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Welcome to Animal Spirits with Michael and Ben. Michael, we got a huge doc this week. You are looking very GQ today.
Well, it's a great time of year. It's bomber jacket season.
Oh, I do have a bomber jacket. I have one.
I get like two months of the year in Michigan where I can wear a bomber jacket. It's September and April essentially.
Thank you. Taking advantage. All right. I want to offer, you know, I like to do both sides of things, right? So I think the one AI related — there's a lot of AI in the doc this week. It has to — sorry, it's like the biggest story of our lifetime right now. We have to talk about it. So the FT has this huge new tool that allows you to see how interconnected the whole hyperscaler thing is. So it's kind of cool. You can click on one company and see who are they tied to, and they're all tied together. And they look at Anthropic, OpenAI, Alphabet, Amazon, Meta, Microsoft, Oracle, SpaceX and Nvidia, and they threw CoreWeave in there too. So they talk about how interconnected all of these big companies are, and the idea is, okay, this is all a house of cards, because I looked at — I think the combined market cap for these companies that they list is like 20ome trillion, 22, $25 trillion, something like that. So a lot of people think, okay, if everyone's in the pool, when this house of cards falls, this is going to be really, really bad.
Well, because it's like you invest in us, we'll loan money to you, we'll co-invest in this together. Yes, your — yes. The fact that your level is rising helps our earnings, and our free cash flow is going to your profits, and it's all interconnected.
So the flywheel is spinning, but once it slows down or potentially reverses, we're all going to die.
But my other side of this is these are the biggest companies in the world. Why isn't this actually a good thing that they are all doing this at the same time? Why couldn't this essentially be — they are big enough and strong enough as companies to keep pushing through all of the worries people have and go, 'You guys seriously think we're going to slow down? We're worth like 20 some trillion dollars, what do we care?'
It sure does seem to be the consensus view what you're describing. Bloomberg ran an article over the weekend with the headline 'AI's wobbly house of cards puts markets and US economy at risk.' They quoted Jim Morrow, the CEO of a Boston investment firm, Kaledine Capital Management. He said, 'People may not fully grasp just how wound up the market and the economy is in all of this. There are just so many things to unravel if it starts.' Actually, with all due respect, Jim Morrow, I think people are extremely — they do fully grasp this is all we're talking about.
I think everyone gets it, right? Everybody gets it so much that the AI trade — tell me if this is fair — the AI trade is trading at 16 times forward earnings. I'm talking about Nvidia. Nvidia is the AI trade. Now, I know there's CoreWeave and Neoclouds and whatever, whatever. I understand that there's semiconductors, there's other things, but if you just want to zoom in, first principles. Is that even right? I hate that term. You know what? I said it. I hate it. I hate people who say it. It is stupid. It is filler. I said it to be ironic, but...
It makes you sound smart when you say it, though.
It's nonsense. It's a jackoff term. That's what it is, Ben. The AI trade is trading at 16 times forward earnings.
It is wild that Nvidia now has a lower forward PE than at any time this entire decade. The stock market is trading at a higher forward multiple than Nvidia. There is so much doubt — maybe warranted, I don't know — but there is so much concern that this house of cards is going to...
So here's my — I'm not saying I necessarily believe this, but...
And people always talk about how this is like the railroad buildout and the dot-com bubble. Okay, those are the two biggest analogies people use. The railway buildout, which I did some pretty extensive research for one of my books, it was all funded by the public. They were the ones...
Extensive? Did you go to primary sources?
You revisited newspapers from 1873?
I read like four books. It was funded purely by the public. Essentially, the public put all the money in. It wasn't even the government that did the buildout of the railroads. It was the public who funded it, and they lost their shirts when all the railroad stocks went under, and that was just a lot of fraud as well. The dot-com bubble, that was also kind of the public. All those IPOs were being funded by individual investors. Today, this is being funded by free cash flow first of all, and now potentially debt from these companies. These companies are the ones that are funding this. It's not like the public is holding the bag. Well, you could say, well, index funds, but still, that's the big difference now is that these companies, they're not relying on the public for funding.
Maybe chart of the year also from that Bloomberg article, and we've seen this before, but it's just — I'm staring at it and my face is melting. It's unbelievable.
Yeah, but this one has a purple line on it. The other ones don't have purple on it.
