All Bubbles End – So You'd Better Have Some Liquidity | David Rosenberg
Summary
Market Outlook: Rosenberg argues the market is in a price bubble with CAPE near 40, breadth narrow, and returns increasingly reliant on AI-driven leaders.
AI: Massive AI capex is propping up growth but risks classic overcapacity; if sentiment turns, he sees 40-60% downside for AI-exposed equities with negative wealth effects.
US Treasuries: He is bullish on Treasuries, expecting falling yields, a steeper curve, and roughly 10% total return potential as a defensive allocation.
Precious Metals: He views gold/silver in a secular bull market, advising adding exposure on pullbacks; gold could reach ~$6,000 with miners participating.
Defensive Positioning: Reduce portfolio beta via sector rotation into defensives, sell covered calls, maintain liquidity, and avoid chasing concentrated passive ETFs.
Japan Equities: Positive on Japan given attractive valuations and policy backdrop; he took profits earlier and is looking to re-enter.
Risks: Watch widening credit spreads, housing price deflation, labor softness, and extreme equity concentration among passive investors and aging boomers.
Key Companies: References to NVDA, MSFT, INTC, CSCO, and IBM as parallels to prior tech bubbles; not endorsements but cautionary examples of valuation risk.
Transcript
Every bubble bursts. I am 99.999% convinced we are in a market bubble. It's a price bubble. At some point, the pin will prick the bubble. This is how it's played out over the millennia. And it's the people that have the liquidity that can pick up the pieces at the bottom. Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. You know, it's easy to feel confused these days. With the stock market at all-time highs, some analysts predict the bull market has a lot longer to run as the businessfriendly policies of the new administration start adding tailwinds to the economy. Others see economic growth as imbalanced at best and worry that overall the trend for 2026 is downwards, risking recession and a material market correction. So which is it? For guidance, we turn to highly respected economist and award-winning researcher David Rosenberg, founder and president of Rosenberg Research. David, thank you so much for joining us today. >> Well, thanks for the invite, Adam. It's great to be on. >> Hey, well, great to have you on, David. And as we talked about before we turned the camera on, congrats to your Blue Jays there. Um I'm hope everybody in uh in your province there is excited at what the series might hold for them. >> Well, it's uh you know, Canada is probably not going to win the tariff war. Uh but I think that the hope north of the border is that they'll they'll win the baseball battle. So, uh, [laughter] a small small, uh, small constellation, >> a small consolation. And I should note on the day that we're talking, um, uh, we just had a, you know, another curveball in the, um, US, Canada trade discussions where, uh, I think Donald Trump just walked away from the table because of some ad that ran in uh, in Ontario. I'm sure we'll get to this this uh talking about the trade impacts uh or the the the impact of these these trade discussions, but um they the surprises are happening in real time here. Um but to the question that I raised there in the intro, David, um why don't we just roll up our sleeves and start right there? Um you know, where in your opinion is the economy headed here? Do we have a healthy economy? Is 2026 going to be a decent year? Is the momentum that uh we've had over these past several years, especially in the markets, uh going to continue or will 2026 be a different story? >> Well, um lots to unpack there. Uh so, let's talk about the economy. Uh because when you ask me uh is it healthy? I guess it's a case of what your definition of healthy is. And uh another case of beauty being in the eye of the beholder. Um I mean the the economy has definitely cooled down uh this year uh compared to what it was uh a year ago. There's no doubt about that. If your definition of healthy is that uh you know we're small positive growth and frankly I don't know how the Atlanta Fed now cast is as high as 3.9% for the third quarter. Uh but then again the St. Lewis Fed now cast which gets very little play is close to zero. Uh which is where we are. Um you know we don't have the government data right now. Uh so the emphasis is on what's referred to as you know the soft data or the survey based data. Uh and we rely a lot on the soft data too. The soft data you can argue is more anecdotal than the hard government data. But the one thing we know about the hard government data uh is that it is also subject to wild wild revisions. Uh one well revision cost uh the BLS commissioner her job if you remember a couple of months ago. uh so I I don't um bow down to the holy grail of just one number or just uh say GDP when we actually run our surveybased models on the economy and uh we've got all the survey data across the business sector and across uh the consumer sector. it actually is pointing to flat growth uh for the third quarter. Notwithstanding what the consensus is or what the Atlanta Fed Nowcast is saying, uh the amalgam of the survey data is telling you that things are as flat as a pancake or what they say in Quebec is flat as a cuda castor, which is a beaver tail. Uh and we already have, you know, Adam, we already have some data points uh for October. Uh we just got uh the complete picture for October from the University of Michigan consumer sentiment index. We've got uh data from various Fed surveys, including the venerable Philly Fed survey, and it's actually pointing to flat economic activity once again for the fourth quarter. So our readings and uh we can talk about what the stock market is telling us. Um but for the here and now uh the incoming information when we model it out is telling us the economy is flatlining. And by the way, it's not just us. Uh look at the beige book. Uh look at the Fed's beige book. You know, it's uh it's been coming out since 1970. Uh it's called beige uh because the cover is beige. Uh but every six weeks uh the Fed sends its uh staff into the field and they go across the United States, all regions, all industries. It really is the most comprehensive look at the US economy and we get that every six weeks. And we started to run some diffusion indices on the base book and we've also done some uh data science on it. And once again, uh, it's pointing to a flat economy. So if your definition of healthy is flat, well then call it healthy. U in actuality, when you look at the percent share of the US economy weighted by population that's still expanding, that share is 18%. Less than a fifth of the US economy is still in expansion mode when it comes to overall economic activity. 6 weeks ago, that share was over 40%. And the last time that you had less than 1/5if of the US economy in expansion mode, well, you got to go back to the summer of 2020 and before that, you've got to go back to the winter of 2009. Uh I don't think we actually look back at those two periods as the economy being healthy. But I guess when I'm saying that we're flatlining, maybe that's being charitable. Uh but I always look against, you know, my view versus what's priced in. Uh a flat economy uh is not priced in. Uh in fact, I would say that when you look at the multiples, a re acceleration of economic growth is actually what's being priced in. And that's where I differ from the consensus. So, you know, in answer to the first question on the economy, uh, call it flat. Uh, I think that it'll become more apparent once we get the flow of government data coming our way. You know, once the shutdown ends, it'll end at some point. Nobody knows when hopefully. >> Yeah. And and look um you know it's not as if there's nothing positive going on but the one thing that is positive going on is this AI spending boom uh which has been going on for a couple of years and it's accelerating and whatever growth we've had in the economy this year has all come directly and indirectly uh from the boom in AI spending and the fact that for building data centers that are the size of Central Park. Uh but when you strip that out, it's so lopsided. The other 92% of the economy that's not AI direct and indirect is actually stagnating. You know, how know I think about the the question about the health of the economy. Uh we don't have non-farm payrolls coming out right now. We know that uh we've had some massive revisions uh showing that the labor market is far weaker than what was uh previously portrayed. But we do have the ADP number. >> And if I'm not mistaken, uh I think that uh ADP uh was down something like 30,000 uh in the month of September. We were it's been negative three of the past four months. So the labor market, you know, that spins off 70% of total personal income comes from the labor market. Well, that's actually starting to contract. So, you know, when I get that question about the health of the economy, because people just look at their Bloomberg terminals and they say, "Well, look what the stock market's doing. The economy has got to be doing great." But what is more important than the labor market? I mean, uh, is the stock market more important than the labor market? Maybe today it is. Uh, I'm I'm not necessarily convinced that it is. Um, but the labor market is clearly sputtering. And what about the other asset class that nobody's talking about, which is the housing market? And I'm not talking about the fact that housing starts and home sales are bouncing along levels that we saw during the great recession. I'm talking about home prices. Because if you're asking me one thing that's shifted say in the past 6 to 12 months is that we have moved from a period of inflation in residential real estate which is a $50 trillion asset class on household balance sheets home prices and I look at the K Schiller index because that is the gold standard for home prices quality adjusted. It's been negative sequentially five months in a row. That is not a blip on the screen. That is a newly established pattern of deflation in residential real estate. And as I said when I was back in Mother Merrill in the opening months of 2007 when a recession was on nobody's radar screen I said there is actually never been a cycle of residential real estate deflation of any kind that's ended well. So, you know, we've got this AI boom that has really camouflaged a lot of problems in the other parts of the economy capital spending in technology and in AI related booming. Uh I do sense we're getting into a classic overcapacity stage which is normal after you've had a inflection point in the innovation curve like we're seeing right now. This is nothing abnormal, but it's really crowded out a lot of investment uh in the rest of the business sector. And then I said before, housing can't get out of its own way. Even with mortgage rates coming down, commercial real estate is trying to find this elusive bottom. Uh exports uh are really doing absolutely nothing and they have a very powerful multiplier impact on the manufacturing industry. and the manufacturing industry as you're seeing with repeated isms of below 50 even with the AI boom is in contraction mode. So it's like the uh you know aside from all that Mrs. Lincoln how was the play? So, you know, we have a very, you know, people argue that the stock market's broadened out. Well, maybe a bit, but when you're taking a look at the concentration of the stock market gains this year, still largely in a handful of stocks. You look at the concentration of earnings growth, which are doing well. Well, again, it's in a handful of stocks, just a couple of sectors. Uh, and, uh, when you're looking at the broad economy, uh, it's really once again very bifurcated. uh if if this AI spending boom ever stalls out uh we'll see the economy what it looks like standing on shore uh with the tide rolling out because I would say that there is more profound weakness beneath the surface than is commonly perceived. >> Okay. So this is this is sort of a story then of um extreme concentration. Um we've all heard of the K-shaped economy. Um you're saying look uh right now