0:00

Welcome to the Met favor show where the

0:02

focus is on helping you grow and preserve

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your wealth. Join us as we discuss the

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craft of investing and uncover new

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and profitable ideas all to help

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you grow wealthier and wiser. Better

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the co-founder and chief investment officer

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at Cambria Investment Management Management.

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Due to industry regulations, he

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will not discuss any of

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expressed by podcast participants are solely their own opinions

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Investment Management or its affiliates. For more

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information, visit Cambria investments.com. Amrede

0:36

Amre de Grandes-Fertas, the

0:38

meal deals with $3.3

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Cinco-Dolares, $3.00, $3.00, $3.00,

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$1.00, $2.5 million, $1.5

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pafita, $1.5 million, $1.5

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million, $1.5 pafitas, $1.5,

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$1.00, $1.00, $1.00, $1.00,

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$1.00, $3.00.00, $3.00, $1.00,

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$1.00, $1.00, $1.00, $1.00,

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$1.00, $1.00, $1.00, $1.00,

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$1.00, $1.00, $1.00, $1.00,

1:01

$1.00, $1.00, $1.00, $1.00,

1:03

$1.00, $1.00, $1.00, $1

1:05

that is. for

1:13

a number of decades as well

1:15

known from his time as Chief

1:17

Global Investment Strategist at Merrill Lynch.

1:19

After that he started his own

1:21

firm, Clow Capital, has been running

1:23

it ever since. Today we're going

1:26

to talk about his illustrious career,

1:28

get into what the investment landscape

1:30

looks like today. Chuck, welcome the show.

1:32

Thank you, ma'am. I'm super excited to

1:34

talk to you today. Before we get into

1:37

this crazy world, we live in. I

1:39

want to touch on a few things from

1:41

your career. You guys start. We've had

1:43

a number of Chicago grads on here

1:45

and, you know, many have worked with

1:47

some super famous Nobel laureates, etc.

1:49

You did too, but there were

1:52

some slightly different ones. What

1:54

was your origin story there? Who'd

1:56

you get started with? At

1:58

the University of Chicago? It was

2:00

actually on a quarterly system

2:02

and I finished a quarter early and

2:05

at that time a very respected

2:07

professor who I'd had classes

2:09

with George Stiegler was on

2:11

early work on a price

2:13

study that ultimately Translated into

2:15

the reason he received a Nobel

2:17

Prize in 1982 which turned on

2:20

to be on regulatory capture but

2:22

this particular study pointed out that

2:25

the traditional price indices that we

2:27

all use, which at the time were

2:29

called the consumer price index and the

2:31

producer price index, actually were badly designed.

2:34

And they were designed to pick up

2:36

list prices when actually the

2:38

prices that were transferred oftentimes

2:40

had discounts and freight allowances and a

2:43

number of other factors. So the actual

2:45

series of price cycles was quite more

2:47

volatile. And of all little series, if

2:49

you start at the beginning and end

2:52

at the end, we'll always end up

2:54

lower. than a straight line series would

2:56

be. And that was an amazing

2:58

insight. Out of that came any

3:00

number of adjustments in the series,

3:02

but we basically found out that over

3:05

the years, the major price indices

3:07

that people used at the time were

3:09

actually inflated. We're on the timeline.

3:12

What years were you there? I was

3:14

there from 1964 to 1966. George actually

3:16

won the Nobel Prize for proof that

3:19

there was something called regulatory

3:21

capture. In other words that...

3:23

Even though most people believe that

3:25

business hates regulation, the reality is

3:28

it loves regulation because the businesses

3:30

that are regulated often end up

3:32

capturing the regulatory body itself through

3:35

transfers over the years and everything

3:37

else. So business actually like regulation

3:39

because it cuts back on competition.

3:41

It was a brilliant insight. As

3:44

two people who are in what

3:46

we call the ETF terror dome

3:48

it's interesting to see that perspective

3:50

on competition So 60s rolled into

3:52

the 70s 70s arguably one of

3:54

the toughest times to be an

3:57

investor We've just gone through this

3:59

experience in the US were

4:01

interest rates were darn near zero

4:03

and then you've had this pretty

4:05

quick move up and everyone for

4:08

at least a little while was

4:10

starting to freak out about

4:12

inflation which if you look back to

4:14

the 70s it's almost cute in

4:16

comparison my favorite is when my

4:19

wife was complaining to her

4:21

father about mortgage rates. and he

4:23

just smiled and laughed. He's like, that's cute

4:25

compared to what we used to pay back

4:27

in the day. Do you see any parallels

4:29

or what was the difference the experience like

4:31

as you rolled out of Chicago and then

4:33

all of a sudden the 1970s, pretty different

4:36

time as far as inflation or interest

4:38

rates relative to today? Quite a difference

4:40

and the reason, and we may get

4:42

into this in more detail a little

4:45

later, the reason is where demographics were

4:47

then as opposed to where they are

4:49

today. In the late 60s and in

4:51

the early 70s, the baby boomers were

4:53

entering the labor force and creating their

4:55

families. And the baby boomers were at

4:58

the time the largest borrowing and spending.

5:00

demographic ever in history. The

5:02

baby boom was built to housing stock.

5:04

There really wasn't a lot of single-family

5:06

housing after World War II, and when

5:08

they came on, they've actually built the

5:11

housing stock. It's been expanded and repaired

5:13

since then and improved, but they built

5:15

it, and they created a tremendous amount

5:17

of debt doing it. So as you

5:19

might think, excess debt in excess credit

5:21

created inflation, If you looked at private

5:24

debt, and you can look at this

5:26

in a general sense, private debt as

5:28

a percentage of GDP, was about 75%

5:30

of GDP in the late 60s, by

5:32

the early 80s was 150% of GDP.

5:34

So you can see the enormous expansion

5:36

in credit that happened in that time,

5:38

and Milton Friedman's insight was that money

5:40

creates inflation, if there's too much of

5:42

it. and there was a whole heck

5:44

of a lot of it for a

5:46

number of years. What we today call

5:48

M3, it's not followed as much today

5:50

as it was then, but that was

5:52

the dominant money measure, it's M2 today,

5:54

but include bank certificates of deposit so

5:56

you can pick up all of the

5:58

increase in mortgage credit. that happened, it

6:00

grew at 13 to 15 percent a

6:02

year for several years, almost a decade.

