00:00AI demand looks real to us, but its skyrocketing growth will decelerate eventually.
00:04When it does, investors will likely stop pricing AI as one trade.
00:08Ed, I am so glad to say he joins us this morning.
00:11Ed, great to see you.
00:12So let's start there.
00:13This is something that we were struggling with a little bit with Nikolai Tengen in the last hour,
00:17where on one hand, he's bullish AI and seeing a lot of productivity gains.
00:22On the other hand, he's saying this is as good as it gets when it comes to market returns.
00:25Do you feel the same way?
00:26No, I think the market's going higher, and I think it's going higher on earnings.
00:31As a matter of fact, I felt the need to coin a new acronym, which is FEMO, Fabulous Earnings Momentum.
00:39We all know about FOMO, which is kind of, it's nice while it works.
00:45FOMO is fear of missing out.
00:46We saw that in the 1999 melt-up situation, is don't bother me with earnings.
00:51I just have to be in this internet concept.
00:54And this time around, the valuation multiples kind of stuck around 20.
01:00That's not low, but it's not terribly high as long as the economy's growing.
01:06But it's earnings that have really been phenomenal.
01:09And some of that has been mark-to-market capital gains on SpaceX for Alphabet and Amazon.
01:16But take that out, and you basically have a 25% increase in earnings in the second quarter, and about
01:22the same in the third and fourth quarters.
01:24So, yeah, I've been bullish on earnings, but not bullish enough.
01:27That seems to be...
01:28You said, I'm not really the bull on Wall Street.
01:32It's all these analysts who talk to companies, and the companies are bullish.
01:35So, the companies are the big bulls on Wall Street, not Eddie Ardenny.
01:39I am curious, though, about what we have seen with performance of the equal weight versus the market cap weight.
01:44And that has been a shift this year versus the previous years.
01:47But the outperformance has come from the broader market.
01:50We were talking before about how the market seemed to be outperforming the economy for a number of years.
01:54Is that shifting, where now we're going to see the economy, the rest of the economy, outperform the market?
02:00Well, there's sort of a view that the stock market is not the economy, but it is, because it's P
02:06-E times E, and E is earnings, and earnings are driven by the economy.
02:11And so, I think the resilience of the economy, the strength of the economy has been demonstrated in the earnings,
02:18and the earnings are driving the stock market higher.
02:21So, with regards to your point on, I call them the impressive 493.
02:27You know, you have the Magnificent Seven that did very well for quite some time, and now they've actually, so
02:32far this year, significantly outperformed the impressive 493.
02:36And I think it's because people have AI fatigue.
02:38It's like, oh, God, I can't really figure this out anymore.
02:42You know, these stocks go up 20 bucks, down 20 bucks.
02:46And so, I think people are just kind of taking an index approach to AI, not knowing exactly which stock
02:52to buy.
02:52And meanwhile, they say, well, who's the sure beneficiaries?
02:56And I think they're finding lots of ideas in financials and healthcare and industrials that are very, you know, we
03:04know, we understand their businesses.
03:06And we also know that there's a good chance that AI could help.
03:08When you talk about going up $20, going down $20, this is exhausting, this sort of single-name volatility, is
03:14that part of a problem with respect to the amount of leverage that's being used in specific sectors and specific
03:20funds?
03:20And I'm wondering, even just with the debt profile and the investment that's going on, a lot of this is
03:25coming with leverage.
03:26Does that worry you?
03:28Not terribly in the sense that this is not a new development.
03:33We've always worried about margin debt.
03:36We're always worrying about credit, and rightly so, because the credit markets tend to see problems before the stock market.
03:43And we saw that certainly in 2007, 2008.
03:48So, debt is always an issue, especially if it goes bad and you have a lot of defaults, and then
03:55you get a credit crunch and then you get a recession.
03:57I don't think that the problems in the debt markets, we're seeing the hyperscalers, bond yields of the spreads over
04:07treasuries have widened a bit.
04:10But they're still able to raise money.
