percent. Those are some pretty funky mortgages in order to be able to make that much money. So a lot of the kinds of things and derivatives particularly that have now been all moved on to centralized exchanges instead of being bilateral, I don't think you have the same kind of risks in the banking system. And by the way, look what's happening with private credit. A lot of the cuspier bank loans that used to exist within the financial system have been shunted onto private credit where people are dealing directly with investors. So I think the next crisis is not about the bank. I think I don't fully agree with that part.

I think we've sent a lot of the cuspier lending activity out to the private credit industry. But now there's this recursive thing happening where the investors in those funds are coming from the wealth management operations of the systemically important financial institutions. The banks themselves are not taking balance sheet risk, their clients are. Yeah. I mean, let's be honest. Yes. I agree with that. That's where the let's be honest. Yes, I agree with that. That's where the money is coming from.

Yeah, I agree with that. But that has different implications. Agree. If something goes wrong, it's not a direct implication. Now rich people have bigger problems than corporate executives on Wall Street. My point is that fiscal, sending people checks is a much quicker way to stop the bleeding,

the economic bleeding. Unfortunately, we did that in a time where people had nothing to spend the money on except to buy stocks and crypto. And then we turned the power back on. There was so much money, not enough supply of goods and inflation. Unfortunately, I think that will be the prevailing lesson is that when you send checks, you get rampant inflation. In reality, we don't know what would have happened if there wasn't. There's no cheap shot. They're never gonna run that back. They made Biden a one-term president.

Yeah, no, I understand. I'll never do that again. I understand. Yeah. Yeah, no, I mean, what was so unique about the COVID situation is that there should have been a normal recession, but it was short-circuited because of the PPP loans and other things that were done.

So that doesn't almost, it almost doesn't count as a recession because the normal transmission mechanisms from weak economic growth to rising defaults didn't happen. So it, you know, we haven't had a real traditional recession since the financial crisis. I mean, this says it all, right? Like you have a chart that shows a stimulus response

to COVID and there's nothing like it. No, there wasn't any. We thought that the, you know. We thought that the global financial crisis was a lot of stimulus. Look at that chart on the right in terms of money supply growth. It's unbelievable. It needs its own.

I want to talk to you about the role of humor in your work. You're a funny guy. You really are a funny guy. Because I'm an idiot, this is my favorite thing you've ever done. Do we have this? Is this CGI or is this really next to you? Oh no, they're still on my couch in my office. So this is your Liberation Day Tariff webcast. I bought them on Amazon.

And for the people listening, it's Michael Semblist with his two panelists. One is an Emperor Penguin and the other is, is that a rook? What do they call baby penguins? It's a rook penguin. It's a rook. So what kind of insight did you gain from your guests that day? What do people say when they see that? Everyone's in on the joke, right?

Well, no, I can't really tell anybody in advance that I'm doing this. No, of course not. Just in case people get cold feet and say, oh my God, you can't do that. I made a whole career out of surprising people rather than asking for permission. You know, I think it was...

You have to remember the fact, you have to remember how we got here. Yeah, yeah. So Howard Luttony comes out with the cardboard thing and here are the Liberation Day tariffs. Again, the president ran on, I love McKinley, McKinley was the father of the modern tariff. I don't have any problem with the president

implementing policies that he ran on and the voter said they wanted. The issue is how do they do it? So they come out with these Liberation Day tariffs and they say, we're doing it based on this formula. The morning they get announced, I actually get an email from the guy, the academic, who wrote the formula that they based it on and they completely botched it.

The formulas would have been, the liberation day tariffs were four times higher than they would have been had they correctly interpreted his work. But they were looking for bombast. They weren't trying to say something that was formulaically accurate. They were trying to get it on the tension. Then don't put a form in the footnote. Well, you got to base it on something. Well, copy paste.

But so the joke here is the McDonald Islands. The herd and McDonald Islands were included on the initial tariff. How did they get on there? Well because they basically had some 19-year-old intern grab a list from Wikipedia of all of the countries that exist and paste them into a thing and they said, let's put tariffs on everybody. And that's how it showed up. And I just think that if you're gonna do something like this that reverses a hundred years of policy,

you should have somebody who is able to rent a car do the analysis, right? Then we have to be 25. So like do it right, find somebody that will, that will substantiate what you're trying to do and do it responsibly. And I didn't think they were doing that. So this was my way of suggesting

that it could have been done better. The market reaction to that was chaos. Yes. Because the rollout was chaos. Yeah. What do you expect? Right, right. Now, that said, we had a 20% correction,

and then, you know, I went back to the toolkit, and on the webcast that we did, on that same webcast, I showed a chart saying, going back 100 years, every time there's a 20% sell-off, you know, 85% of the time, a year later, the markets are higher. So, for all the concerns that people may time a year later the markets are higher. Yeah. So for all the concerns that people may have.

Nobody has a problem with that. The problem with that is does 20 become down 40 first? That's right. That's the issue. It's not will we recover. It's what happens between now and the recovery. Right. It gets way worse. But you know, an 85% success rate, a 20% sell-off covers a lot of sins. You just buy. Economically and earnings and so we felt that it was enough to justify some additional risk

taking. Alright, there's another one I loved in real time when you did it. I think this one spread like wildfire. I picture the FT AlphaVille people who I'm friends with, they must like wait with bated breath for the next Michael Semblist during a European financial crisis. This is your son's Legos. Right. And you basically construct this hierarchy of who has to bail out who to save the European

financial system. And for people that are not watching this, they're listening to this. Michael's got every relevant group, Spain and Italy, the German parties, Finland, the German social democrats, you've got the European Central Bank, and they're all represented by various Lego characters. Stormtroopers. There were Stormtroopers on here. I was on that.

Wait, who were the Stormtroopers? I'm sorry, who were the Stormtroopers in this? The EU Commission? They must have loved that. This didn't go over super well in this. The EU Commission. Yeah, this didn't go over super well in Europe. But this, okay, so first a couple of important things. Normally I wouldn't have the time to do this because this took a lot of time to stage, but it was during one of those LIPA blackouts on Long Island. Oh. And so we had plenty of time. What's that? Was this Sandy? I don't remember exactly what was happening.

We had like a five day blackout. And I had plenty of time for this kind of diorama work. Second, this was actually part of one of the most important decisions that we ever made was, there was more carnage in the US than in Europe during the financial crisis. And a lot of people were overweight Europe and stayed that way for much of the decade. In 2010, as you saw in the compilation, I did not like the dynamics that I was seeing,

which we can get into, but we were violently and massively underweight Europe compared to the US and have been since then. I don't think there will ever be an asset allocation position that we will have in portfolios that will ever make as much as what we've made on that. And so that funny-looking diorama was one of the pillars of the reasons why we were so confident being underweight. Your conclusion was that the US stress tests were real very real they were to his credit used a nine percent default rate yeah you know which had only happened during a brief period

during the recession to stress test but what that did it forced the banks to raise enough raise too much money to either raise capital or dedicate pre-provision income to rebuilding their balance Europe they were smoking crap they assumed a three billion billion loss for the banks. For the entire financial system in Europe, they said the capital shortfall was $3 billion. I'll do you one better. They were raising interest rates. They were worried about inflation in 2010.

The other thing, and I don't think you put it in the deck, but the other thing that people can see in the compilation that's amazing is, if you go back before the euro and you look at things like industrial production and current account deficits, the North and the South move the same. They put the Euro in place and then they broke apart. It's actually a textbook definition of the opposite of what a currency union is supposed to do.