the economy is kind of at stall speed. It's going it's going flat, but it's it's really the AI horse that is keeping it from from being negative. um we're having all this capex spending that's driving enough of that 18% of the economy that's still growing. It's a frightening number um frighteningly small percentage. Um but that that's still keeping us it's still keeping the airplane level right. Um the market you're basically saying sort of a similar story largely being driven I mean it's at all-time highs but that's largely being driven by the surge in market cap by the magnificent 7 these big AI plays and then in the consumer economy you didn't mention this but I I believe it to be true and you can correct me if it's if this is wrong but the consumer spending is increasingly being made up for by the top 10% right so the the the people who the affluent people who own the stocks in those in those companies that are doing really well and keeping the markets at all-time highs because of the capex spending that we talked about. They're still really benefiting and and they're again kind of keeping retail sales at least, you know, flat. Um so it all seems to sort of revolve around this access of AI capex spending and as you mentioned every kind of technological cycle we've seen where we've we've been heavily invested in a new technology you kind of get to over capacity right everybody gets on the train they build out all the new infrastructure and whether it's railroads whether it's dark fiber whether it's whatever they end up having more than they need and then over the ensuing years maybe decades as in the case of the that you know it takes a while for that excess capacity [clears throat] to finally be getting fully used. So I guess the big question here is so where goes a where goes all this AI stuff in the next year? Um, should we just expect this rising tide of of capex spending to keep the game going or are you seeing any signs that are suggesting that it could start maybe even if not contracting just diminishing its growth impulse enough that the weight of the rest of the economy that is not doing so well will start to become a lot more visible? >> Well, you know, trying to time the peak of anything is is next to impossible. So, >> you know, I go back to I mean there's there's differences, but there are a whole lot of similarities uh to what happened in the late 1990s. And uh you know, the recession started in the beginning of 2021 and then of course NASDAQ peaked in March of 2000, the S&P closer to September of 2000. Um and uh it's never quite apparent when you're at a peak. Uh I I thought things were going to start to roll over in 1999. Uh and it kept on going for at least another year, >> right? >> Uh I was called a lunite back then. Uh and uh but you know, so firstly uh I I don't know if I can answer that question of uh of the timing uh or for how this plays out next year. Uh there's been um I mean there's been a lot of spending put into this already. And when you're taking a look at the spending that's been put in, uh the question becomes what then will the total addressable market, the TAM going to have to be to have all this make financial sense, >> right? uh and you're really talking about, you know, that you would need to have that market balloon uh uh roughly eight times to uh to a $4 trillion market size and a $30 trillion economy. And that's a sort of um arithmetic uh that ultimately didn't make sense as we were wrapping around fiber optics uh back in 1999 to early 2000. Uh it's just look, it's just knowing the environment that we're in. Uh and knowing what's out there without trying to time it, you know, because nothing that you and I do for a living is black and white. It's all various shades of gray. And you know, uh, Baron, uh, Nathan Rothschild, you know, the who was the smartest and most successful of the Rothschild brothers, famously said several hundred years ago, uh, that I didn't get wealthy by buying at the bottom or selling at the peak. I played the middle 60%. Uh, so the question is what are, you know, where are we in terms of that middle 60%. Like I think actually, >> you know, we're talking about baseball before, we're we're in extra innings. Uh and I was saying that in 1999 and uh actually we we were in extra innings and it goes back to Bob Ferrell's famous market rule to remember that exponentially rising markets go further than you think but they don't correct by going sideways. So uh we could have uh another year uh of this. I mean it's it's quite possible that all the spending continues to roll out. uh at some point it will come to an end and then we got to decide you know what is what really is the uh rate of return of the invested capital that was put in and I think that's where the disappointment is going to come because you know when you back out the the multiple what is the market telling you the market's telling you that generative AI is going to be so powerful that it's going to drive overall earnings growth in the economy from now to 2030 uh at over a 15% average annual rate >> which is double the historical norm. Uh so the question is some people might say well I think it's going to be 30%. Well then this market is for you. Some people might say well it might be closer to 8 to 10%. Well, then we are even under that optimistic scenario u overdone uh as it is. And the last time that we had these dynamics again was in the late 1990s uh during the internet boom. And you know what I find very interesting is everybody says well it's not the same today as it was back then. Back then it was all about pets.com. It was about companies with no earnings, no cash flow, uh no balance sheet, and no prospects. Uh and that was true for a lot of the coms. But that was the internet wave that engulfed everything. And so you had companies back then with real earnings, real balance sheets, real business models that are still around today like Microsoft, by the way, at the bubble peak in March of 2000. The biggest stock was not Lucent and it wasn't Pets.com. It was Microsoft and it wasn't no trillion dollar stock. It was over $400 billion. >> Mhm. you didn't even have the same degree of concentration that you have on our hands today, although it was very high back then. Uh but you know we had again a a a situation where a whole lot was priced in and not just priced in to the flashy concept companies but companies like Microsoft these giants that are still here today. Microsoft, Dell, Intel, Cisco, IBM, they all went down between 60 and 80% after the broad technology bubble burst. That was a broad technology bubble. This is a broad technology bubble. Uh, is it as big as that one? I would say probably not, but this is the second biggest bubble on record. And you know guess you know Howard Marx was on the tapes on the wires recently saying well you know you can't really call it a bubble because of the quality of the character of these companies today. Well you know you had great companies as I mentioned before that do get get caught up in a price bubble. The Nifty50 stocks of late60s these were all tremendous companies. It's a price bubble and uh I think that's the point that has to be made and the question is what valuation metric are you looking at and you could look at any one of them. You could look at price to sales, price to ebata, price to book, uh the Buffett indicator, and what I look at the most is the cape multiple, uh the Schiller PE because it's smooth over 10ear cycles, and it's got a 100 years worth of data. And that multiple is flirting at 40 right now. 40. We've expanded seven points in the past six months. Last time that happened was back in the late 1990s. uh but a 40 multiple when you look at the history uh the peak bubble multiple going back a 100 years I mean that includes 1929 that includes the nifty50 that includes the internet uh that you typically peak at around 30 and we're at 40 on this multiple it's only been this high one other time and it was in the late 1990s but you know what the bubble highs Nobody ever wants to call it a bubble because it's a very emotional term and it scares people. So, nobody likes to use the word bubble. Jeremy Granthm famously said that a price bubble on any asset or security is when you break above a two standard deviation event. One sigma is a mania, two sigma is a bubble. Well, we've been in a bubble. We've been two SDS on the Kate multiple now since the summer of 2024. So it comes down he asked me before like where are we extra innings and this is going further than we think as for Bob per Bob Ferrell. This this this is not anything new that when you when people like myself talk about a bubble environment. We're not saying things are going to come crashing down the next day. It's just understanding the market environment that you're investing in. Okay? In the sense that the wind is not at your back. The wind is in your face. And in fact the cutoff point on the K multiple is 35. Anything over 35 historically and consistently in the next 1 3 5 10 year periods the total return in the S&P 500 is negative across the board. >> Once you cross 35 uh and that's about the same time that we we crossed into the 2SD event which we've been in now for call it um you know 14 or 15 months. It's not unusual for a bubble environment to last 18 months. That would tell me actually that we're in extra innings, but that lef once again as they say on the French side of the Quebec side of the border that I think the clock is ticking uh on this bull market when you try and time how far you go to a bubble when now you have to have the conclusion or the assumption that we're in a bubble cuz your assumptions in our business drive your conclusions. Uh everything's north of an a 2SD event. It's a price bubble and not a bubble in business models. It's a price bubble. And in the answer to your question about 2026, what causes the bubble to burst? We you you never know like what caused the bubble to burst in uh and this was a housing and credit bubble back in the fall of 2007. And do you remember the exact I mean New Century Financial closed its doors. That was the cockroach in January of 2007. Well, the bad stuff didn't hit the fan for 10 months, right? What what was the Eureka moment back what what caused the NASDAQ to peak? Do you know back in March of 2000? Because I don't remember. It might have been because you started to hear news uh that orders were being cancelled and that Cisco, god forbid, which was the Nvidia of the day, missed its earnings, its EPS by a penny. So, there'll be something out there. And it's the old saying, it's not complicated. The higher they go, the harder they fall. And it's very interesting by the way that in that tech bubble period back in uh 2000, it was the mildest GDP recession on record. And the mildest GDP recession on record caused a 60% collapse in the overall stock market and an 80% Armageddon in the tech sector. the smallest GDP recession of all time because the multiple mean reverted as expectations got resolved to the reality and away from all the hope and insanity that was taking place in '98 and 99. I think we're replaying that. Uh I would say on a on a smaller scale I think general of AI is a is massive. Uh the internet to me was was bigger. Uh but and then we can go all the way back. I mean I don't know if we have to go back to the wheelbarrow from Leonardo da Vinci but you know you go back to the steam engine, the cotton, the railroads, the canals, uh electricity uh and so on and so forth. radar. Uh you get these um you get the innovation curve shifting, investors hop on board, you get the massive capex, and you know what's what else is happening is that everybody's talking about how well this is all being funded off off of balance sheets, but it's not. I mean, we know that, you know, just so far this year, there's been like something like $200 billion of uh of business borrowing in both the private and public markets to facilitate this. >> Mhm. >> So, something tells me that um well, if you're going to ask me, it's it's probably going to be some sort of credit event. Uh I'm not going to say it's going to be something from Subprime Autos, which you've seen