The Compound and Friends - Something's Going to Break, We Don't Know What

Episode Date: November 19, 2024

On this special episode of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Michael Cembalest to discuss: what Trump's win means for stocks and the economy, how Democrats lost big on inflation, the biggest risks to the market in 2025, and much more! This episode is sponsored by Rocket Money. Visit: http://rocketmoney.com/compound and cancel your unwanted subscriptions today! 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/ 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

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All opinions expressed by Josh Brown, Michael Batnick, and their castmates are solely their own opinions and do not reflect the opinion of 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. Ladies and gentlemen. I hear people slapping.

Yeah. People are so excited that you're here. I can't hold them back. in this podcast. And we are going to accomplish two things today. We will assess the aftermath of the election and the resulting market reaction. And we will think ahead toward 2025. If we even get there, we even make it that far, who knows? Open question. Michael is the chairman of market and investment strategy for JP Morgan Asset Management and the author of Eye on the Market since 2005. Michael is also a member of the JP Morgan

Asset Management Investment Committee. He has spent 35 years plus at JP Morgan, having first joined the firm in 1987. Is it annoying if people call you a legend? Can I say you're legendary? That's how I feel. Is that bad? Yeah, I would rather you did not.

Duncan insists that I pay substantial deference. You're a fan favorite. Anytime you come on, the views go crazy, the downloads go crazy, we get tons of feedback. Thank you so much for doing this. We really appreciate it. Great to be here. Alright.

Can we talk about Hamilton first? Yes. I didn't know until I saw the quote from the play, because I never saw Hamilton, that this was an illusion, an allusion with an A, to Hamilton. But you talk about, I think, the thing that a lot of people in your seat aren't talking about, which is almost like the game theory of how to win these things. And either the energy wasn't there or they just didn't understand the rules of the game in 2024.

But to your point, it felt like the economic team, the surrogates who were supposed to talk about the economy, it was almost like a political malpractice. Where were these people? We're at almost no unemployment, record highs for stocks. So talk a little bit about what you were trying to get at in the piece. Yeah, I'm perfectly willing to entertain the notion that there was absolutely no way that Harris

could have won the election based on a variety of factors that we all have read about. Yes. But you play to win and you fight until the end and you put your best people out there. Yeah. And ever since the Morning in America commercials, those were Reagan's Morning in America commercials, it's been crystal clear that voters care

way more about economic issues than they do about just about anything else. There were some shocking numbers that came out of some of the exit polls. Hispanics as a group put economics way ahead of immigration. 40% of the exit polled Hispanics said they were supportive of a border wall and stricter immigration policy. And so ultimately economics is the centerpiece to everything.

For just about everyone. Just about everything. Nixon won 49 states in part because of the fact that that was before all the Vietnam War spending and inflation showed up. It's always been about economics, certainly in the post-war era. Here are your data points.

Close to an all-time high in the labor force participation rate, which is a proxy for can you get a job. Okay, you can. A surge in reshoring activity of U.S. manufacturing jobs after reshoring progress declined under Trump. Industrial policy that overwhelmingly benefited GOP districts. You cited 75% of the spending from the energy bill actually went to GOP districts. You cited 75% of the spending from the energy bill actually went to GOP districts which are in swing states.

Nobody knows that. Largest surge in manufacturing related construction on record ever including the chips bill which they were building facilities in Arizona, Ohio, New Mexico, states that we thought were meaningful. Almost done. Highest year-to-date equity gains in an election year since 1936. Of 10 states Arizona, Ohio, New Mexico, states that we thought were meaningful. Almost done. Highest year to date equity gains in an election year since 1936. Of 10 states with the highest share of imports to state GDP, 8 are GOP states. You would think people would be a little bit more wary about tariffs in those states. They weren't.

The inflation surge was painful, but wages are now rising faster than rents. The Fed was able to raise policy rates without triggering a recession for the first time in 60 years. Nobody has this information in the electorate because no one from inside of the campaign or adjacent to the campaign has been vocally supportive enough to tell that side of the story. Of course, everyone hates inflation, but the economy itself is pretty darn good.

And so, by the way, is the stock market. Yeah, look, again, there are a lot of factors working against the Harris campaign. I was just surprised as an investments person without a horse in the race. I was surprised as an investments person not to see all the stuff you just mentioned flooding the airwaves rather than information about democracy and some of the other topics.

And it goes back to who Biden picked for his cabinet and who Harris picked for her campaign. And look, you know, I, it was a little bit a rough elbows of me. Nobody's ever accused me of not doing that. But I had a chart in the eye on the market after the election. I did a Google Trends search for Menukin in Trump's term against Yellen. We have this. Most of our clients and most of your listeners

couldn't identify Steve Menukken in a police lineup. They don't know who he is. Yellen had a fraction of his recognizability and visibility. She disappeared. There's a lot of second guessing, I think, that can be done in terms of who's out there telling the story.

You and I were talking before the call, I'm older than you, I'm 62 years old. And I remember during the 90s, you couldn't, oh, thanks, sorry. You couldn't turn on the TV or the radio, right, we listened to the radio then, without hearing Bob Rubin or one of his associates talking about the Clinton economy and the

Clinton revolution. They knew how to sell it. They knew how to sell it. They picked a guy who understood the markets, but he knew how to sell it. A former academic and Fed chair may have been a really bad choice in a highly politicized environment to sell what Bidenomics was all about. So it might not have changed the outcome, but I was disturbed to see how little effort there was put

into talking about it. It's more than the fact that she looks like somebody who had just retired from a full career at the Fed, which she did, a very successful career. It's more than that. It's the accent, it's distinctly Brooklyn. If you close your eyes, it's giving Woody Allen. That's not resonating in the states that you need. She was invisible. I'm not sure I would, like, I'm not sanctioning that.

I am happy to say, I'm allowed, first of all, I'm allowed to say it. I don't think that she, even if she gave it her all and was like on the trail, like, gather around, let me tell you the story of the Biden economy, the Biden House, I really don't think it would have helped. But you're right that they should have made more of an effort. The best, by far, the best spokesman for Bidenomics over the last 18 months has been

the Secretary of Transportation. And there simply is no precedent in the modern era for an administration and a presidential campaign run by the Vice President relying on the Secretary of Transportation going that deep in the depth chart to rely. If that's the person that you're relying on to tell the story, you've put the wrong people

in a bunch of other seats. So two things can be true. They failed in terms of delivering a message that Americans wanted to hear. But also, every incumbent around the globe lost their seat. And it's very simple why. People voted for change, and it doesn't matter that inflation was subsiding,

the rate of change was subsiding. If you tried to sell that message, it would have been counterproductive because people would have said, my fucking burrito is $14. I don't care that it's not up month over month or year over year. My burrito is $14, and I don't want to pay that much anymore.

Yes, okay. But I saw that chart from the FT and I looked at their methodology and I think it's fine. There was some fudging going on in there, but essentially they concluded that for the first time in 100 years, voters share for incumbents lost, incumbents lost voters share in every election, okay? Yet in five of the swing states that were contested,

Democrats won four Senate seats. So it's, there was a messaging issue at the national level and within the Harris campaign that needs to be talked about and examined and understood. And then, you know, then there's the other stuff on immigration and the whole process with no open convention and stuff like that we could talk about if you want.