A currency union is supposed to force all those macroeconomic variables to converge. The way they did, remember there were multiple dollars in the early 1800s. And as the regular dollar became the standard across the country, inflation and growth and income and all those metrics across the United States started to converge. In Europe, they blew apart. And so that was a signal to us that something was seriously broken. And that brokenness would, in fact, affect earnings and multiples and everything else. And boy, I mean, that I'm comfortable with that diorama and our positions in Europe being put on my tombstone. That's how much

money we have. You have a chart showing the absurdity of, you showed the dispersion between European countries was further apart than if you had just created a currency based on all the countries whose first letter is M. That's right. Like you said, these countries have so little in common that if we just took the M countries around the world,

that would be a more cohesive. Or the countries at the 40th latitude. I mean you can create or you could reconstitute the Ottoman Empire. That ended up being the right allocation call because it's a dysfunctional... It's effectively a dysfunctional situation. It's a political vision. In a way there are wonderful things about the European vision. Similarly, Europe is leading the world in decarbonization. There's a chart in the compilation. Europe is leading the way with respect to renewables

displacing other forms of fuel. Europe's also leading the way in terms of industrial shutdowns and departures. Europe's also leading the way in the cost of electricity. So Europe has certain political objectives that at times override market and economic objectives and as investors we have to be able to respond to that. The front page of the journal today, the big debate in Europe is air conditioning or not. So this is an example of what you mean. Can we just spend a minute on that? I'd love to. So that people

understand what's going on. Something like 90% of homes in the United States have air condition, even in really northern climates. In Europe, that's not the case. So you have fossil fuel based heating. So there's a huge push in Europe for people to electrify their home heating with a heat pump. So for everybody listening, what's a heat pump?

A heat pump essentially is an air condition that works in reverse, right? And it's very efficient. It can convert one unit of heat into three units of electricity. So it's a very kind of energy efficient device. But if you give people these heat pumps for their winter heat, they'll just flip them and use them as air conditioning in the summer.

So we ran some numbers and for countries like Italy and Greece, all the CO2 emissions benefits that they would get from pushing these more efficient heat pumps would be lost if people start using air conditioning. In July and August. And it's a classic unintended consequence thing that you see in Europe all the time. Right, so I want to, I know we have a few. That's a good transition, let's end on leadership. Yeah, let's do this. Already done?

Well, let's, you gave us the heart out, we don't have one. No, no, no. Michael and I will sit with you all night. Let's do this thing about what was Lehman doing, because it's a great segue into the leadership at what was JP Morgan not doing that Lehman was doing. And you were there at the time. So I think that's a really great lesson for investors to take from this.

Well, you know, part of this dates back to the first Bush administration. And you guys will probably remember this. Before 2004, there used to be something called the broker dealer net capital rule. 12 to 1. 12 to 1, exactly. That's the max leverage a broker dealer could take.

That's right. Forget about risk adjusted, like 12 to 1, hard stop. Which is a lot already. Yeah. And under the first Bush administration, the broker dealers were effective at lobbying the SEC and they rescinded this rule and essentially put in some squishy touchy feely limit.

Within two years, all the big five broker dealers were 30 plus in terms of coverage. Spare, Lehman, Merrill. Goldman and Morgan Stanley. Goldman and Morgan Stanley, okay. And so part of the backdrop was understanding how what looked like a footnotey thing in the journal about a change to risk-based capital rules

had this seismic impact on what was going on in the actual markets. And we saw it, and that was also kind of a scary thing that was taking place. And we responded by kind of gradually pulling in our horns heading into the financial crisis when we saw this. The reason that I put together the chart on the right was all the banks were essentially bum rushed

into taking the capital, whether they needed it or not, with the exception of US bank, which was the one bank that said, no, we won't take it. And, but not all the banks are the same. And, you know, Jamie gave a couple of talks where like, look, we'll take our lumps and we will continue to take our lumps. But putting all the banks together in one boat

and kind of blaming them for everything was what didn't make sense because there were such, it was a very heterogeneous group. And look at this chart, right? There was that giant alphabet soup of all the facilities that were required. Citigroup, Merrill Lynch and Morgan Stanley and AIG, used the vast lion's share of this. And so, at the time that we published these charts, we said, look, we have issues like everybody else, but there are differences in terms of how banks run themselves and how they manage risk. And these were some of the charts that we used.

So in your compilation, you point out that Lehman was running at 35 to 1 and in one part of their business, 100 to 1. Yeah. And JP Morgan was not doing that. No. I want to ask you if this is true. There's an apocryphal story that I heard from someone who was working on a trading desk at JP Morgan right in the heart of this or the run-up to the crisis and Jamie who's taking a tour as he frequently does and just talking to people on every floor and He asked somebody to quote something probably a bond maybe a more something The trader gave him a quote

of where it was trading where it was being valued And this is at a time where people were worried. And the way he tells the story, Jamie said, what's the price? He quotes the price. Jamie said, oh yeah, sell some. He said, what do you mean? He said, let's see, let's see if that's the price, sell some. And of course, the trader can't get a sale off at that price. And that was kind of like a microcosm, I guess, of a bigger story where JPMorgan realized where the market was versus where the reality was were not the same things. You believe that? You think that story is true or something like that might have happened? I haven't heard that one, but having seen... It's a good one, though. Having seen Jamie in action, it's entirely plausible. He's very involved on a detailed level in terms of when he meets with management teams

and they present to him. You know, put it this way, that experience is entirely different than that same experience with these CEOs that preceded Jamie. Like everything about the level of preparation, the consequences for being unprepared, and the kind of questions and due diligence that are going to be asked of you. That changed radically. So on leadership, he stands so far apart from the other leaders of that era. One of them was the best golfer in the world, apparently.

We won't name names. One of them was a world champion bridge player. Jamie didn't have the reputation for having those hobbies. He was focused on the risk taking within the bank and what to do about it. And they're the last one standing, literally. Yeah, you know, and I've mentioned this before. My job requires me to know a lot of things about a lot of things and do so pretty deeply. And there are a lot of times when I need to reach out

to people and get help on certain things. Sometimes something will happen and I'm starting out with a deficit of knowledge that I have to build really fast. Couple of years ago, remember when Credit Suisse blew up and there were the Cocoa Bonds, which were the European version of preferred stock, but they were kind of different than the way US Preferreds function.

And nobody had ever heard of those. And the devils are in the details. Like there's a lot of times when I have to get up to speed on something really fast, or something within the energy space, and I need to understand really quickly how some new technology might work. The halo effect that Jamie has created for the firm over the last 20 years is amazing. I can call people and say, I'm the chief investment officer at JP Morgan Asset Management. Will you talk to me? And almost always the answer is yes. And I attribute that having nothing

to do with me because most of the time never heard of us. But because of Jamie and the impact he's had on the organization, they returned your call. And one of the only times that people, that that didn't work was... You called Elizabeth Warren. I'm not going into that. Okay. During the summer, during the summer of 2008, we were getting a lot of calls from clients. Why can't you guys make 11% annualized return with a 2% vol like this Madoff guy? And so I said, well, I don't know, let me look into it. So I start looking into it. I can't find any information. And you know, the whole thing is very sketchy. I went on to the early version of Google Maps. And I looked at the

building in which the custodian was allegedly housed, and it was the back of a Chinese restaurant. So the whole thing seemed really kind of funky to me. So we said, Okay, let's, let's do a due diligence trip. So we get in the car. And we go up to Connecticut to see the feeder fund. You know, they had that, I'm not gonna mention any names, but you know, there was that feeder fund.

This is the fund that's raising money from people and passing it over to Madoff. Right. Okay. And you know, we had like a 19 section questionnaire that we wanted to ask. And the first one is, can we meet the principal? And the answer was no. And I said, okay, we're leaving.

And they said, well, no, no, no, no. And we just, we got up and we left. Because if we can't meet the principal and talk to him, the rest of the questionnaires are relevant. So I went back and I put some notes in the files saying, like, I don't understand what's going on here. And I drew a picture of a unicorn on their total return chart. And I said, I don't understand what's going on here. And I drew a picture of a unicorn on their total return chart.