already. >> Yeah. Um, but when they say the bond market leads, you know, people look at the treasury market, which is true, uh, but keep an eye on credit spreads, which are still very tight, uh, but have started to widen out. That that's a canary in the coal mine you want to pay attention to. Uh, the only thing I know next year that's lining up positive that I know with certainty is that next year is the peak year for fiscal stimulus from the big beautiful bill. uh which when you add up all the positives and negatives is going to add about 50 basis points to growth next year. It's not monumental. Of course, that's no taxes on tip, social security, uh depreciation allowances. Um it really adds up to 50 basis points is not huge, but the only year where the big beautiful bill adds to growth is next year. Uh but there's other things going on as well. you know, uh, how the global trade war cascades, uh, China US relations. Um, you know, because China, now we know China holds a lot of cards. Uh, rare earth's big card magnets. Um, how's this going to play out? Um, because uh, is is Xiinping going to give up his cards uh, which are these export curbs on rare earth uh, minerals? uh and if uh China continues in that direction considering how important that is for uh US US military in particular is is Trump going to go through with his 100% tariffs. Um so that's that's not going away anytime soon. uh and uh so we still have the lingering trade issue and then again what people don't talk about with respect to government policy is uh the immigration curbs uh and whether you're for them or against them the reality is that there's only two factors of production there's labor and there's capital >> and we're constricting the labor supply uh I think a lot of the employment weakness we've seen have come out of the demand side but that's we know the supply curve is shifting as well so next here. You know, this year was, you're right, a lot of curve balls. Uh we can see that no matter view on the economy, it's not strong. Uh but the stock market is strong, but you know the S&P of 100 is not GDP. Uh next year, I think is going to be another very difficult year to forecast. Um I am concerned about what the message is from one particular market which is the bond market. Uh you know I'll tell you we talking about a weird year you know I'd almost switch roles with you and ask you the question as to if I told the beginning of the year that uh you know that the 10-year Treasury note yield would rally through Fed funds and go back below 4%. Um, a lot of people weren't expecting that. Uh, or that gold even with the recent corrective behavior would be up like over 50%. I told you those two things, those two classic risk on riskoff factors that we'd have the S&P around 6700. I don't know. Uh, would that would that make sense to you? Uh, I mean, talk about divergences. But I am I am I am I am nervous. I'll tell you one thing that that you'd mentioned before because and I did too. We talked about the direct and indirect impacts of AI. AI how it's influenced the stock market. Look, we had the the S&P 100 peaked a trough in 2022 because of the Fed's aggressive tightening and the inflation. We were down 25%. And we bottom that fall just as Nvidia and Chat GPT. that marked that marked the end of that cyclical bare market. Um but you see because of the impact it's had on the equity market. Uh you've got this bulge of equity wealth amongst that top 10%. Well, they still do a lot of spending in the economy. uh even though they don't spend as big a portion of their income as the middle class and the lower income class, it's really as you said been dominated by the higher higher income echelons feeding off uh their bulging uh equity portfolios and an economic parlance terms it's called the equity wealth effect on spending. And where do you see it? Where do you see it? you see it on the personal savings rate which is nosedived nose dived between April and September. Uh and in fact without the savings rate going down because people feel more comfortable spending their after tax income when they see their monthly statements without that benefit of the stock market via the lower savings rate which is the most powerful behavioral aggregate in the national accounts. Did you know? Did you know that consumer spending in real terms would have declined 1.2% at an annual rate over the past 5 months? Instead, it's up 2.6, but not 2.6 because of organic income. Organic income is actually going down. When you look at real disposable income, it's been negative the past 5 months. If people were forced to spend based on their income, and of course income is following this weakening labor market, if the same rate had not gone down, courtesy of the ballooning stock market, 70% of GDP, otherwise known as the beloved consumer, would be negative 1.2. And I'll tell you, I'll tell you, people would be talking about a recession again. Uh, so we've camouflaged a lot of things. the AI effect on keeping the economy at least flat uh keeping the stock market in a bull market mode and this pervasive belief that it's going to be continuing because it's the permanent income hypothesis as per Milton Freriedman that drives spending people have it in you saw the number from the University of Michigan right this is this is actually I mean this is so fascinating when you're talking about dichotoies divergences that the University of Michigan Consumer Sentiment Index, which is now down what, three months in a row, it's in the lowest 1% of all time. Oh, Adam, where'd you pick that? You just you're like uh Merlin the magician. Um, so yeah, and >> I follow your work, David. >> The Well, the thing is that it's not just that. It's the the all the buying intentions components are in the bottom 5%. Uh the employment components worst 1% of all time. This is just I mean look at this chart. This is a it goes back even further. This is University of Michigan. This is one of the soft surveys I was talking about. And then people say h you know but oh but that's that's not GDP. Well, I got news for you. The reason why the NBER takes so bloody long to announce when we're in a recession is because they wait for all the revisions and people bow down to the holy grail of GDP and non-farm payrolls. We see what non-farm payrolls did to the former BLS commissioner, >> right? >> There's no there's no data series soft or hard that's uh infallible. But the various components of this consumer sentiment index uh you you have the headline here. But if you go to the buying intentions, autos, housing, big ticket, durable goods, if you go to the employment indicators, they're the lowest 5% of all time. Uh, in fact, what's really fascinating is that less than 40% fewer than 40% of American households in the survey think they're going to get a wage increase in the coming year. Fewer than 40% think that they're going to be getting there's the un look at the I mean, what does this picture tell you? Expectations of more unemployment. I got a question for you, Adam. Do you know people say to me if I talk about a recession like look, I was being charitable. I said we're flatlining. Okay, because I don't want people to think, well, Rosenberg's just a complete idiot. But maybe it's worse than flatlining. I mean, this is household perceptions of the labor market has never been here before without actually there being an NBER defined recession. Although maybe, just maybe, maybe it's different this time if you want to go if you want to go with that refrain. Um but the point major point here in the dichotomy is that the income spending intention labor market components of this survey are in the lowest 5% of all time. The headline consumer sentiment is in the lowest 1% of all time. This this thing goes back like seven decades. But 56% of respondents are still bullish on the stock market. Did you know that? That's higher than the long run average. >> I'm talking about [clears throat] the real side economic components of this thing are horrible. They're scaling against the bottom of the historical range, but the pervasive belief in the stock market is above the long run average. that's never happened before. So, there's some um deep-seated almost religious fervent belief that AI is going to be the answer to all our prayers. And then at the same time, after all, who needs the labor market when you got the stock market, >> right? >> And that's what I mean is that, you know, you're asking some great questions. We it your first comment was about these are confusing times. Now I don't know if the stock market uh I don't know if the stock market um sentiment component is in the little slides that you have there but >> I don't have that but but but it's it's it's it's inverted you know to the consumer confidence survey itself and all the real side components. So, uh there's a lot of um a lot of divergences and dichotoies uh that I think in the next year are going to have to get resolved. >> Okay. So, I got a shorter term and then a longer term question for you about this. shorter term, um it sounds like you think for whatever trigger reason, um the bloom may come off the AI bubble at some point. And we're already seeing, you know, it's it's it's rare that a week, sometimes even a day goes by where somebody pretty high up in the AI world doesn't say, you know what, this thing's in a bubble, right? Even Sam Alman said it, right? Um so uh let's assume for a moment that that does happen where uh the market just steps back and says okay you know what for reasons x y or z we just don't think we we think we pulled way too much uh of tomorrow's value into today and um it's going to take longer than we thought to get all the spoils from this. So we're going to need to to put some material haircut on today's prices. What would you expect under that scenario? Would you expect.com declines 60 to 80% in a lot of these companies? And then, you know, what would the negative wealth impact have on the economy? >> Well, I'm probably closer to 40 to 60 down than 60 to 80. >> Okay. And and I say that because uh the valuations are extremely stretched, but they were more stretched back then. So as bad as it will be, the main reversion of the multiple to the reality won't be quite as severe. Um but it still will probably be severe. Uh and the one reason why it's going to be very problematic maybe for the economy like my big concern is what are the second round impacts? What are the societal impacts? And so we have to talk about the demographics. Who talked about concentration risk? Yeah, we have uh you know look what do we have like nine trillion dollar stocks top 10 or like n trillion dollar stocks >> y >> uh 40% of the market >> I mean I I can think of three that are about 7 trillion [laughter] together right >> yeah so it's uh yeah exactly so it's a um and you've got the situation where over half the market now are these passive index ETFs these um S&P 500 uh indices uh that track the S&P 500. These passive indices, nobody needs an advisor anymore. Nobody needs a broker. They're lower cost. Um but over half the market is passive and which means that you know in the old days you know you had a broker or an adviser you had an active manager who would do the work for the retail investor they would move you into cash or they get maybe more sophisticated and maybe seeing the clouds coming in uh instead of parting with the portfolio maybe just sell some call options against it >> right buy some >> or do some sector rotation to reduce the overall beta of the portfolio. Who's doing that for monpod kettle today? >> Uh they're just blindly uh investing in uh this concentrated index not even knowing what it is that they have in there. Like the era of doing any fundamental analysis um looking at balance sheets, income statements is over. Well, just by and the reality is that and this is where the hubris comes in is that for the past few years it's really worked well. So then extrapolation comes in and I've seen this before. I've been doing this 40 years and the danger at a bubble peak to extrapolate. Remember who did the extrapolating no matter how smart you are was Chuck Prince >> you know back in June 2007 who