6:05

So of course you're going to have

6:07

inflation. Today it's nothing like that. Money

6:09

supply is actually modest to negative in

6:11

some areas, a lot of areas, especially

6:13

abroad, and we're not building the housing

6:15

stock. So... The other thing about the

6:17

70s that stand out, it was up

6:19

until that time really outside of the

6:21

depression, it encompassed in 1973 and 74,

6:24

the deepest bear market we'd experienced. The

6:26

S&P was down 48, 50 percent, but

6:28

it took two and a half years

6:30

to get there. I had friends in

6:32

the business, we'd say years later, to

6:34

each other, that if you lived through

6:36

the 73, 74 bear market, you're always

6:38

a bear. Now you might be a

6:40

fully invested bear. but you're always a

6:42

bear. And that was the psychology that

6:45

came out of the 70s. And it

6:47

took Paul Volker, a tremendous restriction of

6:49

money growth as he went through the

6:51

80s, which I think would have happened

6:53

anyway, for reasons. I'll talk about later,

6:55

but he did. And of course, the

6:57

inflation devil was gone. And of

6:59

course, by the 90s, there was very

7:02

little inflation, even though we had

7:04

a boom in corporate spending for

7:06

the dotcom boom. So it was

7:08

an interesting decade. but the dynamics were

7:10

totally different and we're not going to

7:13

see anything like that again. Your colleague

7:15

said that I had to ask you about trade

7:17

and lumber in the 70s. You weren't a technical

7:19

analysis guy where you and I know Bob Farrell

7:21

was later. Is that the best way to hedge

7:24

the inflation? Trade and lumber or what? Well

7:26

we did actually for a different reason. I

7:28

was very involved in the building of the

7:30

housing stock because there was so much demand

7:32

for... housing, you literally built the housing

7:35

stock in that decade. So it was

7:37

something that you just followed and because

7:39

I followed the economy and followed the

7:41

behavior of prices, Joyce Stigler sort of

7:43

left me with that interest, I followed

7:45

lumber. And we could see in 1973, of

7:47

course, as interest rates rose, lumber prices

7:50

started to come down because of overproduction

7:52

and the fact that housing demand fell

7:54

as interest rates rose. So you could

7:57

see in the futures markets that that

7:59

was indicating... that that would be the

8:01

case. So I had a very successful

8:03

trade in lumber. Unfortunately, it was too

8:06

successful because as the seasons continued, I

8:08

thought I could try that again. And

8:10

the story you may have heard, because

8:13

I tell it a lot, sometimes when

8:15

you make a tremendously bumbled mistake,

8:17

you learn a lot about the

8:19

capital markets. And I learned a

8:21

lot about the commodities markets, but

8:23

we held a position of short

8:25

lumber. Actually, believing the price would

8:27

go down. contract expired. That was

8:30

in the old Chicago Mercantile Exchange

8:32

at the time. Usually the contract

8:34

would expire at 2 o'clock Eastern

8:36

time, 1 o'clock Central time, of

8:38

course where the exchange was. But then

8:40

about Call, the contract I remember was

8:42

trading high, and I thought it would

8:44

go down the limit because you actually

8:47

had to buy the lumber at that

8:49

time. And it did. touch the limit

8:51

and didn't give it another thought. I

8:53

thought it would just expire that way.

8:55

I get a call after the lumber

8:57

closed and actually just a few minutes

8:59

before the contract closed and they inform

9:01

me little belatedly that the contract was

9:03

going to close in two minutes. So

9:05

I tried to cover, remember there were 10

9:08

contracts, about 20 cars of lumber, in a

9:10

millisecond it went from down the limit to

9:12

flat up the limit. So basically I ran

9:14

it up the limit up the limit and

9:17

up the Oh, you have to deliver 10

9:19

card loads of lumber, one for each of

9:21

the contracts. And I remember saying, well, how

9:23

do you do that? Well, you call a lumber

9:25

mill in the Pacific Northwest and you're telling

9:28

you, you need 10 cars of lumber. I'll never forget

9:30

the phone call because I did raise somebody in one

9:32

of the lumber mills. And I can tell as soon

9:34

as I opened my mouth, he knew who I was.

9:36

And he screamed to the rest of the guys in

9:38

his room. Hey, I've got the guy, I've got the

9:41

guy, I've got the guy who on the guy who

9:43

on the guy who on the phone who really... So,

9:45

anyhow, it was a rather angering thing to do. The

9:47

idea was closed before it closed, but it's one of

9:49

those things that teach you how capital markets work, and

9:51

you make a mistake like that once, and I never

9:54

did again. It reminds me a little bit

9:56

of a couple years ago, when everyone was looking

9:58

at oil futures as they tried. negative. I said,

10:00

why can't I just buy this? It's impossible

10:02

to trade is negative. And I said, well,

10:04

you're going to have to do something with

10:06

that at some point, right? You've got to

10:08

take possession of that oil. You've got a

10:10

big backyard, I don't know, somewhere to put

10:12

it. It's going to be tough to store

10:14

or expensive. Well, that's the issue. In my

10:17

case, I had to get my hands on

10:19

it. The story doesn't end there, by the

10:21

way. I remember. He also asked me, well,

10:23

where do you want to deliver it? Because

10:25

there were certain delivery points in the Chicago

10:27

American Title Exchange System. And so I said,

10:29

well, what's the closest one to the mill? Well,

10:31

it's in Kansas City. Well, then I said, OK,

10:33

Kansas City is it. A few more

10:35

minutes went by. Well, actually, another day

10:37

went by, and they say, we got a

10:39

problem. I said, what's that? Well, there's an

10:42

avalanche, and the train is caught in the

10:44

avalanche. It won't caught in the avalanche. It

10:46

won't in the avalanche. and I wasn't very

10:48

wealthy at the time so even that was

10:50

some money so I offered to get a

10:52

shovel and double to shovel it out but

10:55

they eventually got the shovel out so it

10:57

was a comedy of ours and it went on

10:59

for several days. Well that leads us

11:01

after this really difficult period and listeners

11:04

I mean 70s was tough for

11:06

particularly on a real basis for

11:08

just about anything gold being one

11:10

of the few things that helped during

11:12

that period but that led to the

11:14

1980s and 1980s really the beginning secular

11:16

of a two-decade run. When

11:18

did Merrill start for you? I joined

11:21

Merrill in March of 1987. Okay. Oh

11:23

man, that's good timing too, right before

11:25

October 87. Six months before

11:27

October. Yeah, what was the experience

11:30

there? How was that October? You

11:32

got any fond memories? I'd been

11:34

a strategist before, and of

11:36

course I started my investment

11:38

career on Wall Street. I was

11:40

an analyst for Donaldson Lufkin

11:43

Gen Ret. D.L.J. The famous D.J. It

11:45

was seven or eight years. I had

11:47

been with Cowan and Company, another respected

11:49

broker, but obviously not quite the footprint

11:52

that Merrill had. So I joined that

11:54

in March of 1987. There was some volatility

11:56

building up in the markets and we

11:58

did get a that there was a

12:01

lot of leverage built into the markets.

12:03

The insurance trade has put together a

12:05

number of so-called stop losses that could

12:07

get disrupted as they ultimately did. So

12:09

I got all the credit for actually

12:11

being a little bit bearish. It really

12:14

wasn't because the underlying economy was very

12:16

well. But it was apparently enough of

12:18

the brokers built enough cash so they

12:20

were able to survive the collapse itself.

12:22

But I remember sitting in the trading

12:24

floor at dead Merrill watching all the

12:26

cell orders came in and the brokers

12:28

had these... cards, these small paper cards,

12:31

with little stock symbols. I mean, tons

12:33

and tons of stock symbols. So there

12:35

was tremendous scramble for liquidity. The first

12:37

one I'd seen like that. And it

12:39

was over in a day, but it was

12:41

a scary moment for a few hours. But

12:43

people just had to sell stocks, especially if

12:45

you were open and mutual funds. And of

12:47

course, the industry was dominated by open and

12:50

mutual funds. So they knew there'd be a

12:52

lot of liquidations at the end of the

12:54

year. and we saw a lot of fidelity

12:56

orders come in that I would have thought

12:58

they were impossible to execute but apparently

13:01

somehow Merrill managed to meet the

13:03

needs of whatever client we had at

13:05

the time. So you got thrown right into

13:07

the fire though having been done it already

13:09

at a few other shops but now at

13:11

the thundering herd and you kind of spent

13:14

a lot of time there in a very

13:16

formative bull market period the 80s

13:18

and 90s. How often do you

13:20

talk to an investor? reporter, podcast

13:22

host, today, where they say, Chuck, how

13:24

much does this feel like the late

13:26

90s to you? I bet you

13:28

get that question like once a day.

13:31

And what do you say to them?

13:33

No, it's not remotely the same. I

13:35

think just first of all, and by

13:37

the way, that was a little bit

13:40

of a bump in my career because

13:42

we did get out of stocks before

13:44

the dot-com boom was over. So people

13:46

were nervous about that, but the dot-com

13:49

boom was over. But the dot-com boom

13:51

was really the first massive technology boom.

13:53

I mean, the only other technology boom

13:55

I can remember up to that time

13:57

was when the IBM 360 emerged. do

14:00

that before. The large main frames before that

14:02

took a room to get going. So the

14:04

60s was a good decade to make money.

14:06

It's a good decade to enter Wall Street.

