The Compound and Friends - The Blue Chips of Junk

Episode Date: January 24, 2025

On episode 175 of The Compound and Friends, Michael Batnick and Downtown Josh Brown are joined by Bob Elliott, Co-Founder, CEO, and CIO of Unlimited Funds to discuss: Netflix earnings, the labor market, tariff winners and losers, the case for TIPs, the right gold allocation, hedge-fund fees, and much more! This episode is sponsored by KraneShares! To learn more about the KraneShares Man Buyout Beta Index ETF, visit: https://kraneshares.com/buyo Sign up for The Compound Newsletter and never miss out!: https://www.thecompoundnews.com/subscribe 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

So how's life? Good. Good. Yeah. What's going on? Rocking and rolling. I'm gonna get you to actually slide down a little more. Me slide down?

Yeah. What's the latest? What are you up to? Working on some new stuff coming out. You all work no play or? Oh no, I got plenty of play. Don't even worry. He's all play no work.

So we saw, we, the Royal we, OpenAI just dropped something big an hour ago. John, show the screen. So the killer use case, the app for crypto is here. Oh no, not crypto, for AI. It's here. What do you mean the killer use case? Check it out. What is it? Operator? Oh, this is the agent. Yeah. Oh, the agent.

Yeah. So they just. Agentic AI. So look, what can I do? Book a table. So it'll talk to OpenTable for you. Yeah. John, go to the next one when you get a chance. So they show getting dinner reservations.

This is pretty cool. So if you write out a Grocery Note and upload it, it will read the Grocery Note. Who is the Grocery Partner? Is it going to be Instacart? Just go right into the Fresh Direct and just deliver it for you? Write it out.

I bet you it's going to be Instacart. It's going to be Instacart. Oh, Instacart. Yeah. Well, the good thing is, then it goes to a person, and you only get about 50% of the shit that you order. No, no, no.

Oh, yeah. I mean it. But anyway, so it's not just, it's going to be every Instacart competitor. Of course. And it will be a robot doing the Instacart in two years. And Stealth Pub, they do one with Stealth Pub, but you can get tickets. So all of the shit's here. What I want on this is, if I'm like planning a vacation or whatever, just like, just know my preferences.

Find the flights. Find the flights. Find the hotel. Just deal with all of it. So a lot of people say that that would be the last thing they would want because of how specific people are with travel. And a more obvious thing would be get me two tickets to see like the new Star Wars movie.

So that's in there. Yeah, no, I'm saying like, I feel like travel is... That's easy, like I can do them, how much does that save? You could do that yourself too. You're very specific with travel. Not everybody is. Oh yeah, maniacally so. But it'll learn your preference, like ideally what you do

is you learn your preferences, you only fly, you know, I don't know, you only fly between eight and 10 p.m. And you know, take an aisle seat and stuff like that. That's the benefit, is the complexity. I think the next thing is also how many people want to give their credit card access to a bot and just have it start completing transactions for them. So probably there's gonna be a step in between

where the agent comes back to you and says, okay, this is what it's going to cost, yes or no. Like you'll be able to say yes or no, buy it. Yeah, you certainly don't want to say, buy me some Taylor Swift tickets. And it's like $12,500. Right, I think you're going to need like an interim staff at least for a while when you're trusting

one of these things with your purchases. And so they built all this, it only cost $3 trillion. That's it. That's it. That's it, now we could. This is where the $500 billion of investment happening in the next 12 hours. So what's crazy is that obviously this is where Apple

has to get to and they're playing from behind. They're not getting there. Of course they will. What are you crazy? I don't think so. They have an unlimited amount of money. Yeah. And they're using a chat GPT.

So of course they'll get there. They need Siri to be conversational. Right now you have to say, hey Siri, and then Siri responds. And then the next query you ask is independent of the previous one. What they need Siri to be able to do is get us a reservation for four people at that Chinese place we went to in Rhode Island last year. And then Siri will say, you went to two Chinese places in Rhode Island last year. Did you want to go to this or that? Siri will say, you want to see what movie?

Siri has not improved at all. But my point is they're, they're built rebuilding Apple intelligence on the, um, on the chat, GPT chassis. And they need Siri to become conversational and useful. Right now. Yeah, it sucks. Any person who's ever used it. It literally sucks.

Like, it's not even worth trying. That's the issue. But you're not accustomed to seeing them play from behind to this degree, but they are. The divergence in the stock price right now is pretty interesting. Like, they're getting walloped, relative to the other mags.

Even Buffett sold it. Buffett hates Siri. Well, Pelosi buffet hates well Pelosi. I picked it She sold it right yeah, at least part of it. Hey, what's with the what's with the clothes blinds today? I am so oblivious Ordered by us by colors as well in case you were wondering we were wondering. And can I just ask a simple question? What the f*** is this? Yeah, nobody knows. It's decor.

Nobody knows, Bob. It's decor. Like, they're bocce balls. I understand they're bocce balls, or whatever. Okay, they're croquet balls. I'm gonna have a heart attack. Oh, you did this for the... Is this a croquet ball versus this is a bocce ball?

All right, if you've watched the show on YouTube, one of the things that you'll notice, so this is in the foreground for the main shot. No, I saw that last week. This is in the background. This is an echo of that. It's what we call a motif, okay? So the colors are literally identical

to the way that we set up the colors on the bookshelf. So there's a visual, Duncan, am I explaining this right? Daniel, you look like you want to chime in. Duncan takes no responsibility. You have a microphone in front of you. I asked this question when I walked in and Duncan was like, I absolve all myself, all responsibility and threw you right under the bus about it. I think it's from a curb thing is what I was saying. He said one time it was from a card. But what's the scientific explanation for why you would want to repeat something in the foreground that's in the background?

Get the fuck out of here, all right. I have to say you're- Really, did you go to fucking film school? You seem a little sensitive about this. I barely graduated high school, you can't help me. Who knew this was a trigger? No, I didn't realize that I'm never gonna be invited back here, just questioning his decor.

I had a nerve with the motif. I have painstakingly designed this set. If we let Michael design the set, it would literally... This wasn't here like two weeks ago, right? Yeah, go on. It would be like a half-ripped Pam Anderson poster from 2002, and maybe, I don't know, Kobe Bryant. I mean, you guys looking for the next hundred thousand subscribers.

This guy's breaking my balls. I don't want to go. I'm an artist, Bob. I was watching Meet the Parents to go to sleep the other night. And there's a little Kim poster. Yes. Still funny. Dude, it's so funny.

It held up. It's so funny. There's a scene where Greg is just getting acclimated, Greg Fokker to Bobby D. And his wife Pam, where his fiance goes, so how was work, Greg? And he goes, it's good, Pam, thank you for asking. Oh, you know who's funny? That Owen Wilson is great in that.

So I was thinking, Owen Wilson and Ben Stiller had an epic run. Yeah. Between that and Zoolander was huge at the time. What else? Starsky and Hutch. Oh, that was good Yeah. Between that and Zoolander was huge at the time. What else? Starsky and Hutch. Oh, that was good too. Love that movie.

Manetti. I just watched the opening scene of that because it was on. It's so good. And Snoop Dogg is Huggy Bear. Yeah. And Vince Vaughn's in that movie. Great movie. Let's go.

Let's start the show. Alright, we're doing the show. Time's coming in. Alright. It's a one. Seventy-five. Whoa, whoa, whoa. Stop the clock. Here's a word from our sponsor. Today's show is brought to you by Crane Shares. Ben and I just spoke to Greg Bond of the Man Group discussing bio on animal spirits. That's B-U-Y-O.

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175, ladies and gentlemen, welcome back. Literally the greatest investment podcast that ever was or ever will be. Rick, the best motif. With motifs out, the best motif is the best. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world.

And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. And we're going to be talking about the best motif in the world. Welcome back. Literally the greatest investing podcast that ever was or ever will be. With the best motif. With motifs out the ass. We have a very special guest today, returning champion, Mr. Bob Elliott in the house. Bob is the co-founder, CEO and CIO of Unlimited Funds, an asset manager providing easier access to hedge fund strategies.

Bob was previously the head of Ray Dalio's research team at Bridgewater. Bob Elliott, welcome back. Thanks for having me. We'd love that you're back. Not too much going on these days though. It's hard to even guess at what we might talk about. Are these some of the more entertaining and exciting days of markets in the course of your career?

Because I would say that for me. Like I just every day is insane these days. Yeah, it reminds me of about, you know, four to eight years ago when... 21? Yeah, no, no, I'm saying it reminds me it reminds me of the 1617 18 period. Oh, okay. Always something new, new policies, new incremental news, you got to deal with everything on Twitter, what's happening, size it, is it real? Is it not? How do you deal with all that? That you

know, this finally things are getting a little exciting. Today was on TV. And Trump made a remark at Davos looking at Brian Moynihan from Bank of America. Like you better stop unbanking or debanking the conservative people. He didn't say crypto, but I think he meant that. But apparently there's controversy that like gun companies couldn't be banked. And then the banks came out're like oh no no we debank these people not because they're in the gun business but because they were doing business with Cuba which is illegal like the banks fought back a little bit but I think Moynihan was a little bit dear in the headlights I was on TV right after that happened it derailed the entire

show we spent almost an hour talking about. So to your point, every day, you don't know who's going to hijack or what topic's going to hijack the commentary of the day. Yeah, that's, I mean, good for the financial media. You have plenty of content here to talk about every week. Main thing is how do you keep your head straight. So how? You just look right through it.

Seriously. You ask yourself, will this affect earnings? Right, will it affect earnings, will it affect growth? If the answer is maybe or no, look right through it. And the key thing is, you know, you could chase these things. Like look at tariffs, like incremental news, incremental news, chase, chase, chase, chase. That'll eat you alive versus you have to be disciplined to wait, wait until you alive versus you have to be disciplined to wait.