That's true. So we're looking at the capex of Amazon, Meta, Microsoft, and Alphabet estimated to be a trillion dollars next year, overlaid with their trailing 12-month free cash flow. And this was supposed to be the thing that put the emergency brake on the stock market.
Holy — the reason why all these companies were such amazing stocks is because they're incredible businesses. Just free cash flow out the ass. Asset light, now they're asset heavy. A total rerating, 40% of the index. This was going to slow the stock market down. And then it's sort of — I mean, I guess the Mag 7 sort of stalled out in the first half of the year, as investors were digesting what this means. Okay. But we got past that narrative, and then I think a couple weeks ago we're like, dude, there's nothing else to talk about. Either slow down, keep going. But like I feel like we're sort of in this in-between world where we're just having the same conversation every week. And then we got the slowdown potentially, or at least the whispers of it, with the guy that left OpenAI and said we're all going to die, 10% chance. And now it's supposed to crash the stock market, the slowdown that was supposed to do it. And what has the stock market done since? Look at the semi-trade. It's ramping back up. What is it going to take? The stock market is not going to come down until and unless — I don't even know what — until everyone discovers that it's a bubble. Like I don't know, Ben.
So I guess the Fed would be one thing that you could prick this bubble. The Fed keeps raising rates. Maybe that's pretty much every bubble in history. That's what finally got Japan. But getting back to the free cash flow, if you look at just that chart, you go, 'Well, okay, they're going negative forever, right? Where is their free cash flow coming from?' Torsten Slok says consensus for these hyperscalers is they're going to grow operating cash flow from 600 billion in 2025 to two trillion in 2030. Like the return is going to start coming.
Right? It is getting back to the size of this stuff. Steve Rattner did this chart. He showed the projected IPOs for OpenAI, Anthropic, and SpaceX. SpaceX already happened obviously. At $5.2 trillion for those three companies. Now, this is not inflation adjusted, but it's bigger than all tech IPOs from 1980 to 2025, which is almost 4,000 companies.
But again, I keep coming back to the size of this stuff. I don't think people really have wrapped their heads around how big and powerful these companies are.
You don't? Because I get there was a handful of big companies in the dot-com, but it was all these IPOs of these companies who had no power to do anything. They didn't make money. They didn't have profits, essentially.
Well, I mean, that's not true because Cisco, one of the biggest stocks back then, was certainly a legitimate company.
But not as powerful as the companies are today.
Correct. Cisco back in the late 90s does not compare to the impact that all of these companies have on our daily lives. It just doesn't.
So I'm still having trouble getting used to having conversations with AI, right? I'm talking to Claude and I'm running all these numbers through Claude and saying like, 'All right, what's the best — what's like the base case scenario for Wall Street and what do you think the base case is?' So they gave me three scenarios for how this plays out. Number one is you get like a trillion dollars in revenue, the ROI is huge, and the bull market is justified. Okay, that's the Goldilocks scenario. Two is the technology works, but it's commoditized. The economy wins, but they don't get as big of an ROI on the spend because it just turns into a commodity immediately. And the three would be, okay, the growth falls short and then things get written down. That's the bad. So, kind of right, mom. I promise we're not going to make this a habit of asking Claude what it thinks about the stock market.
You promise you will never do that again.
Everyone's doing this though. But don't you think that those are the three main scenarios people are thinking through right now? And it's like the easy muddle-through one is, okay, this is just everything becomes a commodity.
In that situation, doesn't the rest of the stock market win and the Mag 7 kind of underperforms?
I don't know. Too many variables to make that prediction. But I do think that that is where consensus landed on the conversation that the whole world was having last week about we need to slow down. It was like this is such obviously nonsense that the frontier models are afraid of the open source ones catching up. And look what Meta just did as an example with their Muse agent.
So this was my next topic. Yesterday Meta was up almost 12%. And it's kind of crazy that for as long as we've been in this AI boom, that AI news can still impact a $2 trillion company this much. Like look at the stock price of Meta in the last, I don't know, two weeks.