04:13And now NVIDIA came up with this idea that let's call in all these top financial people from the Hamptons,
04:20put them in the Hamptons' jitney, bring them in, and talk about $500 billion of financing.
04:26So, you know, NVIDIA basically said, okay, you're worrying about financing?
04:31Watch what we have to say about how we're going to do $500 billion.
04:37I don't know.
04:37It was a little hype.
04:38I mean, it was all done with a memorandum of understanding, and we know how well those things are going
04:46these days.
04:46I love that you think they came in via the jitney, but what's funny about this is that if you
04:52think that is hype, and that's basically just NVIDIA trying to basically quell some of the concerns out there in
04:58the market.
04:58I think they are.
04:59Yeah.
04:59Then does that make you a little bit nervous, actually?
05:02Well, I think that AI is a fundamentally important technology.
05:08It's not a revolution.
05:10It's actually an evolution of the digital revolution that started in the mid-1960s with IBM mainframes, and the whole
05:18point of the digital revolution is to process as much information as we possibly can, as fast as we can,
05:24as cheaply as we can.
05:27AI is just the latest progression of that.
05:29Next will be quantum computing mixed in with AI, and there's a lot of positives in all that.
05:34There's negatives.
05:36Some companies will flourish.
05:38I mean, for a while, people thought, you know, cybersecurity is software.
05:41Let's get out of software.
05:42Let's get out of cybersecurity.
05:44And then all of a sudden, they come right back in, realizing that as AI gets, quote, unquote, smarter and
05:49smarter, we're going to need more and more cybersecurity protection.
05:52You say in your note that you've been bullish on earnings, but not nearly as bullish as the recent consensus
05:57of industry analysis, and that's what you said to us as well this morning.
05:59So is your price target even high enough for you?
06:01Do you think you're going to have to come back and reprice?
06:04It's possible.
06:05I mean, look, I was thinking that the market would be discounting $375 a share at the end of this
06:14year for next year.
06:15Now I've raised that to $415 a share next year.
06:20And so by the end of the year, if the analysts are still talking, are talking about something like $415
06:27for next year,
06:29and they're already talking about $408, so we're getting there, $415 times a little bit over $20, and you get
06:36my new target of $8,400.
06:40Now I did keep my $10,000 for the end of what I call the roaring 2020s.
06:46By the end of 1929, even I get kind of confused by the decades here, but we're in the 2020s.
06:56It's gone well.
06:57And I think by the end of the decade, we should be looking at $10,000.
07:00I'm not raising that, but I might.
07:03How much is inflation a constraint?
07:05And by inflation, I don't just mean the CPI print that we get in about an hour and a half,
07:09but also what that does to bonds, given all of the spending globally.
07:14Well, look, the CPI is widely expected to be, on a core basis, up 2.5% year over year.
07:21It's important to realize that the consumption deflator, which the Fed tends to watch more closely, that, according to the
07:31Cleveland Fed's now inflation forecasting, that's expected to run like 3.3%.
07:39So the Fed chair, Kevin Warsh, came in and in June said, I am committed to price stability.
07:48We've had inflation too high for too long, over five years.
07:51In July, he said it again.
07:53And the bond market seemed not particularly satisfied with that because it's like, what are you waiting for?
07:58So maybe he's waiting for the CPI.
08:00Maybe he's waiting for, as you said, there's a lot of data that's going to come out.
08:04Yeah, I am curious, though, about the bond vigilantes, which you coined.
08:08Are they back when it comes to the 30-year note?
08:10In Japan.
08:12Well, they're coming back globally, given the fact that.
08:14They're coming back globally, to a certain extent.
08:17You know, I don't really get freaked out by bond yields between 4% and 5%, the 10-year between
08:234% and 5% in the U.S.
08:25And the reason for that is, you know, people keep talking about higher for longer, implying that the rates should
08:31go down at some point, that they're too high.
08:33This is normal.
08:35No, 4% to 5% is where we were before the great financial crisis.
08:39It's where we were before the inflation of the 1970s.
08:43I think it's a testament to the fact that the economy is doing well.
08:47And 4% to 5% is an indication.
08:49I mean, I'm not sure.
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