14:09

When you get to the 90s it was

14:11

a different game. This time we had personal

14:13

computers, dispersed data processing, and of course the

14:15

internet came on just like that. I mean

14:18

it seemed like a command before Thanksgiving and

14:20

Christmas in 1997 I kind of want to

14:22

say. But the difference was when you really

14:24

analyze the companies, it was a business model

14:27

that was determined to fail. Essentially, you had

14:29

to get what was called eyeballs and the

14:31

stocks were valued on the basis of

14:33

how many people they had buying that

14:35

product. But the problem is the

14:37

cost would always outpace whatever revenues

14:39

you generate from whatever use you

14:41

had. So you had companies that were

14:44

in the plumbing business that said they

14:46

were suddenly dot-com companies because they put

14:48

up a website and stocks would run

14:50

no reason at all. It was a

14:52

very unprofitable time for technology because the

14:55

cost of building the internet was basically

14:57

covered by many of these companies who

14:59

were spending money they didn't have. So

15:02

once they couldn't access the credit market,

15:04

the capital markets, of course the thing

15:06

literally came apart. I remember there were

15:08

stocks like pest.com, a company that actually

15:10

ABC bought it and it showed up on

15:13

the Super Bowl that year. They never made

15:15

money. Literally, never made money. And when you

15:17

look back now, only one company that was

15:19

dominant in the... dot com boom of which

15:21

busted in 2000 2001 only one company

15:23

survived and went on to being a

15:26

much larger entity a number of other

15:28

companies survived but today their shadows are

15:30

the former self but the only company

15:33

that went on to capture other technology

15:35

advancements was Microsoft one company actually there

15:37

were two Apple was the other one

15:40

that also survived but the reason was

15:42

they had the operating systems and I

15:44

think this is the secret to how

15:46

the fangs will work out. They had

15:49

the operating systems and what that meant

15:51

is that they could put out product

15:53

and they could put out software in such

15:56

a way that they could capture the revenue

15:58

streams and they captured the bulk. them, but

16:00

those are the only two companies that

16:02

went on to become dominant companies on

16:04

the post.com boom. So you feel like

16:06

this time is a little different. I think

16:09

you have these giant companies now. People love

16:11

to try and make analogies and markets more

16:13

than anything. You know, say, hey, this feels

16:15

similar to this time. Therefore, I can kind

16:18

of predict the future and what's going to

16:20

happen. Talk to us a little bit about

16:22

some of the companies today. Do the Googles

16:24

and Mag7s of the world feel similar to

16:26

some of these companies or not so much?

16:28

Let's start with the comment that I

16:31

left. There were two large companies, by

16:33

the way, there were other companies that

16:35

survived the dot-com boom and went on.

16:37

Cisco was one and Oracle was

16:39

another, but they never expanded from

16:41

that point. There are shadows of

16:43

their former cells today. And understanding

16:46

how the operating system allowed these

16:48

companies to capture revenues. And more importantly,

16:50

to capture revenues and have such an

16:52

advantage over competition, if you remember, Netscape

16:55

was the first browser, a company to

16:57

create a browser, and Microsoft had no

16:59

problem eliminating them literally because everybody's computer,

17:01

so you could easily throw out software

17:04

as a way of generating revenues. There's

17:06

a similarity today, and the way I

17:08

feel it will work out is start

17:11

with what happened when the Fed accelerated

17:13

the liquidity flow into the markets in

17:15

late 2020 and 2021. You had a

17:18

tremendous boom. And it was in

17:20

technology because there was a new

17:22

new thing in the black. Out

17:25

of that period came, I don't

17:27

know, it must have been hundreds

17:29

of software companies, had IPOs, software

17:32

companies for all sorts of magic

17:34

little things, and they all boomed

17:36

in 20 and 21, and they

17:39

all collapsed in 2022, along with

17:41

the large hyperscalers, the large cap

17:44

tech stocks, and the software companies

17:47

didn't. There's an ETF. the symbol of

17:49

WCLD that captures that dynamic. It's all

17:51

of the companies that were basically in

17:53

most software lists, including Snowflake, which was

17:56

actually pretty good company. And they all,

17:58

boom, they all gave it. back, but

18:00

they never really came back. And to this

18:02

day, the WCLD is kind of trading in

18:05

low range along its base. And of course,

18:07

the things have gone on a greater and

18:09

greater thing. So I think the same dynamical

18:11

workout, and the way I think it will

18:14

work out, is let's say if we go

18:16

into AI, Carson again, is who's going to

18:18

generate revenues and not have the same

18:20

cost issues that so many of the

18:22

dot-com companies have. They always cost more

18:24

to create that product and deliver it.

18:27

unless you had a special advantage. And

18:29

I think it's the hyperscalers. Large of

18:31

the companies that dominate the cloud. Amazon,

18:33

Microsoft, Google, and that has found a

18:35

clever way of accomplishing the same dynamic.

18:37

So there are four of them. The

18:39

question, who will actually deliver? the application

18:42

software and they will have an immense

18:44

advantage it seems to me. Think of

18:46

a pyramid for example and along the

18:48

bottom is where most of the profits

18:50

are and that's the hyper scale is

18:52

as you get closer and closer to

18:54

the top you're getting closer and closer

18:56

to the companies that deliver application software

18:58

and I like to use this anomaly

19:00

this this little metaphor let's assume you've

19:02

got the best artificial intelligence program for

19:04

bankruptcy lawyers it works better for bankruptcy

19:06

lawyers than any other artificial intelligence product

19:08

in the world. But the problem is,

19:10

there aren't that many bankruptcy lawyers. So

19:12

none of the, just like in 2021-22, none

19:15

of those software companies got scale. The only

19:17

ones that will get scale I think are

19:19

the hyperscalers, because they can throw out software

19:21

at the speed of light very, very quickly

19:23

and reach everybody. And I'm convinced that's kind

19:26

of the way it will work out. In

19:28

the likelihood that, well, if you think back

19:30

to the large software companies and who survived

19:32

it was a handful. service now, CRM, and

19:34

I think that will be the case in

19:37

this, in the AI world. The hyperscales will

19:39

will dominate the ability to deliver software

19:41

very expensively and they will

19:43

capture most of the profits. I

19:45

think some of the semiconductor companies

19:47

will as well because there's so

19:49

much proprietary capability there, but I

19:51

think there will be hundreds of

19:53

software companies with AI programs that

19:56

don't make it. It's always interesting as

19:58

you're kind of sifting through. some of

20:00

the companies, you have the ones obviously

20:02

that have a bunch of cash flow

20:05

today, but even the ones back in

20:07

the late 90s, you mentioned Cisco, and

20:09

you had a great quote when you

20:11

were talking about Cisco, Cisco, just a

20:13

very real business, but at the time,

20:16

just got to be really expensive. And

20:18

you said, when I first started going

20:20

negative, the stock went up six times

20:22

before it declined 95 percent from its

20:25

high of $82 in March 2000 to

20:27

less than $10 in late 2003. How

20:29

would you talk about that period, but

20:31

also how do you remain steadfast on

20:34

like a position or a market call

20:36

and something like that when it goes

20:38

against you that much, but also, as

20:41

you think about some expensive names today,

20:43

may have a real business, but it's

20:45

just to the point where it's moonshot

20:47

levels of valuation? Let me show out

20:50

the rest of the story about the

20:52

Cisco, and I'm talking in 1998, 1999,

20:54

and of course, the valuation divergences were...

20:57

infinitely larger than they are today.

20:59

I mean, that is a 22

21:01

times earnings. You can easily, and

21:03

Google is a 22 times earnings.

21:05

You can easily justify that kind

21:08

of multiple. It was nothing like

21:10

the dot-com boom in terms of

21:12

valuations, especially relative to cash flow.

21:14

One of the characteristics of large

21:16

cap tech hyperscales today is to

21:18

generate huge, huge amounts of cash

21:20

flow. And if Amazon ever paid

21:22

out the same percentage of the

21:24

same percentage of it. being held

21:26

on the balance sheets right

21:29

now, which makes hyperscaling very

21:31

profitable. I recommended Great Western

21:33

Financial because the divergences and evaluation

21:36

was so different, and that was

21:38

the dominance, a savings loan company

21:40

at the world, it was run

21:42

by the Sandlers, a great management

21:44

team, and it was five times

21:46

earnings, and Cisco was 80 times

21:48

earnings. Well, what happened, of course, is

21:51

a little early, by April of 2020,

21:53

Cisco had gone up six times.

21:55

And Great Western Financial fell 50%

21:57

because money just went into the...