And I said, I don't get this. This doesn't make any sense. Yeah, it looks like private credit. Right. But, and wait, so wait, hold on, so then. He's a 50 billion dollar fund then too. Right. So I just drew a picture, I'm not even a good artist,

but I drew a picture of a unicorn, put it in the files and forgot about it. And then eventually the SEC ended up deposing me. What did the chart look like? Up and to the right? It was the 11% annualized return with 3% fall. And I got deposed by the SEC who wanted to know what I knew when and why didn't I tell everybody and what was going on. And you know I answered all the questions. I mean there wasn't much to say. They wouldn't talk to you. They wouldn't talk to us. And, but at one point the deposition kept going on and on and on. And I said, well, you know, why didn't you read the Harry Markopolos note from 2001 that said Bernie Madoff is

a fraud and the lawyer that was representing me in the deposition almost had a heart attack. That was the end of the deposition. Yeah. Michael, this isn't what we're here to do. We're not here to score points. By the way, if I could just say a couple of the deficit. Yeah, Michael, this isn't what we're here to do. We're not here to score points. By the way, if I could just say a couple of other things. Please. My favorite of all the pieces in there is the one on why the financial crisis happened the way that it did.

We have this. We like to do it. This is my favorite eye on the market. And the reason it's my favorite one of all time is the public narrative from the government and all of its agents and both parties was the private sector did it. The rating agencies are responsible.

The banks are responsible. Reckless bankers. Reckless lending. Yeah. It was policy. Now, you'll have to read the piece, because this is like a spaghetti chart, but I want to show you something here.

Those red lines are rising. And now we're looking at the 90s here up until 2005. These represent the portion of Freddie and Fannie underwriting that is effectively subprime and all day risk. This is before, look at the black line. That's the private sector. So the GSE is loaded up on all day and subprime risk way before the private sector did. And why did they do it?

Because of the blue line of the GSE low and moderate income lending targets that Congress established. And there's a quote that we pulled from the year 2000 from the HUD reports that is the most amazing smoking gun I've ever seen in the history of smoking guns, where they say, you know, let's have the GSEs do subprime type lending without calling it subprime,

and we will eventually lure, like the sirens, we will eventually lure the private banks to their death. This was Bush, the ownership society. This was George W. Bush extolling the virtues of home ownership, and we need to create more homeowners. This was a combination of Clinton and Bush. And by the way, Andrew Cuomo was the head of HUD when some of Clinton and Bush. And by the way, Andrew Cuomo was the head of HUD

when some of these things happened. So, you know, and to read about how aggressively the public sector tried to, after the financial crisis, change the history of what actually happened, I'm glad that I had the historical records to kind of show, no, that's not what happened. This is what happened. And you know, there are some lessons to be learned here the historical records to kind of show no that's not what happened. This is what happened.

And you know there are some lessons to be learned here about risk taking and risk underwriting and things like that. So I love that one. There was also a piece at the end for how I ended up in the asset management business that's also worth learning that has to do with a piece of candy in the lunch room. So Michael we think this is just an extraordinary document and it is the culmination of decades of your work. And it's just incredible. Where does the artwork come from?

Because that's a really big part of the presentation. It's ChatGPT. Well no, for the vast majority of the history of the market we would commission Brooklyn based artists. Almost like a magazine. Yeah, to draw and they're beautiful. And then more recently we've been using ChatGPT just to do certain things. But I hire artists once in a while.

There are things that GPT can't do. Can we get 20 more years? Yeah. What do you think? Can we keep going? No, there's a lot of... There's still a lot of fish I've never caught. I've never caught a permit.

Which is on my list. You can do both. Go catch a penguin. I'm going to, I'm going in early, in late August, I'm going to British Columbia to catch, on a kayak, I'm going to fish for a sturgeon, like seven to eight foot sturgeon. Okay. So I've done it before and almost, you know, it was pretty dicey. So I can't, I'm looking forward to trying it

Well on behalf of everyone on Wall Street everyone off Wall Street anyone who's ever read I on the market anyone who's a regular reader Michael and I and we here at the compound would just like to say thank you for your extraordinary Contribution to our knowledge. I get smarter every time I finish reading one of your pieces I learn something and I want to thank you because I kind of like Boo Radley I lived in silence for most of my career and you guys were the first place where I went to talk to a broad like podcasty type audience. But now you have your own show.

How do people find your podcast? Yeah let's tell people where they can get more mic assemblies. I post every eye on the market on LinkedIn now. But now you have your own show. How do people find your podcast? Yeah, let's tell people where they can get more Michael Samblis. I post every eye on the market on LinkedIn now. So if you go to my LinkedIn profile, you can find the anniversary piece, you can find the other pieces that I write. This is amazing. Thank you so much for being here. We appreciate you. Guys, make sure to follow Michael Samblis on LinkedIn if you want the latest on the market piece and by all means go and hunt down this 20th anniversary compilation get it as a PDF it is extraordinary you will absolutely

become a better investor once you've digested it thank you so much Okay, here we are. Hey guys, we're not late. Just Dave is in the chat saying, where are these guys? They're late. Probably jet skiing. What do you mean? We literally started at four 59. Come on guy.

We're right on time. James Sykes is here. Dr. Horton, Roger Weatherford, Pedro, we see you. Brian Gill, Shy Locke, Georgie Dee, all the gangsters who are in the chat tonight. Did you just say Shy Locke? That's somebody's name. Riley Anderson. Yes, it is. Nope.

Yep. It is. Go back and go back and roll the tape later. What do you want me to tell you? Hamoud, WallsWorld, James Dean. You know, dispute me on that one. I don't think it's the actual, so. I'm just saying. All right, guys, welcome to an all new edition of What Are Your Thoughts? We are your co-hosts.

With me tonight, as always, is Michael Batnick. Michael, say hello to the folks. Hello, ladies and gentlemen. Super dramatic pause. My name is Downtown Josh Brown. For those of you who are new to the folks. Hello, ladies and gentlemen. Super dramatic pause. My name is downtown Josh Brown. For those of you who are new to the show, we are here to talk about the biggest issues happening currently on Wall Street,

in the markets, in the economy, et cetera. And we are super excited to be here live with all of our pounders in the live chat. Those of you listening out in podcast land, we appreciate you too. Tonight's show is brought to you by public.com and the public trading. I need to tell you, the reason for the pause,

I need to defend my honor. The meter is running dude. Okay, I know, I understand. The reason for the pause, sir, is because sometimes you introduce me and then you keep going. And sometimes you tell me to say hello to the folks. So I pause because I don't know which way you're going.

Okay. Good improvisation. I appreciate it. Thank you for your attention to this matter. Okay. Great. All right. Where was I?

Public is the investing platform for those who take it seriously. You could build a multi-asset portfolio of stocks, bonds, options, crypto, and more. That's right, Josh. Plus, for a limited time, you can earn a 1% match on all IRA deposits, IRA transfers, and 401k rollovers. Easy. Not bad. Guys, fund your account in five minutes or less. Find out more at public.com as in what are your thoughts. That's public.com paid for by Public Invest in full disclosures

and podcasts description. Okay. A couple of things before we get into topic one. I have a couple of mini subtopics, really interesting reactions to earnings. And I know we're going to do a whole thing on earnings, but just like in the last day, it's pretty wild what's going on with some really big stocks. I'll tell you the ones that stood out to me. Tell me what you think. UPS just absolutely hammered. The stock is down five years in a row at this point.

Yeah, always, always. Oh my God, did they beat the shit out of that. UPS said, hey, no guidance for the rest of the year due to macro uncertainty. Wild. You know, this might be the cleanest downtrend you'll ever see. It hit the 200 day about 500 times over the last couple of years.

You know what? I don't get stuck in stocks like this anymore. Anyone with using any kind of trend line stop or whatever is just watching this thing fall like a knife. No one's long this stock unless they're completely on fundamentals. You can't be looking at this chart and saying that there's anything attractive about the rate at which people are willing to sell it. PayPal, they smushed it.

Spotify, down 11%, worst day in two years. And Spotify, this is a really weird call, a really weird quarter. Spotify was supposed to do five million premium subscriber ads, they did eight million. But they had a surprise payroll tax because of gains in the stock price that they owe for employee shareholders.

And it like wiped out, you know, on an accounting basis, wiped out the profit on the quarter an accounting basis, wiped out the profit on the quarter. And they didn't have great things to say about the ad business, apparently. They said, we're going to have to use more AI to figure out the, you know, how to get the ad business growing. So that one thing deserved. I want to say one thing about the Spotify thing.