Wait until you actually see what's going to be on the field, then have edge in figuring out how big a deal it is. Once policies actually come, look, he sits in the Oval Office first day, he's like 25 percent tariffs on Canada and Mexico. Who knows? You can say anything in the Oval Office. It doesn't mean there's policy. He says 35, could say 15.

Right, he can say 15. Until we know what's actually gonna happen. You gotta be patient. And I think that's the thing that's hard, because the media and Twitter, all this stuff, you're looking at all the wiggles, trying to catch the wiggles. You're not gonna win this game

by trying to catch the wiggles ahead of the news. The news will always beat you. Do you think the market will stop reacting, stopping so wiggly as he continues to just throw ideas out? No, no, because everyone's trying to get to have a faster and faster response, right? And to be clear, like if you're on Twitter reading the headline and trying to respond to like you're later than every single AI bot that is trading you know as the words are hitting the literal Screen in terms of the incremental news and so people are you know

There there's just a race to try and be the most responsive get ahead and you know Buy this is what I think is the puck is going next If he's starting up with the banks about not not making loans to christian organization. I don't know if any of this is true. I understand it's an issue and I'm not dismissing it. And the stuff Andreessen was saying about Operation Choke Point and how the crypto industry was literally debanked, I know that's true. I watched what they did with Signature Bank.

They said, oh, you want to bank a... Boom. Yeah. What was it? You want to bank Silvergate? Yeah, you're out of business. Yeah. That was a thing. Rockabye, baby. What did the girl say you want to bank Silvergate? Yeah, you're out of business. Yeah.

That was a thing. Rockabye, baby. What did the girl say in New Jack City when she put a gun to the guy's head? Oh my God. Right? Anyway, I watched them assassinate three banks that were crypto adjacent, so I know it's real. But where the puck is going next is ESG.

They just got rid of DEI in 24 hours. I don't think people understand how willing corporations were to be like, okay, no problem. Like they literally outlawed DEI in 24 hours. The next phase of this is to go to Vanguard and go to BlackRock and go to State Street, I'm guessing. But ESG's over. Yeah, I mean, ESG's been gone.

It doesn't matter. There's still billions of dollars in these strategies. And I think they're going to try to outlaw it. They're going to say any decision that you are making that is antithetical to profits, or not antithetical, but any priority that you're putting ahead of making investors' money is anti-fiduciary and therefore illegal. They're gonna do it.

They're gonna go after the colleges too. Like this is gonna be every day, there's gonna be a new story. I think we can look through it, but some of this stuff is gonna leave a mark. Like what, if you have to guess, like what do you mean? Adina Friedman is the CEO of Nasdaq, and I actually have a lot of respect for her.

She's at Davos and she came out and said, Adina Friedman is the CEO of NASDAQ and I actually have a lot of respect for her. She's at Davos and she came out and said, no, actually, we don't regret the inclusion stuff that we've been doing. And NASDAQ, I think, I think was just forced to appeal something where they wanted all public companies listed on the NASDAQ. Like the rule was going to be that you had to have at least one female board member and one LGBTQ board member maybe. That's getting whacked. Well, it's gone.

It's over. And I think they asked her like, do you regret that you tried to do that? And she's like, no, like I think we've made a lot of progress for society with what we've been doing at NASDAQ. And she didn't back off. And I think she said like, we're going to be a little bit quieter about it. And obviously the term DEI can no longer be used publicly. But I think like there's going to be like a real impact to this stuff.

It's just hard to quantify. Does this mean I buy or sell, you know, any given sector or stock? No. I'm not sure anybody can really do that. No. I'm not surprised but it really do that. No. I'm not surprised, but it is amazing how quickly everybody bent the knee. Like who, all the executives, Bezos, Elon, and Zuckerberg, and Sundar at the inauguration. They have a fiduciary responsibility to bend the knee.

I get it. So Sam Altman tweeted this morning or yesterday, watching POTUS more carefully recently has really changed my perspective on him. I wish I had done more of my own thinking and definitely fell in the NPC trap. What does NPC say? Non-playable character.

OK. It's a video game term for somebody that doesn't think for themselves in a video game. I'm not going to agree with him on everything, but I think he will be incredible for the country in many ways. Exclamation mark. OK.

He had to do that because Elon surfaced something where he was congratulating Reid Hoffman at LinkedIn For all the money he raised to support Biden. So this is all of this is defense Yeah, none of these guys are excited about none of these guys are excited about Trump I don't know about that. They might be excited about the policies. They're not thrilled that they have to That they have to kick in money for inaugural falls. I think these large tech companies are very excited that it's there. They could buy anything they want.

Bezos is excited or Bezos is forcing itself to. Yeah, I don't know if I'm just specific about that. I mean, you talk about what's the investment implication. The M&A stuff is a big deal. And particularly, you know, being able, if you're a venture-backed company and you're trying to get an exit, like, it has been a disaster. How many deals are getting blocked next year? Zero.

Oh, I think Zuckerberg is the most exciting for this. If you're meta, you're out there, you're alphabet, you're out there being able to acquire today anything you want. I think Zuckerberg was the most under pressure from the left. I think he's thrilled to have that pressure completely washed away. And that interview he did with Rogan sounded like a gigantic exhale. He was very happy. He was, I think he genuinely, first of all, he wants to get back to doing M&A

because that's essentially the success of Metta is buying WhatsApp, buying Instagram. Like this is important to him. So I agree with you on that. I think some of them are more like, all right, we have to navigate this. I would throw Sundar Pichai into that boat alphabet. Not happy, not upset, just like, all right, this is what it is.

Yeah, and new leadership comes in. It feels like a big change because we're in like week one and everyone has to change their rhetoric, but everyone changed their rhetoric in 2020. Yeah. And the years before that. And so it's not, you know, this is just the normal path where and rhetoric is also not what rhetoric is not policy. Rhetoric is not policy. Rhetoric is not doesn't influence

what they literally do Yeah, meaningfully. I think investors like the rhetoric though. Like I think I look at the Russell I look at bank stocks. I look at industrial stocks Like I think the investor class likes this rhetoric better than it like Biden era Rhetoric, especially we especially Lena Con type of rhetoric. Nobody liked that. Nobody wanted to hear from Elizabeth Warren. Nobody wants to hear from her ever again.

Nobody wants to hear AOC or Bernie. Even Democrats. I think people want to get down to business in the investor class. And that's where we are. So, are you as excited about the market as everybody else seems to be? The expectations in the market right now are incredibly high, right?

Yeah. Everyone thinks that this is gonna be the most pro-business, you know, pro-growth, somewhat disinflationary environment. But can't that be self-fulfilling if everybody believes it, that they're more likely to invest? Well, I think that's the question is, are the expectations so high that they're not going to be met?

You talk about a $500 billion deal of claims of $500 billion of AI investment. Is that going to happen? Probably not at that scale. There's obviously more AI investment coming, but amongst those those companies like, you know That's just very high expectations That on the question is does the policy actually deliver?

Right and there's certainly if you and I think there's a lot of ambiguity out there on that Which is if you look at a certain subset of the policies, they're not particularly pro-business right if you look at the They're not particularly pro-business, right? If you look at the policies on immigration, that's not a particularly pro-business set of policies. If you look at the policies on tariffs, that's not a particularly pro-business set of policies. So the question is really,

where is it actually gonna play out so far? We don't know, we don't know. I think that's an important thing to recognize. There's a hope is at max levels, and reality is still totally ambiguous. So how much of this is gonna be like macro, like employment, labor markets, interest rates, path of Fed Fund's futures versus,

okay, what does Nvidia actually earn next quarter? Well, I think you have to, I mean, for Nvidia itself, what they earn is macro. Well, not just Nvidia have to, I mean, for Nvidia itself, what they earn. Well, not just Nvidia, but just, the macro versus the bottom up. Here's the thing, I'm a macro guy, so I'll tell you the answer, which is, I think it's gonna be macro driven, right?

But the macro, the thing that are the macro drivers, like presidential policy and even congressional policy isn't that influential on the macro drivers, right? In general, it's just not that influential. All the other things that drive the underlying macro economy. But it could be inflationary or disinflationary for sure. On the margin, it could be inflationary, disinflationary, so that's the question.

Is it, are they actually going to deliver? Are tariffs going to 60% on China or not? Yeah. Right. Or is it just rhetoric? Well, if you knew- Those are two totally different paths. If you knew what he was actually going to do over the next 12 months, do you think you'd be able to like nail the trade?

Yeah. Yeah? Like you would know how to express it? Yeah, if you have, let's say tariffs are at 60%, there are winners, there are losers. Right now those two are priced basically to be the same. Right, there's no differentiation in the market between tariff winners and losers

in terms of earnings, expectations and all that. I guess tariffs, yeah, probably. So that's a good example where if you knew that tariffs were going to be 60% and versus zero, those are two totally different outcomes. I'm afraid to say this out loud, but it does feel like this is just a tough environment to fit. I understand everybody's bullish, which is never like a great thing. And analysts are now chasing. You don't want to see that. Right. never like a great thing and analysts are now chasing you don't want to see that. Right. But the economy is still growing. The Fed is easing. It does seem like a pretty, you know,

AI is gangbusters. It does seem like a pretty favorable time. But that's totally consensus. Yeah, I know. And that's the issue. But if you sell and this keeps going, then people that you sold for be like, what on earth made you sell? Because other people were bullish, that was why you sold? Like, it's a really hard thing, I feel like, to like give people a reason for why you would get off right now. You're right, consensus is what I just said.