22:00

tech sectors. Well, in the subsequent 18 months,

22:02

Cisco went down 95%, as you note,

22:04

and Great Western fans went up six

22:06

times. So it gives you an idea

22:08

of how powerful liquidity was beginning

22:10

and how fast sentiment was going,

22:12

because all the time there's nothing

22:14

wrong with Great Western financial. It

22:16

was still financing houses and building

22:18

mortgages and getting good spreads. I

22:20

was told that Cisco built six

22:22

fiber loops around the city of

22:25

Boston. And as told not too long

22:27

ago, those fiber loops still air, but

22:29

they're running at about 40% of capacity

22:31

because the technology always expanded that the

22:33

same fiber could handle much more data

22:36

as time went on. So eventually, the

22:38

building of the infrastructure will peak. And

22:40

all it has to do is start

22:43

to slow down, let alone peak. The

22:45

market works off second differential, so as

22:47

a change in the rate of change

22:49

starts to slow down, the stocks will

22:52

peek out. So the companies that are

22:54

involved in actually building AI, if their

22:56

orders and their financial results are dependent

22:59

on continued acceleration of the build-out, it

23:01

will prove difficult at some point in time.

23:03

And again, given the $300 billion that's planned

23:05

to be spent now, it may happen in

23:07

a reasonably short period of time. But that's

23:10

when the ability to generate application software will

23:12

become the dominant import. And the big hyperscales

23:14

will still be generating cash flow. It may

23:17

not be growing at the same rate, but

23:19

that will matter less as time goes on.

23:21

So that's the story of Cisco. And I

23:23

think that's why the businesses they were in,

23:26

of course, the telecommunications capacity was being built.

23:28

We had WorldCom and some other

23:30

fantastic flameouts. That order structure was

23:32

simply unsustainable. Just way too

23:35

much telecommunications capacity was being

23:37

built. Well, fun period. As the 90s came

23:39

to a close, you decided to go

23:41

hang your own shingle and went cloud

23:43

capital. Tell us a little bit about

23:45

that idea. Well, it's something that had

23:47

been in my mind for some time.

23:49

Being chief investment strategies of Merrill Lynch

23:51

was very much a travel job and

23:53

China was just beginning to evolve as

23:56

a capitalist economy. My first trip to

23:58

China was in the early 80s. and

24:00

the only cars on the road are

24:02

police cars and taxi cabs. So I

24:04

saw that whole generation move and we

24:06

followed the behavior of money and credit

24:08

so we could always tell when the Fed was

24:10

tightening without telling you it was tightening. So

24:12

we could keep it kind of on the

24:14

right side of the market, but I don't

24:16

think that was the key. I think the

24:18

key was that in fact I think I

24:20

can claim I made an entire career on

24:23

one call and fortunately it turned out to

24:25

be successful. That call was interest rates would

24:27

be declining throughout this period on a

24:29

long-term basis, even each cycle. You will

24:31

come out of each cycle with low

24:33

high and a low low. That call started in

24:35

1987, continued right through the 90s, and I

24:38

think so many individual investors and the financial

24:40

advisors largely served a retail market that turned

24:42

out to be a very useful call because

24:44

they could easily create products around as long

24:47

as they were convinced that the long-term interest

24:49

rate... trend was down and I did make

24:51

that call and I continue to make that

24:53

call by the way when I talk about

24:56

that, but that probably was the heart of

24:58

my career. By the time we get in

25:00

the late 90s I've been out of 10

25:03

years and I remember one time I was

25:05

flying back from back then you had to

25:07

go through Tokyo if you went into China

25:09

so it was Shanghai, Tokyo, New York and

25:11

I was flying over Westchester and it just

25:13

seemed to me I was flying over Westchester

25:15

for hours and hours and hours and I

25:17

just wanted to get that plane to get

25:19

that plane to the ground. and I

25:22

thought to myself I'm getting tired so

25:24

that was 1997 I didn't leave till

25:26

2000 so I hang on around for

25:28

another another three years but it was

25:30

a great job my Merrill job was

25:32

the greatest job I ever had and

25:34

I think was the best job in

25:36

the world you knew the smartest investors

25:38

it was just a great intellectual experience

25:40

and and I managed to get along

25:42

with everybody you mentioned China by

25:44

the way China has been such an interesting

25:46

story not just about its growth

25:49

but The stock market, which for

25:51

30 years, other than this recent

25:53

little run-up, has had almost no

25:55

returns, are pretty close to it. It

25:57

reminds me of Japan in the 90s,

25:59

2000s. Like, they'll have these little rippers where

26:01

they'll make 100% or 200% and go down

26:04

50 or 60 or something. What do you

26:06

think about China as you think about China?

26:08

I know for a long time you had

26:10

commented that it was somewhat uninvestable, but is

26:12

that the same today? How do you feel about

26:14

it? I never thought it was uninvestible

26:16

in the 90s or the 2000s. There

26:19

was a tremendous transformation on how the

26:21

Politburo and the president of China

26:23

felt about it. Girurangy was, a terrificic,

26:25

a terrific CEO of China, at a

26:27

very critical time. So my first trip was

26:29

there a trip that was only several

26:31

years after Cheng Xiaoping really turned it

26:34

into a market economy. And of course

26:36

I saw the whole expansion. It was

26:38

one of the most exciting human developments

26:40

to be able to sit and watch

26:42

and to some extent be part of.

26:44

That all changed really in 2012 when

26:46

GJ Peng became the premier of president

26:48

and I'm still astounded watching this whole

26:50

decade and virtually the destruction of a

26:52

profit motive and an entrepreneurial spirit. See

26:55

that happen. I know lots of Chinese

26:57

folks, especially young people, and they're despondent,

26:59

and there's just no life for a

27:01

young person, especially one with aspiration. That's

27:04

looked down upon right now by the

27:06

government. I never thought he'd last as

27:08

long as he did. He has, and

27:10

has continued to double down on some

27:13

disastrous policies, so we haven't done or

27:15

thought about China for some time right

27:17

now, but... You know we had an office in

27:19

Hong Kong, we had a Chinese mutual fund, and

27:21

I always think maybe we'll have a chance to

27:23

start it up again, but it would take a

27:26

significant change in Chinese leadership. I don't want to

27:28

use the word insane right now, but I think

27:30

of the word insane when I see the policies

27:32

that are being formed there. Well, let's start

27:34

to walk towards the present. Your comment

27:37

earlier, which I think is a really interesting

27:39

one. Bill Gross talked about this once, where

27:41

the decision to say, hey, interest rates

27:43

are coming down was almost like a

27:45

rip fan winkle decision right you could

27:47

make that bet and then just kind

27:49

of step back with bonds is this

27:52

very long trend and there's been a

27:54

few commentators other than yourself maybe Lacy

27:56

Hunt and some others that have really

27:58

kind of been on that train consistently,

28:01

but as we hit that zero bound,

28:03

do you feel this period where we've kind

28:05

of popped back up a little bit? Is

28:07

this the continuation of a trend? Is it

28:09

the end of the trend? Is it reversal?

28:11

As we look at interest rates and inflation,

28:13

how do you think about this going forward?

28:16

I think today there are a lot

28:18

more opportunities and equities than there are

28:20

in bonds, largely because now... When I first

28:22

made that call, bonds were 14, 12,

28:24

13 percent, and today of course they're

28:27

four. So the challenge is different. And

28:29

I'm more interested what's going to happen

28:31

at the short end. I think the

28:33

opportunity is to somehow invest in a

28:35

sharp decline in short-term interest rates because

28:38

of course they're held up by the

28:40

Fed. I think the best way to

28:42

tell my thoughts about interest rates is

28:44

to, for 40 years, interest rates and

28:46

inflation decline from 1982 to, well, 2020.

28:49

So that's 38 years. And there had

28:51

to be reasons why they did. And so

28:53

the question is, what were those reasons and

28:55

have they changed? There were three reasons,

28:57

and they have not changed. In fact,

29:00

they become even more deflationary as we

29:02

go into the 30s. I think the

29:04

most important dynamic in an economy that

29:06

determines the height and shape of

29:08

the yield curve is demographics. Demographics

29:11

are an incredibly important dynamic in

29:13

this. And the reason is, as people age,

29:15

they save more. There's more savings in

29:18

an older population than there is in

29:20

a younger population and Japan is the

29:22

best example of that. Japan ran into

29:24

a point when their capital investment collapsed

29:26

in early 93, grossly overbuilt. The banks

29:29

were the largest banks in the world.

