WEBVTT - How to Avoid Getting Burned by the AI Hype 0:00:13.920 --> 0:00:17.320 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.520 --> 0:00:20.640 My name is Mike Reagan. I'm a senior editor at Bloomberg. 0:00:20.239 --> 0:00:23.520 And I'm Aldona Hirik, Across Asset reportered with Bloomberg. 0:00:23.200 --> 0:00:25.919 And this week on the show, Well, this year's red 0:00:26.000 --> 0:00:29.200 hot stock market finally cooled off a bit in August. 0:00:29.920 --> 0:00:32.120 I followed a blistering rally that saw the S and 0:00:32.159 --> 0:00:35.959 P five hundred gain almost twenty percent and the Nasdaq 0:00:36.000 --> 0:00:39.960 one hundred climbed forty four percent through July. So what 0:00:40.000 --> 0:00:41.879 are we to make of the market running out of 0:00:41.880 --> 0:00:44.440 steam late in the summer. Is it just that typical 0:00:44.520 --> 0:00:48.360 seasonal weakness when investors were all at the beach or 0:00:48.400 --> 0:00:51.000 is there something more going on. We'll get into it 0:00:51.040 --> 0:00:54.720 with a veteran market strategist. First of about a summer's 0:00:54.720 --> 0:00:56.320 almost over, do you have a good summer? 0:00:56.880 --> 0:01:01.920 Well, we know that. You think I was gallivanting around Europe, 0:01:02.240 --> 0:01:04.679 which I did for a little while. Yeah, that was fun. 0:01:05.240 --> 0:01:06.920 Otherwise it just went by really fast. 0:01:07.560 --> 0:01:09.760 I'm ready for fall. I'm ready for the cooler weather. 0:01:10.319 --> 0:01:13.000 I heard you're a big fan of pumpkin spice lattes. 0:01:13.640 --> 0:01:17.479 Not at all, Yeah, you love them. I heard Mike 0:01:17.600 --> 0:01:21.960 Reagan loves pumpkin flavored stuff PSL Pumpkin spice lattes. 0:01:22.800 --> 0:01:24.440 Not at all, Not at all. 0:01:25.880 --> 0:01:29.080 I wonder if our guest likes pumpkin spice lattes. He might. 0:01:29.480 --> 0:01:31.120 He's one of my favorite people to talk to. It's 0:01:31.240 --> 0:01:35.120 Art Hogan, chief market strategist at bet Riley Wealth Art. 0:01:35.319 --> 0:01:37.160 Thank you so much for coming back on the show. 0:01:37.319 --> 0:01:38.959 Thanks so much for having me. I'm very excited to 0:01:39.000 --> 0:01:39.280 do this. 0:01:39.600 --> 0:01:41.120 Do you like pumpkin spice lattes? 0:01:41.280 --> 0:01:43.520 Not really a fan. I like a lot of pumpkin things, 0:01:43.560 --> 0:01:46.319 but not the coffee flavored pumpkin stuff. 0:01:46.400 --> 0:01:48.560 I'm I'm going to spread the rumor that both of 0:01:48.600 --> 0:01:51.000 you like pumpkin flavored stuff. I'm going to tweet it. 0:01:51.600 --> 0:01:54.600 He can't spreading spreading rumors, Vildonna. You're a you're a 0:01:54.600 --> 0:01:57.160 professional journalist. You've got to deal with the facts. 0:01:57.520 --> 0:02:00.440 We need some controversy in our lives, so this, this 0:02:00.480 --> 0:02:04.600 can be it. But Art to start, Mike mentioned at 0:02:04.640 --> 0:02:07.360 the top of the show that we had had this 0:02:07.520 --> 0:02:10.120 blistering rally in the market. So I'm just wondering what 0:02:10.160 --> 0:02:12.800 you're expecting over the next couple of weeks. Do you 0:02:13.240 --> 0:02:15.400 think that we can continue to expect the market to 0:02:15.840 --> 0:02:19.200 digest the gains that we had seen coming into the fall. 0:02:19.520 --> 0:02:21.280 Yeah. I think Mike made a really good point. And 0:02:21.320 --> 0:02:23.280 I think if you look back in history and say, 0:02:23.280 --> 0:02:25.519 what does the SP five hunder do when it gets 0:02:25.520 --> 0:02:27.840 off to a really solid start, And if you looked 0:02:27.840 --> 0:02:31.560 at the last twenty times that the spfif hunder was 0:02:31.680 --> 0:02:34.079 up ten percent or more going into the mid year, 0:02:34.560 --> 0:02:36.679 August and September I have been rough months. That's why 0:02:36.720 --> 0:02:39.440 we call it season lead. Sometimes it takes a little 0:02:39.440 --> 0:02:41.440 bit of a catalyst to remind us, but this year 0:02:41.440 --> 0:02:44.000 it didn't. We just flipped the calendar and August was 0:02:44.080 --> 0:02:47.240 just a bumpy road for all asset classes but certain 0:02:47.320 --> 0:02:49.680 life treasuries, and I think that was part of the problem. 