Consensus is what you said. 100%. Right, and it's across everything. It's across earnings expectations, it's across bond market positioning, it's across, you know, real yields all over. Credit spread. So that's why I think everything is bullish. We've been talking a lot about this,

where we are in the cycle, first year of a presidential term, third year in a bull market. It is setting us up, and obviously, you know, who knows, for like a sideways shopping market. If we could just digest the last two years, I think that'd be great. Nobody's gonna want that,

but I think that would be a pretty healthy outcome. Yeah, and just because, you know, just because if you pencil pencil everyone's penciling out You know that's be at seven thousand and all that's that's gonna happen. It's a lock Right that's Michael's lock of the week of the week this podcast brought to you by Fandool 7,000 I mean that's where the consensus is just Galloping after the market. It's crazy, but they are. They are, and so you could easily get,

the issue is you could easily get a sideways chopping market, some slightly less than desirable fiscal policies that come in, tariffs, things like that. It doesn't take a lot, when expectations are that high, it doesn't take a lot to unwind. So a couple of things, my research associate, Sean and I, keep a list of the best stocks in the market, and it's fundamental and technical.

Basically what we're trying to figure out is like, where are people making money right now? Where are the highest quality names that are going up, that are not too overbought, but that are working? And of course it changes, but like all those Mag 7 names just came back on the list this week. So every time people say, oh it's a rotation, it's like not really. Like small caps are beating large caps this year,

but Amazon just popped back on the list. It's going up. This year, the last three weeks's going up. Alphabet. This year, the last three weeks? No, like this week. This week, Alphabet came back on the list. That's with Russell starting to do as well or better than the S&P.

And it's just so hard to not be in when that's happening. And it's, we're gonna talk about Netflix in a second. This is emblematic of this concept. Well, I think one of the things that's interesting about that is if you look at the earnings expectations, Mag-7 earnings expectations, growth rates are still pretty high, but they're expected to slow.

The thing that is driving the overall market earnings expectations surging is expectations of the rest of the 493 surging from, you know, single digit low single digit type earnings growth to 15% by the end of the year. Yeah, that's where the gap doesn't make a lot of sense like look betting on how how how much disappointment would have to happen for Nvidia not to, you know, deliver earnings in the ballpark of what's expected, right? Yeah. The rest of the market delivering earnings

that are gonna accelerate from low single digits to mid double digits, that's a real question. Tell me the story about how that's gonna happen with a stronger dollar. AI. But yeah, right, exactly, exactly. But where are those companies? Actually delivering increased earnings use where where does the source of that? What's the source of I understand people are buying chips falling dollar

Dollars up I know but falling dollar could be the source of that if it actually falls if it actually but I mean that's No, I understand tech spending right so that's that's the question But though the ROI from last year's techs and gain in the tech spending are Right, so that's the question. The ROI from last year's tech spend. The people who gain in the tech spending are the people delivering the tech infrastructure. No, no, no. The ROI from the tech spend of last year. Like, hey, we bought all this shit from Oracle and Amazon and look, earnings surprise, because it turns out we were able to not have to hire the next 2,000 people, and instead we're getting by with more tools and we're making more money.

Right, and that's the hope in the market. That's the hope. And there's one set of, if you talk about the, let's say the AI-focused tech, whether they'll get the sales and the profits is pretty clear, right? People are investing in AI. Yeah, well, where are the customers yachts, is the question. Right? People are investing in AI. Yeah. Well, where are the customers yachts is the question.

Right. Yeah. Well, all right. So hypothetically, you got 10 gigantic drug makers all selling at 10 P.E. multiples right now, effectively getting no credit for anything they're doing, sat out the bull market last year, sat out most of the bull market, 23 as well. Okay? What happens when one of them comes along and says, our drug discovery costs are actually trending lower because we're replacing people in lab coats with AI? But those, they don't, they don't discover any drugs.

They make acquisitions of companies that discover drugs. Venture back small businesses discover drugs. That AI benefit, I just, I do some work in this space. It's an R&D expense that's a benefit. And the people who are benefiting from that are the small scale companies that are using AI to do drug discovery. So that'll show up in the smaller ones

before the larger ones. Absolutely. Yeah, they're benefiting from it. There's been a stepwise change in that over the course of the last even couple of years But right the big companies they're paying top dollar for those products not the other way around their marketing companies I think people are bullish just on the idea that There will be continued margin expansion at the 493 Well, they're better big right and that's what it comes down Is there margin expansion of the 493 in an environment of relatively tight labor markets?

It's not super tight, but tight labor markets. And if there is margin expansion, who's paying for it? Because the flip side of margin expansion is less hiring, less labor. And so this is the macro, the AI story cannot be divorced from the macroeconomic dynamics. And those are, if you have margin expansion, which is effectively priced into elevated expectations, then it has to be paid for by somebody else.

So either the government has to expand its deficit or households have to massively to save, have to save considerably. What about the magic of productivity? Not enough? But productivity, let's just talk about productivity. Let's say base overall S&P 500 sales or whatever, corporate sales have to align with GDP, right?

And so then you go to margins, which is just labor's, essentially labor share of that GDP number. Productivity supports the nominal GDP number and then gets distributed based upon labor share Right. And so if you increase productivity, let's say we increase productivity 2% which would be a huge impact over the course of say a five-year time frame Computers increase productivity by one to one and a half over 20 years, right? So let's say we increase productivity growth by 2% all you're doing is increasing nominal GP growth by 2% Right and amortized over a 10-year time frame. You're let's say we have you know

The level GP goes up instead of 80% over the over, you know Over 20 your time frame goes up 110% That's a big deal, but it's only 30% increase in nominal sales. That is not that big a deal. Right. Right, and so the only way to get the sort of earnings growth, so if you go from nominal GDP growth of five and a half to seven and a half, which would be huge,

I mean that would be incredible nominal GDP growth, that's not even close to what you need to get the sort of mid-teens earnings growth that is being priced in by the AI boomers. But these companies have grown way faster than GDP for the last time, forever. Right, percentage points, but it all has to reconcile back to GDP, right?

You have to, they can't grow outside of, you know, beyond GDP, their sales growth can't be beyond GDP growth. Global GDP, though. The global GDP be beyond GDP growth. Global GDP though. The global GDP growth is weaker. I'm not saying forever, but it has been for the last decade. Yeah, true. But they can grow their share within GDP, but it's gotta come from somebody else.

It's gotta come from somebody else, and it's gotta come from somewhere. And productivity, all it does is it increases GDP growth by a few percentage points. And that is not close to what's necessary To get the type of earnings growth that the AI boomers are expecting mid double-digit earnings growth Requires that you have margin expansion of something like 1% a year over the next 10 years Okay, where are you gonna get that 1% a year?

Just what about efficiency somebody has to save 1% a year. What about just efficiency? Somebody has to save 1% a year, because if you fire people, if you don't hire people, all margin expansion is, is less money to labor relative to sales. Somebody has to fill that gap because labor getting money, labor's income is spending. All right, I'm lost. What are you trying to say? Sell, f***head. This is not complicated.

No, you're saying these earnings expectations cannot be met from economic growth alone. Without margin expansion. And the only way that you get margin expansion like that is if some other sector of the economy dis-saves. So you either have to have the government budget deficit, like part of the reason why, you know, how have continued to to have margin expansions because the government deficit is wide Right, which is just a transfer pain You Netflix could raise their prices because of the deficit. Yeah Let's talk about Netflix at an economy wide level. That's exactly how it works John put this put this chart up So Bob I when I saw when I when I was watching When I was watching Netflix report earnings in the reaction to this, I was thinking

about you were coming on the show later this week, just because I feel like this is so emblematic of why so many macro investors missed the boat on the upside in equities over the last five years. It's impossible to imagine a company like Netflix until it happens. So this is a company that actually benefits from increased competition. We don't have history books on companies like these where the fact that, so the bare case on Netflix 10 years ago was that everyone's going to do streaming. Therefore, it's a competitive threat to Netflix.

It worked in the opposite way. The more companies did streaming, the more it validated Netflix's place in the budget of every consumer. And it kind of enshrined them as, oh, this is how we consume content now. We just Netflix it. And it's really hard if you're looking at things like cap ratios and trying to figure out like what are stocks worth when a company this paradigm breaking comes along. So what I'm showing you here is the reactions to the last earnings report. And this only goes back to last January.

They've had bad reports. The stock has, you know, gotten killed when they've had a not so great quarter. But just generally speaking, how does anyone envision this is a company that actually continues to find growth in year 20 of what they're doing? It's a consumer staple company. It really is. It's a consumer staple that trades with growth margins. This is what they reported. Record subscriber growth. This quarter, record.

Added 19 million paid subs in Q4. The new total is 302 million globally. Revenue increase 16% year over year to 10.25 billion. For the quarter, beating analyst expectations. Earnings the quarter beating analyst expectations. Earnings 427, beating expectations, 102% increase from the previous year. There's a lot of reasons for that. NFL games help. Mike Tyson back in the ring helps.

WWE helps. Bringing back squid game, which is a global hit, helps, of course. But just the point, it would have been really hard for somebody five years ago, looking at Netflix, selling at 50 times earnings, and saying, you know, I actually think this stock is cheap. Alright, now kill him, Bob. Turns out it was cheap.

It was cheap. Turns out it was cheap. But who could have known? Like, you could have said to yourself five years ago, it's not cheap, I'm buying it anyway, because I think it's going to grow. That would have been the right call. Nobody could have said 50 times earnings is too cheap

given what Netflix is. But like that's how it turned out. And this is just one example of, I could give you 50 off top of my head. I can give you service now. I can give you all these cybersecurity plays. There are a lot of these stocks. And that's what I think has made it so hard for people Whether they're running long short equity or they're running like value based strategies

so I just wanted to get your take on this phenomenon and Whether or not it's gone too far at this point or maybe not far enough Well, I think any I mean mean, why did Netflix succeed is because they were an innovator in taking market share. Yeah. Right? And so there is a raft of companies that we don't want to talk about that have, that are basically dead

as a function of Netflix. Yes. Right? And so- Or had to change their business model. Or had to radically change their business model, et cetera. So throw Disney, Warner Brothers. Exactly, exactly. Put all those in that pile.

All of those in that pile, and not to mention all the cable companies which aren't necessarily all public, but that, if you could, that's a wealth shift within the economy, away from lag roots into innovators, right? The world. But the net benefits of the S&P is undeniable.