told us we should just stay dancing till the music stops. But I don't even think he knew the music was going to stop 3 months later. So we have concentration risk in the market. We have concentration risk in the sense that over half the market now John Bolo the 1970s I mean the pioneer at Vanguard with the you know the Vanguard ETF said said this this will never become more than 20% of the market. It's now over 50%. And then on top of that concentration risk layer layer on concentration risk we have 72% of the US household financial asset mix in equities. Yeah that's higher than we had in the late 1990s. It's a lot higher than it was back in 2007, but that was more of a housing and credit bubble than an equity bubble, but everything got caught up in it. All these markets are somehow correlated. Only 8% of the household portfolio, Adam, is in bonds. Is in the is in the stuff that Lazy Hunt and Van Hoington do for a living, 8%. But like, who who wants bonds really? Are you going to go to your neighbor's cocktail party and talk about your treasury position? I mean, don't you want to make friends and have people talk to you? I mean, so boring bonds 8 72% uh the rest basically mostly in cash 72%. So the but on top of that I mentioned the demographics. Look, uh, over 60% of the baby boomer asset mix is in equities. >> So, double what it should be. Well, you know, you start to think that. So, we're going to stress test this. That's what I mean is that I don't spend my time. No, I write it daily. So, I'm in the current analysis. However, the bulk of what I spend my day doing is thinking not about what are the headlines today or tomorrow. What will the headlines be? 3 6 9 and 12 months from now. That is what consumes me when people say what keeps you up at night. It's what are the headlines going to say between now and the next 12 months? >> And I I'm really worried. I'm worried about the complacency. I'm worried about the hubris. I'm worried about the fact that the reason we got to a 72% share of the asset mix in risk is because nobody took any profits. Nobody took chips off the table. Nobody diversified. Nobody rebalanced in the past three years. That has me nervous. And we're going to stress test the system. When I say the system, I'm not talking about systemic risk. I'm talking about society. I'm talking about the fact that for the first time, now look, you know as well as I do, we will have a bare market. The market cycle is not dead. The business cycle is not dead. Mother Nature is not dead. And I don't know when the next bare market's going to start. I know that we're a lot closer to it today than we've been any other time in the past three years. And what has me nervous is the positioning the positioning of the general retail investing public. And when I talk about this to people in a room, Adam, their eyes just glaze over or they're looking out the window. Um and um but the median age of the boomer is 70. Okay. You know, back in um the tech rack it was 45 70 today. The first of the boomers are turning 80 and they have way too much risk >> and and way too little time. >> They're not they're not they're not they're not my kids, right, in their 20s and 30s. Like time is not on their side. So, um, a lot of stuff is going to happen. Okay. Uh, and and and don't forget what stress will this put on the social security system. Uh, when people see that what they'll have to recalibrate, uh, their golden years in retirement to a totally different lifestyle expectation they have on their minds right now. That's going to have, you see, and the problem here is that you're as an economist, you're always thinking about second round impacts. I think I'm probably tell you the truth more worried about the second round impacts of the stuff I'm talking about right now than I am about the impact of the overinvestment in AI which of course is is natural if you don't get over investment haven't seen it already it's the first time that's ever happened because that is a natural fallout uh from this type of a shift we have in in the technology curve there's nothing we're seeing Adam that we haven't seen before right I think That's true. Um, and so Erggo, it's going to play out much the same. It's just that from the demographics and the concentration risk on household portfolios, especially the boomers, the 78 million picking a python that's driven everything in our lifetime, right? From politics to economics to finance. Well, we're going to stress test society and then there'll be second impacts. This is what could cause this when we get the recession and the bare market could cause a double waterfall uh from the impact this is going to have on the savings and spending function for a very wide swad population called the baby boomer class of which I'm one of them. I'm just not positioned the way everybody else is. >> All right. So, um this is a rich vein here. So, um, your your warning of us sort of sleepwalking into the next bare market. Um, we're we're not, as you said, you try to warn people about it and their eyes just glaze over because David, of course, the market's just going to go up forever. And as a baby boomer, why wouldn't I have even more of my wealth in the stock market because it only goes up, right? Um, so I totally get the risk that you're talking about there. Um, and the uh the the the ripple effect that would have across the economy and and one of the things I've sort of warned people about too is like we talk about this massive wealth transfer that's going to happen from the boomer generation to their children. And that will happen, but I'm not sure that wealth transfer is going to be nearly as big as everybody's counting on for two reasons. One, a lot of it could get vaporized in what you're talking about should that happen. And then secondly, with, you know, costs of all sorts of things going up, especially medical care and end of life medical care, and the boomers seem to be really enjoying spending this money, >> um, that there just might be a lot less left over of the 80 trillion or whatever it is right now. Maybe only 40 trillion gets passed along. It's still a lot, but it's not nearly as much as right now everyone's just assuming is going to make the transfer. So, I do agree that's a really big risk. Let me ask my longer term question for you. um which is uh in addition to that risk right now the societal trajectory is that that top 10% is taking more and more of the spoils right so even though the economy is you know flattish right now to more and more people it feels recessionary right yet we haven't had um uh you know the the large unemployment ment, you know, large job layoffs and stuff that we might get if we end up going into the type of recession you think could ensue from the popping of the AI bubble. Um, but but let me ask you this. um with that being sort of the trajectory where um this this K-shaped economy has fewer and fewer people at the top with more and more of the spoils and so more and more of the people at the bottom get less and less of of the fruits of of the economy. Um and let's assume AI does what it's it's uh everyone expects it to do, which is to start really displacing labor, right? How worried are you about kind of the trajectory of society here where it does seem to be coming increasingly even in capitalist societies like America and Canada that it's really becoming a a a system of halves and have nots with with a fewer and fewer people being fortunate enough to be in the halves category. Well, I I think that you made a really great point and um this K-shaped economy that you're talking about is um has been with us for decades and it's getting worse. No, I I might be Canadian. Uh but I'm a hardcore capitalist. Okay, I'm a capitalist with a heart, >> but I am a I am a capitalist and want to be very careful that you don't get to extremes. Uh, you know, when I talk about income or wealth inequalities to people, they get the wrong idea. They think I'm turning into a socialist. But, you know, democracy and capitalism are always dancing on a very tenuous pin and uh it's a very fragile relationship. Uh I mean look what's happening. Look at the New York mayoral race. >> Mhm. >> And that's that that's spread. It's going to spread. Uh you're seeing it in other cities too. There is a uh a wide divide in the United States. Uh and uh you once again can't extrapolate between, you know, Donald Trump and the Republicans empowering Congress today to what that's going to look like two or four years from now. Um and so when you're looking at what's happening in New York City and imagine that we would have ever had and Madame is going to win probably in a landslide, I think it's it's too late. People have made up their minds. a socialist mayor in the world's financial capital. I mean, you and I have been talking about extremes and divergences throughout this whole call. Uh, think about that for a second and then think about where that's going to lead us, but think about what brought us here. And, you know, frankly, um, I got a lot of hate mail from a report that I wrote several months ago because I was always a Ronald Reagan disciple. uh and I was looking through reams of data uh post World War II and I was always a big advocate for Ronald Reagan and for the tax reform and I would say that I was probably wrong uh on that aspect of it because it was in the early 80s where that income disparity really started to accelerate and it didn't matter who was in office democ rat or Republican and it just kept on going under Bill Clinton uh Bill Clinton um you know cut capital gains taxes with Bob Rubin and um under Obama. Obama had I think more Goldman Sachs people in his cabinet than any other president in history. Uh, and uh, we got Donald Trump who's uh, it's hard to really pin him as in any specific corner, but the first thing he did when he got into power in Trump 1.0 was go through this uh, huge corporate income tax cut, which everybody loved. The point I'm making is that up until Reagan got elected and you looked at um productivity growth per year from like 1950 to 1986, which is when the the Tax Reform Act was passed. And productivity growth averaged 2% per year. and real wages average 2% per year. So the proletariat were at least getting their marginal returns from the sweat they were putting in. They were getting paid their productivity and the owners of capital were getting an annualized growth of 2% per year in real terms. So everybody was sharing in the spoils equally owners of capital and labor. And then something happened in the mid1 1980s. Okay. So what we're talking about is something that's not new. It's just when you compound things every year for four decades, it gets too big to manage. So what's happened is that since the mid1 1980s and it's getting worse is that productivity growth hasn't slowed. Do you know without the with the internet or Microsoft going public and all the Apple iPhones, what are we up to 200 of them? uh productivity growth since the mid 80s has averaged 2% per year. >> Right. But the >> real real workbased pay has only gone up 1% per year. >> Exactly. Yeah. Absolutely. >> So what's happened is that that's why when you look at these things called like economists look at labor market experts look at genie coefficients these classic measures of income inequality. It's out of control. It has me nervous because we've hit an extreme an extreme. And so there's something wrong, I got to say, with the compensation, incentive, and tax system, and it's going to blow up. And you're 100% right. So now we have the situation where um you got this not just K-shaped, this is capital K. And >> yeah, >> this is not a time to put your CFA hat on, okay? This is a time to understand history and to understand the fragile relationship between capitalism and democracy. Right? And we can't let things as capitalists. You see this is exactly what Markx and Engles were talking about. Okay? They were talking about that capitalism will end up eating itself. And once again, this is tough to a Wall Street crowd. This is a tough message. you know, we want all we want all we want our spoils. Um, but it's it's reached um a level of unevenness that