Spotify is, even after it's in a 20% drawdown, the stock is still up 100% and 93% over the last 12 months. This is still the premier name in the space. And so, you know, it's a giant winner that's giving some back, no big deal. I mean, I don't own the stock, so it's easy for me to say, but you know. Yeah, I'm not in it currently.

I would way rather buy this down 12% than sell it. And I'll do you one better. Go ahead. It's actually, even with this little micro crash, it's still above its 200 day. Yeah, it looks viable. The 200 day is 562. Stock went out at 621. So it's like still in an uptrend, which is unbelievable because it's far off the high now. I'm going to keep this one on my radar. Last one I wanted to mention is Starbucks reported after the close.

They missed by 15 cents, but the press release was like, our turnaround is ahead of schedule. So the stock is higher and they announced something called Green Apron Service or they're talking about this Green Apron Service, which I have to ask you, personally. You don't know about my product placement? Very well done. Thank you. I hate this idea. They want to like talk to the customer more.

They're going to sunset all of the pickup window stores and only build coffee houses from now on. And they want to have like, like the employees have to smile at you. Don't look at me ever. Stop it. And then they have to, like, like the employees have to smile at you. Don't look at me ever. Stop it. And then they have to, I don't know. I don't want to make eye contact

with strangers on the street. Like in this day and age, are people looking for more smiles? Like forced corporate smiles? Is anyone, does anyone want that? The employees don't want it. And then the writing- I don't like this take.

The writing of the name on the cup. Does anyone have time for that shit anymore? Is that it? I got a smiley face. I mean, why are we making people do that? Grown adults have to take a Sharpie and misspell people's names. I thought we advanced away from that. What part of the customer experience is that enhancing? So everyone like, oh, I stopped going to Starbucks, but now I hear they're writing people's names on the cups. So, look. Are you asking me for a reaction to you not liking Smiles?

I mean, this is nonsense talk. No, this is his turnaround plan. This is, this is Nichols turnaround plan. And I guess like, I feel like it's going to turn around, but it's not going to be because of like green apron service. Okay, can we talk about the business and not the smiles? So it is six consecutive quarters of same store sales declines, not good.

In the US it was negative 2% and the rest of the world is even worse. But the stock is up 4%, I do want the stock. The stock is up 4% because expectations were obviously worse, implied in the the price and we found that out just in the after hours. No, it could be down tomorrow, who knows? But I was looking at this this morning, Chipotle's performance and Starbucks performance since he left. Chipotle is horrible.

One is up 20%, one is down 20%. Yeah, Chipotle is one of the worst stocks on the board. So Chipotle looks like Nike. Looks terrible. I think the reason the stock- Nike bounce, Nike bounce by the way. I think the actual reason the stock is up in the after hours is the biggest overhang on Starbucks, aside from the penmanship of the baristas.

And not enough smiles. Aside from that is China, it's their most important international market by far. And they've been struggling there. And they announced that they have received 20 companies have submitted proposals to be their joint venture partner in China. So basically, if you don't have a joint venture partner in China that is Chinese, you ain't going to win there.

And that's very deliberate. That's just how that country works. I totally get it. So they can't go in alone in China any longer, or the Chinese-owned coffee houses are just going to eat their lunch. So I think the street is encouraged to hear that they're moving forward with finding a JV partner and signing something that's advantageous to Starbucks shareholders because the status quo is just not it's not going to work. What else caught your eye? PayPal was like not a bad report. SoFi is getting so much credit just because they're like, you know, they they had great

guidance revenue guidance, 60 or 70 million above what was expected. But it's not, it's just weird to see that dichotomy between PayPal and SoFi. They're not identical businesses, but I think their customers are identical. I think the people, right? So it's just, it's odd, like how much credit, SoFi is ripping. That stock looks amazing right now. It's odd how much credit, SoFi is ripping. That stock looks amazing right now.

PayPal is just getting annihilated. That's another turnaround story that never seems to turn around. We're in year three of the PayPal turnaround. PayPal turn around and this thing, every time it gets going, they report earnings and it just is annihilated again. Yeah. So those were there. Those were the big ones that I was looking at over the last day or so. And I know we're going to do some more earning stuff later in the show so we can put a pin in that. Can we talk about Trump? I suppose I, uh, I'm disinterested in this topic, but it is your topic. So let's go ahead.

Well the show is called What Are Your Thoughts? I'm hoping you have some thoughts because this is probably the third biggest story in the market this year. And the conjecture on Wall Street appears to be that Trump is winning. And Wall Street was, I would say, universally opposed to tariffs, just to a man or a woman. Anyone writing research on the sell side, any strategist, anyone covering companies, just everyone said, this is inflation, this is going to crush the economy, this is going to destroy demand, this is going to lead to layoffs, this is going to lead to huge earnings

problems, etc., etc., etc. And it is, but he's kind of getting what he wants from the countries he's negotiating with. And I want to just put this graphic up. So the threats, the 145% with China, for example, all the way on the far right of this graphic, the threat against Vietnam, the threat against Canada, Mexico, as you can see, the imposed tariffs or the agreements

are substantially obviously better than some of the things that we were most concerned with. And that's by design. And everyone knew- It's called negotiating. Maybe you heard that. everyone you negotiating yes how he negotiates what's like a worst-case scenario let me throw that out on the table okay so we got through that part he made a deal in the last four days

with Japan and then the EU back-to-back the Japanese deal seems unclear that they even know what they agreed to chart Chertoff, which I think is really funny. There's a handful of articles today where people from the trade ministry or whatever are sort of like, I don't really know if, I don't think that, I don't think we are certain of what we're doing. But what the Japanese deal and the EU deal have in common is they both involve foreign countries buying more things from America. So it's not just about tariffs. It's now about like make investments in the United States.

How does that get enforced? So I'm really glad you asked that. We'll go there in one second. The headline on the Japanese trade deal before we go to Europe, auto tariffs reduced from 27.5% to 15%. Japanese automakers actually rallied on that, believe it or not. Japan pledges $550 billion in investment capital under US direction. That's the part the Japanese weren't so sure. And there's like profits that go to the United States or maybe directly to the White House.

I'm not sure. Commitments to purchase US goods, aircraft, energy and agriculture. That's very good. Here, US claims the majority, 90% of returns from the investment package. I don't know if the Japanese agreed to that, but fine. What Japan gets- That sounds scientific. That sounds crazy.

What Japan gets, they avoid the 30 to 35% threatened tariff on exports, they maintain access to our markets, greater certainty, blah, blah, blah, elevated diplomatic status because they're accepting the new framework before Europe and before China and some other shit. But it's funny to me that the first headline is like, we have a deal, it was a 70 minute phone call,

we closed the deal and then the Japanese were like, wait, what? But the market doesn't care. The EU deal, you asked the question, how do we enforce this? I thought this was a really funny story. Basically, oh, chart off, I'm sorry guys. So Trump's sitting in the room with the Europeans and he says, how could we be certain the Europeans won't shrug off their plans after a deal is agreed upon. The EU leaders assure him that their investment plans are real and Trump goes, his words,

prove it according to one of the people who's in the meeting. Reasonable. This is the Wall Street Journal. EU officials rattled off the names of companies they said already were prepared to invest with a trade deal in place. Planned investments of almost $200 billion would grow by even more, they told Trump. At the end of the talks, Trump said he would impose 15% baseline tariffs on the EU instead of the 30% he had threatened.

He said the EU would now be investing $600 billion in the U.S. the EU would now be investing $600 billion in the US under the deal, including a separate commitment to buy another $750 billion worth of American energy products from the US over three years. European officials said the $600 billion is based on private companies' investment. So that's like, Volvo is going to build a plant in Indiana. I'm making that up, but that's what that means. So just on the surface, based on what I'm telling you, doesn't it sort of sound like Trump is winning this thing, given all time highs in the market and basically getting huge investment commitments from these countries? What do you think?