For sure. So you had five companies, 10 companies threatened with extinction by Netflix. And then some of them decided to join it because they couldn't beat it. But the net effect for the S&P 500, higher multiple, higher price. So it's a net, even though it's one company taking away from other companies, for the investor class, a net positive. I don't think those companies lost as much market cap

as Netflix gained, is what I'm saying. Yeah, that's true. And the question is, how long can that continue? And how much can essentially the S&P 500 gobble up the world's market share and of course they're picking a market share on a global basis, etc. And so I think there's circumstances like this that I agree with you that traditional like value metrics are not necessarily good indications of high market share grabbing

companies. In fact, they're quite bad indicators of high market share. They're not designed to capture that. Because they're not, they're designed to cap, they were, they were designed like in the 50s. Yeah. When we had a static set of companies out there. And so, and so they're, they're not, they're not good indicators of what's going on. The question is at the aggregate level, do you start to build up from the bottoms up to a set of aggregate assumptions

that make sense or don't make sense? That's why I think when you, why I draw on the in the mag seven or you could say, the expectations of some of these high flying tech stocks actually seem pretty reasonable, plausible. But the question is, is that going to extend to every company in the S&P 500?

No, right? But that's what's being priced in, is that it is going to extend to every company. You think like the median valuation for S&P companies is pricing that sort of enthusiasm in? That type of earnings growth expectation. Remember, what you see, first of all, the median, if you, we don't have a chart here,

but if you look at the median S&P 500 valuation, it's still pretty elevated, right? It's not as elevated as the market cap. It's about like 17, 18. Yeah. It's not 22, but it's not 14. But it's not 14. And that median valuation is typically lower

than the market cap PE. And you look at that that and that's on earnings worth expectations for 12 month earnings worth expectations that are extremely elevated. And we like just people look at 12 month forward P charts and they take 12 month forward earnings as if it's true. And 12 month forward earnings is not true, right? Those are expected earnings.

Expected earnings are not real. That always comes down over time. They come lower. Right. Those are expected earnings. Expected earnings are not real. That always comes down over time. They come lower. Right. And so the reality is that's something like, you know, a high level for the median company for a set of earnings growth that is already expected to be extremely elevated. Okay. So is that the bare case that we're pricing in that that we're pricing in there's too much enthusiasm for Companies to be able to pull off Netflix like feats on earnings And they're just not going to materialize and that disappointment will ultimately lead to lower prices. There's no value for safety. There's no

There's no margin of safety for the companies that are not high fliers. Right. And that is, that's not like a, you know, we're having a financial crisis type story, but that's a stagnation, an asset price stagnation story. Because the starting values are just too high relative to what they'll be able to deliver. Values and expectations.

So credit markets are the same optimism as in credit spreads. Sure, but that story in credit spreads, I think is different in the sense of credit spreads ultimately arbitrage to whether people default. There's no defaults. And there's no defaults. Yeah.

And I think, you know, famous last words, but like there's nothing obvious in the next 12, 18, 24 months that's going to lead to a gain. So why shouldn't valuations be high? Like given the backdrop it makes sense. Well, no, the value, why shouldn't credit, that's an answer for why credit spreads should be low. And why they might even be good value at low levels. It makes sense, given the motif that we're painting, are we painting a motif here? It's actually more of a tableau, would be the way I would phrase it. It's more of a tableau. That's a tableau. Would be the way I would phrase it. It's more of a tableau.

But I guess Michael's... The equity expectations are unbounded at the top side. That's the issue is that there's no... The expectations can be totally divorced, are divorced from the reality of what you're actually seeing in terms of the bottom half earnings growth. So Michael's asking slightly differently, if we're in an environment of very little, if not no default activity, why wouldn't the median multiple on earnings for public companies be higher?

And it is higher, but why isn't that justified? Because default and earnings growth are two totally different things. Yes, but you would pay up for something that you deem to be, you would pay up for something that you deem to be less risky, wouldn't you? Sure, but the credit spread defines what the, what the risk of default is, which is so far out of the money in this sort of environment that it's not particularly relevant to the equity price.

They just happen to mirror each other. The option value of the equity is zero at this point, right? Because the odds that it goes to zero are you know, the odds but I guess don't default don't you normally get high earnings multiples and Low credit spreads concurrently don't those two things often go hand in hand confirming each other Is there both expressions of like fearlessness, right? Right, but you know, you could have, you can have unrealistic upside expectations around earnings growth at a time when you have essentially no default risk or very low default risk. So that's right now.

Or you can have reasonable expectations of earnings growth at a time when there's little default. So you could have low credit spreads, but a 17 multiple on earnings. Exactly, exactly. What if we get low single digit earnings growth and a time when there's little. So you could have low credit spreads, but a 17 multiple on earnings. Exactly, exactly. What if we get low single digit earnings growth and even more margin expansion? That'd be fun.

Yeah, well then, you know, a few more value investors are gonna throw themselves out of the window. Um, I made an observation on this show that. They're just gonna quit. People didn't agree with, but I think I'm right about this. We were talking about, oh, JC was on the show, we were talking about credit spreads and junk bonds in general.

And I made the point, and it's not my original thought, I think maybe Nicholas told me this, the companies that are in these junk bond ETFs are the highest quality version of themselves that we've ever seen because of this explosion of non-bank lending happening in the private markets. If you are a C-weighted borrower, you have like 10 people dying to give you money. That was not the case even two years ago. Which I think should give us all pause if we're trying to take our cues from the publicly traded debt markets.

We're probably not seeing the real story. Right, right. All of the bad. James, you understand what I mean by that? Yeah, I got it. All the bad credits are pushed into the. They're not in HYG. They're not in HYG.

HYG is the blue chip of junk. Right. Okay, that's a different situation Than when most people started following Junk bonds looking for blowouts or credits, but my point is you just might not get the warning there even lower quality Bonds are trading at some very tight spreads historically even like outside of H.y.g. Yeah, I mean off-market off-market. Yeah for now. They'reJ. Yeah, I mean. Off market. Off market, yeah. For now, they're performing.

Yeah, for now. So Bob, don't you think that something, there has to be a trigger to like, for people to change their minds, for like narratives to get reset. Right, and so I think the question is, I mean, what's the, the story that is the trigger is disappointment. that's how oh, that's enough other than

Earnings disappoint other than credit shock. Yeah, I agree this point right disappointment is actually what turns market cycles through time Which is you get let's say that you know, there's I mean if you just go back to historical cycles environments where there was where's Minimal credit growth, right? Which is kind of what's going on right now. We don't have it, there's no credit problem in the economy. Credit growth is actually at recession-like levels right now. So what creates a turn in an economy where you don't have a lot of credit growth being responded, you know, slowing down as a result of monetary tightening,

it's that people build expectations to extremes, and then ultimately conditions come in worse than those expectations, and people start to reprice asset valuations as a function of that disappointment. So that's in an 06 scenario, where we started to hear about Bear Stearns has these two hedge funds

that are loaded up with mortgages, and some of those mortgages are no longer paying and they have to take a write down to the asset value of these funds which means the investors in the funds have to take a hit. Right. Have to take a haircut. It's on paper but they have to take it and that is disappointment and what that leads to is people asking questions that they weren't asking the day before of the other hedge funds that they're invested in and the other asset managers and the other holdings at banks.

And that triggers some sort of a waterfall or a cascade effect of just people not being bullish anymore and being more suspicious. And so when people say, well, we need some sort of exogenous shock. I'm not sure I think I agree with you I think you just have people start asking questions that they weren't asking yesterday, right? And they're just a little more reserved and how little bit but that feeds on itself and households are like well instead of you know Using my open AI bot to do another dinner reservation and it's yeah I think it're like yeah we'll stay in and have some pizza. That hedge fund story that I tell was the summer of 06 and by March of 08

it leads to the bankruptcy of Bear Stearns. It's less than two full years. It's 18 months of just slightly less bullish, slightly less bullish. Exactly. And it's not Bear Stearns in a vacuum, of course, this is taking place. Yeah, I mean lots of other things were going on in terms of the credit boom, but if you just look, I think people are coming into the year and they're thinking it's just like the beginning

of 2023 and 24. Remember, beginning of 23, there was a 100% chance of recession. It is not, right. Beginning of 24, people thought that there was going to be 100% chance of recession It is not right and it's a 20 for People thought that there was gonna be seven cuts Right and that the economy was aggressively slowing and in both those circumstances kind of connecting to the to the what's driving stocks here From a macro perspective what drove stocks up in both years 23 and 24 was that growth ended up being a lot stronger? Than the terrible expectations thanks to AI spending or whatever, but yes

I surprised continued. Yep. The economy is more resilient to interest rate hikes and people expected etc, etc because of income growth Okay. Well you enter 25 totally different story Growth expectations are at two and a half to three percent growth expectations are at two and a half to three percent. They're even stronger in what's priced into the equity market. And so we just have a totally different set of expectations in the market.

And so it's just a lot harder to beat very elevated expectations, totally different than when we came into 23 and 24. Yeah, yeah, this deregulation story, you have like the financials, valuations have gone way up because now they're making a lot more money on, on a steepening curve and NIM and there's just like a lot of drivers now that have already been in place that were not in place a year ago.

That are priced in. Everyone's expecting things to be great. Yeah. And, and what that means is if things are great, we could have a fine year in asset prices. But if anything disappoints, labor markets are a little weaker than expected. Well, let's go there.

Here's another thing that could disappoint. You got another labor market report that I think is, it's not like emergency, but claims going up today. So that's like trending not in the best possible direction. It's not as stable as it was. Now it feels like it's a little instable. It's not bad enough to make you feel like the Fed is coming in with the seven cuts. So it's kind of like in a no man's land where the labor market is for sure slowing down and deteriorating a little bit. Some people would say that's healthy, it's normalizing.