Doesn't this demonstrate how much — not confusion, but just how early we are? There's no — the range of outcomes is 10 miles wide. So this guy on Twitter posted that he had a flight delayed seven hours. He asked Muse to file for compensation. Five minutes later, he had $250 credit in his Delta account, found and booked him a new flight. It just figured everything out. Even responded to the support email itself. This feels like magic. To me, this feels a little bit like — remember how nervous people were to pay with a credit card on the internet when it first came out? To me, this is what working with an agent feels like. So I played with Muse a little bit today. It says like, 'Here, with your approval, I can update your calendar. I can make purchases. I can connect the apps. I have my own computer with a web browser so I can keep doing things when you're away.' And I asked it what can you do for me for travel and all these things, and like it does sound kind of magical, but it's okay. 'I can manage your inbox for you. I can add or schedule events for you. I can go find something you need to buy.' All this stuff. It feels like there's going to be certain people — the tech people are going to adopt it immediately.
So there's going to be other people who are going to be very worried about, really, I'm going to let you into everything.
This morning I got a text from Instinct, which is the other AI assistant, and it said, 'Heads up from the inbox. Your son's second tryout today is at 6 p.m. at the blah blah blah, and he needs to wear the reversible jersey from the first tryout. It's not on your calendar. Want me to add it?' So I walked downstairs and I showed Robin. I said, 'Hey, you probably should download one of these. It's super helpful.' She's on the phone with her friend. Her friend said, 'I'm not doing that. I'm not.' And I made the point like the credit card, this is just the way the world is, and there's going to be a lot of people that resist it. Probably in five, 10 years, everybody will be using it.
I feel like the AI stuff is quickly becoming my personal fantasy football. Meaning, so Chris gets very excited about these things, as do I, but he has to share every detail of his journey. And I said, 'Dude, guess what I did today?'
I said, 'I promise you I will not share the things that I'm doing with AI that are very exciting. If you stop sharing with me, it don't — right. It's like I don't care about your gambling. I don't care about your fantasy football. I'm glad that you're having fun. I'm having fun, too. But it's your own fun.'
There is. You're right. There is going to be so much of that. Can you believe what AI did?
Let me just stop you right there.
We're all doing the same thing.
So Ben Thompson wrote about it for Stratechery. And...
Why do we say Stratechery? I think in my defense I say it because you say it, but it's obviously — Stratechery is obviously tech, right? We both...
Because I'm holding on to Will Ferrell as George W. Bush from SNL saying 'strategy.' So I'm putting Stratechery and strategy together. Okay. So he says he thinks Meta's launch of Muse is a bear signal for the frontier labs, essentially saying this is a very approachable personal agent product, and the LLM — you're not really wedded to them in any way, but if you have your own personal agent who's in your inbox and knows your stuff and knows everything about you, that's how you get — so he's saying this is kind of bearish for OpenAI and Anthropic, and his sort of conclusion was they need to start creating products with moats. Like, okay, you've done this now, where are the agents that give you the moat to keep people there.
Yeah. I feel like the switching costs to this are like nothing going between — if you go from Instinct, which by the way I didn't — is Instinct one of these companies that raised a couple hundred million dollars? That might be out of business overnight. I know nothing, so this is pure conjecture, but just again the thing about how fast things are moving, how narrow the moats are, because I don't see why I can't switch from one to the other or back to Anthropic if they do something.
Well, but his point was once you get your own agent and it starts knowing you and you have it locked into your inbox and your accounts and your apps and all this stuff, it creates more of a moat.
I don't know if that's true.
I don't know how it's hooked into your Delta account and it knows all of your preferences for Delta. You're right. He's saying that does create some sort of moat. Maybe you're right that it's easy to switch from one to the other. I would imagine once you have your own agent, it's going to be hard to switch. It's like having a dentist. Like, who wants to switch their dentist? That's a strange analogy. Dentist.
Have you ever tried to switch a dentist before? It's not easy.
They got to send your X-rays to the other one.
So my father is a periodontist, or he was. He's retired, a periodontist.
Sorry. Someone said when I said braces are a racket and you defended him.
No, no, no. That's an ortho. I have no allegiance to orthos.
It's all in the same mouth area.
So I am a terrible dental patient. I have very sensitive gums, which is probably not a great thing. So I don't get my teeth cleaned nearly as often as I should. And when I say nearly as often as I should, it's probably been two years. I do floss multiple times a day, but I hate going to the dentist.
Well, no one likes going to the dentist.
No, I hate it. I'm sweating right now thinking about it, just talking about it.
