finance
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.
Wes Gray of Alpha Architect discusses the unexpected growth of their ETF platform, which now houses over 100 funds and $37 billion in assets. He humorously notes that the success of ETF Architect was a serendipitous outcome, not the initial business plan, comparing it to Amazon's creation of AWS.
Wes Gray emphasizes the critical importance of having a low-cost and efficient infrastructure for ETF providers to survive in the current market. He notes that without this capability, firms risk offering products at too high a price point to remain competitive.
Wes Gray provides an overview of current market conditions, highlighting factors such as interest rate hikes, inflation, and geopolitical risks. He specifically calls out market concentration as a significant issue impacting the market landscape.
Jack Schwager notes a new trend in his latest book, "Market Wizards", where several young traders cited playing video games as an influence on their trading skills. This is a departure from previous "Market Wizards" books, where video games had never been mentioned.
Jack Schwager, author of the "Market Wizards" book series, explains his criteria for profiling traders. He looks for compelling stories and performance metrics, typically either turning a small amount of capital into a large sum or demonstrating exceptionally high risk-adjusted returns.
Jack Schwager outlines two primary ways traders qualify for his "Market Wizards" series: achieving astronomical growth from a small starting capital, citing one trader who grew $40,000 to half a billion, or exhibiting extremely high Sharpe ratios, with some traders achieving ratios of 10 or more.
Jack Schwager reveals that he discovers many elite traders through word-of-mouth referrals from other traders he has profiled. He also observes that the trading environment has changed significantly, with the rise of proprietary trading firms and an increased prevalence of day trading, which was rare in earlier "Market Wizards" books.
Jack Schwager describes the rigorous vetting process for Lucas Frolick's extraordinary 2020 returns, which were initially reported as hundreds of thousands of percent. Schwager and his co-author required a legitimate ordering firm and direct communication with the firm to validate the figures, eventually confirming a higher, albeit still astronomical, return.
Jack Schwager observes that many traders who start as day traders in the current ecosystem eventually transition to longer-term strategies, holding positions for weeks or months. He notes this trend is a significant shift from earlier "Market Wizards" books, which featured virtually no day traders.
Eric Pachman highlights a significant decline in labor force participation for men aged 45 and over, reaching a record low of 54.7%. This trend contrasts with women in the same age group, whose participation is increasing, driving overall labor force expansion.
Eric Pachman asserts that the traditional unemployment rate is an inadequate indicator for predicting an impending recession. He argues that underlying data, such as the falling labor force participation rate, already reflects a crisis that the Federal Reserve's focus on the unemployment rate overlooks.
Eric Pachman observes a significant shift in the job market, where positions with salaries around $100,000 are being eliminated. These are being replaced by roles such as nursing, indicating a change in the types of jobs available and potentially impacting average wages.
Eric Pachman contends that the decline in the labor force participation rate, particularly for older demographics, signals an economic downturn. He emphasizes that this trend is observable in granular data but is obscured by the focus on the headline unemployment rate.
Eric Pachman highlights a significant decline in labor force participation for men aged 45 and over, reaching a record low of 54.7%. This trend contrasts with women in the same age group, whose participation is increasing, driving overall labor force expansion.
Eric Pachman criticizes the Federal Reserve's continued focus on the unemployment rate for economic forecasting, arguing it is no longer an effective tool for identifying recessions. He suggests that underlying data, like the labor force participation rate, offers a clearer picture of economic distress.
Jim Paulsen anticipates a market correction of 10-20% in the coming months, viewing the recent AI surge as potentially frothy and reminiscent of the dot-com bubble. He believes tech stocks will be most vulnerable, potentially dropping over 20%, while other sectors may see modest gains.
Jim Paulsen argues that despite a recent calming in economic sentiment, the underlying momentum is still slowing and will likely reintensify. He points to zero job creation over the last 12 months and rising part-time employment as indicators of weakness not seen outside of recessions.
Jim Paulsen reports that housing starts are at "lousy" levels and have worsened recently, describing the situation as nearly as bad as during the 2009 housing crisis. He connects this lack of activity to the weak job market, contrasting it with reported "explosive earnings."