Some people would say that's a canary in the coal mine. What's this chart that we have? 70% of GDP or of spending is consumer spending. And as long as we have jobs, as long as people are employed, they're going to continue to spend. That's just what we do. That's right. Only 70% of spending is consumer spending. And as long as we have jobs, as long as people are employed, they're gonna continue to spend, because that's just what we do.

That's right. But, our friend Warren Pies has a chart showing labor concerns, payable breath deteriorating to levels associated with recession. So what Warren and Fernando did was show the percentage of industries with job gains on a year over year basis, and it just went negative, which typically, at least historically, has preceded a recession.

So maybe cause for concern here. What do you think when you see this? Yeah, the labor market's slowing down. It's gradually, this is totally normal. In a kind of, we're getting, we're late cycle. There's been a tightening and, you know, there's just. There's just these gradual cracks that slowly, but surely emerge in the economy, and this is this is highlighting the fact that like,

you know, this isn't dropping off like a cliff, but it is slowly, but surely we can the economy slowly, but surely we can. This isn't layoffs as much as it is companies just not hiring as many people? Just not hiring, right? Yeah. And that is, you know, part of that was essentially a payback, a bullwhip from the fact that they hired

anyone they could find. Yeah, this is hard to take at face value. Look how weird this chart is. Like, look how weird the pandemic was. Like, we're still, there's still so many distortions that we have to work through. See this moment in the mid-80s? Tell us about that. Well, you do dip into that kind of recessionary lack of job gains.

But then you recover without an associated economic event. And I don't know that there is like a specific reason why that looks like it's 1986. I can't think of anything economic that would have mattered but I just make the point you did get a reversal without a recession being the reason for the reversal and I wouldn't be shocked if we start to see more hiring now that the election is over and people have all this irrational or not confidence about Trump and his policies. Like if this line now reverses off of that level,

I don't know that anybody would be totally surprised. What do you think? Well, confidence is not, confidence is partisan driven. If you- Big time, it's all political. We agree. And what, if you look is partisan driven. Big time, it's all political. And what, if you look at partisan driven rises in confidence relative to subsequent economic activity, they're totally unrelated.

Wow, okay. Totally unrelated. So it's not going to bleed into any kind of real life activity. And if you look at that like down at the county by county level and things like that, it's unrelated. And it's why when you look at things like NFIB or ISM is influenced by this or confidence measures, those are simply measures of partisan views.

They offer no macroeconomic predictor of what people are going to do. They have lost all predictive abilities because they are entirely driven by partisan views. So what are some leading indicators that you still find value in? Well, I think like how traditional hard data indications, like permit construction permits of leading, you know, of leading sectors of the economy. So look, if you look at what's going on with housing permits, housing units under construction, they're falling. Not great.

Basically at the most rapid pace that we've seen, except for back of the GFC. New home building. New home building units under construction is plummeting. Would mortgage weights with a five handle change that overnight or not necessarily? Probably not. There's a lot of, I mean, there's a lot of, there's a lot of underbuilding and then a lot of overbuilding. I mean, you can't go anywhere without seeing another apartment building being, you know, near completion and then being completed, right?

This huge supply coming into the market, that's falling. So far we haven't seen construction job losses, but at some point we will see construction job losses as those units plummet. That's a meaningful leading economic indicator. And that's a meaningful leading economic indicator. Or you look at something like, you know, manufacturing investment, which surged as a function of the Chips Act,

and to some extent, the IRA, well that peaked already. The peak is behind us, and that's starting to slow as well. Right, so the question is, is AI investment, stuff like that, gonna pick up, but I think the, you know, it's certainly slowing considerably. And if you get that investment, which had held up the economy in, it was a reason why in 23 and 24,

the economy was stronger than people expected, that's now slowing rapidly. So you got the housing sector slowing rapidly, you have manufacturing weak, and you have business structure investment slowing rapidly. Those are all things that were kind of surprises in the upside of the economy in 23 and 24. They're all moving in the wrong direction.

The stock market is not pricing any of that. And the stock market. It's ignoring it. It's totally ignoring it. Yeah, it's so like for how long could that happen? Can we do this trade policy uncertainty thing? How is this measured? This is a chart showing trade policy uncertainty.

You can see that the only other time it spiked to this degree was under Trump first term. And now we're right back here. I guess this is survey-ish, kind of soft data. I don't know. What does it say? It measures media attention to news related to trade policy uncertainty.

Is that counting the articles? Automated text search results. Automated. So in order... Whatever, there's a series. There's an index for anything. All right. Is trade policy... Well, we're ignoring this too.

Yes. Would be my point. Big time. And I think this is a good example. Where is the upside case on trade policy relative to what's priced in? Where is the upside case? What's the upside case on trade policy relative to what's priced in. Where is the upside case? What's the upside case on trade policy relative to what's priced in?

Well, what do you think is priced in? That it's all bluster. Oh, the market is saying ignore this because none of it's gonna happen. Can we go to the next chart, the earnings expectations? This is what you see is tariff winners and losers, earnings growth expectations are the same. Actually, tariff winners are a bit lower, but like expectations are the

same. There's basically no expectation that tariffs are going to have a meaningful influence on economic conditions. Yeah, we have not separated the tariff winners and losers in the stock market. In the stock market. And so if these two things are the same, if people are saying, look, if you're a tariff winner or a loser, right, your life is the same. Bob, what's in the winner bucket, just for argument's sake? Like what types of stocks?

Domestic oriented industries are big winners. Where they don't have to worry about tariff stocks. So any global. Retail, Walmart and stuff like that is in, it would be in losers, right? Cause they're going to pay up for merchandise. They're going to pay up for merchandise and whether they can pass it through, et cetera. Chart 10 similar story. This is, I guess,

Bloomberg chart relief rally and tariff exposed stocks, equity baskets exposed to trade risks gain on Tuesday. Yeah. This is so noisy. Yeah. It's tough to say that the market is worried about tariffs. But I think, you know, if you really thought that the market was meaningfully worried about tariffs, you'd see tariff losers, you know, tariff winners have much better expectations than tariff losers.

You'd see stock prices move strongly in the favor of tariff winners relative to tariff losers. And that chart doesn't show it because it's just in the last Six or eight weeks, but if you just look at it beforehand, it's basically Versus losers is so you're saying the markets current base case is the upside case right now And we don't have we're not pricing in the potential downside of tariffs yet The market's expectation is that there will be no tariffs. Yes, okay. Which is interesting, because if you look at global assets, Mexican peso, Chinese yuan, their stock markets, et cetera.

They believe it directly. So it's like all the EM investors are like, this is gonna be tough. Yeah. Right? And all of the US company investors are like, it's all bluster, nothing's gonna happen. I remember on election night sitting at the New York Stock Exchange and I remember Adam

Parker sitting next to me watching the peso. Before they said it's Trump, the peso had already reacted and it was crashing against the dollar. Let's do this rotation into European stocks. This is from the Bank of America fund manager survey. This is super interesting to me. This surprised me. It could just be noise, but it shows the monthly change in allocation to Eurozone equities and everybody seems to be vocally very bearish, but yet this had a spike that you haven't seen and

Can I ask you a question? Do you think this is just portfolio rebalance in January? Because Europe underperformed so people just like pressing pressing the button, nope, Europe's supposed to be 20%, not 18%, add 2% Europe. I'm shocked. I would just think that people are just running away. But they're not. But I'm saying like, nobody's bullish Europe, but they're just like pressing the rebalance button

and buying it. You think that's possible? I think that's probably what it is. So do I. I haven't talked to a single person who is bullish on Europe. Right, I don't think there's a story that people are passionate about.

I think they're just getting back up to whatever their weight is supposed to be. Let's get the China stuff. Bob, I want to talk to you about bonds. So we talk about all the risks that is not being priced into the market. Bonds are offering safe Haven, good alternative. Yeah, I mean, look what you got.

We had a couple years where the expectations, the pricing favorite stocks relative to bonds, now as we talked about, expectations have flipped. Pricing of bonds, tips are giving you two and a half percent. Right? On the long end, bonds are starting to look like a good deal relative to stocks on a risk match basis. What do you have any thoughts on the term premium? That's been a big topic of conversation last couple of weeks. Yeah, I mean, the term premium, part of what we're seeing in the bond market with the term premium steepening,

during a period where equity markets have held up, is an indication that there are as stronger growth expectations being priced in the market. Because part of what defines a term premium is essentially what's your choice to take cash today versus to lend it out and get a return in the future. And so if you saw the term premium rise sharply with the dollar falling and stock selling off meaningfully, that would be indicative of people being worried about an inflation

story and, you know, the dollar and all that stuff. But that's not what you're seeing. What you're seeing is stock prices at all time highs and term premium steepening, that combination of things is a pro growth story. Okay, that's the market saying. The market is pro growth. Yeah.

That term premium expansion is pro growth. And the thing that's interesting about it is term premium now is at, essentially the last time it was this level was pre GFC. And so what that's implying, I mean, it's just one of many indicators that are in the rates market that look like we're basically pricing a set of conditions over the next, you know, five or 10 years that look as good as the pre GFC boom.

Pimco is saying bonds are better positioned to play a crucial role in portfolios in 2025. We believe bond yields are attractive at a time when equity valuations and credit spreads are not. And the barber says Bob needs a haircut. Uh, giving, sure. Giving high quality fixed income a favorable starting point. Unlike cash, bonds stand to benefit from capital appreciation as policy weights fall, enhancing their role as a diversifier and stabilizer for equity exposure and portfolios.

Look, it's been very easy for a couple of years to just be long cash and not worry about bonds because who cares? So I guess they're arguing that that time has now passed. I think a lot of people are making that argument. Would you agree, like is lengthening duration the right move for most people at this stage in where we are.

Yeah, I mean part of the question is bonds were challenging relative to cash in an environment of a lot of inflation volatility. And high overnight rates. And high overnight rates. Yeah. And so a lot of that, that's changed, right? Yes, overnight rates are falling. Overnight rates are falling. Have already fallen a little and are falling more. And, overnight rates are falling. Over night rates are falling. Have already fallen a little.