is really unhealthy and unstable. Um, and so as it stands right now, 100% right. I mean, you're seeing it like I said before, you know, what's driving the economy right now is the stock market. I I made a mistake before. I said the S&P is not the GDP. Well, the S&P the the wealth effect on spending is virtually unprecedented. That's what I said before. The savings rate's dropping like a stone. Um because people believe that the stock of equities and this is in a certain percentage of the population is going to be their golden goose and I'm going to spend all my income now. And that's how you get this uh this poten village this illusion that we got this consumer resilience in an environment and I say this over and again consumer resilience in an environment where real disposable income think about that real disposable income a lot of that income is what you know what politicians call the quotes the hardworking American it's you know that's how you run your campaigns on real incomes are going down part of that I think is of course that inflation stop falling at the margin. Maybe it's gone up or it's been stable, but nominal incomes are disinflating. So, real incomes after tax have been going. Most people don't even know that. They don't even know that real after tax income from April to today has actually been negative, but yet consumer spending has been positive. Positive 2.6 at an annual rate, not a small number because of the wealth effect. >> That's the tip right there. Yeah. That's the top of the K driving that. Yeah. So, um, all right, David. Well, look, um, I very much appreciate you going into this territory with me and we could talk about it for a lot longer. And actually, if you don't mind, maybe next time you come on, we'll reserve a little bit more time to talk about sort of, you know, if you were in charge, what type of reforms you would like to see to keep capitalism from going off the rails here. Is as I'm sort of thinking of you as a capitalist with a heart who'd like to keep his head, right? >> [laughter] >> Um >> unlike Maria Unlike Maria Antuinette. >> Exactly. Exactly. So how do we how do we all make sure that uh you know this doesn't end up in in a a French Revolution style ending here. Um and I just want to note too everything you're saying is if the status quo trajectory continues and and I I asked you a question which we don't really have time to get into but is what if AI delivers on its promise of like replacing millions of workers, right? It just makes things way even worse, right? It it it definitely it definitely does. And that this is and I've been writing about it, Adam, just quickly. AI is not going to increase output. When we're talking about increasing is it AI is not making us smarter, right? Um it's not making us smarter. Do do do do do do do do do do do do do do do do do do do do do do you know that um uh I got my own staff telling me that they they have uh they're seeing I'm not going to say who but other people that they they could tell they they run these I don't know these models that can tell how much of a paper was written by AI. Do you do you know this? You can actually tell >> um >> it's making it it's speeding up speeding us up. It's making us faster. Okay. AI is not making us smarter. When they talk about the productivity boom, it's not about that output is going to be accelerating. It's the denominator. It's going to be labor saving. Labor saving. And that was the one thing I got to say in that University of Michigan index, and I don't think I had the chart ready for you. However, one in five Americans now fear a job loss over the next five years. So, what's keeping this glue together for the consumer is that top 10% being fueled by the stock market. Outside of that, we probably would be in a consumer recession right now. All right. Well, okay. Well, look, just to to get down to brass tax here, which is we don't know whether we're in [clears throat] early 1999 or heading into 2001, right? So, does the party in the stock market continue for another year plus from here or not? So, how does all this in your mind translate into, you know, is there an investing strategy that that you think is appropriate given the moment we're in, given what we know? >> Yes, there is. >> I don't get the sense from you. >> I don't Well, the thing is that I I look, I I don't It's like uh if somebody says, let's say your greatgrandfather said, "I got out of the market in 1928." Would you say to him, "What a you're such a You you missed the last leg in 1929. You're such an idiot. But if I told you like the thing is that when I was at Merryill, I was a goat. Then I was a hero, but I was two years early. >> But you know, there's the thing about bull markets and you build up the hubris over time because bull markets are escalators going up over time and elevators, bare markets are elevators that just go straight down. And then we got the two because you know we're talking a lot of you know we spend most of this time talking about big picture things and fundamentals and divergences and dichotoies. Sentiment is so important. Human behavior. I'll tell you the one thing AI is not going to change any more than the internet changed or anything more than transistors changed or semiconductors is these two basic emotions of fear and greed. And I'll tell you after spending time at Mother Merrill in 0809 in Midtown that fear is a more primal greed. But we are in Gordon Gecko right now. I'm going to tell you right now, um, nobody's going to be able to time this thing. I am playing the Baron Nathan Rothschild playing the middle of the cycle. I played the middle of the cycle. Uh, and no matter no matter what your view is on what inning we're in, Adam, we are not in the middle 60%. >> So, I definitely am not recommending people right now chasing nickels in front of the steamroller. Okay? No, I would not be doing that. But if you don't want to partner with your beloved portfolio, people fall in love with your portfolio. I say fall in love with your partner, your portfolio like your forecast won't always love you back. But I'd say I would be selling call options. If I don't want to sell my equity portfolio, sell call options. Other than that, do some sector rotation to at least get the beta citicality and risk down. That means maybe having more of a focus on utilities and consumer staples and healthcare. I have no problem with that. Um I think I I I like the Treasury market. I think bond yields will be going down. The yield curve will steepen. I think that in the next year actually when you look at the convexity and how far rates can come down across the curve, you probably could make 10% uh in the bond market. I got to tell you, Adam, when I tell people you can make 10% of the bond market, when I tell that to people today, you know what they say to me? >> They on. >> Is that all you got? >> Yeah. >> Uh, and so, and I would be saying, look, um, we're we're going through a a very much needed correction in gold and silver right now. It probably is going to continue, [snorts] but that is a secular bull market. You're going to for those people that were kicking themselves and missed uh the there's been multiple legs. I mean the bull market in gold actually started in uh uh late 1999 with the Washington agreement. Um this has been a long secular bull market in gold. Just people recently have woken up to it. Um but I think that a lot of the work we've done is saying that gold the the peak in gold will go to or through $6,000 an ounce. I got my reasons why. Uh silver will go along for the ride. Um so uh we like the precious metals complex. You're going to you're getting another opportunity right now. So you can actually uh I think add some exposure uh to gold and silver and the miners during this corrective period. Uh I'd say that don't be zero8 equities. I'm not zero8 equities. I just have a very low waiting and it's very concentrated in the most defensive parts uh of the market. And I'd be diversifying geographically too. The valuations when I'm talking about there being bubbles. There's no bubble in in Japan. I'll tell you right now, Japan with this new coalition government uh because we were in the Japanese equity market. We took profits uh several months ago. Now we're looking at getting back in. There's other parts of the world uh that look very interesting to us. Global aerospace defense that's got visibility. Uh that's an area uh Canadian pipelines. So, I think what you want to do is get out of your passive ETFs, which is just blind investing. You don't want to be doing that anywhere close to a peak. And when I divine close, I don't care if it's within a year. Be thematic and invest in your highest conviction ideas and in areas that have visibility that won't kill you if the AI trade rolls over or we go into a bare market. So I would say just basically manage your risk. Manage your risk. That's the problem with this passive ETF investing. The era of managing risk. Uh I almost feel like telling young people why do your CFA? >> Uh they they teach you about riskadjusted returns. People don't care about that. They care about gross returns and driving 300 miles an hour down the freeway. That is not how you build wealth over time. And I would just say one other thing. One other thing. survival's kit to investing in a bubble is make sure you have liquidity. Have liquidity because every bubble bursts I am 99.999% convinced we are in a market bubble. It's a price bubble. At some point the pin will prick the bubble. This is how it's played out over the millennia. And it's the people that have liquidity that can pick up the pieces at the bottom. >> That that's well that's how you build that. Well, that is how you build wealth over time. You know, you're not trying to time the market, but you're trying to um at least like I said, nothing's black or white, but you got to play the shades of gray. And as I said, you know, the wind, you know, when you're at a 2SD multiple across the board, >> um, the wind's in your face. Make sure that you have a liquidity buffer. Okay. I would suggest that I'm not going to time it, but in the next 12 months, you're going to wish that you did. >> Okay? And and just to bring it back to Baron von Rothschild again, so he said, "Play the middle of the cycle. That's how you get rich over time." He's also the one that we said buy when there's blood in the streets and that's you can only do if you have liquidity. >> That's 100% right. Yeah. Play play the middle 60%. That that is prudent diligent investing. It's hard it's hard to preach because of the Gordon Gecko factor, right? Um and the extrapolation which you always get at Bubble Peaks into the future and we're living it. Look, it's not as if I I'm Look, I've been doing this 400 years, but I've been doing it for 40 years, so I've been through this rodeo before. >> Mhm. >> Um, so, uh, I'd say that there's ways you can protect the portfolio without having to sell everything. Uh, there's ways that you can influence the beta and cyclicality of the portfolio. Uh, without actually having to take down your equity position, just re just just reposition within your existing position. But uh I would say um bonds I I would be hiding in bonds. When I hear people saying 10% you expect 10% in in the total return in the 10-year Treasury and I get back that's all you got. That is when you know that we are in a really funky unsustainable sentiment driven market environment. >> All right. Well, we will have to leave it on there. David, uh, thank you so much, folks. Please express your appreciation for David giving, um, so much of his his overall analysis, but also, uh, really detailing out a great way to stay riskmanaged in a a uh, you know, highly uh, uncertain and perhaps vulnerable market like this. Um, but but please show them that by hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. David, I can't thank you enough, my friend. Great job this time. And um look, we'll have you back on um either very late this year or early in Q1 to kind of call an audible for us on where you see things. >> Excellent. >> All right. Very much appreciate it, my friend. Everybody else, thanks so much for watching.
