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00:00So, my mentor, Peter Lynch, had insatiable curiosity and he needed a foreign stock jock.
00:08So they came to me in early 84 and they said, have you ever been abroad?
00:13I said, I've been to Tijuana, I've been to Montreal, what do you need to know?
00:15So they sent me off to here and they said, get your glove, because end of the year of
00:2084, we're going to start our first foreign stock fund.
00:22I was it.
00:23So, you know, but as one of the things with Ned Johnson, they gave you opportunity three
00:29into the fire and let's see what you got.
00:31The fire right now is AI.
00:34You are scathing our listeners and viewers that own this stuff in their retirement plans
00:40at Fidelity everywhere else as well.
00:43What should be their action into the autumn?
00:47Why am I not surprised by the question?
00:50We spoke about a couple of months ago when I was when I was last on things have gone
00:54from bad to worse.
00:55And let's just step back for a second because there's so much day to day volatility.
00:59This announcement, that release, et cetera, et cetera.
01:02Most recently, all this stuff over the weekend.
01:04I mean, Tom, Paul, think about this.
01:07You have a commodity that's deflating at like record speed with debt that's being built
01:14up at record speed.
01:16Like, what could possibly go wrong?
01:18OK, so every day, you know, every week, there's another model that comes out and then the Chinese
01:23can do it for 95 percent off.
01:25And now there's noises about, you know, Trump maybe is going to ban Chinese AI or whatever.
01:30As we said last time, I think this is going to be the biggest misallocation of capital
01:36in history.
01:37Wow.
01:38And when people say, is it worse than dot com, not as bad as dot com, history rhymes,
01:44it doesn't repeat.
01:45I read something interesting the other day, not an original thought, but I thought this
01:47fellow put it brilliantly.
01:48He said, you know, this AI thing, it's kind of reminds him, it's kind of like if you took
01:53dot com and merged it with the great financial crisis, i.e. all the Ponzi finance schemes
01:58of housing, it's kind of what you got.
02:00Oh, boy.
02:02So, what aren't you buying here, I guess, in terms of the concept of AI?
02:08One, I mean, I think we're all kind of disabled, we're trying to every day learn a little bit
02:12more what this means, what it actually is.
02:15To me, it just feels like what we were talking about five years ago, which was big data,
02:18and it's just another term.
02:20But I've been told, no, no, no, this is a new way of computing.
02:24This is a new way of processing information, and it requires a tremendous amount of computing
02:29a power, which requires a tremendous amount of capital, and that's kind of what you got
02:34to get your head around.
02:35You're not buying that?
02:36No.
02:37Okay.
02:38We all use AI.
02:39I use AI.
02:40Yep.
02:40People savagely attack me on Substack and X, because, oh, you used AI.
02:44Yeah, I like AI, okay?
02:46It doesn't mean it's a good investment.
02:48It's like, you know, Peter always used to talk about, you know, the difference between a product
02:52and the stock, all right?
02:53The question is, is AI, if you do reverse engineer the math, and you look at the trillions
02:58they're spending on CapEx, and just reverse engineer and say, okay, how much gross profits
03:04do they need to make to justify that?
03:06And in turn, what are the implied revenues that you need to justify that?
03:10Liars figure, but figures don't lie.
03:12And so the question is, is there going to be an acceptable return on capital, all those
03:17trillions of dollars are being spent?
03:18Or it's just going to be, you know, a $100 billion TAM, and you're going to end to be
03:24a commodity business, and there's going to be no margins.
03:26That's the issue.
03:27One last point I want to say on this, Peter Barrett, a bank credit analyst, made a really
03:30good observation a couple of months ago, likening it to .com.
03:33He said, you know, the folks in 99 who were all bullish on the internet, they were right.
03:39Internet traffic went up like 43% compound for the next 25 years.
03:42It went up like 25 million percent.
03:44Didn't stop Nortel from going bankrupt and Global CrossFit from going bankrupt.
03:47These are two different things.
03:49George Noble with his folks, hugely visible on social, can't say enough about his careful
03:54writings on Twitter, on LinkedIn as well, and of course, definitive forever at Fidelity
03:59International.
04:00I love how Justin Baer treated you in the book.
04:02I mean, I read the book cover to cover, just enjoyed it.
04:05They kept lockovers out of it.
04:07You know, I went through, I did an index search for lockovers just to see how many people
04:12were in it.
04:12Thank God they kept that.
04:13That and the Boston Racquet Club, they kept out of it.
04:16What's different now in the racket?
04:19Is it easier not to lose money now because of the cacophony we're living in terms of financial?
04:26Is it easier not to lose money?
04:29I actually think it's easier to lose money.
04:32And the reason is, and I'm breaking this here, breaking.
04:36We've heard, you know, the term fiscal dominance has made the rounds the last couple of years.
04:42If I hear that term one more time, I'm going to put my fist through the wall.
04:44Well, I'm coming out with a new phrase.
04:46It's called narrative dominance.
04:49Narrative dominance.
04:50In other words...
04:51I love that.
04:52Okay.
04:52Do you remember the book Alan Keyes wrote a couple of years ago, a few years ago, the
04:56post-truth society?
04:58We're in the post-truth stock market.
05:00It doesn't matter what reality is.
05:02Right.
05:02They're trying to tell you, this is what you should believe, and we're going to put
05:05enough liquidity, spike the drinks enough.
05:07So, what are you complaining about, Tom?
05:09You're looking at these numbers and everything.
05:10Can you parse between Mag 7, or do you treat them all the same?
05:15They're all a little bit different.
05:16But, so, for instance, no surprise, we've talked about this before, the electric car company
05:21that shall not be named uniquely stands out for being extraordinarily unattractive.