I mean, there's lots to get into, but one of the key themes for me for this lecture was old media, just dead. The role that Rogan and other podcasters played and the fact that she said no, or what, I don't know what happened there, but she didn't go on for whatever reason, that mattered a lot. Yeah, she also didn't go on for whatever reason. That mattered a lot.

Yeah, she also didn't go to the Al Smith dinner. And some people were kind of like, wow, that's the first time. That's the big Catholic event in New York City. And it's the first time that a candidate opted not to appear. And obviously her campaign made the decision, what's the benefit for her going just to get kind of

made fun of by Trump who was in attendance. Because it's a roast kind of a little bit. Yeah, but you know, Americans are kind of looking, I think, for people that have been battle tested. And the whole point of Harris's candidacy is it avoided all the battle testing associated with presidential campaigns. And that was just another exclamation point on it.

So, you know who the biggest beneficiary was of Bidenomics? Ironically, it's Elon Musk. There's literally nobody has benefited more in the last four years. The problem is they lost him. They dissed him for the EV event at the White House. And quite frankly, he didn't get over it. Maybe he shouldn't have. They acted like he doesn't exist. He is the singular person to serve as the catalyst for the EV revolution.

Whether you like Tesla cars or you don't or you like him on Twitter or you don't, you can't say that he shouldn't have been there. And I think that that's emblematic of the priorities of the Democrats. They're more worried about groups like unions and NGOs and the various organizations that have served as the underpinning of the left for the last 25 years. And they were not really thinking about, like, how do we reach out to people

that normally wouldn't vote for us but are maybe up for grabs? So I looked at that as like, wow, you guys lost Elon Musk. The EV guy is defected to the Republicans. I will say this. It is remarkable how much effort and money that he put into supporting Trump

since the only revenue raising item in the entire Trump arsenal other than tariffs is clawing back the EV subsidies as part of a reconciliation bill. So he wants it. What's that? He wants it. That's gonna hurt sales of Nissan Leaf and Chevy Bolt more than that's gonna hurt the average Tesla consumer. Yes, but. Rivian's dead. Anything that anything that kind of takes away from the momentum of the EV transition isn't good for Tesla either. Right. Because it slows down investments in battery manufacturing, it slows down investments in in charging, you know, highway charging capacity. That's not an entire win for him. But it is notable that you got it. notable that- You got an income cap of $150,000 to receive that 7,500.

I think the calculation on Musk's part is- Most of my buyers are- My buyers make more than 150,000 and this is an easy thing for me to hurt my competitors. Yeah, until the next model gets rolled out. Right. And the markets also didn't like the rollout of the auto taxi, right?

I mean, there's a lot of questions about that too. One of the charts that you cited was the home to price income ratio. This is obviously a huge deal. Housing for people my age, completely unaffordable. And her solution to the problem might have been more problematic than the problem itself. Democrats have this inclination that anytime there's a problem, give people more money to solve the problem. And when the problem is a supply-demand problem, Democrats tend not to think about a positive supply shock, right? Because supply shocks that everybody learns in Econ 101 are the way that you deal with excess demand.

You do something to increase on a shock basis supply so that there's a supply demand equilibrium and bring prices down. So the notion that you were going to solve the housing problem by giving more people more housing subsidies to go and push housing prices up more. It sticks inflation with more inflation. Right, it made absolutely no sense. So crazy it just might work. And so crazy it probably would have failed. So there's something very insidious going on in the United States. And this is part of the reason for Jamie,

when Jamie talks about Trumpism, the part that he does latch onto and likes, and has said this publicly, is deregulation. And if you look at the root of the housing problem, the root cause is a massive increase in zoning regulations and land use reform lawsuits. It used to be that something like 30 or 40% of all new homes were 1400 square feet or less.

Starter homes. Starter homes. They're gone. They're 8% now. And that's too cheap, right? And that has directly, that percentage from 33 to eight has directly coincided with the increase of zoning regulations.

You think it's cause and effect? More zoning regulations, less affordable housing, period? Oh, absolutely. Okay. And because what it does is it makes it too hard for home builders to make money building starter homes because of all the regulatory constraints. And you know.

Can we put your charts up related to this? Just so you can walk us through these. They should give the home builders the money. So Dan, there's one US core in food inflation. It's attached to the home price to income ratio. Chart four. Okay, so let's focus on the one on the right. This is the home price to income ratio. It's never Okay, so let's focus on the one on the right. This is the home price to income ratio.

It's never been higher. It's 50 to 50 year high. It's got a lot of variability, but it's practically doubled since when I was a kid. What do these numbers on the y-axis mean? Ten what? Times? That's the ratio of home prices to income. So the median home price is 10 times the median income in the United States?

After having been six and a half. What was it in 1995 when I was 22? About 7.5. Okay, so that's meaningful. That's it. It's very meaningful. All right, let's put these next two up. You're showing us here land use regulation versus starter homes. Yeah, it's... Look at this crisscross. It's almost perfect. Absolutely. And what you're seeing on the gold line is the starter homes that went from almost 40% of all new homes to eight, over this intervening 40-year period. And that blue line is the Achilles heel of the whole thing,

which is these are the federal and local land use cases where people are suing because of zoning restrictions. But what are these zoning restrictions about? Are these about the Sierra Club? No, lot sizes, floor to area ratios, setback limits. But who wants those regulations? Who's pro that? Oh, incumbent homeowners are essentially,

and look, in San Francisco. So it's NIMBY stuff. Yeah, it's all NIMBY stuff. Okay, all right, got it. And so the reason, go back to that chart. The reason the chart on the right is there is who would you trust to break the logjam of a housing crisis, one of whose root causes is too much regulation?

An administration that set a new gold record in new regulations by presidency or one that didn't. So, Michael, the voters have not seen your chart and they certainly would not have been studying this data in October. I know, I do. So do they just have a sense that this is the case without knowing the data? Do they just equate Biden with less affordable housing because of too many rules? I think the voters are smart enough to draw that connection. I don't know. I think they know that, to put it this way, the inner life in an inner city is getting

worse rather than better. And one of the issues there, and there's a Wharton analysis that shows this like perfect correlation between housing affordability in 25 different MSAs, you know, the metropolitan cisco areas and their level of zoning regulations. So people know intuitively that life in a big city has gotten more expensive and more difficult over time. They're voting for change, they know.

And the Democrats really haven't come up with anything. What could Biden-Harris have done, either of them, both of them, to change the perception of them being responsible for unaffordable housing? Or unaffordable, anything. Yeah, what could they have? I never have heard a, you know,

Harris or Biden or Warren or Sanders, I've never heard anyone in that constituency talk about the need to increase supply as a solution to too much demand. Because increasing supply is typically, primarily a private sector solution where you need to cut red tape, you'd need to cut taxes, you might need to provide red tape, you'd need to cut taxes, you might need to provide

workforce training, right? So that would be helpful. But generally, supply increases as a solution to inflation. So we gave away $4 trillion to keep Broadway shows running. Okay, fine. I get it. There was no money. There was no money to make starter home construction fully tax deductible. There was like no... Nobody thought, oh, what if a first-time homebuyer, single-family, non-attached home, is a 0% interest rate mortgage for the first five years. It's not demand. You don't want more subsidies. You don't want to make it cheaper for people so they can push prices up. But don't you think people will build more starter homes if those loans are available to the buyer?

