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Excess Returns is dedicated to making you a better long-term investor and making complex investing topics understandable. Join Jack Forehand, Justin Carbonneau and Matt Zeigler as they sit down with some of the most interesting names in finance to discuss topics like macroeconomics, value investing, factor investing, and more. Subscribe to learn along with us.
Jay, founder and CEO of Infrastructure Capital Advisors, discussed his macroeconomic views and S&P 500 targets. He stated that despite unexpected headwinds like the war in Iran and elevated interest rates, projected earnings growth driven by AI could push the S&P 500 to 8,000 or even 9,300 next year.
Addressing market anxieties surrounding CoreWeave and AI infrastructure debt, Jay argued that panic is largely misplaced. He noted that CoreWeave has robust long-term contracts, significant current EBITDA, and utilizes standard project financing models similar to power plants.
Jay pushed back against the narrative that artificial intelligence is in a speculative bubble, characterizing the current market environment as a 'reverse bubble.' He pointed out that many stocks in the AI ecosystem are trading at massive discounts relative to their growth and peg ratios compared to historical tech bubbles like the late 1990s.
Discussing specific equity picks, Jay highlighted Marvell Technology as a prime example of an undervalued growth stock. He noted their agreement with Oracle implying strong future revenues and argued that the company trades at an attractive valuation relative to its growth rate.
Jay launched a strong critique against the Federal Reserve, calling its leadership incompetent and arguing that they rely on faulty Keynesian models and flawed inflation indices like the PCE. He contended that real-time inflation is significantly lower than reported and that recent rate hikes have needlessly strained the economy.
A tech strategist from Baird warns that investors are facing significant macro headwinds, including geopolitical conflict related to Iran and Brent crude trading around $115. These pressures are severely impacting European economies and tech exposure.
The semiconductor index dropped 6.3%, marking a shift from over-exuberant speculative greed and complacency to concern and fear according to the podcast guest.
The guest highlights that their tech team has fully embraced Anthropic and Claude, calling the tool an unrivaled competitive weapon that provides a massive flow of information.
The conversation points out the immense scale and free cash flow of major tech monopolies like Meta and Google, which continue to dominate infrastructure and engineering capacity.
The guest expresses skepticism regarding Apple, arguing it remains a hardware-focused company facing rising DRAM costs and lagging behind in internal AI model creation and infrastructure spending.
Eric Jackman of Data for the People announced that the organization has officially become a sponsored entity of Fiscal Sponsorship Allies. This move was necessary because the IRS wait time for 501(c)(3) conversion is over a year, and Data for the People relies on donations to operate.
Eric Jackman expressed skepticism about the month-to-month changes in the jobs report, citing a decline in survey response rates (down to 43%) and the inherent margin of error (plus or minus 122,000 jobs at the 98th percentile confidence interval). He suggests that the survey is designed to estimate the absolute number of employees, not to track monthly changes, leading to potential inaccuracies.
Eric Jackman suggests that investors should focus on long-term trends in the labor market rather than relying on month-to-month changes in the jobs report. He argues that the current methodology for reporting monthly changes introduces significant error, making it less reliable.
Jack Raines, author of "Young Money: A Field Guide to Wealth and Purpose in Your 20s," recounted his experience trading SPARC warrants, which saw him turn $6,000 into $400,000 and then lose approximately $160,000 in a single day. He attributes this volatile experience to the speculative nature of SPARC warrants during the pandemic-driven market boom.
Jack Raines advocates for young individuals to risk a small, manageable sum of money, such as $6,000, to learn from potential financial losses. He believes that experiencing significant losses early in life, when there is ample time to recover, provides invaluable lessons that can prevent larger, more damaging mistakes later on.
Jack Raines explained the mechanics of SPARC warrants, describing them as a type of call option with a longer expiration period and a strike price, often trading at a leverage to the underlying stock. He highlighted how their value could skyrocket during speculative market bubbles, as seen with companies like DraftKings and Nikola Motors.
Jack Raines identified the widespread involvement of celebrities and public figures in launching SPARC entities as a clear indicator of a market bubble. He cited examples like Shaquille O'Neal and Paul Ryan, suggesting that such broad participation signaled an unsustainable level of hype.
David Rosenberg believes the current market conditions, even before the FOMC meeting, present a strong opportunity to enter the treasury market, which he describes as beaten down and maligned. He notes the market's pricing in of potential rate hikes, which contrasts with earlier projections and suggests a potential for a bull steepener in the treasury curve.