And are likely to fall more. And inflation volatility has come down. And intermediate term rates have gone up. They're more attractive. And rates have gone up. Or we were on the high side when we were moving up in this most recent period to be a, look like a good buy because the negative effects of bond yields rising

had started to emerge in that sort of 475 to five range, you know, 18 months ago or a year ago, right? When we saw it in the summer of what, 2023. And so we basically were bumping up to that same point again, except inflation wasn't at 6%, it was, you know, it's at 3%. A lot of the commentary this winter has been, uh-oh, maybe people are sick of lending to the treasury

because of, you name it, debt to GDP or deficits or both. Do you buy that or do you think? No, that's total garbage. Okay, so I- Total garbage. So I agree with that, Colas agrees with you. Wayne Cook, go on. that Colas agrees with you cook what like I'm like reader agrees with you like the The the real people who seem to know what they're talking about scoff at that

Well, you can see the triangulation in the inner market action, which is if you were really concerned about Lending to the US Treasury. Why would the dollar be so the dollar wouldn't be strong stocks would be Crashing correct, right And stocks would be crashing. Correct. We would be in a panic. We would be in a panic. And you see that in traditional emerging market economies, bond yields rise, the currency goes down. Okay.

So it's politicians saying this, not intermarket analysts. And then there's a fundamental story, which is all of this talk, like the US is gonna default on its debt, it can't pay back The debts too high it's total garbage that spiral that spiral all that's total garbage and the reason why that is is if Yields are too high given economic conditions. The Fed will just buy the bonds like

Who who how many of those people who are talking about the US debt spiral? Talk about what's going on in Japan? Is Japan having a debt spiral? Japan's having, yeah, the currency is declining, but arguably that's actually beneficial. They actually need a currency decline to stimulate a depressed economy. But the bonds, the bonds are paying exactly what the yield has always said. There's no default on the bonds and their debt levels are a multiple of what the US is.

So part of that narrative, so the Fed is cutting overnight rates, yet the 10 year yield is going in the opposite direction. It rises 100 basis points while the Fed funds rate is cut by 100 basis points. And the people who, everything they look at all they do is see politics they come out on tv and they say This is bond vigilantes the first stage and they are rejecting Uh trump plans for the economy. They're rejecting what biden did and deficit spending in general and we're seeing the opening stages of uh

Of a serious financial problem, but they're myopically looking at one market and not looking at cross market and seeing the holistic picture of what's going on. The reason why bond yields rose in response to the Fed coming in with a 50 basis point easing is because the Fed was too easy relative to conditions, which meant that stocks and gold rallied

relative to bonds, right? That's a positive return story, right? That's a positive set, growth positive set of pricing related to a bond yield cycle. And not indicative of a debt spiral. And not indicative of a debt spiral. Okay, thank you for clearing that up for us. You'll see a debt spiral when the dollar falls

relative to other currencies, and when stocks start to fall meaningfully in response to bond, and bond yields continue to rise while stocks are falling. Okay, we haven't had that yet. We haven't had that, nothing close to it. We've had rising bond yields with rising stock prices. We've had rising bond yields with rising stock prices, We've had rising bond yields with rising stock prices.

And what we've also seen is when bond yields get too high, stock prices start to fall, which sow the seeds of bonds rallying. That's literally what we saw in the last- As people go to bonds for safety. Yeah, yeah. It works like a charm every time. It works like a charm right at five.

Yeah. If we were to burst through five, would you say maybe something's changed or not necessarily? No. Can we talk about tips with you? Yeah, are we allowed to talk through five, would you say maybe something's changed or not necessarily? No. Can we talk about tips with you? Yeah, are we allowed to talk about tips here on? Pro tips or anti tips? I love tips.

Reflective of very elevated expectations to kick off the year, much higher than the last couple of years. This favors bonds versus stocks ahead. Outlook to kick off the year. So you wrote about this. Let's put this chart up of annual real GDP growth. This is what I was talking about.

If you have one chart to characterize how to think about what's going on right now is this chart. Okay. Which is 2023, here's what the expectations were zero growth recession. 2024 the expectations were 1% and actually in December they were even lower than 1%. Today, they're actually a little bit higher

as we get, as we've entered into January. They're like two and a half percent growth. So why did stocks rally? Well, actual growth came in way above what the expectations were. Oh, look at the size of the surprise in stock price. The size of the surprise in stock prices makes sense in the context of how big the economic surprise was.

That's not gonna happen again. You're not gonna get a, I mean that would be 6% to the people. Exactly, the only way you get a similar sized positive response is a 6% growth. This is a great chart. So we don't know what the yellow line's gonna be by the end of 25, but it's highly unlikely we surprise to the degree that we

have in the last two years. So we ran out of that rocket fuel of upside economic growth surprise. Exactly. And that is when we talk about how you can have disappointment create a turn in asset prices. This is like classic. It's a classic setup. Classic shit doesn't work anymore.

Classic macro setup. Put up the tips chart, John. I think it's 16. All you guys talk about these individual companies and this is the only chart that I know. Okay. What's going on here? Tips.

Okay. Say more. Good? Good. Buy them. Okay. Why are they a buy here? Two and a half percent real yields. Okay. You can lock a buy here? 2.5% real yields.

Okay. You can lock in a 2.5% real yield. No risk for 20 or 30 years. So why were they, so why was it negative directly following the pandemic? It's just a function of the degree to which- People expected the- Fed funds rates to dropped?

Yeah. Okay. You know, the economy needed massive stimulation. to which people expected the fed funds rates to dropped. Yeah. The economy needed massive stimulation. And what that meant was negative real yields for a certain period of time. So tips were a terrible buy. They were terrible buy. And now they look, so the higher this,

so right now it's 2% plus real yields. So this is as attractive as tips have been in the last 20 years. Since the global financial crisis. 25 years. Yeah. Okay. Are the flows showing that people are taking advantage of this situation right now? Oh man, nobody wants to talk about tips.

Okay. Well, because I guess 2.5, why do you think that is? Like 2.5% is not that exciting? 2.5% real yield. Dude, if you can get 47,000% then Trump coined well, would you bother? Well, there you go, there you go. I know it's old school. From an allocation perspective though,

tips versus what? Well, certainly why would you buy nominal bonds unless you think we're entering a deflationary spiral, when you could buy tips and just take the inflation risk off the table. Maybe there is inflation that's too high. Right now it's priced to be essentially two to two and a half percent forever.

You can buy these tips and not worry about it. That's number one. I thought so, it's number two. But number two is if you just look at what's the expected long-term return of bonds relative to stocks, here you're getting a guarantee there's no risk. Two and a half5%, no risk.

So the question is how much real return do you have to expect to get in stocks over the next 20 or 30 years in order to hold equity risk relative to bond risk? Because here you get 2.5 for free, guaranteed, you don't have to get out of bed, you don't have to do anything. You just buy these bonds, sit on them 30 and you'll you will have compounded two and

a half percent real right so how much you need in stocks you need six and a half percent real right for something like four percent above what this what this yield is okay well six a half percent real I mean you don't see a lot of six and a half percent real growth over 30 years in equity markets. Right. Are you surprised, I thought like positive real rates were bad for gold. Unless the Chinese are buying. So what's the story?

Why do you think gold is such a strong? Well it is central banks buying. Gold's a global asset. That's the most important thing to think about. When you're trading gold, the vast majority of gold demand happens outside the United States. And so most gold buyers are not looking at US yields.

They don't care about US yields. If you're in China, you know, gold is one of the few assets that you can basically hide capital in these days without, you know, facing, you know, government either surveillance or problems, because you can't move it off offshore because there's intense capital controls.

You can't really put it in Bitcoin and cryptocurrencies. Gold's like your only choice, right? And so you're seeing, particularly in China, you're seeing this, you know, there's a deleveraging, somewhere between deleveraging and depression going on in China. Bond yields are falling rapidly. House prices are falling rapidly, the currency's falling.

What do you put your money in? They're using gold. You use gold. Yeah. And then the central banks are too. There's this underlying dynamic that has supported gold for an extended period of time, which is that, you know, central banks are buying gold and they're strategically

under allocated to gold and there's lots of reasons, geostrategic reasons why you'd want to wean yourself off of dollars and hold other assets. Well, they all watched what we did to Russia after the invasion. And they said, OK, what can we do that's not dollar denominated and sitting in banks that the United States could effectively shut off? Right. And so the answer is gold. And the answer is gold. And so they're buying basically as much gold as they can Yeah, and that's that's an underlying structural bid and then on top of it You've got a story where there's a global easing going on which on a global basis a global easing is generally beneficial to gold

particularly in those countries that you know, typically are Big gold mine and then there's Diwali season. Okay, hold on. You have a comment, another reminder, you probably don't have enough gold in your portfolio. How much gold do you guys have in your strategic portfolio? It's not part of ours.

Zero. Zero. You and everybody else. Don't need it. What are you talking about? Works with it, works with that. How many bonds you got? Tons. Tons. How's that done for you? Well, it depends works without it. How many bonds you got? Tons.

Tons, how's that done for you? Well, it depends on the investor. Sucked, sucked. In some years, yeah. Sucked. In some years, in some years gold sucks. But that's the thing is, if gold, let's say if you're looking for a diverse fire for stocks,

gold outperforms bonds in 50% of equity drawdowns. Yet you hold piles of bonds and zero gold. No current income requires sale of principal for retired investors. Not quite the same risk profile either, much more volatile. A lot of investors don't think in Sharpe ratios. Like I know that's your world, but. Well, forget about Sharpe ratios,

just think about drawdown terms, which is what lots of investors think about. You definitely want gold in your portfolio from a drawdown perspective. I think gold. Because the time in which bonds are not helping you diversify your stocks is the time in which gold often is a beneficiary.