Maybe. Okay. But you've got to tackle some of these zoning issues. There are places in New York City where you can't build multifamily housing because there was once a parking lot or there was once a retail establishment. In most of the five boroughs, it's zoned for single family housing. You wouldn't believe the difficulties that multi-family developers have in actually being able to get permits to build.

It's gotta start there. I think a lot of where we are today stems from the pandemic and putting the economy on ice, on life support, and just resuscitating us like out of nowhere like, oh, we're alive now. And I think that we'll never know how effective the stimulus would have been if it weren't for the supply issues, right? The ports, all that sort of stuff.

And it's sort of a shame because it's not unreasonable to think that sending checks out in a recession is actually the right medicine. But don't you think that future regimes are gonna be so afraid because of the last time it caused inflation? Yeah, I mean, I would never criticize anybody for the decisions they make in the middle of a pandemic that they haven't seen before.

In retrospect, some of the school closure decisions, I mean, even the New York Times has kind of fessed up, some of the school closure decisions were disastrous in terms of their impact on early learning. There are gonna be lifetime income consequences for people that were negatively affected in grade school and in middle school because of the decisions that were made.

My kids, I had an eighth grade daughter who graduated in 2020. They threw the high school yearbook through a slit in my car window as I drove through the parking lot. This is not good for their mental health. Yeah, I think the yearbook dynamics are the least of it. I mean, there are some obvious... But it's emblematic of the way school was carried out that year.

And it's nobody's fault. It's just... Well, it's people's fault. But we over-erred on the side of caution to protect our seniors, which had first-order immediate effects. Nobody wanted grandma and grandpa to die. But then the second order and tertiary order effects were going to feel to your point for like years to come. But I asked you about the inflation specifically

because that's the root of all of this. It's high prices. Like that's where it starts and stops. It's high prices. And it happened because of the pandemic. Yeah, but it also happened because- Extra stimulus. It also happened because of the pandemic. Yeah, but it also happened because- Extra stimulus. I agree, I agree.

It also happened because the Democrats were also desperate for an economic alternative to the status quo. And the Biden people in particular commissioned a study, it was from the Hewlett Foundation, and it came out in, it was, remember that MM- MMT? Yeah, MMT stuff, I stuff I was gonna say MMA but that's different they did this study where they they finally said okay and this is 2020 right and the Biden administration can now finally think about all sorts of stimulus without having to worry about

inflation any administration before them would have been terrified to pick up that document. The Biden people embraced it wholesale. So it's, yes, it's the pandemic, but it's the mentality of how you dealt with the pandemic and what you thought the risk factors were of different policy responses to it. And they were desperately looking for a hook on which they could do this.

This is the quote, and you included this in your piece, if economic developments over the past decades show anything, it's that there is greater head room for spending without causing undue inflation. Acknowledging this creates space for a new consensus, permitting governments more room to spend on efforts that boost aggregate demand without worrying about inflation quite so frantically, to which you said, actually, Biden and Harris should have been a lot more frantic. The subsequent inflation surge was the worst since the late 70s and accompanied by the

worst housing affordability data on record. There was a Jackson Hole speech about how people of color are more susceptible to the effect of rising rates, and maybe we ought to think about the inequality that comes from hiking rates too soon into an expansion. There was mission creep in a lot of areas. I think the Fed was trying to be all things to all people after the great financial crisis, and they may have kind of jumped the shark. They should not be wading into inequality

to the degree that they're having an effect how quickly they want to squelch inflation. People were protesting for the first time in my life. People were protesting at Jackson Hole, and they said that higher policy rates were essentially regressive because it rewards savers at the expense of people who owe money. Untrue?

Well, inflation is worse. Inflation is worse for those people. Well, I would argue that the Fed is supposed to be making decisions independent of its consequence for progressivity and regressivity on cash balances. They have a dual mandate, full employment and low inflation. Everything else is just noise. But if the message was, hey, we won,

we landed the plane, inflation stopped, prices stopped going up and no recession, I think that people would have been so angry at that message. You know, people always credit Reagan for the disinflation that took place in the early 80s. The Reagan people were furious at Volcker when he raised the policy rate to 18 or 19 percent. But he did it because he felt that it was the right thing to do, irrespective of the politics.

That's what Fed people are supposed to do. We're not in Kansas anymore. We're not about to repeat that. And they paid a huge price for it. Nick Tsimoreous wrote yesterday how Democrats blew it on inflation. He is willing to point fingers. This is Nick. President Biden hadn't even been inaugurated when he and his senior advisors made a monumental gamble in January 2021 that would reverberate through his presidency.

Fresh on the heels of a $900 billion COVID relief bill that Congress had approved weeks earlier, Biden proposed a $1.9 trillion stimulus bill. So a big critique in the Obama years was that there wasn't enough fiscal stimulus and the Fed was left to push on a string and try to do it all by themselves. The Biden folks, many of them were around, including Biden, for the Obama years, and they seemed like they really wanted to go hard the other way. Let's do more fiscal stimulus than anyone has ever done. Unfortunately, it was coming on top of all of the stuff that Trump had done and

Mnuchin and the Federal Reserve. And we said at the time, a lot of people did that, this is not necessary, but he promised it. Nor is it inflation reducing. I think we all said it. Remember, he promised it. That's the problem. When you talk about how the Biden-Harris people were susceptible and like, well, you know, there was a global effort to push out the incumbents and there was a global frustration with the global inflation surge. The Biden people did a lot of things on top of that. They actually passed something that they called the Inflation Reduction Act, which is the most Orwellianly named bill in the history of Congress. It's almost perfect. And yeah, and it has done nothing except increase inflationary pressures.

There are 49 categories in the PPI report. Over the last few years, the number one thing that's increasing in the producer price report, transformers and power regulars for transmission. Power prices are going up, not just in California, but in Texas and Pennsylvania and New York. This is a very, very inflationary bill. And I think that essentially increased the pressure

and the inflation albatross on Harris because they had that thing looming in the background as well and that people did experience. People are experiencing that every day. And not everything is coming from the White House. You had like half the states increase minimum wage. I mean they felt that they had to. You had the COLA adjustment for Social Security recipients. The biggest ever in one year. Some of this is cause some is effect and some is both. Some is just like, I guess,

responding to a crisis by making the crisis worse, but not intentionally. But the end result of all this, Michael, during Biden's term, prices rose in the aggregate by 20 percent, during Trump's term prior, 8 percent. It's more than a double in the aggregate rise in prices for everything. And if we go in line items and we start looking at auto insurance, it's hysterically funny. This is really, look, there's social issues that got people out to vote or got people really vocal,

but I agree with you. It's like you had to come out and tackle this inflation story head on, even if it doesn't work, you have to make the case to people that they're making more money than ever, that their home price is rising in value. I'm not saying that the story was an easy one to tell. No, definitely not.

But nobody was even trying to tell the story. Michael, if you look at this chart, it's for the share of Americans who assess their own finances and the national economy positively. And the line that shows, when people say, how are your own finances? That's steady.

That's around 75%, give or take, and it doesn't really fluctuate that much. People feel okay about how they're doing. But if you look at, if you ask them, how is the national economy doing, and you were to chart the spread between those two responses, it has blown out like credit spreads in the GFC, just an absolute explosion in the difference

between how people think they're doing and how everyone is doing. And that is at the heart of this election. That's it. I mean, we should move on to like what happens next, but if there's another big elephant in the room with respect to the election, it was the immigration issue, which I think there's also. Before we get there, I want to ask you about the Fed.