David Rosenberg disputes the prevailing inflation narrative, arguing that it's primarily driven by oil prices, which are an exogenous factor. He points to deflating rents and negative year-over-year new home price growth as evidence against sustainable inflation, also noting decelerating wage trends and a lack of monetary inflation.
David Rosenberg suggests that the market has priced in nearly two rate hikes by the end of the year, a move he describes as manic. He believes that if the Fed's dot plots do not significantly change, it indicates that market expectations for further rate hikes might be excessive.
A new ticker, ROSY, is available on the TSX, representing David Rosenberg's and Rosenberg Research's top investment ideas. The ETF is built upon Rosenberg's long-standing model portfolio and asset allocation strategies.
Jenny Johnson, CEO of Franklin Templeton Investments, shared her core principles for leadership, which she calls the 'four Ps': people, passion, purpose, and persistence. She emphasized the importance of building the right team, loving one's work, articulating a clear purpose, and persevering through challenges.
Jenny Johnson, CEO of Franklin Templeton, reflected on her journey from intern to CEO, advising young professionals to approach every role with full enthusiasm and to learn from diverse experiences. She highlighted that skills gained in seemingly unrelated areas, like running a credit card department, can become invaluable later in one's career.
Franklin Templeton CEO Jenny Johnson drew parallels between current anxieties about AI and job displacement and historical technological shifts. She cited the Luddites and the introduction of automated looms in the 1800s as an example, noting that while some jobs were lost, new industries and roles ultimately emerged.
Jenny Johnson, CEO of Franklin Templeton, shared that her experience managing a credit card department in the 1990s provided early insights into predicting consumer behavior through data, similar to today's focus on AI. She noted that analyzing credit card data offered valuable trends on consumer spending, which is crucial in a consumer-driven economy.
Jim Paulsen points out that while the overall economy appears strong, the growth is becoming increasingly narrow, with certain sectors performing poorly. He is focused on the negative forces impacting these struggling parts of the economy and believes this could lead to broader economic concerns.
Jim Paulsen notes the increase in energy prices and the rise in the ten-year bond yield to 5%, with the two-year yield suggesting the Fed has already raised rates. He argues that these factors, along with an inverted yield curve, indicate very negative policy forces at play.
Jim Paulsen discusses the upcoming Federal Reserve meeting, stating that the market is pricing in an 80% chance of a rate hike, but he personally views it as a 50/50 probability. He believes Fed Chair Powell might feel compelled to hike to signal continued focus on inflation, despite potential split opinions within the Fed.
Jim Paulsen breaks down earnings per share, noting that while the technology and telecommunications sectors (the 'brany-ack earnings') are performing exceptionally well, other sectors tied to commodities and the remaining seven S&P sectors are showing much weaker growth. He highlights that averaging these disparate results can mask underlying economic weaknesses.
Jim Paulsen argues that the Federal Reserve faces a challenge in managing monetary policy for an economy with two distinct narratives: booming tech earnings and struggling commodity-linked sectors. He suggests that a uniform policy approach might be inappropriate given this divergence.
Jim Paulsen discusses the risk of a bear market specifically within the technology sector. He notes that while tech earnings have been strong, the market's overall performance might be masking underlying vulnerabilities in this sector, suggesting a potential for a downturn.
Mike Contopilis and John Kirchner of Janice Henderson argue that most investors' bond portfolios haven't adapted to new market regimes, leading to underperformance. They highlight that traditional bond thinking, focused on long duration and coupon payments, was disrupted in 2022 and needs a rethink.
Mike Contopilis believes the market is shifting towards a secular environment of inflationary pressures, driven by deglobalization, labor market changes, and a lack of productive capacity. This contrasts with the disinflationary era of the past 40 years.
John Kirchner explains that the US aggregate bond index, heavily weighted towards Treasuries and mortgages, has a six-year duration and approximately 5% yield, creating significant interest rate risk without substantial yield. He suggests investors are not getting what they want from these funds.
Mike Contopilis draws a parallel between current cyclical forces and the 1960s 'guns and butter' era, citing increased global defense spending and fiscal initiatives like the CHIPS Act and Inflation Reduction Act. He argues these factors, combined with low unemployment and accelerating money velocity, put upward pressure on interest rates.
John Kirchner and Mike Contopilis of Janice Henderson assert that investors have options beyond traditional, underperforming bond indexes. They developed a report and offer various products designed to address the challenges of the current fixed income landscape, suggesting a need for more sophisticated approaches.