I do think that's what it sounds like. I mean, that's what the smart people are saying, like Neil Dutta, for example, and he knows more than I do about this stuff. Yeah, we're going to take Neil's quote in one second, because I thought that was really... Not much of a market reaction. Like European stocks rallied it, which you mentioned already, but... Because 15 is better than 30. That's really what it boils down to. And one of the interesting things is that the EU has the authority to negotiate trade on behalf of 27 countries, right? And they don't like it at all. And they're making themselves, they're making their opinions heard.

We actually have some examples. Benjamin Dussa, who is the trade minister from Sweden, said, quote, the least bad alternative to a standoff. French prime minister mourned it as a, quote, somber day that he called tantamount to, quote, submission. The German chancellor, the head of the largest economy in the EU, said his country would, quote, suffer considerable damage under the agreement.

The Spanish prime minister said he could support the deal without quote, without any enthusiasm. Hungarian prime minister summed it up best, quote, Donald Trump ate von der Leyen for breakfast, end quote. So that's the European reaction. It's the European reaction. The European reaction is f**k it, do it. Let's just be done with this topic. Here's Neil Dutta and then we can move on. He says, I can't help but wonder that as every academic and critic of the White House lights

their hair on fire over the effective tariff rate. America is taking some steps to rebalance our economy. For the PhD academics losing their minds, the issue is that this is a win in the traditional sense of the word. Entering a hot dog eating contest might be stupid, but if you eat the most hot dogs, you win. So Neil kind of likens these tariffs to having the same effect as a consumption tax or a VAT tax. I think that's the right way to think about it.

When you listen to the company calls today and yesterday and the way that they're talking about how they're dealing with tariffs, they're eating a little bit of it, they'll pass a little bit of it on. It ultimately takes the form of like an invisible, it's visible, but an un-itemized that tax. The more you consume, the more of these tariffs you're going to end up paying. And wasn't, you know, it's, the White House doesn't frame it that way, but like that's sort of how it turns out to be.

Okay. Well, if it had to be, I'm glad that we won. I don't like tariffs and I wish that we never did it, but if I'm a patriot and I'd rather win than lose. But who knows what sort of ramifications it's going to have long term. These are our biggest, most important trading partners, or at least certainly near the top of the list, and you're forcing them into submission and really pissing them off. I hope it all works out.

Yeah, I think it's not even just the long term thing. I think it's long term, but then it's also like, we haven't really seen a material pull back in spending across the board. But there are certain categories where this stuff is just, it's making people switch to something else. And you might say, good, switch to something else. Yeah. And you might say, good, switch to something American. All right.

There'll be some of that. Listen, I hope we look back on this and say, we were all making a big deal out of nothing. We switched and the world went on. That'd be my hope. All right. Let's speak to moving on. Let's do that. So last week or the week before, we were talking about semiconductors. And the AI trade is powering everything.

That is where it starts and stops, this market rally. It is not being powered by the consumer. It is not being powered by anything other than artificial intelligence and the hyperscalers continuing to spend. Was I early early to this half a trillion dollars um yeah I think I was saying like six months ago the only thing that matters is AI yeah and it's kinda like everyone just accepts that now

well it does because the market is making all time highs as earning expectations are making all time highs and embedded in those expectations is monster profits from Nvidia and the likes. And so that's it. That is all that matters right now. But getting back to the question, can the market rally without semis? I honestly do find it hard to believe, not forever, but like for today, that is what's powering the market.

But Chart Kid Matt made something interesting that this is a question that we've asked in the past. It's not the first time we said can the market rally without. So chart on please John. Here's Apple and we're showing that Apple's weight and the S&P peaked and in my estimation it will never be higher than it was. It was 7.8% in the summer of 2023. It is now down, this is a big change. Its weight is down 27% from 7.9% to 5.7%. That's a big deal. And the market, it's a big deal. And the market is up 40 plus percent over the same time.

Not an apples to apples comparison pun intended, but just an interesting thought experiment. So I think that market cap went to Nvidia and Microsoft. Mm-hmm. It was an interesting thought experiment. I think that market cap went to Nvidia and Microsoft. I think it's that cut and dry. Microsoft is going into its earnings tomorrow at record highs. Its market cap is up by a fifth in the last two months that came right out of Apple. Money did not come out of Apple and go into Wells Fargo. I think we all sort of understand that large cap managers who are

invested in the AI theme are pivoting to Nvidia and Microsoft and away from Apple. They may pivot back, but that market cap doesn't disappear into the ether. You know I'm one of these guys who has to know, you know, where did it go? That's where it's going. Yeah. So, if there is a moment in time... But wait, put Matt's chart back up. Ask the question, do we need Apple in a bull market? Well, no.

The answer is no. I mean, there's no... We know that we don't, but we do need an Apple replacement. Like, you need another mega cap. That's right. We need leaders. So for the listener, for the viewer, I don't know when the last time you looked up Microsoft's market cap, you probably think it's two trillion.

It's actually about to be four trillion. So like, do we need Apple in the bull market? No, so long as we have blank. And in this case, it's Nvidia and Microsoft. Like they're passing the torch back and forth. That's what's happening right now. But would you agree the biggest risk to the bull market, at least in today, it's disappointing AI numbers or guidance, obviously that's it. I think that's the biggest near term risks to the market. Um,

that one of these, and we've said this, one of these companies, uh, shocks wall street with like a guide lower because they're spending too much on AI, like, like an earning shortfall because they just don't have the ROI from the investments they've been making. And- Not yet, it will, it's not yet. It's not happening yet.

It's not yet, no. No, Google just got up their guidance, their capex by $10 billion. It's not happening yet. It'll happen actually, but not yet. Correct. So, but that is, the day that happens, you literally could see a circuit breaker on the NASDAQ.

If it may never happen. Maybe all of this spending is super profitable, and they'll outrun that concern. But I'm pretty sure that at some point in the future, I don't quote me on time, we will get ahead of ourselves if we're not there. It's just crazy to me to have bellwether stocks for the real economy, like Chipotle and UPS,

just like dive bombing to 52 week lows, and people saying the consumer is holding this up. No, it's not. It's not. It's hyper-spellix. Stock market Americans are holding up the entire thing right now, and stock market American spending is being fueled by the wealth effect created in Silicon Valley as a result of the AI capex race.

And that's it. And there's no other story. I don't give a shit what you think. There isn't. And I can't imagine people don't see that connection. Now this will age really poorly if we never have that moment. And like the overall economy re-accelerates. But we will have that moment. At some point there will be a disappointment.

Obviously, that's where the stock market works. Callie did a thing on her site today. I think this is right. She's like, if you own the SPY, like a third of your portfolio is now in three stocks. Like that's what's holding everything up right now. And what's so funny is there's a lot of circular spending going on. Like Meta and Microsoft are the ones

buying all the chips from Nvidia. Nvidia is selling those chips and the end customers are spending on all this cloud compute in return right back at Microsoft and Meta. It's extremely circular. I don't think the extent to which that's holding up the market is fully appreciated. Everyone's like, yeah, yeah, yeah, tech is dominant. Man, if this goes into reverse, I don't know what catches us. There are no stocks big enough is my point.

There are no stocks big enough. Apple reports this week. Let's do a couple of quick previews here. During the previous quarter, Tim Cook said the tariffs could add $900 million to Apple's costs for the Q3 fiscal quarter. Well, I guess we're about to find out because we're there. Revenue expected $89 billion, which would be a 3.7% year-over-year gain and a 2.1% gain in earnings per share. Barely growing.

This is just not a growth stock. Barely growing. Let's put this chart of the EBIT up. Here's the quarterly year over year growth in cash flow. It's like effectively nil. All right. Microsoft, a little bit more of a bright spot, 73.8 billion in revenue expected, $3.38 in earnings. That would be 14.1 and 14.5% growth respectively. And if they do those numbers, this company is just incredible. Last quarter, they beat on the top and bottom line.

Let me see what else I would say. Oh, Azure revenue growth. Last quarter it was 35% year over year hedging out changes in currency, which was better than the 31% growth. This quarter analysts are looking for the same thing, 30 to 4 to 35%. And they've already guided CapEx to be 80 billion for the year. John, tell that chart on. The CapEx one. This is it.