29:31

Japan has never had positive real interest

29:33

rates since that time. Despite horrendous, well,

29:35

people would say horrendous, government deficits. I

29:37

would argue it's a good thing the

29:39

bank of Japan was so aggressive to

29:42

put liquidity in the economy because the

29:44

private economy was on its back and

29:46

government had to make up the difference.

29:48

But Japan has never had positive real

29:51

interest rates from that time. I think

29:53

Europe... especially the currency union, fell into

29:55

that same time warp in maybe

29:57

2013, about the time of the

29:59

Greek. credit crisis. And that's when demographics

30:01

reached to a point, amelorated a little

30:03

bit by the immigration there, but still

30:05

the dynamic was the Germans were systemic

30:07

shavers anyway. They started to save more

30:10

than they could invest. And if you

30:12

save more than they could invest, as

30:14

an economy, you're going to have a

30:16

strong currency in low interest rates. If

30:18

you invest more than you save, as

30:20

what happened in the baby boomers, you're

30:22

going to have a cheap currency, a low

30:24

currency, and you're going to have high

30:26

interest rates rates. So now we're beginning

30:28

to enter that. time war right now,

30:30

where the economy is about to enter

30:32

a period in fact it already has

30:34

where savings exceed investment. And I'll use

30:36

a couple of anecdotes to make the

30:38

point. Think of the investment side of

30:40

it first. I was one of the

30:42

first analysts to visit Disney World. It

30:44

was back in December 1972 and a

30:46

bunch of us analysts flew down to

30:48

Orlando and we went through the orange groves

30:51

and fields and suddenly this this big

30:53

park showed up in front of us.

30:55

It was Disney World. And for the

30:57

next 50 years, if you go up

30:59

Route 4 from Orlando, ends up in

31:01

Jacksonville somewhere, there was the infrastructure building.

31:03

And that's really what the country's investment

31:05

is. It's this huge commercial real estate

31:08

stock and residential real estate stock we

31:10

built over the last 50 to seven

31:12

years. And it went from Orlando for

31:14

about 30 miles. Maybe actually about 50

31:16

miles. And there are housing developments and

31:18

hotels and more hotels and more residential.

31:20

It goes 30 miles and then it

31:23

stops. And to keep the same level

31:25

of investment in our economy, you

31:27

have to build over the next 30

31:29

miles, and that's not going to happen.

31:32

And it's not going to have it

31:34

largely because of demographics. The baby boomers

31:36

now own 60% of the housing stock.

31:39

And there's two things that are happening.

31:41

One, they're going to start to retire.

31:43

They're very late and retiring. Once you

31:45

stop spending. You don't buy houses. You

31:48

don't buy cars. You may be going

31:50

to cruise line. And I think that's

31:52

a great. but they don't spend and

31:55

that only exacerbates the savings to

31:57

investment imbalance now the other

31:59

course is simply where balance sheets

32:01

ended up. Once you reach the

32:03

point where private debt equaled about 160%

32:06

of GDP, that was in the

32:08

early 80s, today it's about 150,

32:10

you can't have high normal interest

32:12

rates simply because at high normal

32:14

interest rates, you can't service 150%

32:16

of GDP debt load. Every time the

32:18

10 year tries to knock about five,

32:20

it gets pushed back. And of course,

32:23

we're already beginning to see that in

32:25

the credit card. Right now, in our

32:27

economy right now. it's a credit card

32:29

experience that's really sustaining spending, especially among

32:31

low and medium income people. So credit

32:34

card rates usually are 12 to 13

32:36

percent. Well, in 22, the banks move

32:38

them up to 20 to 28 percent.

32:40

And those revolving credit balances are growing.

32:43

Well, now, 22 or 28 percent doubles

32:45

in three years. So you can see

32:47

the private sector is taking on a

32:49

huge... liability there and the spending is

32:51

simply unsustainable. So we kind of think

32:53

your only point now where savings will

32:56

be forced to exceed investment and if

32:58

that's the case you're going to have low

33:00

interest rates and a strong dollar. We're kind of

33:02

seeing that right now. I mean the big concern

33:04

that most investors claim they have, and

33:06

you hear expressed on Wall Street a

33:09

lot, is that because government deficits we're

33:11

going to have a weak currency in

33:13

higher interest rates and quite the opposite.

33:15

is happening. And it's a good thing

33:17

it's happening because if you look at

33:19

Japan, government deficits were extremely high, but

33:21

the private sector was saving and that

33:23

means you weren't really creating much young

33:25

liquidity. The same thing is happening today.

33:27

Look how strong the dollar is. In

33:29

fact, if you look at liquidity and

33:31

now it's affecting... Our markets, look how

33:33

narrow the quality spreads are. Triple B's

33:36

never got much of, I don't know

33:38

how many bond funds were formed over

33:40

the last several years, hoping for more

33:42

distressed rates, but you never got them.

33:44

The triple B level is about 60

33:47

basis points over the government. So I

33:49

think the way we'll find it works

33:51

out is that as we say more than

33:53

we invest, the government can borrow

33:55

and it can borrow without the

33:57

deleterious effects. People are saying because

34:00

the private sector is actually liquidating credit.

34:02

You can get on a conference call

34:04

today without the management saying we're reducing

34:06

our debt. Government debt's about 33 trillion, private

34:09

debt's about 49 trillion, so. That $49

34:11

trillion is falling as a percentage of

34:13

GDP, fastening that government sector is growing.

34:15

That's why the dollar is so strong,

34:18

because we're not creating as much dollar

34:20

liquidity as people think. It has profound

34:22

implications, because right now in the Fed

34:24

flow of funds data, they tell you

34:27

how much liquid assets are in the

34:29

household sector, it's got to be approaching

34:31

$50 trillion. The economy is only 28

34:33

trillion, so. That's a tremendous amount of

34:36

liquidity. You're stuck at the short end

34:38

of the ill curve. It may take a

34:40

little longer than people think, but that doesn't

34:42

matter how long it takes, because the market

34:44

will ignore it anyway. Think of how stocks

34:47

have behaved in the face of both an

34:49

easier and a tight Fed, but if I told

34:51

you two or three years ago that the Fed

34:53

was going to increase interest rates 500

34:55

basis points and pull back the

34:57

size of its balance sheet from nine to

34:59

seven trillion, most people would

35:01

assume. So stocks boomed in the face

35:03

of those two events. And I suspect

35:06

that only becomes even greater pressure on

35:08

equities as time goes on. So we

35:10

are going to say we're going to

35:12

save more because of who we are

35:14

as a demographic, and we're going to

35:16

liquidate balance sheets. And the final point

35:18

in the thought process is that the

35:21

banking system is responding to that. 20

35:23

and a half trillion dollars two and

35:25

a half years ago. They're about to

35:27

break 17, 18 trillion dollars. They're about

35:29

to have a 17 handle on it.

35:31

So the banking system is liquidating its

35:33

deposits. And I think if you go

35:35

on the website, if any of the money-centered

35:37

banks and ask, what is the interest

35:40

rate the yield, they're willing to pay

35:42

on a normal demand deposits, I think

35:44

you'll find it's about 10 basis points.

35:46

And the signal from that is that

35:48

the banking set is not trying to

35:50

go its deposits because it lending opportunities

35:52

to match. because savings is they're holding

35:54

on to more savings, then it's possible

35:57

to invest in it. So that's a thesis.

35:59

It would show. up eventually and more

36:01

downward pressure on the short end

36:03

of the curve and I suspect long

36:05

term it's bullish for equities because

36:07

that's the only part of the

36:10

economy that really generates free cash

36:12

flow. That's the important word free

36:14

cash flow. How do you think

36:16

about productivity? You know everyone's like

36:18

the word cloud of aid 2025 might

36:20

be austerity government doge but also

36:22

the AI. boom that's happening around us.

36:25

How do you kind of think

36:27

or factor that in as far

36:29

as productivity improvements? Any other second,

36:31

third order implications too? Well, productivity

36:33

equals profits. So it's obviously profit

36:35

supportive and inequity supportive, but it's

36:37

easy to measure. People try to

36:39

do it one or two ways.

36:41

They try to do it anecdotally.

36:43

It's hard to measure anecdotally, but

36:45

there is one measure you can

36:47

look. Actually when you're talking about

36:49

productivity, you're talking about labor productivity.