Jared Dillian argues that while investing all savings in the S&P 500 index fund has worked for the past 20 years, it's a fundamentally flawed strategy due to excessive volatility. He suggests this approach is akin to being a 'crazy gambler' and that Americans' reliance on stocks is unusual compared to other global markets.
Jared Dillian proposes his 'Awesome Portfolio' as an alternative to the S&P 500 strategy, designed to reduce volatility and investor unhappiness. The portfolio consists of 20% each in stocks, bonds, gold, cash, and real estate.
Jared Dillian explains that his 'Awesome Portfolio' is an evolution of Harry Brown's Permanent Portfolio. The key difference is the inclusion of real estate, which Dillian believes significantly improves the risk-adjusted returns and reduces volatility compared to the original 25% allocation across stocks, gold, bonds, and cash.
Jared Dillian discusses how volatility in investment portfolios can negatively impact an investor's psychology, leading to poor decision-making. He notes that checking a volatile portfolio daily increases the chance of experiencing negative news, which can cause stress and lead to suboptimal actions.
Jared Dillian points out that many individuals overlook their primary residence as a significant component of their investment portfolio. He highlights that for a typical middle-class person, their home equity can represent a substantial portion of their total assets, often exceeding allocations in stocks or other investments.
A significant portion of Gen Z investors, 26%, view sports betting as a deliberate and ongoing part of their long-term financial strategy. This is according to a Betterment survey, which also found that 52% of Gen Z investors redirected money from traditional investing towards sports betting in the past year. These findings align with anecdotal evidence from financial planners.
Financial planners are increasingly encountering clients, particularly younger ones, who present with gains from cryptocurrency or gambling. These clients often view themselves as winners, but their newfound wealth creates new financial planning problems, such as managing taxes and understanding long-term implications. This trend necessitates a shift in how financial advisors approach client conversations.
The current investment landscape, characterized by 'yolo-ness' and rapid market recoveries, mirrors gambling due to underlying behavioral biases like overconfidence and the underestimation of luck. Experts suggest that the psychological experience of quick recoveries, unlike the prolonged downturns of the 2000s, is preventing a necessary sentiment reset. This speculative behavior persists even after significant drawdowns.
Unlike the dramatic, single-event losses that can shock investors into caution, the problem with sports betting lies in its subtle, grinding nature. Many participants slowly lose money over time through frequent, smaller bets, creating a 'grinding despair' that is harder to recover from than a single large mistake. This gradual financial erosion may not provide the sharp learning moment needed for behavioral change.
Dave Nadig describes the insidious nature of sports betting as a potential financial strategy, noting that it's often not a single large loss but a slow erosion of capital through consistent betting. He likens this to a 'grinding tax on math literacy' because it doesn't provide the clear negative feedback loop that might deter such behavior. Nadig also points out that this habit can become problematic when it's a percentage of income without assets accumulating behind it, or worse, when assets are withdrawn to fund the habit.
Cameron Dawson notes that unlike the 2000s, where market downturns created a generation of risk-averse investors, recent rapid market recoveries have fostered a continued appetite for speculative gains. This psychological difference, where new highs are reached much faster after corrections, fuels behaviors that resemble gambling. Dawson questions what it would take to reverse this trend, acknowledging that a protracted bear market, while painful, might be necessary for a sentiment reset.
Dan Niles, founder of Niles Investment Management, believes we are in an AI revolution that will reshape the world. However, he cautions that this could lead to over-investment and a significant pullback in semiconductor stocks, potentially in the range of 30% to 50%. He notes that current valuations are not as extreme as during the dot-com bubble.
Dan Niles is closely monitoring two key factors for AI growth: the number of tokens being produced and the price per token. Since May, the price of AI tokens has dropped by 50% due to the rise of open-source models. However, the volume of tokens produced has more than doubled in the same period, suggesting a potential offset.
Dan Niles highlighted that the three major public cloud vendors—Amazon Web Services, Microsoft Azure, and Google Cloud—experienced accelerating revenue growth in the second quarter. More significantly, their operating margins expanded by approximately two percentage points, indicating improved profitability alongside increased revenue.
Dan Niles identified a significant negative development for AI growth: increasing political opposition to data centers. He cited a Gallup poll showing strong public opposition to data centers, with bipartisan agreement against them, even in states like Texas. This political risk, he believes, could hinder AI development.