I didn't — the first three years of my job, I had no health insurance, no retirement plan, and no dental insurance. I was like on my own. It was a very small company, and I didn't get my teeth cleaned for like three years, and the first teeth cleaning afterwards when I got a new job was horrendous. They...
All right, let's — different topic. I can't take it. Okay.
Although Ben, you saw me squeamish at Future Proof.
That's true. There was a booth at Future Proof that gave IVs for energy boost or pain, and someone said, 'You guys have to get an IV. It's magical.' And you were doing this looking away because you couldn't see the needle go in. And I gotta tell you, I'm someone who — this is going to sound very odd to say — I feel like medicine doesn't have an effect on me. Like minor medicine, like if I take ibuprofen or Tylenol, I feel it doesn't. I never feel better or worse. I feel the same.
You know, that's interesting.
So I wouldn't go as far to say as medicine doesn't impact me because that's a bold claim, Cotton.
But I always feel the same, too. Like I was a pothead for a long time and I no longer am. And it's been several years, but it was just part of my life. Self-medicate, I suppose, not a great thing. But I was talking about it with somebody recently, said, 'Do you feel different?' And I said, 'I don't know. I don't think so. I think I feel the same.' That can't possibly be true because marijuana is terrible for your overall everything. But I kind of feel like I always feel the same.
Not to steal your thunder, but I'm the same same guy.
Yeah. If it's like big medicine, then yes. But cold, flu medicine, none of that. I feel like none of it touches me. But the guy at the IV, because people said, 'Hey, get an IV. We're in the sun all day, we're drinking at night, you know, we're eating. Like, we're kind of tired.'
We're doing a lot on our feet.
Yeah. It was a very busy time for us. And someone said, 'Get an IV. It'll make you feel better.' So we did the B12 one. And the guy said, 'Give it an hour and it'll kick in.' And honestly, an hour later, I felt invigorated. It actually worked.
Yeah. Maybe that was part of it, too. Nature.
All right. Can we move off this AI topic for now? I think 15 minutes is plenty. I'm full. You have anything else?
I just — my conclusion is just what if these companies are so big that all of the worries about being a house of cards are just not going to come to fruition?
Most of the worries don't come to fruition. It's a beautiful thing. Not William Bernstein, who is like Mason — might go on my brain.
Bill Miller. Thank you. So Bill Miller had such a great quote one time when he was asked what worries you about the stock market, and he said nothing. He said the market does plenty of worrying for me. I think that's such a great way to look at it. Whatever all of us are concerned about, that's why Nvidia is 16 times forward earnings. All of the worry is in the price. Doesn't mean it's — and it doesn't mean that the worry is always the appropriate amount of worry. It could be under-worry or over-worry. But whatever you're worried about, just assume that the market's worried, too. That's a great way of looking at things. Okay.
If anyone should be worried, it should be your son who's having a second tryout. I can't believe we put kids through this. Two tryouts for one sport.
It's — dude, it's crazy town.
Yeah. All right. One of the things that we've been discussing on the show a lot lately is just how perhaps the most important variable in all of this discussion around the stock market and the economy is just how much money there is in the system and how difficult it is to quantify that impact. So for example, the Wall Street Journal reported that household net worth hit 186 trillion in the second quarter of this year, which is up 26 trillion from just the fourth quarter of 2024. $186 trillion. What does it even mean, Ben? How many times do we go back and forth to the moon with dollar stacking?
So I had Chart Kid look at this for me last week. At the end of 2019, so I'm looking at just the 2020s alone, we were at $109 trillion for total US household net worth. Today it's 186 trillion. It's effectively almost doubled this decade, household net worth. And we broke it down by all these — the Fed has all these different cohorts: the top 1%, the remaining top 1%, the next nine, the next 40, and the bottom 50. And every single group has seen at least a 60% rise in net worth. It's kind of funny. The biggest gain on a relative basis is the bottom 50% who've seen their net worth more than double off of a low base obviously, but this is not just a kind of thing where the rich are getting richer. Everyone has seen their net worth increase this decade, every group, the low end to the high end. And you're right, this is the simple — why is the economy powering through another rate hike? Because everyone has more money. That's why.