Because the Fed is going to become, I think, is where the puck is headed for the now victorious GOP and all of the voices that support the GOP. They are now going to look at the Fed as part of the problem. And Axios actually wrote today one of the strange quirks of the 2024 election cycle. Political donations by Federal Reserve system staff totaled more than $600,000 with 92% going to Democrats. I didn't fact check this. Let's assume it's directionally right. 92% rounds up to 100%. People are now going to look at the Fed like it's a, not democratic institution, but a democrat institution. And they're going to, I think, they're going to be where the puck is going. Elon just tweeted, what would be better for monetary policy, the FOMC or a Magic eight ball? You can imagine what the response was to the survey.

But it feels like this is the next shoe to drop as a result of all this inflation. Well, maybe. I'll tell you that a non-independent Federal Reserve tends to make things worse. And that's what happened to Arthur Burns during the early 70s when Nixon and Roger Stone, who unfortunately is still alive,

was doing some of the dirty tricks on back in his early 70s. He caved to them eventually. And he did, he did. He overruled other members of his staff, he supported the wage and price controls. And if you look back at the fuse of the great inflation in the 1970s,

a lot of it emanated from poor Arthur Burns because the Republicans were threatening to stack the court essentially and put more people on the FOMC board. They were disclosing his compensation in the press. I mean, they really went after him pretty hard. So the Republicans can go after Powell and the Fed. History says it may not work so well

because the one thing Trump can't bully or control is the 10-year treasury. And that's going to be the ultimate barometer and control mechanism for the next administration. Because the wrong kind of tariffs, I'm not saying there's no room for tariffs, but the wrong kind of tariffs and too much deportation, which tightens the labor markets, particularly the lowest quintile, and the Fed's going to have no choice but

to start to hike rates again. He can't get us to start buying the tenure, push yields down? You need that. And that's what's so fascinating about what's about to happen, because you need a productivity shock, right? You need a massive surge in deregulation. Because when you look around the world and within the history of the United States,

particularly the Eisenhower administration, deregulation pays enormous benefits in terms of small business. And the Biden people, I was looking at, there's a guy, Doug Holtzikin, who is at the American Action Forum, and he published, I was reading some of his stuff over the weekend.

The Biden administration went absolutely hog wild with paperwork burdening regulations, a lot of which they're trying to jam through during these last couple of months. And so I buy into the notion that a broad, effective, deregulatory agenda aimed at small and medium-sized businesses can have a huge payoff. And so it's going to be this horse race

between the administration's deregulatory agenda, which you can throw energy into, right, with the appointment of Chris Wright as Energy Secretary, right, from Liberty Energy. I heard he likes your charts. He does. He wrote a 180 page piece last year on his view of energy and the first chart in there came from our annual energy piece. Hey! All right, it's good that this time past has a voice for the new administration. You're saying that's the plus pole that's being set up. So it's the tariffs and the deregulation inflationary pressures against the deflationary pressures

of the deregulatory agenda and a pro-business agenda. And you know, we'll have to see how that turns out. So what about the economic ramifications of what he's saying he's going to deal with the immigrants? It depends. First, let's just talk about immigration dispassionately. It's hard to do, but let's talk about immigration dispassionately for a minute. The United States has a low organic birth rate and needs immigrants. Whether you look at Heritage, Institute Cato, they all agree the United States needs

some kind of immigration to prosper. But the way the Biden administration handled it was like someone who said, my car's dirty, I need to wash my car. Drive it into the ocean. It's about to rain, I'm going to park it on the street and leave all the windows and doors and the hood and the trunk open.

And that deluge cleaned the car, but also caused all sorts of problems. New York is now saddled with a 10 to $15 billion asylum hit for mostly housing, but also medical stuff. And you know how the federal government has the OMB, which is the President's mouthpiece, Office of Management and Budget, but then there's an independent Congressional Budget Office, the CBO, that kind of tells the truth? The same thing happens with New York City's Mayor. He's got his own version of the OMB, an Office of Management and Budget, but then there's Brad

Lander, who's at the control of the currency, who tells the truth about what's really happening. And he published a report last year that said the city is underestimating by something like 10 to 15 billion dollars. Oh my God. The cost of the annual cost. And that money comes from where? Everyone right? Police, firemen?

Subway fares, you know, business taxes, taxes on the sale of property, you name it. And the problem is that money is desperately needed right now for New York to do something about the stock of underutilized office space on 23rd and 9th. That is gonna eventually have to get converted. It's got a 20% occupancy rate going to zero and somebody's gonna have to convert that

either to industrial or residential housing, and somebody's going to have to convert that either to industrial or residential housing, but it costs money to do. And unfortunately, the city got slammed with this asylum hit right at the time that it needs money to deal with the Warsaw Homeshop. So that's now going into reverse. On Trump's first day after the election, he spoke on the phone with Eric Adams, I think they want to use New York as a test case for how fast they can reverse that. You have people who are already here. I don't think you have new people who are going to arrive.

Yeah, I mean, it will be easier for them to cut the inflow rates in half or to a third. Right. Who knows? Let me ask a dumb question. If we convert these into apartments, how many more people can the city handle? They can certainly handle as much as we were handling. You know, I mean, this city hasn't grown in years, and so the city can certainly handle

more people. And we're having the opposite problem. We're having little miniature versions of the Tenderloin District in San Francisco, where three or four office buildings in a row become empty. The underlying street level retail then become empty. And then it becomes like a magnet for squatters and bad behavior. And then it starts to spread.

And the city's gonna have to be aggressive about doing something about that. And those buildings can't be left to just languish, not on the tax rolls for years until somebody figures out what to do. Let's put these charts up for Michael. I think there's four of them all stacked together. But you're telling the story here visually

of what you're saying. The top left is the components of Comptroller estimated revisions as it relates to New York City. So what is the story here to you? The story here is that first of all the mayor's underestimating by 25 billion what they're gonna need over the next few years. We don't have the money for any of that, it looks like. And asylum is about equal to the sum of all of the other cost shortfalls that the city's experiencing.

Does Bitcoin fix this? Yeah, is there any off, and there's no offsetting revenue coming as a result of the asylum seekers, even if they start working, they're probably not paying taxes. Not this magnitude. Right, okay.

Even if they're paying taxes. It's just not, it's a net, net, net, net zero no matter what you do. It's a net negative. Net negative. Michael, the chart on the bottom right that you mentioned, the US labor force growth, foreign born labor force versus native.

If we push a lot of these people out that do the jobs that Americans don't want to do, isn't that inflationary? It depends how many you push out and over what period of time. And that's, as I mentioned, that's a risk that this administration is going to be grappling with because to the extent that they deliver

on their campaign promises, which is to do this, it could have a reverberating, I mean, the Fed didn't start easing until the lowest quintile of wage growth started to roll over. And so if they tighten the labor markets too much, the lowest quintile, and that starts to hook up again because of a labor shortage, then the Fed's going to be in a box.

Are you worried about a pickup in inflation? I think you have to be concerned about the combination of deportations, tariffs, and budget deficits on the structural inflation decline that's underway. So there's some structural forces in play now as you get normalized supply chains and there's more cars on the lots. And remind me to mention an EV thing in a minute.

But so there was some structural things underway that are bringing inflation down, but some of these things could push it back up. I think everybody understands that. But again, the Biden administration gets, in my mind, very little, if any, credit for the immigration bill that they didn't stop talking about over the last few months.