Ben Hunt argues that the credibility of both the Federal Reserve and the Treasury has been significantly damaged due to inconsistent messaging and actions. He likens this to breaking a teacup, which, even when repaired, is never the same.
Ben Hunt outlines four significant problems that he believes will make the next few months challenging for markets. These include issues within the shadow banking system, crowding out effects from government and AI capital needs, rising interest rates, and a stretched consumer.
Ben Hunt highlights potential risks in the shadow banking system, particularly concerning captive insurance organizations. He cites Mark Walters' purchase of sports teams as an example of how these entities can be used for funding, with potential for significant losses.
Ben Hunt explains the crowding-out effect in the capital markets, where the immense funding needs of AI companies and governments will drive up the cost of money. He states that this situation creates a one-way bet on higher interest rates.
Ben Hunt links rising oil prices due to the Iran conflict to increased inflation and higher short-term interest rates. He also notes that the US consumer is again in trouble, with savings depleted and stimulus fading, exacerbating economic concerns.
Ben Hunt believes the Federal Reserve will need to significantly raise interest rates, contrary to market expectations of a single 25 basis point hike. He anticipates a rally in short-term bonds (2-5 year Treasuries) with at least a 100 basis point gain.
Ben Hunt predicts that inflation will be higher than the market is currently pricing in for next year. He suggests this will lead to a rally in the long end of the bond market, specifically recommending investment in 30-year Treasuries.
Ben Hunt believes the market is underestimating the probability of a recession. He predicts that this increased risk will lead to a significant rally in gold prices, projecting a potential increase of at least 20%.
The Federal Reserve's move away from forward guidance is expected to increase volatility in the short-term bond and stock markets. This shift means that investors will have less certainty about future Fed actions, leading to more unpredictable market reactions.
Kevin Mure suggests that midterm election volatility is currently underpriced in the market. He points to seasonal trends where September often sees increased volatility and argues that implied volatility for midterms is not fully priced in.
There's a discussion about the Federal Reserve's potential shift away from forward guidance. This change could mean that market participants will have to rely less on explicit Fed communication and more on market signals.
There's skepticism about whether government officials will maintain their resolve when faced with market pressure. The speaker suggests that historically, officials tend to cave and do whatever is necessary to support the market.
Kevin Muir discusses the current state of the bond market, noting that while it feels volatile, its actual ranges have remained relatively stable. He attributes the perceived volatility to factors like a rise in nominal GDP, elevated deficits, and significant corporate bond issuance driven by the AI build-out, alongside global fiscal stimulus efforts.
The discussion touches on Scott Bessent's proposed 'liquidity buyback' strategy, which aims to encourage liquidity in specific parts of the yield curve by buying back off-the-run bonds and issuing more liquid ones. There's a debate on whether this is a form of quantitative easing (QE) or an 'operation twist'.
During the conversation, there's a humorous interjection about Stanley Druckenmiller's direct approach to using AI, with one speaker humorously stating they don't pay for sex and don't let AI write their stuff. The guest (Kevin Muir) expresses a preference for Druckenmiller to write his own material, while the host (Matt Ziggler) finds Druckenmiller's audacity in using AI noteworthy.
A complex potential mechanism for debt monetization is discussed, involving the Treasury buying back longer-dated securities and replacing them with near-dated T-bills. This could overwhelm the market for T-bills, leading primary dealers to buy them, thus reducing system reserves and increasing front-end funding costs, potentially forcing the Fed into reserve management purchases.
Kevin Muir highlights the current global fiscal environment, noting that unlike in the past when the US had a higher deficit-to-GDP ratio than other developed nations, now many countries are increasing fiscal stimulus. This shift, partly attributed to geopolitical positioning, contributes to the overall supply in bond markets.
Dan Rasmussen, founder of Verdad Advisors, argues that private equity markets are experiencing a "train wreck" due to an over-reliance on consensus trades and inflated asset prices. He notes that a massive backlog of unsellable assets, acquired at peak multiples, is forcing firms into complex financing maneuvers to avoid liquidating at significant losses.
Despite the significant criticism private credit is receiving, Dan Rasmussen believes it may perform better than private equity over the next five years. He points out that private credit is at least receiving cash flow back at high interest rates, making it difficult for the equity in those capital structures to survive and grow.
Dan Rasmussen estimates that by 2021, software and healthcare technology comprised over 40% of private equity investments, with deals done at "crazy prices." He questions the intangible value of many of these sub-scale software businesses, suggesting they might be generic rather than possessing strong IP moats.
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