This next chart shows one of my favorite formats of charting. It shows the cumulative flows by year. So January through December going back to 2021, which was a bubbleicious year. And that looks like Barry Bonds pre-steroids compared to 2026, right? It's just a completely different slope of line. There's so much freaking money in the system. Now, every time I talk about the assets, I always do mention that it's not permanent. We have not reached a permanently high plateau. These numbers can fall 30% in a bear market or more, but it's powering so much. Unbelievable. The one thing I noticed from this chart, look at how every year for tax time when people get their refunds, how it increases. There's a spike every year on tax time.
Yeah. Right. The payment. And then — but you're right. 2021 was way higher than 2022 or 2023 because that was a speculative year, and this year just puts 2021 to shame and last year.
So I'm really proud of investors. There is a record pace of money flows into bonds through August. 600 plus billion dollars into fixed income. And the worst thing an investor can do in general in the stock market is add to losers. Right? That is a very, very bad strategy. If that is your strategy, trust me, you will eventually stop.
Wait, why is that a bad strategy? This is the Warren Buffett strategy.
No, it's not. Do not — losers. No, that is not a Warren Buffett strategy.
Buying stocks that are down.
Buying stocks that might be down versus adding to losers is not the same thing. If you have a negative return on a stock and you consistently average down, you will lose a lot of money. That is a fact. That is not an opinion. That is a fact.
Stop stealing Duncan's investment strategy. He's a big-time average-down guy.
The bond market is not exactly the reverse because there are variables involved, but we are now staring at a 5% 10-year. That is, in my opinion, an attractive investment, and I think that investors are rightly taking advantage of it.
I bought bonds last week.
I bought bonds two weeks ago. This is literally the first time in my entire...
By the way, that felt like a real weird one-up. I just meant to say like I'm with you. I'm not trying to say I bought bonds before you did. I'm with you, and I don't care if bonds go to 5.5% more or because guess what? I will add to my loser.
So I guess other than maybe a target date fund for my kids' 529 plan, this is the first time I've ever personally bought bonds in my entire career.
5% yield because we haven't seen 5% yields since before the great financial crisis.
It does. Okay, you put this one in here from Goldman Sachs. Equities relative to bonds. So this is — equities have enjoyed a near record period of outperformance relative to bonds. So this is both the US and world portfolio. It shows the spread between stocks and bonds, and it was the highest in the 1950s, 1960s, which makes sense because I was also coming off of very low — and this is what, 10-year rolling returns.
So as a result of this, people are severely underweight bonds just for natural drift.
Complacency. Stocks have given you 14% a year. Bonds have given you a flat real return. Why would you own bonds? 2022 PTSD. I get all of it. But if you are even a little bit worried about the stock market or you don't think that the 14% will persist, you have 5%.
Finally. Finally, for our entire career, it was like, well, I can own bonds. 2%, 1.5% — what's left.
So in the early part of this decade, we showed a chart to our clients where we looked at different yield levels, and we said this is what your stock portfolio needs to do to hit like a 6, 7, 8% bogey. Right? If you have a 60/40 portfolio but bonds are only yielding 1 or 2%, you need much more lifting from the stock market. So you might need to go from a 60/40 portfolio to an 80/20.
And in fact a lot of people did that. Our advisers were telling people, you either lower your expectations or you increase your equity allocation. And lo and behold, the stock market actually came through.
It really did. Son of a...
It was kind of like the stock market needs to return like 11 or 12% per year to hit this return bogey for a 60/40 portfolio. And god damn it, it did. Can you believe it?
So now I had Sean, our research analyst, create this for us, showing with a 5% yield, you need — so before in the early 2020s, you probably needed like 11% in stocks to get a 7% return in a 60/40 portfolio. Now you only need 8% from stocks with your 5% with bonds.
So this is much more in alignment. And the people who did take more risk now can hopefully think, oh, I went from — I should have been 60/40, I went 70/30 or 80/20 or 90/10. Now I can maybe get back to 70/30 or 60/40 because these things are more in alignment. The world is healing or has healed.
Even if yields keep going up to your point.
One more thing from Mike Zaccardi. I feel like I like this. This is another from Goldman. They look at all these different scenarios for the next 10 years. And I like this because I feel like every return scenario that we've looked at for the past 15 years has been awful. Here's why the returns are going to be lower going forward. Goldman looked at all these different scenarios. They looked at stagflation, stagnation, Goldilocks, which I think is just a strong economy. And then they looked at the best case, like Goldilocks plus a continued AI boom. And they say if we get a Goldilocks plus an AI boom that doesn't falter, we could be seeing 14% annual returns in the S&P for the next 10 years. So that's the economy still powers higher and the AI boom continues, 14% per year.