0:02:49.840 --> 0:02:52.720 Yields backed up, but we saw some pretty quick draw downs. 0:02:52.720 --> 0:02:58.040 It was more noticeable and the seven largest AI darlings, 0:02:58.080 --> 0:03:00.480 the Magnicent seven, right, which were off a lot more 0:03:00.560 --> 0:03:03.560 than the index was. But I think that what happens 0:03:03.639 --> 0:03:05.360 is you do sort of look at this and say, Okay, 0:03:05.480 --> 0:03:08.560 these gains sustainable to me. The more important thing that 0:03:08.680 --> 0:03:11.799 happened sort of post Memorial Day and into this August 0:03:11.800 --> 0:03:14.040 the September time frame is the market's really broadening out 0:03:14.360 --> 0:03:17.440 and it's quietly getting some sponsorship for some of the 0:03:17.520 --> 0:03:20.360 underperforming sectors in the first six or seven months this year, 0:03:20.400 --> 0:03:22.560 and by that, I mean, you know, it was all 0:03:22.600 --> 0:03:26.000 about technology, communications services, and consumer discretionary in the first 0:03:26.000 --> 0:03:28.440 half of this year, and all of a sudden, posts 0:03:29.080 --> 0:03:33.840 memorl Day into August, we started to see energy pick up, 0:03:34.160 --> 0:03:36.720 which is great, right, So one of the biggest laggards 0:03:36.720 --> 0:03:38.960 in the SP five hundred is up seven hundred basis 0:03:39.000 --> 0:03:42.920 points over technology in the last month, right, And I 0:03:42.960 --> 0:03:45.520 think that's helpful. Industrials are up three hundred basis points 0:03:45.680 --> 0:03:49.280 or two hundred and seventy basis points above technology, So 0:03:49.440 --> 0:03:51.640 that catch up trade is really important. And I set 0:03:51.680 --> 0:03:53.080 it up that way because I think that's what the 0:03:53.120 --> 0:03:55.560 back end of this year looks like. We can continue 0:03:55.600 --> 0:03:58.160 to have markets grind higher. I really think the trade 0:03:58.160 --> 0:03:59.600 is going to be about, Hey, what didn't work in 0:03:59.640 --> 0:04:01.920 the first of this year. What should I be focusing on? 0:04:02.280 --> 0:04:04.120 And I think investors are looking for that now. The 0:04:04.120 --> 0:04:06.160 other piece of the puzzle that really worked well post 0:04:06.160 --> 0:04:08.960 Memorial Day and continues to out perform is the Russell 0:04:08.960 --> 0:04:11.600 two thousand small caps, big under performer in the front 0:04:11.600 --> 0:04:13.480 half of the year, and I suspect they're going to 0:04:13.560 --> 0:04:15.080 perform in the back half, you know. 0:04:15.400 --> 0:04:17.920 Towards the end of the month. Obviously, we got Jerome 0:04:18.000 --> 0:04:22.560 Powell's speech at Jackson Hole, and the market really seemed 0:04:22.560 --> 0:04:24.760 to take that as a positive. You know, I'm not 0:04:24.839 --> 0:04:27.120 exactly sure what it was. He didn't seem to really 0:04:27.160 --> 0:04:31.320 break too much new ground. But is this sort of 0:04:31.760 --> 0:04:34.760 nascent rebound we've seen from the August folatility is that 0:04:34.800 --> 0:04:37.560 all due to pal Do you think just taking sort 0:04:37.600 --> 0:04:40.320 of the worst case scenario off the table when it 0:04:40.320 --> 0:04:42.920 comes to rates or what? Is it just a coincidence? 