All Bubbles End – So You'd Better Have Some Liquidity | David Rosenberg
Summary
Transcript
Every bubble bursts. I am 99.999% convinced we are in a market bubble. It's a price bubble. At some point, the pin will prick the bubble. This is how it's played out over the millennia. And it's the people that have the liquidity that can pick up the pieces at the bottom. Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. You know, it's easy to feel confused these days. With the stock market at all-time highs, some analysts predict the bull market has a lot longer to run as the businessfriendly policies of the new administration start adding tailwinds to the economy. Others see economic growth as imbalanced at best and worry that overall the trend for 2026 is downwards, risking recession and a material market correction. So which is it? For guidance, we turn to highly respected economist and award-winning researcher David Rosenberg, founder and president of Rosenberg Research. David, thank you so much for joining us today. >> Well, thanks for the invite, Adam. It's great to be on. >> Hey, well, great to have you on, David. And as we talked about before we turned the camera on, congrats to your Blue Jays there. Um I'm hope everybody in uh in your province there is excited at what the series might hold for them. >> Well, it's uh you know, Canada is probably not going to win the tariff war. Uh but I think that the hope north of the border is that they'll they'll win the baseball battle. So, uh, [laughter] a small small, uh, small constellation, >> a small consolation. And I should note on the day that we're talking, um, uh, we just had a, you know, another curveball in the, um, US, Canada trade discussions where, uh, I think Donald Trump just walked away from the table because of some ad that ran in uh, in Ontario. I'm sure we'll get to this this uh talking about the trade impacts uh or the the the impact of these these trade discussions, but um they the surprises are happening in real time here. Um but to the question that I raised there in the intro, David, um why don't we just roll up our sleeves and start right there? Um you know, where in your opinion is the economy headed here? Do we have a healthy economy? Is 2026 going to be a decent year? Is the momentum that uh we've had over these past several years, especially in the markets, uh going to continue or will 2026 be a different story? >> Well, um lots to unpack there. Uh so, let's talk about the economy. Uh because when you ask me uh is it healthy? I guess it's a case of what your definition of healthy is. And uh another case of beauty being in the eye of the beholder. Um I mean the the economy has definitely cooled down uh this year uh compared to what it was uh a year ago. There's no doubt about that. If your definition of healthy is that uh you know we're small positive growth and frankly I don't know how the Atlanta Fed now cast is as high as 3.9% for the third quarter. Uh but then again the St. Lewis Fed now cast which gets very little play is close to zero. Uh which is where we are. Um you know we don't have the government data right now. Uh so the emphasis is on what's referred to as you know the soft data or the survey based data. Uh and we rely a lot on the soft data too. The soft data you can argue is more anecdotal than the hard government data. But the one thing we know about the hard government data uh is that it is also subject to wild wild revisions. Uh one well revision cost uh the BLS commissioner her job if you remember a couple of months ago. uh so I I don't um bow down to the holy grail of just one number or just uh say GDP when we actually run our surveybased models on the economy and uh we've got all the survey data across the business sector and across uh the consumer sector. it actually is pointing to flat growth uh for the third quarter. Notwithstanding what the consensus is or what the Atlanta Fed Nowcast is saying, uh the amalgam of the survey data is telling you that things are as flat as a pancake or what they say in Quebec is flat as a cuda castor, which is a beaver tail. Uh and we already have, you know, Adam, we already have some data points uh for October. Uh we just got uh the complete picture for October from the University of Michigan consumer sentiment index. We've got uh data from various Fed surveys, including the venerable Philly Fed survey, and it's actually pointing to flat economic activity once again for the fourth quarter. So our readings and uh we can talk about what the stock market is telling us. Um but for the here and now uh the incoming information when we model it out is telling us the economy is flatlining. And by the way, it's not just us. Uh look at the beige book. Uh look at the Fed's beige book. You know, it's uh it's been coming out since 1970. Uh it's called beige uh because the cover is beige. Uh but every six weeks uh the Fed sends its uh staff into the field and they go across the United States, all regions, all industries. It really is the most comprehensive look at the US economy and we get that every six weeks. And we started to run some diffusion indices on the base book and we've also done some uh data science on it. And once again, uh, it's pointing to a flat economy. So if your definition of healthy is flat, well then call it healthy. U in actuality, when you look at the percent share of the US economy weighted by population that's still expanding, that share is 18%. Less than a fifth of the US economy is still in expansion mode when it comes to overall economic activity. 6 weeks ago, that share was over 40%. And the last time that you had less than 1/5if of the US economy in expansion mode, well, you got to go back to the summer of 2020 and before that, you've got to go back to the winter of 2009. Uh I don't think we actually look back at those two periods as the economy being healthy. But I guess when I'm saying that we're flatlining, maybe that's being charitable. Uh but I always look against, you know, my view versus what's priced in. Uh a flat economy uh is not priced in. Uh in fact, I would say that when you look at the multiples, a re acceleration of economic growth is actually what's being priced in. And that's where I differ from the consensus. So, you know, in answer to the first question on the economy, uh, call it flat. Uh, I think that it'll become more apparent once we get the flow of government data coming our way. You know, once the shutdown ends, it'll end at some point. Nobody knows when hopefully. >> Yeah. And and look um you know it's not as if there's nothing positive going on but the one thing that is positive going on is this AI spending boom uh which has been going on for a couple of years and it's accelerating and whatever growth we've had in the economy this year has all come directly and indirectly uh from the boom in AI spending and the fact that for building data centers that are the size of Central Park. Uh but when you strip that out, it's so lopsided. The other 92% of the economy that's not AI direct and indirect is actually stagnating. You know, how know I think about the the question about the health of the economy. Uh we don't have non-farm payrolls coming out right now. We know that uh we've had some massive revisions uh showing that the labor market is far weaker than what was uh previously portrayed. But we do have the ADP number. >> And if I'm not mistaken, uh I think that uh ADP uh was down something like 30,000 uh in the month of September. We were it's been negative three of the past four months. So the labor market, you know, that spins off 70% of total personal income comes from the labor market. Well, that's actually starting to contract. So, you know, when I get that question about the health of the economy, because people just look at their Bloomberg terminals and they say, "Well, look what the stock market's doing. The economy has got to be doing great." But what is more important than the labor market? I mean, uh, is the stock market more important than the labor market? Maybe today it is. Uh, I'm I'm not necessarily convinced that it is. Um, but the labor market is clearly sputtering. And what about the other asset class that nobody's talking about, which is the housing market? And I'm not talking about the fact that housing starts and home sales are bouncing along levels that we saw during the great recession. I'm talking about home prices. Because if you're asking me one thing that's shifted say in the past 6 to 12 months is that we have moved from a period of inflation in residential real estate which is a $50 trillion asset class on household balance sheets home prices and I look at the K Schiller index because that is the gold standard for home prices quality adjusted. It's been negative sequentially five months in a row. That is not a blip on the screen. That is a newly established pattern of deflation in residential real estate. And as I said when I was back in Mother Merrill in the opening months of 2007 when a recession was on nobody's radar screen I said there is actually never been a cycle of residential real estate deflation of any kind that's ended well. So, you know, we've got this AI boom that has really camouflaged a lot of problems in the other parts of the economy capital spending in technology and in AI related booming. Uh I do sense we're getting into a classic overcapacity stage which is normal after you've had a inflection point in the innovation curve like we're seeing right now. This is nothing abnormal, but it's really crowded out a lot of investment uh in the rest of the business sector. And then I said before, housing can't get out of its own way. Even with mortgage rates coming down, commercial real estate is trying to find this elusive bottom. Uh exports uh are really doing absolutely nothing and they have a very powerful multiplier impact on the manufacturing industry. and the manufacturing industry as you're seeing with repeated isms of below 50 even with the AI boom is in contraction mode. So it's like the uh you know aside from all that Mrs. Lincoln how was the play? So, you know, we have a very, you know, people argue that the stock market's broadened out. Well, maybe a bit, but when you're taking a look at the concentration of the stock market gains this year, still largely in a handful of stocks. You look at the concentration of earnings growth, which are doing well. Well, again, it's in a handful of stocks, just a couple of sectors. Uh, and, uh, when you're looking at the broad economy, uh, it's really once again very bifurcated. uh if if this AI spending boom ever stalls out uh we'll see the economy what it looks like standing on shore uh with the tide rolling out because I would say that there is more profound weakness beneath the surface than is commonly perceived. >> Okay. So this is this is sort of a story then of um extreme concentration. Um we've all heard of the K-shaped economy. Um you're saying look uh right now the economy is kind of at stall speed. It's going it's going flat, but it's it's really the AI horse that is keeping it from from being negative. um we're having all this capex spending that's driving enough of that 18% of the economy that's still growing. It's a frightening number um frighteningly small percentage. Um but that that's still keeping us it's still keeping the airplane level right. Um the market you're basically saying sort of a similar story largely being driven I mean it's at all-time highs but that's largely being driven by the surge in market cap by the magnificent 7 these big AI plays and then in the consumer economy you didn't mention this but I I believe it to be true and you can correct me if it's if this is wrong