Jim Paulsen highlights that real disposable personal income, excluding subsidies, is in deep negative territory and declining year-over-year. He asserts that this trend is historically associated with recessions and predicts it will lead to weaker consumer spending and overall consumption.
Jim Paulsen explains that economic policy has become contractionary since early in the year, citing increased yields, slowed money supply growth, and a contracting fiscal deficit. He believes these reversals, which previously helped the economy, will now negatively impact economic data with a lag.
Jim Paulsen expresses concern about the extreme bifurcation in the market between "new era" tech stocks and the rest of the S&P 500. He notes that forward earnings for the information technology and communications services sectors have spiked due to AI, while earnings for the other nine sectors have remained relatively flat.
Matt Zens, CIO of Longview Research Partners, emphasizes the importance of evidence-based investing, especially during periods perceived as bubble-like. He advises investors to focus on market prices rather than speculative narratives and highlights the value of diversification.
Matt Zens of Longview Research Partners explains that the discomfort experienced during market downturns is what ultimately rewards investors who stick with their strategy. He notes that people often overestimate their ability to handle volatility in hindsight.
Matt Zens believes that while AGI is distant, the immediate future of AI involves smaller, frequently updated models. The key challenge for companies will be the seamless retraining and deployment of these models as industries adopt the technology.
Matt Zens sees significant investment opportunities in the AI sector, not only in companies developing AI models but also in those enabling their training and deployment. He highlights that the rapid pace of AI development presents both challenges and immense upside.
Matt Zens suggests that market concentration doesn't inherently mean the market will perform worse, but rather that diversification becomes even more valuable. He advises against starting investment analysis with a 'bubble' narrative, instead emphasizing the information conveyed by market prices.
The recent IPO of SpaceX was highly anticipated, with its market performance described as "going up like bananas" initially, followed by a significant drop. Jack Forehand noted that "no one cares about the fundamentals of SpaceX right now," with initial price movements driven by anticipated index flows rather than intrinsic value. Andy Constant warns that the technology sector, particularly AI, might be facing an oversaturated market where "there's just not enough pie for all of them to be successful."
Andy Constantin suggests that the rapid growth in Artificial Intelligence might lead to a situation where there isn't enough economic "pie" to support the earnings growth expectations of all semiconductor and tech stocks. He uses the analogy of GDP as a pie, which can grow, but the demand for microchips and related technologies could outstrip the available portion for individual companies.
The narrative around the Federal Reserve's credibility has shifted significantly from a year ago, with current trends showing positive gains. However, an analyst points out that the "rate of change is unsustainable," likening it to a 2% daily increase that cannot continue indefinitely. This suggests that the market's pricing of future outcomes may become problematic if the current trajectory persists.
The "crack spread" is being highlighted as a key indicator for the health of the oil market, serving as a truth-teller about whether the right type of oil is reaching the right destinations. This metric is presented as a reliable signal for assessing the efficiency and effectiveness of oil distribution and refining processes.
Chris Mayer notes that SpaceX's valuation, reaching $2.6 trillion and trading at 145 times revenue, is significantly higher than Google's historical metrics. He recalls mocking Google's then-high valuation and expresses concern that SpaceX's current valuation might be unsustainable, suggesting investors might get a chance to buy in at a lower price later.
Chris Mayer announced his upcoming book, "The Investor's Odyssey: Resisting the Sirens and Playing a Long Game." He explained that the book aims to help investors navigate market noise and maintain a long-term perspective, especially relevant in the current AI-fueled market boom.
Chris Mayer suggests that the current market is experiencing an AI-fueled boom, leading many to adopt AI features regardless of their actual utility. He anticipates a market 'reckoning' and advises investors against succumbing to the urgency to invest early, stating there's often ample time to enter the market later.
Chris Mayer discussed how companies can become 'cheaper' not only through a decrease in stock price but also through accelerated growth in earnings and revenue. He cited Airbnb as an example where, despite stock price stagnation, its increasing earnings made it cheaper over time.