0:04:42.920 --> 0:04:45.560 I think he had such an easy comp compared to 0:04:45.640 --> 0:04:47.760 last year. Right So, last year it was Jackson Hole 0:04:47.839 --> 0:04:49.839 j Powell who just crushed the market, came out with 0:04:49.920 --> 0:04:53.720 a comically short speech and talked about how much more 0:04:53.760 --> 0:04:56.000 work they had to do, right so, and looking back 0:04:56.040 --> 0:04:58.120 and say, well, how much has changed year over year, 0:04:58.240 --> 0:05:00.640 I think Jay Powell was a lot more comfortable. You know, 0:05:00.720 --> 0:05:02.000 we just don't know, and we're going to have to 0:05:02.040 --> 0:05:04.120 be careful about it because they're getting to that last 0:05:04.160 --> 0:05:06.839 mile getting headline inflation from three percent out of two percent, 0:05:06.880 --> 0:05:09.040 et cetera. And that's the tricky part because they don't 0:05:09.040 --> 0:05:10.960 want to overdo it and break something, which the Fed 0:05:11.080 --> 0:05:12.920 usually does. They don't want to underdo it and end 0:05:12.960 --> 0:05:15.680 up in a seventy situation where inflation comes rory back. 0:05:15.720 --> 0:05:17.719 So I think he delivered the right message. I don't 0:05:17.720 --> 0:05:21.560 think he made any news unnecessarily. I think navigating by 0:05:21.600 --> 0:05:24.200 the stars and the cloudy sky was kind of the 0:05:24.279 --> 0:05:26.920 highlight for me. But I think if you combine that 0:05:27.480 --> 0:05:30.320 with the path of economic data that we've seen of 0:05:30.440 --> 0:05:34.760 late and yields, finally these sort of calming down a bit, right, 0:05:34.800 --> 0:05:37.120 So if the Treasury curve calms down a bit and 0:05:37.320 --> 0:05:39.200 stills a bit more of a risk on attitude, I 0:05:39.240 --> 0:05:41.080 think that has been helpful for the last couple of days. 0:05:41.080 --> 0:05:43.279 But it's only been you know, two or three days 0:05:43.600 --> 0:05:46.440 in August where we've actually seen much of a rally, 0:05:46.440 --> 0:05:48.120 where most of the month we couldn't put two days 0:05:48.120 --> 0:05:50.240 together in a row. So I think it's you know, 0:05:50.279 --> 0:05:52.040 we continue to have a bit of a bumpy road 0:05:52.080 --> 0:05:53.520 in front of us, but I think the good news 0:05:53.640 --> 0:05:55.760 is we're going to put August in the rear view 0:05:55.800 --> 0:05:58.120 mirror in September is going to come around, and we'll 0:05:58.160 --> 0:05:59.080 get through that as well. 0:05:59.200 --> 0:06:01.560 That's such a good point about having the two days 0:06:01.839 --> 0:06:03.880 in a row, which is a stat one of our 0:06:04.000 --> 0:06:06.919 Bloomberg colleague, Aliena Popina, actually ended up writing about the 0:06:06.920 --> 0:06:08.839 other day, and it was just so surprising to me 0:06:09.400 --> 0:06:12.760 just reflecting on that. So you mentioned the seasonality factor. 0:06:13.040 --> 0:06:15.160 I'm just wondering how much weight we really should be 0:06:15.240 --> 0:06:19.000 putting behind something like seasonality, where people just looking back 0:06:19.040 --> 0:06:23.280 at history say, okay, September tends to be choppy, October 0:06:23.320 --> 0:06:25.279 tends to be choppy. How much weight do we put 0:06:25.279 --> 0:06:25.800 behind those? 0:06:26.000 --> 0:06:28.240 The way I think about it is, I think the 0:06:28.279 --> 0:06:31.359 seasonality piece of the puzzle is a good it's a 0:06:31.360 --> 0:06:33.000 good rule of thumb, but I don't think it's anything 0:06:33.000 --> 0:06:36.000 you change an investment decision for. I think it's important 0:06:36.040 --> 0:06:38.440 to know that historically there are months that are that 0:06:38.480 --> 0:06:41.039 are softer than others, and there's certainly cycles like the 0:06:41.080 --> 0:06:43.800 presidential election cycle that are important. I think in general, 0:06:44.120 --> 0:06:46.120 it's just it's more of a it's more of a 0:06:46.120 --> 0:06:48.039 guide post for you to say, Okay, this may be 0:06:48.120 --> 0:06:50.320 the reason why we're seeing softest, but it's all, it's 0:06:50.360 --> 0:06:51.600 never going to be the reason that you want to 0:06:51.680 --> 0:06:53.159 change your long term investment ws. 0:06:53.400 --> 0:06:56.400 You know art you mentioned earlier Magnificent seven, you know, 0:06:56.480 --> 0:06:59.920 the big megacap text shares at the top of the 0:07:00.400 --> 0:07:03.480 S and P five hundred US waiting top of the 0:07:03.560 --> 0:07:08.000 