but the consumer spending is increasingly being made up for by the top 10% right so the the the people who the affluent people who own the stocks in those in those companies that are doing really well and keeping the markets at all-time highs because of the capex spending that we talked about. They're still really benefiting and and they're again kind of keeping retail sales at least, you know, flat. Um so it all seems to sort of revolve around this access of AI capex spending and as you mentioned every kind of technological cycle we've seen where we've we've been heavily invested in a new technology you kind of get to over capacity right everybody gets on the train they build out all the new infrastructure and whether it's railroads whether it's dark fiber whether it's whatever they end up having more than they need and then over the ensuing years maybe decades as in the case of the that you know it takes a while for that excess capacity [clears throat] to finally be getting fully used. So I guess the big question here is so where goes a where goes all this AI stuff in the next year? Um, should we just expect this rising tide of of capex spending to keep the game going or are you seeing any signs that are suggesting that it could start maybe even if not contracting just diminishing its growth impulse enough that the weight of the rest of the economy that is not doing so well will start to become a lot more visible? >> Well, you know, trying to time the peak of anything is is next to impossible. So, >> you know, I go back to I mean there's there's differences, but there are a whole lot of similarities uh to what happened in the late 1990s. And uh you know, the recession started in the beginning of 2021 and then of course NASDAQ peaked in March of 2000, the S&P closer to September of 2000. Um and uh it's never quite apparent when you're at a peak. Uh I I thought things were going to start to roll over in 1999. Uh and it kept on going for at least another year, >> right? >> Uh I was called a lunite back then. Uh and uh but you know, so firstly uh I I don't know if I can answer that question of uh of the timing uh or for how this plays out next year. Uh there's been um I mean there's been a lot of spending put into this already. And when you're taking a look at the spending that's been put in, uh the question becomes what then will the total addressable market, the TAM going to have to be to have all this make financial sense, >> right? uh and you're really talking about, you know, that you would need to have that market balloon uh uh roughly eight times to uh to a $4 trillion market size and a $30 trillion economy. And that's a sort of um arithmetic uh that ultimately didn't make sense as we were wrapping around fiber optics uh back in 1999 to early 2000. Uh it's just look, it's just knowing the environment that we're in. Uh and knowing what's out there without trying to time it, you know, because nothing that you and I do for a living is black and white. It's all various shades of gray. And you know, uh, Baron, uh, Nathan Rothschild, you know, the who was the smartest and most successful of the Rothschild brothers, famously said several hundred years ago, uh, that I didn't get wealthy by buying at the bottom or selling at the peak. I played the middle 60%. Uh, so the question is what are, you know, where are we in terms of that middle 60%. Like I think actually, >> you know, we're talking about baseball before, we're we're in extra innings. Uh and I was saying that in 1999 and uh actually we we were in extra innings and it goes back to Bob Ferrell's famous market rule to remember that exponentially rising markets go further than you think but they don't correct by going sideways. So uh we could have uh another year uh of this. I mean it's it's quite possible that all the spending continues to roll out. uh at some point it will come to an end and then we got to decide you know what is what really is the uh rate of return of the invested capital that was put in and I think that's where the disappointment is going to come because you know when you back out the the multiple what is the market telling you the market's telling you that generative AI is going to be so powerful that it's going to drive overall earnings growth in the economy from now to 2030 uh at over a 15% average annual rate >> which is double the historical norm. Uh so the question is some people might say well I think it's going to be 30%. Well then this market is for you. Some people might say well it might be closer to 8 to 10%. Well, then we are even under that optimistic scenario u overdone uh as it is. And the last time that we had these dynamics again was in the late 1990s uh during the internet boom. And you know what I find very interesting is everybody says well it's not the same today as it was back then. Back then it was all about pets.com. It was about companies with no earnings, no cash flow, uh no balance sheet, and no prospects. Uh and that was true for a lot of the coms. But that was the internet wave that engulfed everything. And so you had companies back then with real earnings, real balance sheets, real business models that are still around today like Microsoft, by the way, at the bubble peak in March of 2000. The biggest stock was not Lucent and it wasn't Pets.com. It was Microsoft and it wasn't no trillion dollar stock. It was over $400 billion. >> Mhm. you didn't even have the same degree of concentration that you have on our hands today, although it was very high back then. Uh but you know we had again a a a situation where a whole lot was priced in and not just priced in to the flashy concept companies but companies like Microsoft these giants that are still here today. Microsoft, Dell, Intel, Cisco, IBM, they all went down between 60 and 80% after the broad technology bubble burst. That was a broad technology bubble. This is a broad technology bubble. Uh, is it as big as that one? I would say probably not, but this is the second biggest bubble on record. And you know guess you know Howard Marx was on the tapes on the wires recently saying well you know you can't really call it a bubble because of the quality of the character of these companies today. Well you know you had great companies as I mentioned before that do get get caught up in a price bubble. The Nifty50 stocks of late60s these were all tremendous companies. It's a price bubble and uh I think that's the point that has to be made and the question is what valuation metric are you looking at and you could look at any one of them. You could look at price to sales, price to ebata, price to book, uh the Buffett indicator, and what I look at the most is the cape multiple, uh the Schiller PE because it's smooth over 10ear cycles, and it's got a 100 years worth of data. And that multiple is flirting at 40 right now. 40. We've expanded seven points in the past six months. Last time that happened was back in the late 1990s. uh but a 40 multiple when you look at the history uh the peak bubble multiple going back a 100 years I mean that includes 1929 that includes the nifty50 that includes the internet uh that you typically peak at around 30 and we're at 40 on this multiple it's only been this high one other time and it was in the late 1990s but you know what the bubble highs Nobody ever wants to call it a bubble because it's a very emotional term and it scares people. So, nobody likes to use the word bubble. Jeremy Granthm famously said that a price bubble on any asset or security is when you break above a two standard deviation event. One sigma is a mania, two sigma is a bubble. Well, we've been in a bubble. We've been two SDS on the Kate multiple now since the summer of 2024. So it comes down he asked me before like where are we extra innings and this is going further than we think as for Bob per Bob Ferrell. This this this is not anything new that when you when people like myself talk about a bubble environment. We're not saying things are going to come crashing down the next day. It's just understanding the market environment that you're investing in. Okay? In the sense that the wind is not at your back. The wind is in your face. And in fact the cutoff point on the K multiple is 35. Anything over 35 historically and consistently in the next 1 3 5 10 year periods the total return in the S&P 500 is negative across the board. >> Once you cross 35 uh and that's about the same time that we we crossed into the 2SD event which we've been in now for call it um you know 14 or 15 months. It's not unusual for a bubble environment to last 18 months. That would tell me actually that we're in extra innings, but that lef once again as they say on the French side of the Quebec side of the border that I think the clock is ticking uh on this bull market when you try and time how far you go to a bubble when now you have to have the conclusion or the assumption that we're in a bubble cuz your assumptions in our business drive your conclusions. Uh everything's north of an a 2SD event. It's a price bubble and not a bubble in business models. It's a price bubble. And in the answer to your question about 2026, what causes the bubble to burst? We you you never know like what caused the bubble to burst in uh and this was a housing and credit bubble back in the fall of 2007. And do you remember the exact I mean New Century Financial closed its doors. That was the cockroach in January of 2007. Well, the bad stuff didn't hit the fan for 10 months, right? What what was the Eureka moment back what what caused the NASDAQ to peak? Do you know back in March of 2000? Because I don't remember. It might have been because you started to hear news uh that orders were being cancelled and that Cisco, god forbid, which was the Nvidia of the day, missed its earnings, its EPS by a penny. So, there'll be something out there. And it's the old saying, it's not complicated. The higher they go, the harder they fall. And it's very interesting by the way that in that tech bubble period back in uh 2000, it was the mildest GDP recession on record. And the mildest GDP recession on record caused a 60% collapse in the overall stock market and an 80% Armageddon in the tech sector. the smallest GDP recession of all time because the multiple mean reverted as expectations got resolved to the reality and away from all the hope and insanity that was taking place in '98 and 99. I think we're replaying that. Uh I would say on a on a smaller scale I think general of AI is a is massive. Uh the internet to me was was bigger. Uh but and then we can go all the way back. I mean I don't know if we have to go back to the wheelbarrow from Leonardo da Vinci but you know you go back to the steam engine, the cotton, the railroads, the canals, uh electricity uh and so on and so forth. radar. Uh you get these um you get the innovation curve shifting, investors hop on board, you get the massive capex, and you know what's what else is happening is that everybody's talking about how well this is all being funded off off of balance sheets, but it's not. I mean, we know that, you know, just so far this year, there's been like something like $200 billion of uh of business borrowing in both the private and public markets to facilitate this. >> Mhm. >> So, something tells me that um well, if you're going to ask me, it's it's probably going to be some sort of credit event. Uh I'm not going to say it's going to be something from Subprime Autos, which you've seen already. >> Yeah. Um, but when they say the bond market leads, you know, people look at the treasury market, which is true, uh, but keep an eye on credit spreads, which are still very tight, uh, but have started to widen out. That that's a canary