Yeah. This is it. This is the entire story. We're looking at CapEx to revenue. We shared this chart a couple of weeks ago. But if you're listening, it's Microsoft, Alphabet, Amazon, and Meta, notably absent as Alp because they're just not spending any money. But these companies are supporting the stock market.

And as long as they got higher and if you think that Microsoft and Metta are going to be out of step with what Google said last week, you're crazy. No way. Metta is the same night expecting revenue of $44.8 billion. That would be a 14.8% year over year. Earnings should be up 13.5%. EBIT should be 17 billion, up 14.6%. Meta has grown operating income. The last three quarters, 46%, 39%, and 31%.

They already increased the midpoint of their CapEx guidance. Also they were at $62.5 to $68 billion in April and they raised it. That's all this week. And Amazon, which we previewed last week. We jumped the gun a little bit. We don't have to do that again. Gun to your head. Which one of these is going to have the best, I won't even say report, but reaction? You have to pick one.

Yeah. Not Microsoft, just because the stock is just perfect. There's no hiccup. I would say Amazon. Okay. I want that to be right. I think it's going to be Metta. And I'm purely basing that on the advertising numbers from Alphabet last week. I hope these, you know what? I hope all these stocks get hit, frankly. We need to know.

I'm not in it. It's fine. No, no, no, no. I don't want anybody to lose money. But we need a reset. Just a little bit of a reminder of what risk is. The desert needs water. People are out of control.

I wonder if the analysts are gonna push Zuckerberg on some of the hiring that he's doing. Like he's giving people billion dollar salaries. Like I wonder if anyone's gonna be like, so hold on, you're just gonna acquire every AI startup or take 50% stake or whatever. You're just literally gonna spend billions of dollars on acquihires. And I wanna hear them, yeah, that's what we're doing. Because that's literally

what they're doing. I mean, it's insane. They're building this meta super intelligence thing that is like they're the new thing they're calling their AI effort. And they are just going out of control, like recruiting people out of everywhere and paying top dollar. And I wonder if anyone's going to ask them about, like, is that sustainable? John, we have that headline from Apple. Keep talking, Josh. What's the headline? All right. So, Apple has lost its fourth AI researcher in a month to Meta, marking the latest setback to the iPhone maker's artificial intelligence efforts.

Who the f*** is that sitting in the chair? Is that a, is that an AI? That's an actual person. I don't know. Look at the head. When I have gray hair, I want to have hair like that. That man, that is a delicious head of hair. Tim Apple is obviously going to get a lot of questions about like, what are they doing? Well, is it sustainable? And the last time they embarked on like a spending spree

like this, almost completely unchecked, was the Metaverse era. And it only took like one or two really scary stock price reactions for them to knock it off. And they eventually knocked it. It took a while. You think so? No, I feel like it took two quarters.

No, no, it took a while. Really? Yeah. Anyway, let's keep moving. Let's do some morning stuff. Let's do a growth reactions, et cetera. All right. I asked Sean for this and chart kid Matt,

two of the goats at a Red Holes Wealth Management. Well done, boys. So far 168 S&P 500 companies have reported. That's going into today. So there's more. But just to give you a flavor, this week we're gonna get 162 reports. So this is a really, really big week.

It's like the Super Bowl. In addition to all these Mag-7 names, you also have a Fed meeting and a GDP report thrown into the mix. Jobs report on Friday. Blended earnings were for the S&P 500, which is actual plus estimates, up 4.5% year over year, which is 171 basis points above estimates at the beginning of the season. That's good.

Five of 11 sectors posted a year over year increase in profits. 1.71 basis points above estimates at the beginning of the season. That's good. Five of 11 sectors posted a year-over-year increase in profits. What is this chart? Oh, this is the blended earnings growth. So you can see it's about half and half, but all the market cap is on the left side. Communication services, tech, financials, these are the biggest market caps in the market. These are the ones that matter most. And they are holding up the market, quite frankly. The only reason we're at a 22 multiple. Let's do the sales growth.

Next one. Can't fake sales. So the only sector with negative sales is energy. But again, that's hugely commodity dependent. It's very noisy. And it's not really the way to think about those stocks. But every other sector blended is seeing year over year revenue growth. Last one is actual earnings growth.

Energy negative 25%. Technology plus 17.2. Communication services plus 17.2, communication services plus 17.2. It's AI. And Puyo financials is an AI. Yes it is. Yes it is. All these bull markets that these financial companies

are feasting on are directly related to AI. It's all one trade. It's all AI. By the way, speaking of AI, I was out of general. I. It's all AI. By the way, speaking of AI, I was out to dinner with- Did we agree to AOE? No, I like AI. I was at dinner with Dan the other night. And his ETF, guess how much is in the Ives ETF?

He launched this when? July 16th. Holy shit, it just launched. Guess how much? 300. 400. No way. Really? Oh my god. He's like we're, I don't want to say anything else, but it's unbelievable. $400 million in like two weeks. Did he pay for dinner? It's pretty, dude, it's impressive. Very impressive. All right, next chart. On this show, we root for Dan Ives. All the way. The beats are being rewarded at pretty much an average

of 1.1%, which is pretty good. The misses are being annihilated. The huge rally, we had a 30% S&P rally off the lows of April. And the market is saying, like, okay, we gave you the benefit of the doubt, show us the number. And God, God help you. If you miss by a penny or two, they're taking stocks down by an average of 5.2%. This is the worst one-day price reaction for missed earnings.

You have to go back to Q1 of 2017 to find a more punishing environment. So you have an 82% beat rate, which is good above average, but God help you if you miss like UPS. They are carrying you out feet first. And I bet you that continues. I don't think that's going to change. I think that's going to be the story of this earnings season. I bet you that continues. I think that's going to be the story of this earning season. We gave you the benefit of the doubt, your stock price rallied 20-30%, you better put up.

And not every one of these companies will. Which brings me to my question for you. Do you think by the time we get to the tail end, which is Nvidia, do you think this will have been a successful earnings season from the standpoint of like, all right, we may not have made new highs, but we held up, like we held the gains. Like what do you, like how do you, you think that'll be the perception? Yeah, I know. I don't think it's going to debacle. Like how do you think that'll be the perception? Yeah, I do. I don't think it's going to debacle.

You really need this week's MAG-7 earnings then to be good. Yeah, and I expect them to be. What if they're not? It's another correction, right? Like another market-wide 10%. When you say they're not, I think it depends less on the numbers and more on what they say, more on guidance. I think it depends less on the numbers and more on what they say, more on guidance.

I think it depends more on the reaction itself. I'm saying, but the reaction will be a function of guidance, not what they did last quarter. I just don't see them being like, whoops, we got over our skis. I just don't see it. It's still so early and based on everything they've said for the last couple of quarters, the idea that they're not going to affirm or continue could happen. I just don't see it. Heather McFarland in the chat is reminding me of something Dan said. Something like, it's 9 p.m. but this party goes all night long or something. Remember he said that? I mean I know

he said that a bunch of times. Okay. Or something like, it might be midnight, but this thing goes all night, or something. It's hilarious like that. All right, I guess it's too early for the Mag-7 to materially disappoint. So as long as their guidance is good,

this should go down as like a good earnings season. I think so. But also, listen, the VIX is at 15, and people are going out of their minds speculating. If we get a little slap on the wrist, like, all right, I'm here for it. Yeah. All right, the weight loss drugs are crashing.