Nazek one hundreds waiting to The whole frenzy towards AI 0:07:08.080 --> 0:07:10.880 has been kind of fascinating to me because, you know, 0:07:10.920 --> 0:07:14.720 we're used to seeing something like that built entirely on hype, 0:07:15.080 --> 0:07:18.200 but in this case, you know, the fundamentals seem to 0:07:18.240 --> 0:07:21.840 be coming in early, hand in hand with the hype. 0:07:21.840 --> 0:07:23.960 You know, every time in Video puts out a forecast 0:07:24.040 --> 0:07:26.800 or its earnings release, it's like wow, you know, it's 0:07:26.840 --> 0:07:31.000 like this is real here and now fundamental improvement based 0:07:31.040 --> 0:07:33.720 on this AI theme, at least for n Video, but 0:07:33.760 --> 0:07:36.400 I'm sure for others, you know, the cloud service providers 0:07:36.440 --> 0:07:38.880 and all that. So how are you thinking about that 0:07:39.040 --> 0:07:43.680 sort of separating the hype from the actual fundamentals in 0:07:43.760 --> 0:07:46.520 the AI plays and where do you see it going? 0:07:46.600 --> 0:07:50.440 Like to me, it almost feels like with stocks that big, 0:07:50.640 --> 0:07:54.400 market caps that big, and sort of this speculative frenzy 0:07:54.520 --> 0:07:57.640 around AI. It seems like kind of a dangerous combination 0:07:57.760 --> 0:08:01.600 for volatility potentially until we out the winners and losers 0:08:01.600 --> 0:08:05.960 of AI more completely and comprehensively. But I'm curious how 0:08:06.000 --> 0:08:09.520 you're thinking about sort of that that hype combined with 0:08:09.600 --> 0:08:14.400 actual fundamental improvement so quickly in the cycle of something 0:08:14.440 --> 0:08:15.400 that's being hyped. 0:08:15.160 --> 0:08:17.120 Like this, right, such a great point, and I think 0:08:17.120 --> 0:08:19.120 you set it up perfectly. I think when you think 0:08:19.120 --> 0:08:21.440 about anything new, the best analog for me is going 0:08:21.480 --> 0:08:23.440 back to ninety five to two thousand when we think 0:08:23.480 --> 0:08:27.160 about the Internet, right, So, the Internet and dot com revolution, 0:08:27.240 --> 0:08:30.040 and that was going to change the world. And what's 0:08:30.080 --> 0:08:33.440 interesting to me is that going back to that timeframe 0:08:33.480 --> 0:08:36.680 and say, yes, ninety five companies started company public and 0:08:36.720 --> 0:08:39.199 then it really got a head of esteem into ninety seven, 0:08:40.000 --> 0:08:42.240 eight hundred and fifty three companies came public and most 0:08:42.280 --> 0:08:44.200 of them didn't even have business models, but they put 0:08:44.200 --> 0:08:45.480 dot com at the end of their name, and we 0:08:45.480 --> 0:08:49.080 can remember all of those and that virtually all of 0:08:49.080 --> 0:08:53.280 them are gone now, right, and virtually the winners in 0:08:53.320 --> 0:08:55.439 the Internet cycle, and you and I using it in 0:08:55.480 --> 0:08:57.920 our daily basis really didn't happen. Is so two thousand 0:08:57.960 --> 0:09:00.800 and five right, So that total adres market and that 0:09:00.880 --> 0:09:04.000 opportunity took the better part of a decade. So what's 0:09:04.000 --> 0:09:08.000 different now is, first and foremost, we haven't had just 0:09:08.040 --> 0:09:11.360 a flood of new, newly minted companies that are AI 0:09:11.840 --> 0:09:16.680 specific or have AI adjacency, or have AI attributes. And 0:09:16.760 --> 0:09:19.120 that's good. So there's not that sort of speculative bubble 0:09:19.200 --> 0:09:21.960 and newly minted companies. I think that's very powerful and 0:09:22.000 --> 0:09:24.000 a big difference, and I think that's healthy. I also 0:09:24.040 --> 0:09:26.839 think the time is going to be compressed between when 0:09:27.240 --> 0:09:30.440 companies adopt an AI strategy as part of their business 0:09:30.480 --> 0:09:32.440 model and may monetize it, So I don't think we 0:09:32.480 --> 0:09:35.040 wait a decade to see this happen. We've certainly seen 0:09:35.160 --> 0:09:38.560 Nvidia growing their revenues because they're making the only chip 0:09:38.559 --> 0:09:41.480 in town that really drives enough GPUs for companies to 0:09:41.559 --> 0:09:44.000 actually have that AI strategy. So I would say as 0:09:44.000 --> 0:09:46.640 an investor, the two things I would say early on 0:09:46.800 --> 0:09:49.120 here is to say, yes, this is new and exciting. 