I mean just think about the last couple years. Yeah, it's definitely worked the last couple years. Let's put your table up. You're showing us. It's not just the last couple years, it's the last couple of years. Yeah, it's definitely worked the last couple of years. Let's put your table up. You're showing us. It's not just the last couple of years, it's the last 50 years. Well you're gonna show us 1973 to 2024. This is, yeah, this is from MFAVOR.

Basically shows, take two portfolios, stocks and gold, stocks and bonds, it's the same outcome. So the volatility in stocks, bonds is nominally lower. Okay, I think most people know that offhand. Gold is at the end of the day, a commodity. It's not the most volatile commodity, but it's not a bond either. Right. Okay. All right.

But you know what? Gold is a line item, eyesore, for investors. Hasn't been a line item, eyesore, for the last 25 years. But I'm just saying, if you're in a stock bull market and bonds are lagging deeply behind, well that's what bonds are, nobody gives a shit. If you're in a stock bull market and gold has just gone sideways and not kept up for the previous decade. So that's 2011 through 2021, that's a 10 year period

where gold does nothing, equities are doing roughly, I mean this is crazy, but like 15% a year. Tech is maybe 25% a year in that period, give or take. Having an allocation to gold pisses off your end investor more in that environment than an allocation to bonds. Bonds didn't do great, but they weren't as volatile as the price of gold was and they actually did make progress total return especially if you're reinvesting. You could not say that about gold over that 10 year period. From 22, 23, 24 gold looks great bonds look like shit.

So it's flipped. My point to you earlier works with it, works without it. If you tell me you want to own gold because it's non-correlated and it's a diversifier, I agree. If you tell me you want to own gold because it's non-correlated and it's a diversifier, I agree. If you tell me you want to own gold because it hedges inflation, I think stocks are better at that. I mean, I know stocks are better at that.

200 years of history. I'm just saying. But the 200 years of history argument is a bad argument. Who cares about 200 years? Is a bad argument. Fine, 100 years. 150 years of that? Yeah. We were is a bad argument. Who cares about 200 years? Is a bad argument. Fine, 100 years? 150 years of that.

We were on a gold standard. So the price of gold was zero. The return of gold was zero. So that's not at all the monetary regime we're in right now. So the only monetary regime, the only reasonable corollary time is once the gold peg was broken and we floated on gold.

Okay, the technicians are wildly bullish gold right now. Gold looks great. And silver too, are you bullish specifically right now? Yeah, well what I'd say is gold is a better asset to hold than to trade. Yeah. Because there's a lot of idiosyncrasies that happen in it and so the point is buy it, 10% of your allocation.

Don't trade it. And don't trade it, just it, 10% of your allocation. Oh, don't trade it. And don't trade it. Just hold it, and just let it go. I wanna talk to- Oh wait, hold on, hold on. During the massive inflationary run-up of the early 2020s, like 2020, 2023, GOLD did shit.

Yeah, but this is the catch-up now, after the fact. Yeah, give me a fucking break. I'm just telling you, that's the problem with- Now GOLD's had inflation now? That's the problem with trading it. That's the problem with trading it. That's why you don't trade it. Because it could be a lag or a lead. It's definitely a diversifier.

It's a diversifier. For sure. And that's where I would say, just think about it as a diversifier. Don't get too hung up on is it precisely inflation hedge or not. It's not. It is, if you look back through time, it's very good at hedging extreme or even moderately high inflationary environments.

And there's like one instance of that, I did in the 70s. No, that's not, I mean, if you look back in developed economies over the last 100 years, right, you're focused on the US, the US experience. I am a US investor. But if you broaden your horizon to think about all developed economies over the course of the last hundred years, like gold outperformed

in depressionary environments, 2008, the Great Depression, etc., and in highly inflationary environments. And that represents like 20 or 30% of macroeconomic environments across developed economies over the last hundred years. So if you just look at the U.S. and you look at this disinflationary period and that's what you you know, what you've grown up on that is an unusual circumstance relative to the history. But investors don't live in in the last 200 years. They live in today. Sure fine, but but okay let's look at today. Let's look at post 2020. Does the popularity...

Bonds or gold? Does the popularity of- Gold. Then why don't you hold any gold? Because it works without it also. You hold plenty of bonds, you don't hold any gold. Because it works with it or without it. I mean, we know this empirically.

Listen, I think there are a lot of things that we would own if investors never got to look at them. But that's not the real world. People line at them in their portfolio for better or worse. Like talk to Cory about this. Like for better or for worse, people line at them their shit and they just do. It's really hard.

It would be easier if they didn't. You have a certain type of investor that you talk to, no matter how much money you just made them, the only thing they focus on is the one holding that's down. Yeah, so Bob, if we could say- Yeah, but why do we own this? If we could say, listen. But why don't they do that with bonds?

Why aren't they beating? We just told you why. Because, dude, people don't care about it. People don't care about their bonds. They know what it is. You don't want to get like stock volatility and no returns of gold sometimes. I'm not saying that's like the rational,

but that's how people invest. We lied to them. Nobody's mad when bonds lag a stock market. If you give people a 10% allocation to anything, I don't care. What about in 2022, they must have been pissed. I don't care if it's gold, I don't care if it's whatever. If you give people a 10% allocation to something

other than bonds and cash, and that thing significantly lags stocks, or worse, goes down in a stock market, you have to answer for it like every day. So if you're trying to build portfolios for people that they can actually live with and stick to, that's a consideration. Don't you think, I think managed futures

are another great example of things that, in a vacuum, improve portfolio returns, volatility, drawdowns, people can't stick with them. Cause they're too non-correlated. They will sell them at the wrong time. They will absolutely parachute out right when they should be getting more bullish. Hey, let me ask you about this.

Separate topic. So I feel like the Chinese stocks are the opposite of US stocks in terms of everything imaginable. As one-sided as optimism is for us stocks China's the exact opposite Would you be so bold and your personal account maybe to take a fire or this is just dead money? I don't trade markets that are not determined by macroeconomic fundamentals and the Chinese stock market is a product of political decision making

by Chinese authorities, I mean even you just one day they decide, you know, that they should go down in order to hit all the wealthy people, the next day they decide the better bunch should invest in them. You think they're that powerful, they can determine whether or not the market goes up or down? Yes.

Then why are they allowing it to fall for three years? Well, I think that's a good, it's a good indication of the fact that maybe things that are not traditional macroeconomic drivers are driving the set of policy behaviors that we're seeing. Okay. Right. So that's the sort of circumstance, you know, in the U.S. case, you kind of know like stocks fall, the economy weakens, central bank sees. They fired a bazooka in September. They were able to pull off a pretty good three minute rally. And then that was it.

Well, I think part of the reason I don't know how on command it is. Part of the reason why it hasn't progressed is because they haven't delivered anything. They just announced it. Yeah. Like I joked at the beginning of the year, they had their big fiscal stimulus, which is to give people money to buy toasters. Yeah. Like, $10 billion, it's an almost $20 trillion economy.

They're allocating $10 billion so that people can buy toasters. It's like- That's a big stimulus for the toaster business. It's almost, they're either totally incompetent or they know exactly what they're doing, which is that they don't care about stimulating the economy. Right.

They care about toast. They care. I get it. We want to ask you some hedge fund stuff because you are one of the people that we know who are among the most knowledgeable. Given your experience as a GP, what are all the new LPs in wealth management missing

as they allocate to alts and private equity and hedge fund like strategies and things that they just haven't in the past? You've sat on the other side, famously at Bridgewater during a massive run up for macro hedge fund investing. What do you think people are missing now who are coming from where Michael and I are in the wealth management space? Yeah, because they seem to be voraciously allocating. So talk a little bit about what you're seeing and what you think might be being missed. Yeah, well, I think one of the biggest things is, is everyone's into these

illiquid products. Yeah, they love it. And not recognizing that you're not getting your money. So if you I don't know if you pull up chart 19, like one of the biggest things that you see is. What is this? This what this shows is the quarterly distribution rate of, you know, private equity, venture capital, etc. And it is. Yikes.

It is. You can't distribute because there's no exits. That's right. OK, that's right. So that's so when you talk to somebody about investing in venture capital used to be you know You'd allocate you get capital calls over the first two and a half years five years six years You get your money and then five six years you get money, but the way it works now is you're all your capital gets called and You never see your money. Yeah until companies can go public or get acquired right which you know

And now we're seeing venture capital distribution rates at five percent, you know never see your money. Yeah. Until companies can go public or get acquired. Right. And now we're seeing venture capital distribution rates at 5%. Essentially, you're just never seeing the capital. And that has all sorts of consequences around liquidity of portfolios because people aren't, particularly when we talk to big institutional investors, they are stuck in a pickle, which is they expect the money to be coming in the door and the money's not coming. They have nobody to sell assets to.

They can't turn these companies fast enough to return capital. And in particular, when you think about, part of the whole story is very strong IRRs in these. And when you had venture capital, you allocate in two and a half years, two, three years, and then you get exit starting in year five, et cetera, that's where you get very, very strong IRRs.

Well, if it takes 10 years or 15 years to get your money, then it totally blows out the IRRs. Why would you ever invest in venture capital, pay all those fees, take that illiquidity when the cash flows are so extended. So you get crap IRRs. Oh, I see it. The interval is becoming so long

that it's limiting how much you can make per year. Exactly. And so basically in this sort of circumstance, it makes no sense to invest in these sorts of investments relative to investing in the public markets. Right, you're having a negative penalty, a negative penalty. So is that one of the big drivers

for why the private equity and alts people are coming so hard at wealth management? Yes, yeah. Because they need another pool of capital to come in while they're waiting for of capital to come in while they're waiting for institutional capital to get back out. In particular, I mean the way it used to work is you'd,

you know, you'd invest in a fund vintage, you'd get your money paid out, and then you'd go back into the next one. You'd go back into the next vintage, et cetera. But you can't re-up if you don't get your money out. Exactly, and so one of these companies have to grow their assets, so the only way to grow them is to go talk to people

like yourselves to try and get smaller scale investors to come back in. I shudder to think who they go to after us. When they're done with wealth management, where do they go to FanDuel? Like what's the next, what's the next, they go to Robinhood? Bob, there's an article in the journal, hedge fund fees eat up half of clients' profits.