This bull market is way past midnight. This bull market is now in a complete and total hangover from whatever went on last year. These stocks are just being destroyed. So Novo Nordisk, I guess, came out with an earnings report over in Europe and man, they crushed this stock. It fell as much as 30% at one point, wiped out $93 billion of market cap. And the problem for Novo, and we've been talking about this on the show, like we did a whole

thing about HIMSS being sued, being like having a partnership with Novo Nordisk, Nordisk break apart over generic sales of semaglutide and terzepotide and all of these compounders that are knocking these guys off. Well, it's like having a huge material effect. This company just lost 100 billion in market cap because of this. Novo cut their sales outlook, now expecting 2025 sales growth of eight to 14%,

down from the high end of the range was 21%. Oof. Yeah, really bad. 8% to 14%, down from the high end of the range was 21%. Yeah, really bad. Said operating profit would be lower than previous forecast. This is the second time they've cut their forecast just this year. Chalked up the diminished outlook to the availability in the US of copycat versions of WeGov. The company said despite US regulators recently ordering an end to the practice known as compounding, it has continued with multiple entities still marketing and selling unbranded versions of semaglutide, the main ingredient in WeGovV and Ozempic. So they have to like, I mean, this is just going to be lawsuits, law enforcement, maybe

like, I don't really know. I don't know, law enforcement, maybe like, I don't really know. I don't know what they're going to do. I don't know if the FDA gives a shit really. I feel like there are probably thousands of companies in the United States and around the world just making their own version of this drug and selling it. They're all running advertisements like crazy. Hymns is a really good example.

Hymns has the distribution. Novo has the patented product. Which would you rather have right now? like crazy, Hims is a really good example. than have the stupid patent. What good is that? So that's crazy. We have some charts. I wanna show you. This is Novo Nordisk versus its market cap. Michael, the losses here are staggering. This was almost a $700 billion company,

and I think it was the largest market cap in all of Europe for like five minutes last summer. Do you remember us talking about that? Yes, I do. Yeah. Stock is down by two thirds. It's a $240 billion market cap and still dropping like a rock. And that's not over three years. That's over six months. Yeah. It's wild, right? Okay. Uh, here's Eli Lilly. Not as bad. Eli Lilly almost hit a1,000 a share.

It's been flatlining. It's in a 17% drawdown. But compared to how much it had gone up since 2020 when this weight loss craze started, that's not terrible. It just looks like a pullback. Let's show this a nice selection. To me, it looks very heavy. I'm not buying it. It looks like it's going to $600.

Next chart. This is just the share price. So it's at $776. Again, it was almost $1,000 last September. And it's not looking good. All of these rallies are sold. You have this persistent pattern of lower highs, not what you wanna see.

And they're fighting the same battle that Novo Nordisk is fighting. They might be better at litigation or something, but the trend is definitely against these guys. So I don't think this is the type of blue chip stock being down 17% that I'm like, yeah, I can't wait to buy it. In the chat, they're saying Novo should donate a billion dollars to build Trump golf courses.

Suddenly there would be aggressive enforcement. Yeah, you know what? That's obviously hilarious. But I wonder if Novo Nordisk outside of the general pharma lobby has any power whatsoever to make the stop. Because I don't know what kind of money is being spent on the other side by the compounders to have it continue. It might just be a lobby battle until somebody gets serious about enforcing this stuff.

And in the meanwhile, these stocks are just absolutely f**ked. All right. Let's rewind the clock. I feel like stock market investors always, but especially in 2025, have a very short memory. There's a lot of risk taking, a lot of speculation, and how quickly we forget what we just

lived through three months ago. Ryan Dietrich quote tweeted this tweet from back in May. This is in May 2nd, so I guess a month, three weeks after the bottom. Goldman said, markets might not have bottomed. Wells Fargo, could we test the lows? Morgan Stanley, retesting the low end of 5,000 is feasible. JP Morgan sees S&P falling to $4,000, worst case scenario. Bank of America sell the rebound in US stocks.

So Yahoo Finance put together this banger of a chart that shows how the 2025 price targets have evolved over time. And like they always do, I'm not throwing shade. This is the job. It's impossible not to do this. I would have done the same thing. You follow the market. So you have the initial

forecast coming into the year, they were all pretty aggressively bullish and why wouldn't they be? And then you had the TAF reaction and the freak out and of course they lower their estimates and just like that they're back to where they started, if not even higher. We could skip the next one. Wait, wait. Can we stay here? Sure. So Wells Fargo and Morgan Stanley never changed their target. Good for them. They just like wrote it out and were the last to react. I guess my question to you would be, why wouldn't everyone just not react? Why do they have to?

I know the market fell a lot. But what's the- I think because when you're 20% above or below your year end target, it just looks like sort of ridiculous. I think maybe. What other defense could there be? Doesn't this look more ridiculous?

Well, yeah, with the benefit of hindsight, but given where- But no, but be the last to downgrade then. Who gives a shit? No one's like, in other words. I understand what you're saying. A game theory in the next 20% bear market, like you know what? We didn't save anybody any money anyway

if we downgrade now. What if we just don't? Yeah, that's not how life works, but too shy. No, but you see what I'm saying? Oh, I see what you're saying. I understand. From a pure gamesmanship perspective, all right, we could downgrade it now,

and maybe it falls further. No one's going to give us credit for that. I agree. You missed the first 20%. If you're not first, you're last. Or just don't even bother. Right. So Dietrich tweeted that the S&P is up 8.6% year to date, about average.

And then Ballotune is just, no, no, it's just a perfect 10 at a time response. Eric said 8.6% is amazing given the amount of negative headline firepower thrown at the market by the media. Adjusted for that, it's up like 30%. Yeah. Wait, so in other words, it's an average year, but like, what's the, what is he saying? Four out of 75 years stocks have gained eight, 10%.

Like we almost never have an actual average year. All right, so we never have an average year because when the market is down, on average it's down 13%. When the market is up, on average it's up 20%, 20 plus percent. When you net those two out, yeah, it's like eight to 10%, whatever it is. But I don't care about that. I care about Eric's point is that when you think about how black it got in April, everywhere, the

fact that we're up 9% of the year is pretty remarkable. Again, I know we're beating this dead horse, but it needs to be said over and over again, at least for future posterity. Pull the XLK out, pull the XLC out, and we are negative on the year. Of course. Yeah, no doubt. So it's only a plus 8.6% year because of this once in a lifetime CapEx explosion thanks to a software program that nobody saw coming as recently as three years ago. That's it.

There's nothing else going on that could possibly have this market up 8.6%. But maybe that's the thing about a bull market. There's always something else. There's always something that bails us out. But this felt like one of the all-time kick saves. We can't run it back a different way. There's no, this is just what it is. There's no counterfactual.

We can't prove it. Because people would say, what if something else came along? Yeah, maybe. I don't know. All right. IPO, did this go public? Is this going public tomorrow? I'm not sure.

Figma on Monday raised the preliminary pricing. It's not out yet, but I'm trying to think. I think it's this week. There's a few reasons why this one's notable. Okay. You and I used Figma when we were working with the company that built our last website. They used Figma as the design doc for us to all go into and point out mistakes in the design before it became live on the website. That's the way Figma is used. It's

definitely a competitive space. They don't have it all to themselves, but it's a pretty big company. This is Martin Pierce at The Information. Sometimes good things happen to nice guys. but it's a pretty big company. Figma raised the preliminary pricing range for its IPO Monday to between $30 and $32 a share from an initial range of $25 to $28. At the upper level of the new range, it's a market cap of $18.7 billion. Blah, blah, blah, blah, blah. Look, it's a 48% revenue grower. It's got a lot of the attributes that people are looking for in a software stock.

There's a lot of deep client capture, etc. All your designs are already in there. Why would you switch providers? We'd like these types of stocks. It's definitely at risk of AI doing what they do better and cheaper and faster and blah, blah, blah. But then of course, this is the kind of company that will say, hey, we're gonna do our own AI

and our product's gonna improve. So I think it's notable that we can still get these $18 billion tech stocks to market that aren't even AI plays. It's just a design software company. But I like that we're still seeing deals. Well, I love that line. Dillon Field, one of the more grounded founder CEOs

you're likely to meet. Nobody would ever say the same about you. And it's great to see good things happen. What the fuck? You love seeing good things happen to good people. But wait, there's more. Throw this tweet up, please. I'm not one of the more grounded tech CEOs you know.