0:09:49.160 --> 0:09:51.800 We don't know how big this gets, but who are 0:09:51.840 --> 0:09:55.240 the obvious players? And Video is obviously the leader here 0:09:55.440 --> 0:09:58.800 and every time they report they raise their quarterly guidance 0:09:58.920 --> 0:10:02.520 in billions of and while there's still the only game 0:10:02.559 --> 0:10:04.520 in town, and they are right now and they've got 0:10:04.559 --> 0:10:08.120 the early, early lead. They will eventually get some competition, 0:10:08.200 --> 0:10:10.560 but for now, I think that's that's a safe place 0:10:10.600 --> 0:10:12.000 to be if you want to have some force near 0:10:12.000 --> 0:10:14.800 your portfolio there. And then the two incumbents are obvious, 0:10:14.920 --> 0:10:17.200 right that the you know, the hyperscalers that can actually 0:10:17.440 --> 0:10:20.840 use this right away and afford to develop an AI strategy. 0:10:20.840 --> 0:10:25.360 See that's obviously Google and in Microsoft right and every 0:10:25.360 --> 0:10:26.959 week there to come out with a different announcement and 0:10:27.000 --> 0:10:28.920 talk about about how much you're going to charge for it. 0:10:29.000 --> 0:10:31.160 But the difference that makes in the near term for 0:10:31.160 --> 0:10:33.559 those two companies is much smaller than the difference that 0:10:33.640 --> 0:10:35.600 it has made for in video. So you know, to me, 0:10:35.920 --> 0:10:38.839 there's three obvious players, but I would overweight the guys 0:10:38.840 --> 0:10:40.840 that are selling the picks and shovels to the gold rush. 0:10:40.920 --> 0:10:43.960 And that's in video right now, and clearly it's It's 0:10:44.360 --> 0:10:47.079 what's amazing to me is it's a lot cheaper than 0:10:47.080 --> 0:10:49.880 it was when they reported their earnings a week or 0:10:49.960 --> 0:10:52.960 so ago, and and you know, you might have some 0:10:53.000 --> 0:10:55.360 better opportunities here. So they sharpen your pencil, but don't 0:10:55.400 --> 0:10:57.600 jump in and never put on a full position at 0:10:57.640 --> 0:11:01.280 one time, and any of these things. But the biggest 0:11:01.280 --> 0:11:02.800 thing I'd be concerned about is if we start to 0:11:02.840 --> 0:11:05.320 see the capital markets open, we start to have a 0:11:05.360 --> 0:11:09.600 flood of newly minted companies that are AI specific or adjacent. 0:11:09.679 --> 0:11:12.080 I would avoid that at all costs because they likely 0:11:12.120 --> 0:11:13.679 don't have models. There's gonna be a lot of hype 0:11:13.720 --> 0:11:16.160 around them. They're going to get priced at twenty and 0:11:16.160 --> 0:11:19.199 litle bit at sixty, and that doesn't end well for anybody. 0:11:19.280 --> 0:11:20.960 It's like when a couple of years ago a bunch 0:11:20.960 --> 0:11:23.840 of companies were adding just blockchain to their name. Right, 0:11:29.559 --> 0:11:33.199 I do have another question about the big tech companies 0:11:33.200 --> 0:11:35.760 for you. There was this really interesting report from Bloomberg 0:11:35.840 --> 0:11:40.560 Intelligence this week that said, looking over the past five, ten, 0:11:40.720 --> 0:11:45.280 fifteen years, there's only one equity mutual fund that has 0:11:45.320 --> 0:11:50.439 outperformed QQQ, which is the giant NAZAQ one hundred ETF. 0:11:51.320 --> 0:11:55.640 Just one has outperformed QQQ over that timeframe, and it's 0:11:55.679 --> 0:12:00.599 because they had a heavyweighting towards Tesla. Wondering what you 0:12:00.720 --> 0:12:03.240 make of something like that and just how difficult it's 0:12:03.320 --> 0:12:06.720 been to beat these giant, giant companies