Do you think this is a salacious headline? Or, because you were an insider insider do you think that it's Yeah, it's true. Yeah, it's true. But or it's total garbage or just over half the industry's total gross performance Was eaten away by fees over the past two decades According to LCH investments that compares to about 30% between 1969 nice and early 2000s, said the company, which manages and advises on hedge funds on behalf of,

blah, blah, blah. This increases the proportion of gross gains being paid away in fees is clearly not- You can stop eating. Oh, really? The advantage of investors. Eating. It's 50%.

Hedge funds have earned 3.72 trillion since the late 60s and kept 1.8 trillion of that in fees. Not bad, not bad. What's the problem here? Fees are too damn high. Okay, but people are still paying them. I mean, just think about this. Happily, the fees at this level,

it's not just that they're taking 50% of the returns. It means they're taking essentially 100% of the alpha. More than 100% of the alpha for themselves. Because a lot of these are underperforming funds and that's how of it. That's right. That's right The fees happen whether you're outperforming or underperforming as long as you're net positive The fees are happening even if you're not net positive, right? You still take your management management fee. Okay, right? Yeah These numbers are eye-popping Citadel is the most profitable money manager since inception. Earned clients $83 billion since 1990.

That is unbelievable. And returned $9 billion in net gains to clients last year. Hey, how do I get into this fund? The problem is you don't know Citadel is going to be Citadel in 1990. Because nobody knows that. And by the time you know, you can't get in. Right, well now they don't. And that's the big issue is that.

Why won't Ken Griffith democratize his gains? Because he doesn't want to deal with democracy. One more for you on the same topic. This looks like a PR firm packaged this headline and sent it directly to the reporter at the Wall Street Journal and then the reporter just published it. When I see stuff like this, John, put this image up. This hedge fund created an excel on steroids. The need to analyze an overwhelming influx of stock data and do it fast.

Pushed Man Group to become its own kind of tech company. This feels like a headline from like 10 years ago. Yeah, like everyone's a tech company now. Yeah. I don't know. You, I mean, you were at Bridgewater. So arguably you were at one of the most cutting edge data crunching hedge funds ever. Excel on bath salts.

This seems like whatever they're doing is just like sort of par for the course. It's not like, it's not that impressive. Oh, they have a souped up Excel. I don't know. I think in the industry, the differentiator is not how good your tech is in general. Even like for the D.E. Shaw's and the Citadels? I'd say the one area where that's not true

is if you're in high frequency trading, it matters a lot. But I think about those. Like Jane Street. Yeah, those companies in many ways, those companies are, they're called hedge funds, but they're not really hedge funds. They're not taking market directional positions on assets, right? They're market makers.

Yeah. Right. And yes, if you're a market maker, sorry, liquidity providers. They're taking a rake. They're taking a rake. Right. And look, if you can be in the business taking a vig, it's a great business to be in.

But it's not a hedge fund. It's not directional positions. When you talk about directional positions, you have to have a certain quality of tech in order to do that, but it's not the thing that's going to differentiate one firm from another. The thing that differentiates it is the quality of investment strategy. Should Seth Klarman have owned more gold?

So this sounds- Everyone should have. Now this one sounds like a story that the PR firm begged the reporter not to publish, but they did anyway. Clients of Seth Klarman's bow post group pulled roughly seven billion from the hedge fund in the past three years, losing patience with the famed value investor after a decade of lackluster returns. BOWPOST annualized at 4% a year since 2014.

I just told you the S&P did like 15%. It's now $23 billion fund. Performance over the last decade is about a fifth of its historic returns lagging virtually everyone lost money in three out of the last 10 years not easy to do. Although not steep drops. I don't know this guy wrote the book on value investing probably the most respected value investing hedge fund manager. I don't I want to say of all time would I be right.

Okay. Does anyone not worship Klarman in that corner of the world? I think this illustrates how long you could have a style that's out of favor for, and there's nothing you can do about it. I mean, I think it's kind of incredible how long it survived. It's still 23 billion,

and they're underperforming for a decade. For a decade. Massively. And- John, we have this chart by the way Just I know these aren't all great comps, but Vanguard 6040 Pivotal path multi-strategy third point Elliot and black is a Bow post this very little things that you could have allocated to ten years ago that would have had a worse outcome Not that they've lost people money, but like wow you pay a lot of fees for that to 10 years ago, that would have had a worse outcome.

Not that they've lost people money, but like, wow, you pay a lot in fees for that. I think the thing, going back to the, how can the funds take 50% of the returns in fees, is because allocators are so incentivized to invest in blue chip managers. Brand names. Even if they suck. Yeah.

And so there's- You don't get fired for that as fast. There's some managers that are out there that have done poorly for a decade. Yeah. Right? They've 15 years and yet they are some of the biggest asset managers, you know, some of the biggest hedge funds out there. And the reason why that is, is because if you talk to allocators taking a risk on a new manager or a smaller manager, it just never makes sense from how they're incentivized.

If you're up in Boston and you work at one of those colleges and an endowment and you're like, yeah, we're going to give 7% to bow post. Nobody's bothering you about that. Even if it doesn't work out because it's just like, this is what you do. Okay. So there's a lot of inertia there then and it's it survives and that's why like the problem of the hedge fund fees is not when the returns are good because when they were you know a good manager it's totally worth it right if you can get course 15% pay your two and twenty totally totally fine. The problem is when you get 5% returns for forever,

15 years, and they're taking basically all of it for themselves. Well, they don't give it back. Bob, do you have fun on the show this week? Of course. We love hanging with you. I want to tell people a little bit about unlimited funds and then we'll wrap up the show.

But give people kind of like the elevator pitch who haven't heard of your your company. Yeah we you know I was you allocate to bow post what else? I was a two and twenty manager for most of my career yeah and and starting a few years ago decided to flip that and and bring low-cost indexing to two and 20. And make you want like a little bit of a not it's not a crusade. You're not like uh, You feel like it is you want I know you're on a mission, but do you feel like you're like, um trying to overturn the industry or not really

Well, I think it challenged the industry challenge. Okay There's a lot of a lot of bad like that headline said there's a lot of bad stuff that exists in the industry Yeah, and and in the same way, you know in a lot of ways Vanguard brought massive consumer surplus to millions of investors That's what we're trying to do. Okay, so it's hedge fund like strategies in an ETF wrapper That's a little bit customer friend more Customer friendly and but trying to do it intelligently. You're not doing alpha cloning. No, you're not trying to mimic people's an ETF wrapper that's a little bit customer friendly, but trying to do it intelligently. You're not doing alpha cloning. No.

You're not trying to mimic people's portfolios exactly. You're trying to capture the various styles and strategies, popular strategies within the hedge fund world. That's right, that's right. We built technology basically that allows us to look over the shoulder of the hedge fund managers, see how they're positioned in pretty close to real time

And then you know we put that we package that into into an ETF Wrapper and the good thing about that is tax-efficient liquid You know easy to invest and you don't need to be accredited or anything like that. You can do it at $20 or 20 million are you have 20 million? They give me a call. Are your old friends from Bridgewater, et cetera, like, yo, dude, can you shut up? Are they? No, because I had a little, I had stockbrokers be like,

is there any way you could stop? Just because I was talking about commissions and conflicts and retail brokerage and telling all the stories. Do you hear from people that are like, dude, we get it, shut up already? Oh, I mean, out on Twitter, you see it all the stories. You hear from people that are like, dude, we get it, shut up already. Oh, I mean, out on Twitter you see it all the time. Where even the suggestion that you could, you could build something that looks like

how hedge funds are performing in an ETF rap, the venom, it's quite remarkable actually. Yeah, I get it. People are a little sensitive. Like nobody wants these things. Nobody wants stuff that they're live, they had threatened. Nobody wants to have their livelihood threatened. Yeah. People, look, people are overpaid in every type of line

of work under the sun, but I think in the hedge fund world, like most people in it would acknowledge we are being paid a lot of money and we can't always deliver. Right. And that's really all you've been saying. That's exactly right. So, all right, dude, your question on the show this week.

I wanted just one item of housekeeping. Michael and I and many members of the Ritholtz Wealth gang are coming down to Naples, Florida. And we're doing client meetings and prospective client meetings. So if you are a fan of the show and you're interested to learn more about how we manage money I would tell you to go to info at ridholtzwealth.com Send an email subject line Naples and Certified financial planners from the firm will be reaching out to see if a meeting makes sense and help you get on our calendar And we'd love to say hello to you in person anything you want to say on that

I'm excited to speak with Brian Belsky. We sold out, no more tickets available, but we're going to be busy, so I'm excited. Yeah, we have a lot to do while we're down there. Okay, wanted to ask you what you're most excited about for the future. What do you got? In the short term?

I don't care. The end of this cold. What's that? The end of this cold, I'm going to Florida next week and man, I need it. Let me tell you. Our lives are not man I need it. Let me tell you. Our lives are not built for this cold. Let me tell you a fun fact.

The next time we'll have a sunset that happens before 5pm is November 2025. You with me on that? Feel good about that, Duncan? Yes? Definitely. John, you feel good about that? It can't get any colder. How about that?

It can't get any darker. How about that? It can't get any darker. All right. Bob, thank you so much. Guys, please follow our friend Bob Elliott everywhere. He is the man. Twitter, LinkedIn, all the places. Even TikTok. Go to unlimitedfunds.com. TikTok.

And hey, everyone, thanks so much for listening. We'll see you soon. I can't believe that's been posted so long. Are you sure? What happened? What? What happened? What?