Because they didn't oppose it until after New York and Chicago and the other cities were feeling the fiscal impacts of having those immigrants bussed there by Texas. And so I think they didn't get as much political credit for that bill as they wanted to get because it was done under duress. It wasn't something that they really believed. They had four years. They waited until three months before.

That's the lower left. They waited for three months before. That's the lower left chart. They waited for three months before the election and tried to do something bipartisan. That's the lower left is. Removals. The lower left chart is the biggest indictment of the Biden administration's approach to immigration that I've seen.

Yeah, and it was purely ideological. It was not an economic consideration. Let's have open borders because it's great for the economy. It was purely, let's reverse everything Trump did and think there were a lot of people who thought there wouldn't be consequences for having elevated immigration. Yeah, I think it's really hard to ascribe motivations because nobody ever really talked about it openly. I What I can talk about are the consequences that I mentioned before Which is that an enormous number of Hispanic voters felt that this was mishandled.

Eight of the ten border counties they went for Trump and these are almost all Hispanic Spanish-speaking households. Guess who gets guess who loses their job first when another 500,000 undocumented workers come across the border? Guess whose schools go to shit when they lose control because there's too many students in a district? They're not stupid. They're not voting to make people on Twitter feel self-righteous about racial issues. They're literally voting their own survival.

And I think nobody was really counting on that. And it was a big shock. I'm too old for some of these debates. I come from a generation when the vast majority, until about 15 years ago, the vast majority of immigrants into this country came here legally through whatever mechanism it was, it was done legally. And so I'm 62 years old and, you know, I'm the wrong person to talk to about this

because I just, you know, my parents came, my father came from a family where they were, they were originally from Lithuania and they were named Arnold Stanley and Howard when they got to the United States because they were all so desperate to assimilate and become part of the United States. Yeah.

That, you know, so I'm sympathetic to the immigrants that feel globally that there needs to be a legal process and also a legal process would then allow the United States to do what Canada, Australia, and the UK are now doing which is needs-based immigration and merit-based immigration. In other words, we need more truck drivers. Yeah. Let's prioritize that. They're selecting what's good for the country. That's right. And it's funny because they're more liberal. There are other yeah, but there's other Anglo-Saxon countries that are doing this.

Yeah, and I think when you look at the progressive wing of the Democratic Party, they are violently against this. And so that's another long-term solution to some of these issues. Well, let's talk about the Trump trade. So since the election the S&P is up 3%. Financials are up 8%. Discretionary is up 7.5%. That's mostly Tesla, so the election, the S&P is up 3%. Financials are up 8%. Discretionary is up 7.5%. That's mostly Tesla, so we'll throw that out. Energy is up 6%. Those are the big winners.

Obviously, Bitcoin, US dollar, interest rates. What's your take as a market overdoing it? Or they have it just right? I think that makes sense, right? I mean, even up until a few days before the election, the highest Trump shares I saw in some of the betting markets were 60, 70%. So it makes sense that after the reality

of his election becomes clear, that you have those things kind of gap up to the full level that they were pricing in. I mean, there's no question that this is great news for banks, right? I mean, this in. I mean, there's no question that this is great news for banks, right? I mean, this is, I mean, the two things that are terrible for banks are an administration that is dead set on regulating them at every step

and a flat yield curve. So now a steeper yield curve, a little less regulation, you know, and that's good for banks. Energy, you know, sometimes the Biden administration gets an unfair wrap on energy, oil, gas and natural gas liquid production went up substantially under Biden, but they passed an energy bill for renewables

that's gonna cost somewhere between one and $2 trillion over the next 10 year budget window, which wasn't captured in the original CBO scoring of that bill. And obviously, this administration is going to live different approach. You know, it's once bills get passed, they're very hard to unwind. Trump ran in 2016 on getting rid of the Affordable Care Act and control both chambers of Congress and wasn't able to do it.

As I mentioned, 75% of the energy bill capital spending has been taking place in Republican districts. And you're starting to see quiet back channels to the administration of what they don't want them to cut. The Trump people have been suggesting that all they really want to do is Eliminate the EV subsidies like I got paid money is that I got $7,500 yeah to buy a

hybrid Jeep Wrangler Which is an awful car we spoke about this piece of shit, I can't wait to get rid of it. It's horrible. It gets 19 miles on a full charge, and I've had five recalls. One of the recalls said, even if it's not plugged in, it could explode.

So I had a- It's a big deal. So don't park in your garage. So I parked it in the driveway, and I created a moat of gravel around it in case it imploded. Good thinking. So, but I got a $7,500 subsidy for a vehicle

that I might or might not drive on a full charge, you know, an electric charge. So I could drive it as a full internal combustion engine because I got the same $7,500. So that's what Trump wants to get rid of. But because it was part of the energy bill, combustion engine, we got the same $75 million. So that's what Trump wants to get rid of. But because it was part of the energy bill, it can only be eliminated as part of another legislative bill that passes Congress through reconciliation that removes it.

So the Department of Energy- They have the horses to do- I mean, they got a four seat- What is it? A four to six seat margin. It's the tightest governing margin in the house since 1900. So we'll see, right? McCarthy had trouble with the caucus and we'll see how Johnson does. So with the tariffs and how far is- Tariffs, they can do more unilaterally, right? So that's different than the energy bill.

So how quickly do you think he's gonna to be to respond to market the markets reaction because last go-around he put the taverns on the market didn't like it and he didn't do anything to unwind them it said I'm just kidding like so there's a lot of people say that oh he's a markets he's a markets guy that's a scoreboard and it's true and therefore if the market's react make a fun of me adversely that's what I say no it's not just you if the markets react adversely. That's what I say. No, it's not just you. If the markets react adversely, he'll back off. He's not going to blow up the Dow Jones over tariffs. Not the industrials, maybe the transports.

I don't know. We'll see, right? Because I think we could live with the 60% tariff on an additional set of Chinese imports, a lot of which would end up making their way to the United States through third party countries. But if he's serious, and I don't know if he's serious, if he's serious about a universal tariff

of five to 10% on all imports, that's a big deal. We haven't had one of those since the 1930s, and I think the markets would shoot first. He's not going to do that according to news reports he's so serious he's so serious about the tariffs that he hasn't been able to finally choose his Treasury Secretary yet because he really wants somebody who will full-throated declare this is good for the American people say the only there's very few things that you can't say on this show.

But the one of the things I don't think you can say on this show is what you just said. Which is that he won't do X. Because none of us have any idea what he will or won't do. You probably would have said the same thing about appointing Matt Katz as Attorney General. But would you agree that if he does do that, the market gap's down 5%? Depending on how it's structured, there's, look, Europe puts VAT taxes in, and then quietly under the table unwinds them

because they make them, well, you know, you're not subject to it here, you're not subject to it there. They're doing the same thing with carbon taxes. There's all sorts of allowances and offsets. Everything depends on the details. But I don't think you can say. He did it with Apple.

What's that? He did it with Apple. Apple, we got an iPhone exclusion. The phones are being made in China. Like that's it. Right. So we know that he's willing to play ball. He's not like, he's not as extreme indeed

as maybe he is in word. Let's, I mean, I have no choice in my job but to wait and see what the policy pronouncements are. I will say this, he's tending to pick people for cabinet positions who are true believers in the things that he says he wants. Right? I mean, by the time, you know, like Stephen Miller, he believes it.