that have just 0:12:06.760 --> 0:12:07.760 been doing so well. 0:12:08.240 --> 0:12:10.680 Yeah, anytime, friend that you look at it, you're always 0:12:10.720 --> 0:12:12.960 going to see a high percentage of active managers, whether 0:12:13.000 --> 0:12:15.760 they're running mutual funds or to tap asset management firms 0:12:15.800 --> 0:12:18.880 or have their own funds, beating the market, and especially 0:12:18.880 --> 0:12:22.000 a market that is driven at least over the course 0:12:22.000 --> 0:12:24.440 of the last call it two or three years, by 0:12:24.480 --> 0:12:27.040 the five or ten largest names in the SPF voter. Now, 0:12:27.880 --> 0:12:30.079 that's nothing new to us, right If you go back 0:12:30.080 --> 0:12:32.400 to the last fifty years or at least thirty years, 0:12:32.480 --> 0:12:34.120 you could pick every decade and say, what were the 0:12:34.160 --> 0:12:36.320 top five names of the SPFF voter. It's just the 0:12:36.400 --> 0:12:38.880 names change, but the size because of the way the 0:12:38.960 --> 0:12:40.719 SPF hutter is made up. But it's a market cap 0:12:40.760 --> 0:12:44.120 weighted index, they always have an outsize impact on the 0:12:44.160 --> 0:12:46.800 overall index. And it used to be companies like Exxon 0:12:46.880 --> 0:12:50.079 Mobile and General Electric and AT and T, and over 0:12:50.120 --> 0:12:52.640 the years, that's kind of obviously shifted over to companies 0:12:52.679 --> 0:12:56.160 like Apple and Alphabet and Facebook. And I think that 0:12:56.160 --> 0:12:58.400 that's going to change again, you know, ten years from now. 0:12:58.440 --> 0:13:01.760 But I think in general that the sort of active 0:13:01.800 --> 0:13:06.560 management versus passive management or active versus ETFs is a 0:13:06.679 --> 0:13:09.240 very difficult game to play, and it's a very few 0:13:09.520 --> 0:13:12.520 you know folks have had a long term record of 0:13:12.600 --> 0:13:17.320 beating right and and I'll ask you a question. Name 0:13:17.400 --> 0:13:19.960 for me a hero of viewers that is a long 0:13:20.040 --> 0:13:22.320 only fund manager, because what I was your age. I'm 0:13:22.320 --> 0:13:23.520 going to have five names for you. 0:13:23.720 --> 0:13:25.640 This is a trick question because there aren't. 0:13:25.520 --> 0:13:27.640 If you can't name any, then there's none in your life. 0:13:27.760 --> 0:13:29.839 Right So, you know, when I started the business, Peter 0:13:29.920 --> 0:13:32.520 Lynch was a rockstar type portfolio manager and had you know, 0:13:32.559 --> 0:13:35.680 outperformed for years, but nobody was invested in the market. 0:13:35.720 --> 0:13:39.120 Nobody could buy the Triple Cues or the Spiders. You know, 0:13:39.160 --> 0:13:41.480 we just didn't have as much passive back then. So 0:13:41.520 --> 0:13:44.640 it's made that role that much more difficult. Warren Buffett 0:13:44.640 --> 0:13:47.160 I Sposh falls into that category, but different investment style. 0:13:47.600 --> 0:13:50.360 But you know, four years and years you would you 0:13:50.360 --> 0:13:52.959 would have your favorite long only portfolio manager at the 0:13:52.960 --> 0:13:55.280 tip of your tongue. And right now I can't find 0:13:55.280 --> 0:13:57.200 anybody that just has that answer for me right away. 0:13:57.280 --> 0:14:00.599 Mike well Art, I'm glad you brought up Lynch. I 0:14:00.640 --> 0:14:03.800 actually have a Peter Lynch related question for you, because 0:14:04.320 --> 0:14:06.000 I was reading one of your notes and I found 0:14:06.040 --> 0:14:08.920 this interesting. He wrote, we foresee a path to S 0:14:08.920 --> 0:14:11.240 and P five hundred earnings of two hundred and thirty 0:14:11.280 --> 0:14:14.920 dollars for twenty twenty three and two point fifty in 0:14:15.160 --> 0:14:18.320 twenty twenty four. Now, this is what I found interesting. 