Which would give us literally the greatest bull market of all time.
What probability — if you're a betting man, you're a FanDuel guy or whatever DraftKings — what probability would you put that? Like what odds would you have to have to say, okay, we're going to do this Goldilocks and AI boom for 10 years? 10 more years, double-digit returns.
But talk about switching costs. Theoretically — and I don't think this is necessarily unique to me — theoretically, it is super duper — not theoretically, it is incredibly easy for me to use DraftKings or Fanatics or one of the prediction market sites to do my sports betting. But FanDuel, which I've been on since the beginning, has all of my data. So I actually am not going to switch because that's my scorecard. Just like your dentist. It's inertia.
I don't go to the dentist. We've been through this. All right. So what percentage probability — I don't know. How would I even know where to begin? 11%.
I was going to say 10% probability of that, but I honestly think that it's kind of funny because there's a 10% chance robots will wipe us out and a 10% chance we could just see the greatest bull market of all time continue. So I'm talking about this with Josh Knight, and what are your thoughts? The reason why I said so emphatically — sometimes I hedge or not hedge, sometimes I say I think when in fact I know. So earlier in the conversation I said emphatically that adding to losers is a terrible strategy. And that is not an opinion. That is an empirical, quantifiable, backed-by-data fact. So Josh and I are going to be talking about a piece that Adam Parker at Trivariate Research wrote. The title of the piece is 'Buy and Hold Doesn't Work.' And Adam showed the percentage of stocks beating the S&P 500 over the last three years and over the last 10 years. And it is just down and to the right, the number of stocks that are outperforming over a three-year and a 10-year period, and not just in the S&P, the rest of the 2000. And then he breaks it down into one-year, three-year, five-year, 10-year periods. And the best chance you have at picking a stock that's going to beat the market is over a one-year period. Because in the short term, there's a lot of potential dislocation where a stock can get oversold and it could bounce for a year, and it could still be a terrible stock over a 10-year period of time. But over a 10-year period of time, which is what Goldman is doing, you have literally zero clarity. Absolutely zero. Nobody knows anything in any field about what the world will look like in 10 years. Nobody.
So my reading of that would be that it probably used to be easier to be an individual stock buy-and-hold investor. And a lot of people in the past did it in like the 30s, 40s, and 50s. Did it for dividends. But I think things change so much faster now that it is harder to be an individual stock buy-and-hold investor.
It's impossible. So Adam says only 23% of the top 500 US stocks held for 10 years beat the index in the latest observation.
That's a wild stat. The thing is...
For three-year holdings, the hit rate is 27.7%.
But everyone would look at Nvidia and Apple and all the tech stocks and go, no, no, no, you guys are wrong, but those are the outliers.
Those are the outliers. Hello. But it's again — I repeat because I could hear people say, 'Concentration max, you idiots.' It's the same exact thing in the top 2,000 stocks.
That's a wild stat. So 10 years, 23% of stocks. Wow. Which is another reason why it's so hard to beat the index for active managers. You have to be more actively traded. Interesting.
So, all right. Ben, this is really random. I don't know exactly why I threw this in here or why this popped into my brain. But it did. And I was thinking about Taxi Cab Confessions. Taxi Cab Confessions was a show in the, I guess, mid to late 90s. It was a show that I watched when my parents went to sleep that I shouldn't have been watching. I guess only my dad's house because my mom didn't have HBO. So I watched it at my dad's house. And Taxi Cab Confessions was exactly what it says. It was basically like a confession in a taxi cab. People were going to church in a taxi cab. It was — I think it was in New York and Las Vegas, late-night riders, drunk, inhibitions to the wind, and they would just share crazy stories with the taxi cab driver. Why was I thinking about the show? I have no freaking idea. But if you showed this to somebody today, there would be a lot of questions that this was such a provocative show back in the day.
Right? If you did this show today, people are so much more used to cameras and talking, and you would get people be way more performative about it. It wouldn't be as real.