36:51

So hours. Total hours worked actually

36:53

have been declining for several years.

36:56

In fact, they're a percent or two

36:58

lower than they were in 2019. In

37:00

fact, in this morning's labor report, costs

37:02

were up a little bit. It looked

37:04

like a kind of a too hockish

37:07

or too fast report, but labor hours

37:09

worked actually was down. And that means

37:11

we're turning from a full-time employment toward

37:13

part-time in part. We've been moving from

37:15

full-time at the margin, full-time to part-time.

37:18

That eventually is a sign that we

37:20

are becoming. more productive. The best way

37:22

to look at that is simply nominal

37:24

GDP. Normal GDP is probably up eight

37:26

or nine percent. Could be more, I've looked

37:29

at it lately, since 2019. So if we're

37:31

getting eight or ten percent more nominal GDP

37:33

at lower labor hours worked, and we really

37:35

haven't had the effect of AI yet. So those

37:38

are three demographics. The fact that

37:40

balance sheets have to be delivered. And

37:42

thirdly, labor productivity suggests there's a

37:44

deflationary world ahead. And the bond

37:46

market's probably an OK place to

37:48

be. But the real opportunity is

37:50

finding ways to invest in a

37:52

decline in short-term interest rates. Perfect. Well,

37:54

let's hear it. You mentioned cruise lines. It's funny.

37:57

I was watching a commercial the other day and

37:59

I was always like... These mega cruise ships

38:01

always look like my worst nightmare. I

38:03

got a seven-year-old, though, and we

38:05

were watching a commercial, and I was like,

38:07

you know, that actually looks sort of fun.

38:09

I don't know. Now the key is talking

38:12

my wife into doing it, which she is

38:14

a strong no-against. But you mentioned cruise lines,

38:16

you're welcome to talk about those, or also

38:18

talk about any other big opportunities you're seeing,

38:21

and the equity sectors here in 2025.

38:23

I made the point about how I think

38:25

the hyperscale technology event will work out,

38:27

and that's one element of a portfolio

38:29

that I still think there should be

38:31

some exposure there. We've never had a

38:34

dynamic in the economy where free cash

38:36

flow can be compounded out at such

38:38

a rate. But there are some areas

38:40

where we have shortages, the price-cost relationship

38:42

is going to improve. and in a

38:44

market with the liquidity we have,

38:46

there's going to be opportunity. I

38:48

still think the most interesting industry,

38:50

which is undergoing some restructuring, as it

38:53

happens, it's probably entering 20 years of

38:55

boom times as a defense aerospace industry.

38:57

In the commercial airline, we only have

39:00

two builders of aircraft, and I don't

39:02

think anybody's going to touch them for

39:04

a while, and all they have to do is

39:06

correct their supply lines. Once Boeing, it corrects its

39:09

supply line issues, it's a very strong

39:11

cash generating institution again. No, we're going

39:13

to need more airliners as we go

39:15

through the next decade and the backlogs

39:17

already stretch into the next decade. And

39:20

I think the same true is also

39:22

on the defense side as well. In

39:24

fact, I think the Pentagon is beginning

39:26

to realize that it needs an efficient,

39:29

effective, and profitable defense structure and I

39:31

think the authorization process will adjust to

39:33

that. The cruise line story is an

39:35

interesting one and I'll tell you where

39:38

the idea originally came from. Another Chicago

39:40

economist named Merton. It was combined with

39:42

Franco Medigliani at that MIT at the

39:44

time, and it was called Miller Medigliani

39:47

Thesis, and if you had any graduate

39:49

training in business, you heard of it.

39:51

And it was actually another brilliant insight,

39:54

and the insight was you can't change

39:56

the value of a firm by changing

39:58

the debt equity ratio. And out

40:00

of that came junk bonds, out of

40:02

that came index funds, out of that

40:05

came so many transformations in the financial

40:07

world. But it's true, if you increase

40:09

debt, your value of the equity is

40:11

going to go down as a percentage

40:13

of capitalization. And if you reduce debt,

40:16

the value of the equity is going

40:18

to go down. As a percentage of

40:20

capitalization, and if you reduce debt, the

40:22

value of the equity is going to

40:24

come up. But the biggest one was

40:27

the cruise lines. They shut them down.

40:29

The CD shut them down for two

40:31

years. And through some of the cleverest

40:33

ways of human intuition, they managed to

40:35

survive. But of course, they came out

40:37

of it with extremely leverage balance sheets.

40:39

If you're looking at carnival stock with

40:41

72 at one time, it ended up

40:43

eight. and Royal Caribbean, I forgot quite

40:45

what the numbers were, but I think

40:47

it was 50 and 12. So the

40:49

equities were quite depressed because the balance

40:51

sheet was so leveraged. But we're coming

40:53

into a period of time where we're

40:55

about to see a boom, and younger

40:57

families were suddenly, it was usually an

40:59

industry mostly patronized by older folks, but

41:01

suddenly pan felonies come, and you get these

41:04

new Royal Caribbean ships that have carnivals on

41:06

them. So our senses that demand would be

41:08

good, it has been booking for 26. and

41:11

the cash flow is high as that is

41:13

paid down in the case of Carnival. I

41:15

want to say a debt probably peaked at

41:17

$33 billion. It's 29 today if it gets

41:20

to 25. Their investment grade stocks $25. It

41:22

was 72. I don't know why I can't

41:24

get back there. So I suspect that this

41:27

is an industry because it does give a

41:29

family a very good experience at a

41:31

fraction of the cost that Disney World experience

41:33

would be. So it just looked to

41:35

us like it was the one part

41:38

of the leisure and entertainment. world that

41:40

had a number of things going for

41:42

them. And we think it still does.

41:44

You know, there's a natural gas story.

41:47

The shortage showed up when Russia invaded

41:49

Ukraine and there's an LNG development that's

41:51

come from that. It increases demand for

41:53

natural gas by 20% and the premium

41:56

is kind of depleted. So you've got

41:58

a good cost relationship that probably means

42:00

the man for natural gas will go

42:02

up. I think there's a good story

42:04

there. Well, natural gas is interesting

42:07

because that was a commodity that

42:09

in the early 2000s, it almost looks

42:11

like a VIX chart or corporate bond

42:13

spread or something, where like every once

42:15

in a while it'll just do this

42:17

face ripper where it goes from two

42:19

or three up to six, eight, ten,

42:21

twelve, fourteen, and then often comes back

42:23

down, but you have these periods of

42:25

kind of relative calm overlaid with

42:27

these. giant runs up. We're kind of at the

42:29

lower levels of net gas or three

42:32

and change I think today, but there's

42:34

been periods where it's been multiples higher

42:36

than it is currently. Well, it's an

42:38

industry where supply can be very volatile

42:40

and if supply can be volatile and

42:42

this price elasticity, you're going

42:44

to have the kind of volatile price

42:47

behavior you saw. There is a difference

42:49

and the difference is, well, what made

42:51

the volatility occur in the especially the

42:53

downward volatility was the development of the

42:55

permeumine. and the Eagle Ford feels they're

42:57

kind of used up not totally but

42:59

cost a little bit more to generate

43:02

large increases in production and of course

43:04

most of the companies have been forced

43:06

to become a little bit more so.

43:08

shareholder friendly and more concentration of free

43:10

cash, low and dividends. So I think

43:12

you put those two things together and

43:15

it's a little harder for the supply

43:17

side to respond so quickly, but natural

43:19

gas, you know, there may be a

43:21

glut later in the decade because the

43:23

number of trains, the so-called plants for

43:26

these things are proliferating and a tremendous

43:28

amount of money is going into it.