0:14:18.440 --> 0:14:21.600 Using a twenty multiple on the blended earnings of two 0:14:21.720 --> 0:14:25.440 forty gets us to forty eight hundred for the SP 0:14:25.520 --> 0:14:28.760 five hundred. I'm curious how you got to that twenty 0:14:28.880 --> 0:14:32.400 multiple because I always think back to Peter Lynch and 0:14:32.480 --> 0:14:35.640 his rule of twenty. You know that the multiple plus 0:14:35.640 --> 0:14:39.400 the rate of inflation in a fair market should equal twenty. Now, 0:14:39.760 --> 0:14:42.840 there's plenty of examples of it being below and above that, 0:14:43.480 --> 0:14:45.560 but it does kind of average out to that interestingly. 0:14:45.600 --> 0:14:47.480 So, unfortunately, for the last ten years, if you applied 0:14:47.520 --> 0:14:49.560 the rule of twenty, which is a discipline that I've 0:14:49.560 --> 0:14:51.560 always tried to use, you would have been out of 0:14:51.680 --> 0:14:53.280 You would have been out of the market for most 0:14:53.320 --> 0:14:54.960 of the time. Part of that was the fact that 0:14:54.960 --> 0:14:57.800 we have very low inflation, and then we shifted the 0:14:57.880 --> 0:14:59.800 very high inflation or a very short period of time. 0:15:00.080 --> 0:15:01.960 I think that what I tried to do is taken 0:15:02.040 --> 0:15:04.480 it and that twenty multiple is obviously a trailing multiple, 0:15:04.720 --> 0:15:07.400 not a not a forward multiple, so it's a you know, 0:15:07.440 --> 0:15:09.400 I think that makes it a little bit easier to 0:15:09.400 --> 0:15:11.560 sort of justify. And I said, what what does that 0:15:11.640 --> 0:15:13.480 multiple look like on the end of the year for 0:15:13.480 --> 0:15:15.560 the last five years, And that's ad her about where 0:15:15.560 --> 0:15:17.720 it is and my role as a strategy. You have 0:15:17.720 --> 0:15:18.840 to come up with a number, and I was at 0:15:18.880 --> 0:15:21.400 forty four hundred, and everyone thought I was crazy in January, 0:15:21.840 --> 0:15:24.160 you know, having to have something in print and not 0:15:24.200 --> 0:15:26.280 having people saying, oh, so you think the market's going down. 0:15:26.800 --> 0:15:28.920 I just kind of rolled out to what we think 0:15:29.000 --> 0:15:32.920 twenty four looks like. And we're confident in that estimates 0:15:32.960 --> 0:15:35.320 we have both this year and next year because after 0:15:35.360 --> 0:15:38.040 the second quarter earage reporting season, the estimates went up, 0:15:38.120 --> 0:15:41.400 not down, which is you know doesn't always happen. And 0:15:41.520 --> 0:15:44.800 we saw no degradation of the of the twenty four estimates, 0:15:44.920 --> 0:15:46.680 which is a positive. A lot of that can change. 0:15:46.760 --> 0:15:48.960 It is a moving target, but you're right. It's like 0:15:49.320 --> 0:15:51.200 it was difficult to type that number when I put 0:15:51.240 --> 0:15:53.600 it down, but I felt a little more confident was 0:15:53.640 --> 0:15:55.720 kind of looking out a bit further and using what 0:15:55.760 --> 0:15:57.520 the average was for the last five years. 0:15:57.960 --> 0:15:59.760 Yeah, well that's the thing though, it does seem it 0:15:59.800 --> 0:16:03.560 does seem like a reasonable multiple in the state and age. 0:16:03.600 --> 0:16:05.560 You know, I guess I've been kind of surprised that 0:16:06.640 --> 0:16:09.680 this acceleration in inflation and interest rates hasn't knocked the 0:16:09.760 --> 0:16:12.960 multiple down further. You know, is there you know, is 0:16:12.960 --> 0:16:18.200 the multiple just you know, signaling that the market believes 0:16:18.320 --> 0:16:21.200 inflation and rates are going to normalize back to pre 0:16:21.280 --> 0:16:22.120 COVID levels, do you think? 