No. All right, Jeff Richards. The last five technology IPOs are up 142% on average. Amazing. That's kind of wild. The last 20 are up 93%, performing well beyond the lock of windows. He said, the last 12 months,

the prevailing narrative was there is no IPO market. Well, smart companies prepared anyhow and were ready to take advantage of favorable conditions. So you'll have to see it. This is really, really important to a functioning capital market that these new companies can be treated well by public investors.

We need more of that, so. Yeah, you never know when the window's going to be, uh, the window's going to reopen a few good weeks in the NASDAQ and they're doing deals again. So that's exactly how it works. All right. So I am going to make the case that everybody needs to be cool. Maybe no more new positions for a minute. Let's let the market breathe. We have just had a spectacular run. The VIX is at 15. We're seeing a lot of silly behavior, and I'm not telling you to sell your 401k or stop

anything like that. I'm just saying for individual positions, if you're feeling strong, relax. The market has been on fire. I, you, all of us, we're not geniuses. So just take a breath. And I brought data. So a few tweets from Bob Elliott. Not trying to be a Debbie down. I'm just trying to be a little bit sober here. Speculative trading indicator, the three month rate of change. We've seen this twice in previous history. At the end of the dot com bubble. And at the end of the 2020-2021 mania.

Okay, that's number one. Number two. Look at this. This is as clear as a bell. The implication is maybe it goes further. Just calm down. But not much further. No, you never know.

All right, here's another one. Quantitative analysis from Bob, or I guess it was from Goldman that Bob tweeted. Stocks typically underperform after sharp rises in speculation, which is pretty intuitive, right? So they're showing sharp increases defined as a three-month

change in the indicator exceeding 15 points or roughly the top 5% of observations since 1990. And they show what happens 3, 6, 12, 24, 36 months later. And it's not a catastrophe, but you know you would expect a little bit of backing and filling. Another thing, this is from Jason Gepfer, a sentiment trader. So Helene Meiser tweeted that the S&P at new all-time high and fewer than 100 stocks making new 52-week highs. So what that means is this rally is fairly narrow.

It is AI and only AI. And Jason shows that when that happens, especially when it starts to cluster, where you see new highs with fewer and fewer participating stocks, on average, returns aren't great. Not catastrophic, but just not great. So my point is, we're all having a great time. If you're in individual stocks,

unless you're in the bad ones, you're making money and just pump the brakes a little because the wind has been an hour back for the last three months off the lows, really uninterrupted and we're extended to say the least. I got another thing here for that. Jim Reed is the head of macroinformatic research at Deutsche Bank. Ooh, research. Okay, now you have my attention. Yeah, research is like finance.

When I say it, better pay attention. I'm leaning in. We're back to a boom in margin debt in the stock market. So this is investors borrowing against their own stocks to buy more stocks. So, it's not like borrowing in general. This is specific. Don't margin debt me. I mean, of all the things-

I'm talking to the listeners, talking to the viewers. So, this is like borrowing good stocks to buy more stocks. The level of margin debt accumulated on the New York Stock Exchange in May and June was the fifth largest two-month increase since 1998. So we're talking about the rate of increase. Okay, so people are going nuts. People are going crazy. The only periods with larger two-month increases were right before the 2000.com bubble burst

and right before the 2008 financial crisis. Quote, while the current surge doesn't quite reach the extremes of those prior episodes and could therefore easily climb further, it still ranks among the most aggressive 12-month rolling increases on record, more ominously perhaps. Quote, margin debt, listen to this one, as a percentage of GDP now exceeds levels seen in both 2000 and 2007. Margin debt as a percentage of GDP? Don't come through with that nonsense. Give me the stuff. Why? Because the market cap relative to GDP is near all-time highs. Why would you adjust margin debt for GDP?

It's not relevant. It's just a way of thinking about the level of speculation relative to the size of the economy. The point remains, there's a lot of speculation out there. And so yes, this can continue. We could be up 25% before the year is over. Who the hell knows? So I'm not saying like panic, sell your stocks, like, but maybe.

So what are you saying? What should people do? I'm saying that if you are thinking about putting on a new position because you feel like you missed it and you feel yourself buying out of the fear of missing further gains, if you feel that impulse, take a beat. Okay, what about existing positions? That's up to you. Use your own risk management. Whatever. I had a little bit of shaving last week, a little bit of shaving. Yeah, I sold a bunch of stuff, like some shares of things that I'm keeping or just outright got out of things that just were a waste of

time like Pfizer. I'm not looking for like, what's my next stop? Because I hate it when the market is so extended. It's been above its 50-day moving average for three weeks straight and it's just like, you feel like there's nothing to buy. Now things are starting to get interesting again with all of these earnings reaction blowups in like really good companies. And I'm just like sitting back and I want to see if some opportunities get created. Guess what? I guarantee they will.

I mean, that's- Well, they are already, but like we're going to get, we're going to get a hundred, what do they say? 160 reports this week. Like we might've seen nothing yet. Just, yeah. Don't feel like you're never going to get shot, is what I'm saying, okay? Yeah.

Just take a break. And by the way, unless you are fully invested with every dollar you'll ever earn, and you'll never have a fresh dollar to put into the market, this is great. All right, mystery chart. Okay. John, please.

What is this? Okay, it's a, oh, I know what this is. This is the two year. So close. Okay. 10? No, wrong direction. Oh, okay.

Three month. Fed funds. Oh, all right. Whatever. Reveal. You were close, dude. You were close. That was embarrassing. Oh, okay. Three month. Fed funds. Oh, all right, whatever. Reveal.

You were close, dude. You were close. That was embarrassing. All right. There's a Fed meeting tomorrow. I don't think we're, I think we're almost out of time to discuss it. Put that chart back up, please, guys.

This is a big L for me. I mean, my God. You should, like, I feel like everyone, everyone working in investing should, like, sort of be able to do that, right. I mean, my God. You should know. I feel like everyone working in investing should sort of be able to do that, right? I'm ashamed, yes. So we're showing you guys the federal funds effective rate and we're hovering just below 5%.

And I don't think we get a rate cut tomorrow, but maybe they use the presser to set the stage for the September cut and they'll use August, the Jackson Hole convention to like kind of reinvest in the messaging from tomorrow. But that's sort of what's going on. We have one more chart. All right.

So this is Fed funds rate expectations. So you can see the blue diamond represents the FOMC's own year end estimates. The green diamond is market expectations, which you could see fell all the way down to for 2026, fell down to 3% but have since been rebounding, meaning that we think terminal rate is probably higher rather than lower. The FOMC's long run projection is about 3%. So we're far away from these projections. and they might have to at some point, but right now they don't have to, and they're not, and tomorrow's probably another non-event.

What do you think? Yeah, nothing. Nothing happening tomorrow. Is there anything he could say that you think would be a surprise in either direction for the market? Oh, there is absolutely anything he could say. Is there anything that he will say? What if he's super dovish?

What if it's a dovish hold? And he's like, yeah, listen, we could totally cut rates. Not in those words, but if that's what he implies. I think it's going to be a lot about tariffs now that there's more clarity. Because that was the unknown. That was the only reason why they weren't cutting rates. They're going to ask him 10 different questions about,

what did the president say to you behind closed doors? blah and do you have any plans to leave before May and that's it's going to be like all the drama is going to be about like them trying to get him to say something about Trump and he's too smart for that. I am not a fed watcher. I will not be tuning in. I'll see the highlights. No, not this one. I watched I watched the good ones.

This is nothing burger. That's right. All right, guys, thank you so much for joining us and making this show the platform that it is. Love everybody who comes to the live on YouTube. That's 5 p.m. every Tuesday. Those of you listening, thank you so much. We appreciate you as well.

And you can always catch the video replay. And it's just, it's unbelievable how much engagement and how much you guys are responding to the show. So we love you for that. Tomorrow is Wednesday, which means it's an all new edition of Animal Spirit starring Michael and Ben. My personal favorite podcast,

there'll be a new Ask the Compound. And at the end of the week, we've got an all new Compound and Friends with a returning champion guest. So from all of us here at the Compound we thank you, we appreciate you. Leave a rating and review and we'll talk to you soon. you