Correct. And also if an Uber driver started talking to you — although I suppose maybe at 2 a.m. anybody talks, but for the most part people don't want to talk to their drivers.
It's kind of like how reality TV was actually kind of real when it first started, and then people realized like, oh, if I am more performative, I can become a star, and then became fake.
Interesting. All right, let's talk about the Fed. Can I both give the Fed credit for raising rates last week and also question why we had to raise rates?
Okay, so first of all, this chart from Deutsche Bank shows the average 10-year yield versus the average nominal GDP growth, and it tracks it pretty darn closely, and it's saying so rates where they are make sense given nominal GDP growth, but also...
Ruchir Sharma tweeted this. We've used all this. So he talks about Wells Fargo and Capital One saying, 'Listen, the consumer is strong.' There's all these quotes. 'We see similar spending strength across all our credit spectrum, including some of our lowest income customers. Overall, the consumer continues to show a lot of strength even in the face of a lot of uncertainty out there.' These are the same quotes we've been reading for four years.
Right. About the — so everyone's saying strong. So my question is...
Why does the Fed feel like they need to slow the economy? If we have a 4% unemployment rate and yeah, inflation's 3.5%, they want to get — why? The economy is doing fine. Why do they feel the need to have to slow it down?
That's a good question. My knee-jerk reaction is that they are worried — and I could be way, way, way off — that they are worried about the AI buildout fueling more inflation, and the hyperscalers are borrowing a lot of money, and maybe if you increase the cost of capital it will slow them down a little bit. Because to your point, I don't know that they think that this is going to do anything to energy prices because, for example...
CPI without energy is up 2.5% year-over-year, which is pretty damn close to their target. CPI with energy is 3.4%, 3.24%.
So all the increase we've seen is coming from the Iran war essentially.
Well, a lot of it, but the other side of that is the Wall Street Journal ran a piece weeks before the midterms. Almost everything is getting more expensive. So consumer prices in the aggregate are up 27% since January 2021, but there's a lot of things that we pay for on a daily basis that are up 40%, 60%. My question is, why are we harming consumers because tech companies are spending a lot of money and because we went to war with Iran? Why do we have to harm households because of that?
Which — how is this harming households?
It's making it much harder to borrow, and we're trying to slow the economy. So we're harming households potentially because we went to war with Iran and we have an AI buildout going on. The Fed can't stop those things.
Do you really think that — do you really think the hyperscalers — if the Fed raised rates even another 50 basis points, is that really going to slow down the AI buildout? You think Mark Zuckerberg is going to say, 'Yeah, okay. Now we'll slow down.' No way.
Maybe not the hyperscalers, but...
It's a drop in the bucket.
I don't know. I'm not the Fed. What do you want from me? But this is a...
But here's the thing I do get, because everyone said Waller is a puppet. He's doing whatever Trump wants him to. So I give the guy credit because everyone said he's just — he actually raised rates because that's what the committee wanted to do.
So this is not weighted, but this is just like if you look at the individual items within the basket. All right, some items are obviously more important than others. Energy, for example, more important than others. But a third of the consumer basket is still rising at more than 4% year-over-year. There are still a lot of things that are going up way faster than is comfortable.
I'm surprised that's not higher because the average is 3.5% almost. This is interesting because lower income households need this. So Mike Zaccardi showing that the K — I think the K-shaped economy was always kind of bunk. Like we've talked about how it's always been rich people have always just spent more. In August...
Hold on, be careful because people get really annoyed about this. I don't think that we've said that the...
K — there was never anything in the shape of a K. Like people say K-shaped economy because it's a good narrative, but no chart ever actually looked like a K.
Yeah, I think we agree with the premise that there are always winners and losers, and that the upper class of the economy has always done better than the lower class.
Right? So here's the thing that stinks, because right now it says in August after-tax wage growth for lower income households continued to outpace that of higher income households. So lower income households are seeing higher wage growth than middle income and higher income. Right now this has flipped. So it's flipped a couple times. In the early 2020s it was lower, then it flipped. Now it's back. The thing that stinks though is that there's a way bigger consumption of energy prices in a budget for lower income households. So they need this raise. But this raise for them effectively is going to pay higher gas prices. That's what stinks, right? It's a great, great thing that the lower-income households now have higher wage growth, but most of those gains are being eaten up right now.