43:30

So it's kind of like the fiber

43:32

loops in Boston, maybe, but that's a

43:34

few years out. In the meantime, there's

43:36

going to be acceleration of acceleration. and

43:39

if the industry can use capital efficiently

43:41

for a while, there'll be some opportunities

43:43

in the stock market. I see you mentioned

43:45

kind of one other area when you

43:47

talk about AI, any particular companies like

43:50

there, I know you mentioned device

43:52

manufacturers. That's the first instinct that people

43:54

have. Who are the users, the beneficiaries

43:56

of it? And the idea is that

43:58

the users of technology. will be where

44:00

the benefits are. The last time I saw that

44:02

that was true was the emergence of the

44:05

jet aircraft in the 60s, because jet aircraft

44:07

were so efficient, I mean you could go

44:09

from New York to Paris without

44:11

stopping at Greenland. There's no question

44:13

the banks are becoming more efficient

44:15

with technology generally and the banks

44:18

that have spent the most on technology

44:20

are the ones that held up the

44:22

best, but it's not clear that it

44:24

actually turns into profits because everybody has

44:26

the same access to it. And I guess the

44:28

best example I can think of is, let's

44:30

say, 5G. When 5G came along, a material

44:33

step up in the power of

44:35

telecommunications, particularly in a

44:37

wireless world, but AT&T and

44:39

Verizon never did much. And the

44:41

actual final user didn't get any

44:43

efficiencies out of it. We just

44:45

created capacity because they had to create

44:48

enough capacity to offer the service, and

44:50

the service demand never gone up with

44:52

the capacity. So that's an area that

44:54

people who are used, AI, you know,

44:56

Palantir, and... There are few stocks like that

44:58

that have emerged, but they're finding ways

45:01

to actually develop software in an AI

45:03

form for a specific market, and there

45:05

will be successes in that frame. But

45:07

the idea that banks will suddenly generate

45:10

huge amounts of profits because they'll

45:12

generate, I, leaves out the fact

45:14

that this is a very price

45:16

elastic industry, very sensitive to what...

45:18

deposit rates are and it's an industry

45:20

and structural over supply. Now let's look at

45:22

the other side of the equation. You know

45:25

what industries will not benefit from AI and

45:27

I would argue the financial sector is probably

45:29

the best example because it just adds a

45:31

tremendous amount of capacity to an industry that

45:34

is in a situation where already cannot leverage

45:36

its deposits. The banking system has $18

45:38

trillion of deposits which cannot be leveraged.

45:40

Net interest income didn't really grow, even

45:43

though the curve steepened a little bit.

45:45

They made money in the capital markets

45:47

business, but that's also a hotly competitive

45:49

business. And so it looks to me

45:52

like AI, because it makes everybody more

45:54

efficient, just brings the price level down

45:56

for the customer. I'm not sure that there

45:58

are all sorts of sorts. of secret ways

46:00

that the economy will benefit from

46:03

AI particular companies might, and Palantiers,

46:05

perhaps today's child, but you know,

46:07

when the internet emerged, it was

46:09

funny, it wasn't people who had

46:11

websites that made, you had to

46:13

wait for the development of Google

46:15

and Amazon, and then ultimately

46:17

meta, all of which were developed

46:20

between 2004 and 2012, and they

46:22

actually captured the profits. And the

46:24

semiconductor manufacturers did as well, so

46:27

I suspect the companies that... will

46:29

actually be the huge beneficiaries of

46:31

artificial intelligence have been

46:33

formed yet. Yeah, it'll be fun

46:35

to watch. Let's jump around a few

46:38

kind of short questions as we wind

46:40

down the time we have with you.

46:42

As you look back on your career,

46:45

the hundreds, if not thousands, of trades

46:47

and ideas you've had, has there been

46:49

a most memorable investment over the decades

46:51

that's just burned into your brain?

46:54

That's dangerous. The spectacular investment. I

46:56

made five times on my money

46:58

in a matter of weeks. It's like

47:00

an addiction. You want to do this again.

47:02

So sometimes a great investment like that makes

47:04

it more difficult. You have to have

47:06

a diversity of investments to be reasonably

47:09

successful in this business. But I would

47:11

say. The same thing I said earlier,

47:13

I had one good idea, and

47:15

that was interest rates are going

47:18

down. I started 1987, so here

47:20

we are in 2027, it'll be

47:22

40 years, for 36, 37 years.

47:24

It's the best idea, right? The

47:26

red, interest rates are still going

47:28

down. The short end will be

47:31

at 1%, sometime in the next

47:33

few years, and the long end,

47:35

the 10 year will be at 2.5%.

47:37

It'll sit there forever. Oh boy, that's

47:39

a hot take, I like it. Well,

47:41

you listen in bond investors. We're olding,

47:43

we're getting older, we're saving more

47:46

than we're investing. As academic

47:48

as that sounds, it's the most

47:50

important dynamic in the economic

47:52

backdrop. The private population

47:54

is saving more than the

47:57

government can possibly spend. If

47:59

you sit down. with a group of

48:01

your peers, you're getting coffee, walking

48:03

around, having lunch, whatever it is,

48:05

but it's a bunch of CIOs,

48:07

president, strategists of investing

48:09

firms. What's a belief that

48:11

you have that probably most

48:13

of them would disagree with? Well,

48:16

I'll say one thing. The ideas

48:18

I just expressed today are non-consensus.

48:20

Now they can turn consensus on

48:23

a heartbeat. A couple of week

48:25

data points from the government will

48:27

change everybody's idea. come up occasionally,

48:30

like for example, when President

48:32

Trump announced all these terrorists and

48:34

he did it suddenly and he did

48:37

it in a very aggressive form and

48:39

of course the market for a

48:41

while collapsed, but then caught itself

48:43

and come back as it always

48:45

does. It catches itself and come

48:47

back and that's respectful of the

48:49

liquidity that's out there. But the

48:51

general consensus among everybody was that

48:53

this would be inflationary and yet

48:55

if you go back to 2017

48:57

when Then President Trump inaugurated a number

48:59

of terrorists, and they go out two

49:02

years from that to 2019. Fed funds

49:04

were at 1.6 percent. The two year

49:06

was at 1.76 percent, and the ten

49:09

year was at 1.7 percent. So, terrorists

49:11

don't matter. At least in

49:13

an inflationary sense, because if

49:15

one thing there were substitution

49:17

effects, let's look at the

49:19

aggregate here. Right now, manufacturing

49:21

of the economy, 12 percent

49:23

of the economy is manufacturing.

49:25

3% is imports. And so it's going to

49:28

be some sets of 3% that matters

49:30

here. There will be substitution effects. There'll

49:32

be companies, countries, there's 15,000 ways to

49:34

get goods into the United States. And

49:37

we'll find every one of them. So

49:39

I think the Smootholly Tariff and some

49:41

of the famous experiences in history, A,

49:44

it was a different economy and I'm

49:46

not sure that had as big an

49:48

impact as is as commonly believed because

49:50

the monetary policy was kind of mucked

49:52

up then too. I think that's probably

49:55

the latest one where it's easy to

49:57

see reason to be anti-consensus, but consensus

49:59

is... I found that yesterday visiting

50:01

some clients. Sometimes a singular

50:03

idea about how the economy works

50:05

can be active in many, many

50:08

different sectors here. But I would say

50:10

that's the most recent experience where

50:12

my view of things would be different

50:14

than the consensus. What do you think

50:16

has been the biggest surprise over the

50:19

last 10 years or so? To me,

50:21

seeing interest rates that got to zero

50:23

and negative was definitely, I felt

50:25

like a curious time. I feel like markets

50:27

are always surprising us, but

50:29

anything that you looked around and said,

50:32

man, that was a weird time or

50:34

this wasn't something I was expecting.

50:36

I think what happens is,

50:38

you're not surprised at something

50:40

happening, it's you're surprised it's

50:42

happening to the extent it has,

50:45

and you're completely underestimated the

50:47

impact. And I would say

50:49

the most recent example of

50:51

that, which really held or firm

50:53

back a little bit, was in August

50:55

of 2013. If you go back and look

50:57

at a chart, Google I think went

50:59

public in 2008 or 2007-2008, had a

51:01

run and then just died and really

51:03

flat performance for years. And then suddenly

51:05

in August of 2008, Rooke broke out.

51:07

And I said to myself, technology is

51:09

coming back in some way. And I

51:12

couldn't quite figure out which way or

51:14

form. But that was the first breakout

51:16

in technology, which of course captured all

51:18

of the things as time went on.

51:20

It also combined with the emergence of

51:22

indexing. combining indices into a ETF

51:25

or mutual fund and selling the index.