0:16:22.120 --> 0:16:23.320 I don't know if they believe that they're going to 0:16:23.360 --> 0:16:25.880 normalize back to pre COVID levels, but they certainly believe 0:16:25.920 --> 0:16:28.000 they're heading in that direction. Right, So you know, we 0:16:28.440 --> 0:16:31.880 headline CPI going from nine percent to three percent, obviously 0:16:31.880 --> 0:16:34.240 we're heading in the right direction. So no one's going 0:16:34.320 --> 0:16:36.720 to use, you know, what inflation was six months ago 0:16:36.800 --> 0:16:38.040 or three months ago. They're going to use what they 0:16:38.080 --> 0:16:39.560 think it's going to be in six months. And I 0:16:39.600 --> 0:16:41.920 believe it's going to have a two handle, especially if 0:16:41.920 --> 0:16:44.920 we start to get shelter costs in line with reality, 0:16:45.000 --> 0:16:48.040 right that the government uses something owner's equivalent rent, which 0:16:48.080 --> 0:16:50.120 has got a lag of six to twelve months because 0:16:50.120 --> 0:16:52.720 it's kind of survey, right, But if you look at 0:16:52.760 --> 0:16:54.880 you know, any of the other real time data, you know, 0:16:54.960 --> 0:16:56.960 like Zilo or redfin or any of the folks that 0:16:57.000 --> 0:16:59.080 give us that real time data, we know that that's 0:16:59.120 --> 0:17:00.960 off by a bit. So I think that the inflation 0:17:01.040 --> 0:17:04.440 numbers just naturally have more to come down, and I 0:17:04.480 --> 0:17:07.560 think that helps sort of justify a bit of a 0:17:07.640 --> 0:17:10.080 higher multiple than we normally would have if in fact 0:17:10.280 --> 0:17:11.920 you and I were sally using the rule of twenty 0:17:11.920 --> 0:17:15.120 and subtracting the current inflation rate. So I think it's 0:17:15.240 --> 0:17:17.320 I think that's where the difference lies. The other thing 0:17:17.400 --> 0:17:19.600 I think about two is, you know, we talked about 0:17:19.640 --> 0:17:21.560 the S and P five hundred and that multiple, but 0:17:21.680 --> 0:17:23.520 adding one of those five years, if you were to 0:17:23.600 --> 0:17:26.360 back out the top ten stocks, the multiple has been 0:17:26.480 --> 0:17:28.680 add or about fifteen between fifteen and fifteen and a 0:17:28.720 --> 0:17:31.119 half and it continues to be the case. So again 0:17:31.240 --> 0:17:33.640 that's the tricky part about having five hundred stocks where 0:17:33.680 --> 0:17:35.840 the ten of them have the most influence and are 0:17:36.040 --> 0:17:38.480 attributed much higher multiples because they have much higher growth 0:17:38.560 --> 0:17:39.479 rates in general. 0:17:40.200 --> 0:17:42.840 So speaking of different ways, to look at valuations for 0:17:43.040 --> 0:17:44.840 the market. I actually had called you about this a 0:17:44.920 --> 0:17:47.000 couple of days ago because I was trying to find 0:17:47.080 --> 0:17:50.760 a different way of measuring the rally that we had 0:17:50.800 --> 0:17:52.680 seen in the s and P five hundred so far 0:17:52.680 --> 0:17:55.639 this year. So if we take the SMP five hundred 0:17:55.720 --> 0:17:59.879 market cap and we divide it by nominal GDP, or 0:18:00.080 --> 0:18:03.200 if we take it and divided by CPI, the gains 0:18:03.280 --> 0:18:06.560 just aren't as great as you know, whatever we had 0:18:07.040 --> 0:18:09.120 we had risen as much as twenty percent this year, 0:18:09.280 --> 0:18:12.159 nearing those all time highs that we had seen at 0:18:12.160 --> 0:18:15.560 the start of twenty twenty two. It's just not there's 0:18:15.640 --> 0:18:19.240 just much further to go to reclaim those highs. 0:18:19.400 --> 0:18:21.480 I think that's such a great exercise because what it 0:18:22.000 --> 0:18:23.840 tells you is two things. In my mind. I forget, 0:18:24.000 --> 0:18:27.560 it tells you that the Fed that has, you know, 0:18:27.640 --> 0:18:32.000 a thousand economists looking at markets probably feel a whole 0:18:32.000 --> 0:18:34.760 lot more comfortable with how far we've come during What 0:18:34.800 --> 0:18:37.080 they've been trying to do is kind of tighten financial 0:18:37.080 --> 0:18:40.840 conditions because they can live in a nominal world. Right 0:18:40.880 --> 0:18:42.959 they say, Okay, the market's up, but not not when 0:18:43.000 --> 0:18:46.720 you factor in GDP, or if you factor in inflation. Now, 0:18:47.280 --> 0:18:50.000 you and I and the rest of the investing world 0:18:50.520 --> 0:18:54.000