05:26All right, I've never seen a short at such scale, a trillion five, and then with its
05:34cousin, SpaceX, which we spoke about last time as well.
05:37SpaceX is not Mag 7, but those are just unbelievable companies.
05:40They're just atrocious.
05:42And then at the other extreme, you have, you know, Google, fine, and then everything in
05:46between.
05:46So, again, it's a market of stocks.
05:49Know what you own.
05:50Peter Lynch, please call your office.
05:52So, how concerned are you about the overall economy if, because so much of economic growth,
05:59underlying economic growth, is AI related?
06:03You pull that out, what does that mean?
06:07Again, the economy's not the market.
06:09The market's not the economy.
06:10I am concerned.
06:11My call has not been for recession.
06:13Ours has been for rotation, not recession.
06:15However, as we've been discussing, you know, this Ponzi finance, circular financing with
06:24its underwriting AI, when the market says no mas, and you start looking at the CDS on
06:30Oracle or, you know, whatever, and the market says game over, to your point, you're asking
06:36the right question.
06:37And I think we're looking at, you know, I'm focusing on the market, not on the economy
06:41so much, but when you're spending trillions of dollars and running a deficit of 7% of
06:45GDP, like, how are you going to get a recession, all right?
06:47Problem is, you're looking at a global increase in cost of capital.
06:52And a nominal GDP or a character of it maybe we've never seen before.
06:56So, you mentioned CDS, credit default swap, and, you know, there's a debate, folks, about
07:00its efficacy and that.
07:01The blunt instrument is, I'm looking on the screen at the yield space, it's price down,
07:05yield up.
07:06How does that play out?
07:08Is it play out where, like in August of 1998, it just breaks or because of leverage or whatever?
07:15Or do you see it as just sort of ebbing into some form of cataclysm?
07:19Well, what's really interesting here, much has been said about the passive bid and indexation,
07:24and much has been said about the huge deficit spending.
07:28And so, if you think about past cycles, Tom, what will bring on the contraction is if stocks
07:34go down, corporate managers cut back, and that gives you the economic impulse to have
07:39a slowdown, if not recession.
07:41With stock prices, though, continuing to stay up there, that sort of information content
07:48from the pricing was missing, all right?
07:50And they keep driving the economy with more fiscal spending.
07:52So, to your question, everyone wants to know what's the magic level of rates that is going
07:56to cause this thing to topple over.
07:59As you know, I've been pretty outspoken about Scott Besson and what the Fed's trying to
08:02do.
08:03And, you know, on August 19th, when he said, oh, we're buying bonds, and we're going from
08:07$2 billion to $4 billion or $4 billion, whatever the number was, I said, no, this is a sign
08:12to short bonds, not buy bonds.
08:14Scott Besson is the modern-day equivalent of Norman Lamont.
08:17This is the UK, 1991.
08:21I find it really rich that Mr. Besson, who, by the way, is wrongly credited for having
08:27been involved in the Soros-Drucker-Miller takedown of the Bank of England, had nothing
08:31to do with it at all.
08:33He basically is Norman Lamont now.
08:35And by that, I mean, what got the Bank of England in trouble is when you defend an artificial
08:39price that's not justified by the fundamentals, the market attacks you.
08:43And that's what he's trying to do with our bond market right now.
08:46As a matter of fact, with the whole AI complex, I would say, they're trying to prop something
08:49up which has no economic justification.
08:52It goes back to our last meeting, where people say, why don't you like AI?
08:55So look, show me the cash flows.
08:56You can't.
08:57And so I think the market's going to continue to attack the bonds.
09:01I think yields are going to continue to go up.
09:03I also think the market's going to attack AI.
09:06And I expect the whole edifice to collapse.
09:09Well, that means a lot of the S&P earnings that we've seen year to date this year.
09:14I mean, 20 handle, 30 handle in the second quarter.
09:17I'm not sure the exact math, but what I'm hearing from strategists is like at least half
09:23of that growth was AI spending related, margin related.
09:29So that doesn't bode well for the equity markets at all.
09:32I don't think so.
09:33I agree with you.
09:34You know, markets are discounting mechanisms.
09:38Wayne Gretzky, please call your office.
09:40Let's go to where the puck is going, not where it is right now.
09:43And so and then the other thing I would say in respect to where we are on there in the
09:47earnings clock right now, I find it remarkable that the market has held up as well as it
09:52has given the surge in bond yields and surge in oil prices.
09:56If Tom had come to us, Paul, two months ago and said, you know, I have a dream that one
10:00day bond yields are going to be at five and crude's going to be at wherever.
10:04What's the equity market going to do?
10:05We'd say, no, it's going to be down a lot.
10:06I want to find a question here, which is people are comfortable and I would suggest
10:13every conversation buried in paragraph six is they're comfortable because they have Phil
10:19Correa at Pioneer was brilliant on that.
10:21The inflation, the bright lights of inflation helping out and it's into this high nominal
10:27GDP.
10:28Is Mr. Warsh going to depress nominal GDP and will that be the catalyst for your just
10:34concerns?
10:34I, I, I, my crystal ball in Fed watching is no better than anybody else's.
10:39As a matter of fact, I don't spend much time on it all.
10:41I think it's a waste of time because I'm a good at it and I don't know anybody who really
10:43is.
10:44That being said, I think Warsh is in a possible position.
10:48You know, if he says, gee, this is, I love these terms that come up with, this is a dovish
10:52hike or a bullish pause or whatever it is.
10:54If he comes up with a dovish hike, Mr. Mark's going to say, oh, so you're done.
10:58So I think if he comes up with a dovish hike, rates are going up.
11:02If he says, no, we're going to do two or three rate hikes at the market's discounting, they're
11:06not going to like that.
11:07So I think he's in a thankless position.
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