All right. One of the interesting things about the economy right now is the continued — is strength the right word in the labor market?
It's picking up again. Yes, there is increased strength in the labor market. I would...
How about this? How about this? A lack of weakness. Maybe not the same thing as strength.
But initial unemployment claims are down 10% in the past year, and continuing claims, meaning people that have been uninsured for a while...
How do you reconcile this with AI is going to take all the jobs? The labor market is getting stronger.
Well, I feel like we keep having this conversation. I don't think anybody thinks AI jobs are all going to come overnight.
Okay. That sounds like you're moving the goalpost.
I'm not moving the goalpost. I think that's a ridiculous... You're spiking the football.
I'm not spiking the football. I'm saying it's good. It's a good thing that we're reassessing this because there were some people giving forecasts for six months from now.
No, no, but no, that's not true. That's not true. Nobody said in six months all the jobs are going away. You're literally making that up. Who said...
Dario from Anthropic said in six months half of all entry-level white collar jobs will be gone?
I don't believe he said that.
That was an actual quote.
All right. Well, he was actually wrong. Either way, do you think that AI is not going to impact the economy? I mean, is that what you're saying?
Here's... So, I have this, this is a good lead-in. So, John Arnold posted, 'West Coast, we're approaching an economic transformation unlike anything in modern history. East Coast, we're looking at three more years of 2.1% GDP growth.' I'm just throwing it out there. What if AI gives us a little bit of boost in productivity? It makes our lives demonstrably easier and more efficient, but it does like the internet. There's no huge change to GDP. I think that's a very reasonable outcome we could see because I think the tech people think we're going to have like 4% growth, 6% growth. It's going to be this magical utopia of growth. And I really think that there's a much higher likelihood that growth is just two, two and a half percent.
Perhaps. But is GDP the right measure?
That's what the tech person would say.
No, but it's true. What does that really capture? The total output of our country.
Yeah, it's kind of a big deal.
I don't think it's the right metric.
What is the right metric?
I don't know what the right metric is.
I'm not helping with vibes right now either. Everyone hates it.
Well, that's definitely true.
But I'm just saying I really do think that this is a more likely outcome that GDP could increase a little bit and that would be a huge thing over the long term because the economy is so big. But the tech people go, 'Wait, what?'
So, if GDP does increase a little bit and the stock market doesn't crash, then Buffett's indicator, which is something that he doesn't really care about anymore, is going to get even more lopsided. The size of the stock market versus GDP is going to continue to make bears insane.
I think it's... and Munger even said like, Buffett doesn't believe this anymore. Get out of here. I think why wouldn't the stock market be a bigger percentage of the GDP over time? The claim that it has to be a certain level because it was in the past. Why?
No. Corporate America is more powerful than everything else and more people invest in the stock market. Of course, it's bigger. There's more money in the stock market than there was in the past.
But one piece of our output, but it's the biggest piece. I don't want to let this... I don't know why things pop into my brain all the time. Popping guy. You know what just popped in? You singing your song, your karaoke song. So every year, is it every year at this point? Is it a tradition? Can we call it that?
Well, the last two years I've done it now.
Okay. So it's a thing now. So, Ben's go-to song is... Ben's a big Top Gun guy. Is it 'Lost That Loving Feeling' or 'That Loving'?
'You've Lost That Loving Feeling.' It's funny. My kids, we were talking last night. What's your favorite movie? And I said, it's probably Top Gun.
Did you show them the video?
You did very well. I mean, you're an introvert, but on the mic, my god, you're like Britney Spears out there.
I gave it my best. Obviously, I had some liquid courage going, so that helped.
Yes, vibes were very high. Everyone was doing karaoke. There was some 'Friends in Low Places' and 'All the Small Things.' Good times.
So, it's funny. Everyone always says that Twitter is like the biggest cesspool in the world of social media. And obviously in a lot of ways it's true, but have you ever waded into LinkedIn before?
So, I post some stuff on there.
I mean, not... but what do you mean by waded in?
Just like done a scroll of the posts on LinkedIn.
Okay. Everyone says the biggest psychopaths in the world are on Twitter. I think they're on LinkedIn. But I saw a big long post and it said hashtag written without AI. I don't know how long that's going to last for because I feel like people are going to stop caring about that. Like people have really strong feelings about that now. I think it's going to go away.