There's no equivocation. Mass deportations. Yeah. Yeah. Like there's no equivocations with him or Homan. So Trump may or may not want whatever. He's putting people in positions that really believe in those things. And that's his right as the president who won an election to pick the cabinet that he wants to have around him.

And then it's up to the Senate to see whether or not they'll exercise their function of due diligence here or basically go to a recess appointment and let them all just have. We asked Adam Parker how disruptive mass deportations would be. When I say mass, more than a million people, let's say. And I think there's 11 million people

of a non-citizen status in the country right now. I think a million is practically speaking, logistically, almost impossible. But Adam's point was on S&P earnings. How will Metta's earnings be affected by the deportation of a million? It wouldn't be at all. It wouldn't be because the most profitable companies

in the S&P right now have incredibly low labor to capital ratios. And the labor they do hire are not at that level. But now you're talking about, you know, the entire consumer discretionary sector, some of the staple companies, and then, you know, other industries that feed off of that. So I think we'll have to see.

We may end up in some kind of middle ground where there are some highly, remember, Illinois, New York, California, a lot of states are, and even Florida, are going to vigorously resist some of this. There's a lot of project sites in Florida that are months behind schedule because they can't get workers. Some of the agricultural fields are already empty. So a lot of the small business people are worried about this and we'll see how it goes. I'm not convinced that this is as doable as the administration might think. Mike, the last time you were on here, I think we spoke about some of your top 10 surprise predictions for 2024.

Any victory laps, anything you got terribly wrong? Let's see. I did predict that Biden was gonna drop out of the race for health reasons. Yep, nailed it. So, nailed that one. Yep. Where is this?

Oh, I got it right here. Okay, top 10 surprises. We can go through it and I'll tell you which one. Real quick, US dollar remained stable. I was right about that. In spite of all the hand wringing of people that are like, oh, the bricks are going to have the wrong currency.

The dollar was fine. The DOJFTC won a big antitrust case. They did against Google. President Biden withdraws sometime between Super Tuesday and the November election. He did. And can we just stop for a second? Can I tell you the two insights I had

about why I was comfortable writing that? The first was an interview he did in August 2023 where somebody asked him, what would you do if China invaded Taiwan? And he answered the question, which no president has ever done because you're not supposed to. That's part of official US policy. One China is the stated US policy. And he said we'd bomb Mexico.

He said that we would defend Taiwan. And like his people immediately went into overdrive and had to explain it. That was number one. So that was clear to me that he was kind of losing it. The second one is my wife's mother was widowed in her early 70s and then spent the next 25 years

like dating lots of older men. So she's an expert on the health decline of older men. So I asked her, this is the only time she's ever been helpful to me in 35 years, but like, what is your professional opinion as a serial dater of old men on Biden's tradition? And she said, look, you know, the way his elbows were

and the way he's walking, he's in terminal decline. So those were the two things that I keep going. What an edge. Okay, number four, the driverless car backlash is coming. That's kind of a yellow, that's mixed. It didn't not happen or happen. I will say this, the LIDAR stocks are still down 90%. So there's no evidence that self-driving cars

are kind of picking up. And look how poorly Tesla stock was performed the morning after they did the auto cab rollout. Broadly said- You rode out a two-door taxi. Can you think of something with less actual use? A one-door taxi. Yeah. Keep going.

Broadly syndicated loan losses rise above private credit losses for the first time. That didn't happen. Argentine dollarization will fail if implemented. That's a mixed bag. They've now backed off against dollarization and say they want to have a bi-monetary economy. But I will say this, the progress they've made as measured

by a bunch of different market and economic statistics towards stabilization is much better than I thought it was. He's a star, that dude. He's in the United States right now. But he's, it's only him. Yeah. That's the risk for Argentina. It's only him and there's still a giant party of Peronists that are waiting for him to fail

Well, the thing with the Peronists is that they are they are without Any ideological constraints if populism is hot right now? The they'll push you a populist if if fascism is hot They'll push you one of those they have every flavor available But I will say that the stabilization program that they're working on is done better than I thought it would. Four more. Russian invasion of Ukraine drags on with no ceasefire in 2024.

Correct. Despite storm clouds over US regional banks, their stocks will do well in 2024. Absolutely. Got that right. Due to retirement of dispatchable power generation and under investment in pipelines, gas storage, and witherization, major US cities

will face electricity outages. Thank God. That didn't happen. Did not happen. Last one, researchers will complete work on an inhaled COVID vaccine that will sharply reduce transmission. That happened.

That's being rolled out. Okay. So I got six right. Not bad. Six right. Pretty damn good. Two mixed, two wrong. And this was done in honor of Byron Ween, although Byron never kept score.

And so I think- It would ruin the exercise. Right. Well, I'm going to keep score. I'm doing another one. I've decided to do another one next year, but I'm going to publish a table of what I got right. Before we let you out of here,

give us a couple of minutes on RFK Jr. and Matt Gaetz. 323. This room purposely has no clocks or windows. It's like a casino. It's like a casino. We're not kicking you out. Okay.

What's your take on, are these for shock value or is it like payback? Like I owe RFK because he swung his 500,000 people my way when I needed it. Like what is the thinking behind doing this kind of stuff? I don't know. I mean it's hard, I mean I don't know. It's stunt casting though? I don't know. I mean, it's hard. I mean, I don't know. It's stunt casting though. It does get headlines. The stocks hate it.

And he loves that. Biotech, healthcare stocks are doing terrible. And they crushed anything with vaccines. Vizer, Moderna. I don't want to get too deeply into it. I mean, I... In one of my pieces recently, I gave people a bunch of links if they want to read about his history

and what he's gotten right and what he's gotten wrong. And in particular, some outbreaks that have taken place around the world as soon as he airlifted himself in there. But you know, I have a kid with a deadly peanut allergy. Yeah. And there are, no, but no, there are things that have changed about the food supply. Yeah. And- It's all in your head. No, but no, there are things that have changed about the food supply. Yeah.

And there are things that are really unhealthy about aspects of the American food ecosystem. And so there may be certain things that he's able to shine a light on. If you look back, there are some FDA drug recalls of some really bad drug, remember Cerebrex? Yeah. Right?

So, and there's- It was giving people heart, it was giving people heart attacks. That's right. Yeah. And- The FDA is infallible. That's right. We agree. And they have not just recalls,

there's a long list of drugs that are put on some kind of a blacklist, which is basically like, you know, take them if you want them, but we're not responsible for what happens to you. So there's, there are a lot of fair questions to ask about the drug development establishment. I'm just not sure that he's the right guy to do it.

No medical background, no scientific degrees of any kind. He's a very opinionated person who studies these issues, but then he also does things like conflate vaccines with mercury with autism. In Europe they don't have mercury in the vaccines and they have the same incidence of autism. So very easily debunked pet theories. He's not great for the scientific method. Let's just say that vaccines are, and I had a table in a recent I on the market that showed before and after vaccines by decade for specific diseases. Along with antibiotics, vaccines are the greatest achievement

in the history of biomedical science. Doesn't mean that there can't be improvements to the process, but I think that's an indisputable fact. Matt Gaetz as attorney general, the most powerful law officer in the land. Yes, I'm putting my dog in charge of cat protection. Well, you have a chart. Can we throw your chart up?