51:27

And from that moment on, I

51:29

think we end well for several years

51:31

we end up form the S&P simply

51:33

because we didn't capture that dynamic. Even

51:36

though we knew what was happening, we

51:38

knew about indexing and we knew about

51:40

how big, but it was hard to

51:43

turn a portfolio around. That's just one

51:45

of my own personal mistakes. But I

51:47

say that was one thing I noticed

51:49

and I think people more likely to

51:52

because everybody knows what's going. The information

51:54

flow is humongous. But the biggest thing

51:56

is understanding the implications, especially how big

51:58

a factor could be. the combination

52:00

of the things developing huge market capitalizations

52:03

ultimately dominated the index and

52:05

it mean if you weren't

52:07

invested in those you're going

52:09

to underperform the S&P. Took a while

52:11

for me to figure that out and I

52:13

knew the moment it started and of course

52:15

we knew indexing but we never thought it

52:17

would become as dominant as it was and

52:19

turned out to be one of the great

52:22

inventions in human financial markets is the ability

52:24

to index and probably did everybody

52:26

else. Yeah well said we wrote a... piece last

52:28

year called the bare market

52:31

and diversification on that topic alone

52:33

about how the S&P no matter

52:35

what portfolio did 60-40 endowment permanent on

52:37

and on you got creamed by the

52:39

S&P for the past 15 years but

52:41

not just creamed by the S&P on

52:44

an absolute level but creamed by the

52:46

S&P years in a row it's like

52:48

14 of 15 years or something for

52:50

a lot of people That's hard.

52:53

They don't want to underperform

52:55

their neighbor who's just dollar

52:57

cost averaging into SPY or

52:59

whatever they may be. The other is

53:01

the whole battle between growth and value.

53:04

Value hasn't worked for a long,

53:06

long, long time. And if you look at

53:08

the dominant factors that are going

53:10

on right now, it may still

53:12

not. Productivity means profits. but it

53:15

probably means profits for the larger

53:17

companies rather than the smaller companies

53:19

because the larger companies have scale

53:21

to be able to use that technology.

53:24

It's funny as I mentioned spy

53:26

because you're at Merrill when some

53:28

of these sector spiders came out

53:30

and here we are full circle,

53:32

Chuck. You now got a couple

53:34

ETFs, CBLS, CBSC, Vincent LaRusso involved

53:36

over there at cloud capital. You

53:38

even do a little shorting, which

53:40

I mean, 2025, I feel like

53:43

all the short sellers are retired

53:45

or in the cemetery at this

53:47

point, and we have a very

53:49

soft spot for anyone that does

53:51

shorting, but it's a hard business.

53:53

How do you think about the

53:55

ETF space? Well, both of our

53:57

ETFs are net long, and CBFSs

53:59

is... maybe 50 or 60% net long. So

54:01

it is a net long shop. But every once

54:04

in a while, you see a company

54:06

out there with bad management,

54:08

bad business plans, bad balance

54:10

sheets, no cash flow, and we just

54:12

can't help ourselves. We've got to

54:14

be able to exploit that insight. The

54:16

market's been a bull market for a

54:18

terribly long period of time, so obviously

54:20

there are some hills to climb, but

54:23

there are two themes out there that

54:25

are kind of different than just, they're

54:27

far apart from indexing as you can

54:29

imagine. One, of course, is small stocks

54:31

or small and medium stock, and the

54:33

second is short selling. The thing about

54:35

the both of them is they're very,

54:37

very difficult to do. I mean, to

54:39

really invest in small stocks, you have

54:41

to come up with individual... special situations,

54:43

and that's hard to do, and it's

54:45

hard to build a portfolio out of

54:48

it. And there aren't that many small

54:50

medium cap managers left, as an effuciary

54:52

in the in the abatement space. I

54:54

can see it. The people who did

54:57

well in the 70s and E's, of

54:59

course, as you point out, are not

55:01

here. And the other thing would be

55:03

short selling. It's hard to do.

55:05

Obviously, the fact that's hard to

55:08

do means not everybody is

55:10

trying to do it. in this market. But

55:12

that's simply because of the trend

55:14

of the market. Of course, short sellers

55:16

always come out of the woodwork when

55:18

there's a bare market and the trend is

55:20

with you. But in my world, if

55:23

we're right in the economy, we'll be

55:25

throwing off excess liquidity for the next

55:27

decade or two. I suspect short selling

55:29

will be challenging, but when you catch

55:31

something, it can be very profitable. Our

55:33

short book actually was pretty good last

55:35

year. It wasn't in turn out to be a

55:38

good year, so, but it's a lot of work.

55:40

and you have to be very resourceful. You gotta

55:42

be mindful. Those positions can move, it

55:44

can be painful. We always joke and

55:46

we talk about longs and short approaches.

55:49

We say you got twice as many chances

55:51

now to be right and wrong. That's good,

55:53

that's good. It's good, it's bad. See? Yeah,

55:55

at least in a long, there's limited downside

55:57

and in a short there is not.

56:00

You work with some amazing names at

56:02

Merrill over the years, Bob Farrell,

56:04

Richard Bernstein, any particular memories, stories,

56:06

lessons from some of these cast

56:08

of characters that you've got to

56:11

interact with over the years? Yeah,

56:13

I mean, Bob Farrell and I cost

56:15

worked at opposite corners of the

56:17

19th floor at the World Financial

56:19

Center and a remarkable individual and

56:21

a wonderful, wonderful, wonderful guy. We

56:24

had a lot of fun together. He

56:26

was late in his. He'd already had decades

56:28

of decades of fame. So I was very

56:30

proud and happy to work with him and

56:32

we developed a strong personal relationship

56:34

as you might imagine. Richard Bernstein, I

56:37

brought him into Merrill Lynch. I think

56:39

it was in 1989 and really very

56:41

very smart and resourceful young man.

56:43

And of course he's been phenomenally successful and

56:45

I'm so happy to see that. A

56:47

lot of the other Merrill Lynch folks that

56:49

I got to know of course were the

56:52

FAs because ordinarily the chief investment strategies doesn't

56:54

do a lot with the retail

56:56

side of the business because My

56:59

responsibility was to service fidelity in

57:01

Putnam and the mutual fund giants of

57:03

the time, but one day I decided

57:05

to make a presentation to several offices

57:07

got together and they filled a

57:10

hotel ballroom with maybe three or

57:12

four hundred people and I went on

57:14

babbled on for half an hour, maybe

57:16

thirty, five, forty minutes and I looked

57:18

at the people and they're mostly elderly,

57:20

a lot of elderly folks. They brought

57:22

their notebooks and they were taking

57:25

down everything I said and I talked

57:27

to myself, you know. This is the

57:29

heart of the business. This is the

57:31

real business. This is savings. It's not

57:33

somebody managing somebody else's money. It's savings.

57:35

They're saving for retirement. They're saving for

57:37

kids. And I was just moved by

57:39

that. And I did a lot of

57:41

it. In fact, I understand I was

57:43

the first investment strategist that ever did

57:45

a lot of it. And of fact,

57:47

I understand I was the first investment

57:49

strategist that ever did a lot of

57:51

it. And of course, Merrill with the

57:53

Thunderering for a few minutes watching the people came

57:55

in and I said. You know what an honor

57:57

that they're coming to listen to me but I

57:59

understand. personal investing is very

58:02

serious business. Merrill had great

58:04

financial advisors, still does, and I

58:06

mean, it was a highlight of my

58:08

career. It just plain was watching those

58:10

people and being able to do the

58:12

service of bringing the capital markets or

58:15

the stock markets of them in a

58:17

way, hopefully that was understandable.

58:19

And that must have been partially

58:21

successful because they kept showing up.

58:24

Chuck, it's been a blast. We've kept

58:26

you long enough. We'd love to keep

58:28

you all today. Thanks so much. Podcast

58:31

listeners will post show

58:33

notes to today's conversation

58:35

at mebfaver.com/podcast If you

58:38

love the show if

58:40

you hate it shoot

58:42

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58:44

mebfabor show.com We love

58:46

to read the reviews

58:48

Please review us on

58:50

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show anywhere good podcasts

58:54

are found. Thanks At Rocket we

58:56

believe everyone deserves their shot

58:59

at the American Dream. So

59:01

if you're feeling locked out

59:04

of home ownership, we're here

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to give you back the

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Rocket on the Dream. rocket.com.

59:26

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