Yes, you can. I thought this was an important way to think about it. Like, let's say you're not on Twitter and you don't understand the animosity toward him because of potential sex scandals and all this other stuff. I'm not kidding. I have no idea. No, no, no, throw all that out.

Just the relevant experience. That's this multicolor chart, guys. 100 years of US Attorney General appointments by prior years of experience. And you point out, you point out- There's a lot going on on this chart. Okay, Gates has not served in the Department of Justice, a US Attorney's office, a state Attorney General's Office, lacks prosecutorial

experience at federal and state levels, nor does he have executive experience at a major US or state agency. He worked at a small Florida law firm. Nine lawyers. Okay. So, like a strip mall, basically, law firm. And then he was in the Florida state legislature and that's it. So, forget about all the personal stuff with him, who knows what's true, what's not.

Just on that basis alone, it seems weird that Trump wants to die on this hill, or maybe this is the guy that you throw out there so that the Democrats get to say no to one, which is my theory. Well, no, that the Republicans get to say no to one. Well, everyone gets to say no to one, yeah. Yeah. Everyone feels better, all right, we didn't let him do Gates.

He got this, he got this, he got this, we got rid of that guy. Is that possible? It's possible. Smart like that. It's possible. I don't know, like, when you look at the appointments in aggregate,

it looks like they're trying to break something to make it better. And I'm going to take this administration at their word, I think they're going to break something. So in my outlook for 2025, I think while the markets might end up the year higher, I'd be surprised if we didn't have a 12 to 15% correction along the way.

And I'm going to be telling our clients to kind of prepare for that. Because they're there. When the potential chaos dawns on people. Or when they're going to break something. And I don't necessarily know in advance what that's going to be. But their rhetoric is, we want to disrupt.

We want to break things. We want to change the way that things function. I'm going to take them at their word that that's exactly what they're going to do. Well, that Doge thing, I mean, that's a whole other, we didn't even talk about that. You know, at the end of the Planet of the Apes movie, Dr. Zayas says to Charlton Heston, you know,

go out and look, you might not like what you find, right? And then he goes and he sees the statue. That's a great way to end this conversation. Okay, why am I saying that? There's 300,000 employees in the federal government. As a share of the total workforce, it's 2%, that's the lowest number it's been in 85 years. So go ahead, cut heads.

What are you cutting? But you're already dealing with that lower workforce. Now, I hope you have the chart on the entitlements versus the others. We have it. Okay, please bring that up So what does the federal government actually spend money on? I think it's before this one Yeah, there it is. Stop this one. Okay Here's the other thing that Trump and his political advisors might not like Because

Elon and Vivek are going to go out looking for not just people, but big dollars to cut. Look at that gold line. Because of prior bills, non-defense discretionary spending has already been cut to the bone to its lowest level since the early 1960s. The real money, right? to quote the guy like, you

know, I robbed banks because that's where the money is, it's entitlements. And so what's gonna happen when Vivek comes back and... Would they dare? ...and say, well, you're gonna have to make some changes to Medicaid. That's where the money is. Would they? I think it would cause a crisis within the Trump people because a lot of people would say that's where the money is. Would they? I think it would cause a crisis within the Trump people because a lot of people would say that's politically the third rail.

For the listener's benefit, the blue line of this chart is entitlement spending, which by 2034 is expected to, is that 5X versus what it was in 1965? No, it's 5X the level of non-defense discretionary spending. Let me spend 60 seconds on this. Please, I want to know what's in the goldmine. Okay.

In the 1960s, like a third of the people in the United States over 65 lived in poverty. So there was a growing support in both parties for some kind of safety net. They created the safety net at the end of the 1960s. Was this the Great Society? yes, Lyndon Johnson. So Medicaid, Medicare, enhancements to Social Security which had already existed. But they said how much money should we spend on this? Let's spend roughly the same amount of money on this as we spend

on everything else. And everything else is border control, the judiciary, infrastructure, satellites, airports, all of the things that the federal government says. Drinking supply, like very vital stuff. Job reclaiming, all the stuff that you could argue is critical for future growth. But they didn't put any guardrails or breakwaters on this whole system.

So over time, the blue line kept going up as a multiple of the gold line and is out of control because there's no other countries have guardrails on this ratio. We don't. And so this is just keeping growing, growing, growing and ultimately... This is distinct from social security that's its own animal? No, social security is in the blue. So my understanding is... But the bigger pieces of the blue is Medicaid, Medicare. A lot of the things in here, a lot of this stuff was meant to supplement

people's retirement. Social Security was not meant to pay for someone's entire retirement, but it's now being used that way among the bottom fifth of the population that need it. For some people, yes, for some people, no, the bigger issue with cell security is, you remember this, when it was originally structured,

the life expectancy of- 61. Was basically that you die and wouldn't get it. So the median person would never get the money. Now, like the median ages are late 80s, early 90s, depending upon what demographic you're looking at. But the bottom line is that this, I don't know what they're going to find that's meaningful.

And what I'm expecting from Vivek and the Doge department with Elon is lots of fanfare and cork popping and a very small amount of headcount and dollars are going to cut. Here's another theory. He's setting them up as the scapegoat for when something goes wrong.

He can get rid of this doge thing in two seconds. It's not an actual government department. No, it's not. So he could say, they failed. They failed you. They failed me. They're out. I want them out of the White House.

It almost seems like, hey, heads, I win, because they cut a lot of waste, and it gives me things to say on from the podium. Tails, they fail to do anything meaningful. I just get rid of them and I don't really pay the consequence for that. The missing piece here that I haven't shown is military spending. And military spending is notoriously difficult to cut, probably has an enormous amount of

potential for cutting. Like what happens when you go to Northrop Grumman and you're like, okay, this B-1 bomber is years late and billions behind schedule. What are you gonna say to them? We don't want the plane? So there's been a lot of research done on tremendous cost overruns in the military.

Maybe they can set up requisitioning processes that approve on that, but that would take years to do. Well, if Musk knows anything, he knows that. Yes, that will take years to do. And there are so many contracts that are currently in train that you wouldn't even see the benefits of that by the end of Trump's first term, by the end of Trump's term.

Let me know if you want to spend just a few minutes on some of the AI stuff we're working on too, because that's- We have you. We have you. We have you. Shoot. All right. Clear your head.

What's fascinating about what's going on is you have these hyperscalers, right, that are spending, let's call it rough numbers, about $500 billion a year building out GPU infrastructure. And they're scheduled over the next couple of years to make, let's say, 100 billion a year. So there's a $400 billion hole in between the money that people are spending and giving to Nvidia

and other data centers and stuff like that, and the amount of money that they're making. And so that's the biggest question, I think, for the markets, putting all this election stuff aside, is within the next 12 to 18 months, are we gonna start seeing the killer apps that make JP Morgan fill in part of that 400 billion? Like, are we gonna be able to reduce our workforce by 20%

or enhance our productivity by 20% and be willing to spend on inference models to close some of that gap? The signs of this are not encouraging. It's a mixed bag. The day that Microsoft put out its initial copilot numbers, the stock got hammered, the whole NASDAQ got hammered. Do you have an iPhone 16 yet?

No. You don't need one. I have it. Yeah. I updated the software. Siri is dumber than she's ever been, honestly. There's a lot of- At very rote tasks. What I can't tell is, all the sort of, like what you're seeing from OpenAI in a lot of our companies and the street

is AI adoption rates are going up. There's no question about that. But AI adoption rates could be as simple as a company is just checking the box. Yeah, we have our employees use GPT when they want. We don't have any answers yet on how much people are actually gonna be willing to shell out and reel hard dollars for this stuff

when it comes time for them paying for it. Or how are these hyperscalers going to make all this money back? Well, the hyperscalers, they continue to say, the ones that are spending $500 billion on this, they continue to say the biggest risk is under-investing. That, yes. How many quarters can you say that

with no uptick in ROI? Right. I just, just for fun. Six quarters, eight quarters? Just for fun, I went back to our archives and I looked at the amount of money that Corning made in 1999 and 2000 laying fiber optic cable. And after that dream on Wound, it took them 20 years to make the amount of money that they made in 1999. Yeah.

Because there were so, and so that's my concern. Eventually all this GPU infrastructure is going to be utilized. How long will it take and who's going to go bankrupt on the way there? And you know, some of these kind of the risk is under investing. Be careful for these for these empire builders, even within banks like JP Morgan. All the big firms now have these independent AI departments full of engineers.

They're not profit centers, they're cost centers, and cost centers typically get evaluated in terms of their importance based on how many people they have, what their budgets are. That's the last guy. In defense though of. That I'm going to go to to say, how is this working out? What are the cost benefit issues associated

with AI adoption? Do you think we should spend more money? So Michael is quoting Sundar Pichai at Alphabet and to defend him saying, the biggest risk is under investing, for Google it probably is, if we have a permanent shift in behavior whereby the user expects to get the answer,

not a list of links where the answer might be found, nobody is more susceptible to that than the Google search monopoly. And I have found the AI overview that appears in Google searches to be quite helpful. Yeah. I'm not paying for that. I'm not paying for that.

And they've already got 95 plus percent search browser market share. So that's not going to increase their margins or pay for that. That's a defensive strategy. The same way that they're paying $30 billion a year to Apple for Google to be the default. Which they won't be allowed to do anymore either. Depending upon how the Justice Department lawsuits kind of work out of settlement. Yeah, and Google is not monetizing the AI summary

to the extent that they monetize search, and they're probably years away from being able to do that. So if anybody can say the risk is under investment, it's not Zuckerberg, it's not Tim Cook, it's literally Google. All right, so the biggest risk to the market over the next, let's call it 12 to 18 months. Yes. Is it big tech pullback, because that will drag the market down with it, it's so big.

Yeah. Or is it something macro Trump related? No, I think the bigger risk is this recognition that like right now, let's use like the metaverse scale, right, the metaverse was a complete loser in almost every regard. The markets are pricing the metaverse risk of AI at zero. If the markets price a 30% metaverse outcome for AI, right? Like, so it's not, it doesn't work.

It's like how much fear and uncertainty has to creep in. Cause right now everybody buys in a hundred percent. And so all that has to happen is for some uncertainty to creep in about the timetable for some of this stuff. And look, we're watching all of the corporate AI adoption. We're watching the spend that companies do on inference models. We're waiting to see evidence that self-driving vehicles

are good enough to actually work in places other than Phoenix and San Antonio, where they're sunny every day. You know, and we're waiting to see, but I think that's the biggest risk for them. It's amazing that these companies have spent so much money and their margins are still going higher. At the same, like their margins are not being impacted

by the spend. However, the benefit that they're getting is the multiple expansion. Because if this does not come to fruition, the margins might stay high, but the multiples will contract immediately. And let's finish up with a few energy related things. All of these hyperscalers have committed to their customers

and their stakeholders that the power is going to be green. Okay. Not so fast. have committed to their customers and their stakeholders that the power is gonna be green, okay? Not so fast. You can't recommission a nuclear plant that's already in the process of being decommissioned. There are three plants in the United States, Palisades in Michigan, Duane Arnold in Iowa, and Three Mile Island Reactor Number One,

that were decommissioned within the last few years and haven't been dismantled yet, where the spent fuel is moved off site, et cetera, et cetera, and they start dismantling the equipment. So yeah, there are three instances of decommissioned nuclear plants that may be able to go on the grid, but there's not 12 of them.

There are tons of companies competing to build small modular reactors. Not a single one of them has ever been delivered on time, under budget, or is currently operational. So that's a lottery ticket. Maybe it pays off, maybe it doesn't. So the other big thing staring these data center investments in the face is the power expenditures are going to be high unless they just kind of quietly push all the green stuff under the rug and

Rely on natural gas of which there's one that this might be the time That's right. You get away with it. That's right. Oh man. This has been incredible. Did you have fun on the show today? I Did I do it always have to always learn so much from you? I want to tell people where they can subscribe to I on the market because I would imagine people people where they can subscribe to Eye on the Market, because I would imagine people listening to you would love to go deeper on some of these topics. Well, I generally publish everything I write. First it goes to our clients on the first day,

and then within a day or two, I publish it on LinkedIn. Okay, so follow Michael Semblist on LinkedIn, and if you want it early, be a JP Morgan client. Would be the right way to phrase it. Okay, when is your 2025 outlook coming out? Everyone wants to see that. Is that next week? No, no, no, no, it always comes out the same day.

It always comes out on January 1st of the new year. Oh, okay, all right. So we got some anticipation built in for that. Yeah, so do you guys publish an outlook of some kind? I do predictions. You do predictions. Michael does predictions. As a rule, we're a firm that doesn't predict.

Barry's written thousands of posts on why we don't predict. We don't think that we have any sort of edge on what's going to happen next year. Mine is for fun. And Michael does it for fun. But I saw the first two 2025 outlooks from Wall Street today. Brian Belsky is out. He's at $6,700 on the S&P on $275 in earnings, which would be about an 18% expected growth for earnings.

Wow. Not sure if we get there without AI, I guess would be the way I would phrase it. And I saw somebody else's. Oh, Mike Wilson came out. and he's now a bolt. 6500, yeah. 6500. Oh yeah, he changed his title. Yeah, it's crazy how that happens.

Ding, ding, ding. I bet you're thrilled not to have to do a S&P 500 price target, year-end price target. You know, the great thing about being on the buy side is people don't reward us for that kind of thing. They reward us for whether or not we manage their portfolios in a way that meets their expectations for risk adjusted returns,

whether that's an endowment, a foundation, a pension plan or an individual. So I just want to close with something. I had a health scare this year. I had a cardiac ablation procedure about a month ago. And I was kind of feeling tired and exhausted before then. And I had that procedure and so far it seems to have worked. And the applause goes to Mount Sinai.

They deserve all the applause. And it made me appreciate and kind of reinvigorate me for continuing to work and appreciate and kind of reinvigorate me for continuing to work and do this kind of stuff and do this show and I really enjoy it and so thank you very much for that. I'm going to tell you right now as somebody who's been reading you forever, you're at the top of your game. Michael Samblis, ladies and gentlemen.

Thank you very much. Never better than right now. It's probably even the top. It's only downhill from here. Hey guys, make sure we follow Michael Samblis LinkedIn at jpmorgan.com. Find the research page. His stuff will be on there. Special thanks to Duncan. Special thanks to Daniel, Nicole. This is really a pleasure, really a treat. And I can't wait for you guys to hear this episode. And if you love it as much as I think you will, ratings, reviews, do the stars, whatever

platform you're on, we appreciate you. Thank you so much. All right, take us out. Thanks for watching!