in the coal mine you want to pay attention to. Uh, the only thing I know next year that's lining up positive that I know with certainty is that next year is the peak year for fiscal stimulus from the big beautiful bill. uh which when you add up all the positives and negatives is going to add about 50 basis points to growth next year. It's not monumental. Of course, that's no taxes on tip, social security, uh depreciation allowances. Um it really adds up to 50 basis points is not huge, but the only year where the big beautiful bill adds to growth is next year. Uh but there's other things going on as well. you know, uh, how the global trade war cascades, uh, China US relations. Um, you know, because China, now we know China holds a lot of cards. Uh, rare earth's big card magnets. Um, how's this going to play out? Um, because uh, is is Xiinping going to give up his cards uh, which are these export curbs on rare earth uh, minerals? uh and if uh China continues in that direction considering how important that is for uh US US military in particular is is Trump going to go through with his 100% tariffs. Um so that's that's not going away anytime soon. uh and uh so we still have the lingering trade issue and then again what people don't talk about with respect to government policy is uh the immigration curbs uh and whether you're for them or against them the reality is that there's only two factors of production there's labor and there's capital >> and we're constricting the labor supply uh I think a lot of the employment weakness we've seen have come out of the demand side but that's we know the supply curve is shifting as well so next here. You know, this year was, you're right, a lot of curve balls. Uh we can see that no matter view on the economy, it's not strong. Uh but the stock market is strong, but you know the S&P of 100 is not GDP. Uh next year, I think is going to be another very difficult year to forecast. Um I am concerned about what the message is from one particular market which is the bond market. Uh you know I'll tell you we talking about a weird year you know I'd almost switch roles with you and ask you the question as to if I told the beginning of the year that uh you know that the 10-year Treasury note yield would rally through Fed funds and go back below 4%. Um, a lot of people weren't expecting that. Uh, or that gold even with the recent corrective behavior would be up like over 50%. I told you those two things, those two classic risk on riskoff factors that we'd have the S&P around 6700. I don't know. Uh, would that would that make sense to you? Uh, I mean, talk about divergences. But I am I am I am I am nervous. I'll tell you one thing that that you'd mentioned before because and I did too. We talked about the direct and indirect impacts of AI. AI how it's influenced the stock market. Look, we had the the S&P 100 peaked a trough in 2022 because of the Fed's aggressive tightening and the inflation. We were down 25%. And we bottom that fall just as Nvidia and Chat GPT. that marked that marked the end of that cyclical bare market. Um but you see because of the impact it's had on the equity market. Uh you've got this bulge of equity wealth amongst that top 10%. Well, they still do a lot of spending in the economy. uh even though they don't spend as big a portion of their income as the middle class and the lower income class, it's really as you said been dominated by the higher higher income echelons feeding off uh their bulging uh equity portfolios and an economic parlance terms it's called the equity wealth effect on spending. And where do you see it? Where do you see it? you see it on the personal savings rate which is nosedived nose dived between April and September. Uh and in fact without the savings rate going down because people feel more comfortable spending their after tax income when they see their monthly statements without that benefit of the stock market via the lower savings rate which is the most powerful behavioral aggregate in the national accounts. Did you know? Did you know that consumer spending in real terms would have declined 1.2% at an annual rate over the past 5 months? Instead, it's up 2.6, but not 2.6 because of organic income. Organic income is actually going down. When you look at real disposable income, it's been negative the past 5 months. If people were forced to spend based on their income, and of course income is following this weakening labor market, if the same rate had not gone down, courtesy of the ballooning stock market, 70% of GDP, otherwise known as the beloved consumer, would be negative 1.2. And I'll tell you, I'll tell you, people would be talking about a recession again. Uh, so we've camouflaged a lot of things. the AI effect on keeping the economy at least flat uh keeping the stock market in a bull market mode and this pervasive belief that it's going to be continuing because it's the permanent income hypothesis as per Milton Freriedman that drives spending people have it in you saw the number from the University of Michigan right this is this is actually I mean this is so fascinating when you're talking about dichotoies divergences that the University of Michigan Consumer Sentiment Index, which is now down what, three months in a row, it's in the lowest 1% of all time. Oh, Adam, where'd you pick that? You just you're like uh Merlin the magician. Um, so yeah, and >> I follow your work, David. >> The Well, the thing is that it's not just that. It's the the all the buying intentions components are in the bottom 5%. Uh the employment components worst 1% of all time. This is just I mean look at this chart. This is a it goes back even further. This is University of Michigan. This is one of the soft surveys I was talking about. And then people say h you know but oh but that's that's not GDP. Well, I got news for you. The reason why the NBER takes so bloody long to announce when we're in a recession is because they wait for all the revisions and people bow down to the holy grail of GDP and non-farm payrolls. We see what non-farm payrolls did to the former BLS commissioner, >> right? >> There's no there's no data series soft or hard that's uh infallible. But the various components of this consumer sentiment index uh you you have the headline here. But if you go to the buying intentions, autos, housing, big ticket, durable goods, if you go to the employment indicators, they're the lowest 5% of all time. Uh, in fact, what's really fascinating is that less than 40% fewer than 40% of American households in the survey think they're going to get a wage increase in the coming year. Fewer than 40% think that they're going to be getting there's the un look at the I mean, what does this picture tell you? Expectations of more unemployment. I got a question for you, Adam. Do you know people say to me if I talk about a recession like look, I was being charitable. I said we're flatlining. Okay, because I don't want people to think, well, Rosenberg's just a complete idiot. But maybe it's worse than flatlining. I mean, this is household perceptions of the labor market has never been here before without actually there being an NBER defined recession. Although maybe, just maybe, maybe it's different this time if you want to go if you want to go with that refrain. Um but the point major point here in the dichotomy is that the income spending intention labor market components of this survey are in the lowest 5% of all time. The headline consumer sentiment is in the lowest 1% of all time. This this thing goes back like seven decades. But 56% of respondents are still bullish on the stock market. Did you know that? That's higher than the long run average. >> I'm talking about [clears throat] the real side economic components of this thing are horrible. They're scaling against the bottom of the historical range, but the pervasive belief in the stock market is above the long run average. that's never happened before. So, there's some um deep-seated almost religious fervent belief that AI is going to be the answer to all our prayers. And then at the same time, after all, who needs the labor market when you got the stock market, >> right? >> And that's what I mean is that, you know, you're asking some great questions. We it your first comment was about these are confusing times. Now I don't know if the stock market uh I don't know if the stock market um sentiment component is in the little slides that you have there but >> I don't have that but but but it's it's it's it's inverted you know to the consumer confidence survey itself and all the real side components. So, uh there's a lot of um a lot of divergences and dichotoies uh that I think in the next year are going to have to get resolved. >> Okay. So, I got a shorter term and then a longer term question for you about this. shorter term, um it sounds like you think for whatever trigger reason, um the bloom may come off the AI bubble at some point. And we're already seeing, you know, it's it's it's rare that a week, sometimes even a day goes by where somebody pretty high up in the AI world doesn't say, you know what, this thing's in a bubble, right? Even Sam Alman said it, right? Um so uh let's assume for a moment that that does happen where uh the market just steps back and says okay you know what for reasons x y or z we just don't think we we think we pulled way too much uh of tomorrow's value into today and um it's going to take longer than we thought to get all the spoils from this. So we're going to need to to put some material haircut on today's prices. What would you expect under that scenario? Would you expect.com declines 60 to 80% in a lot of these companies? And then, you know, what would the negative wealth impact have on the economy? >> Well, I'm probably closer to 40 to 60 down than 60 to 80. >> Okay. And and I say that because uh the valuations are extremely stretched, but they were more stretched back then. So as bad as it will be, the main reversion of the multiple to the reality won't be quite as severe. Um but it still will probably be severe. Uh and the one reason why it's going to be very problematic maybe for the economy like my big concern is what are the second round impacts? What are the societal impacts? And so we have to talk about the demographics. Who talked about concentration risk? Yeah, we have uh you know look what do we have like nine trillion dollar stocks top 10 or like n trillion dollar stocks >> y >> uh 40% of the market >> I mean I I can think of three that are about 7 trillion [laughter] together right >> yeah so it's uh yeah exactly so it's a um and you've got the situation where over half the market now are these passive index ETFs these um S&P 500 uh indices uh that track the S&P 500. These passive indices, nobody needs an advisor anymore. Nobody needs a broker. They're lower cost. Um but over half the market is passive and which means that you know in the old days you know you had a broker or an adviser you had an active manager who would do the work for the retail investor they would move you into cash or they get maybe more sophisticated and maybe seeing the clouds coming in uh instead of parting with the portfolio maybe just sell some call options against it >> right buy some >> or do some sector rotation to reduce the overall beta of the portfolio. Who's doing that for monpod kettle today? >> Uh they're just blindly uh investing in uh this concentrated index not even knowing what it is that they have in there. Like the era of doing any fundamental analysis um looking at balance sheets, income statements is over. Well, just by and the reality is that and this is where the hubris comes in is that for the past few years it's really worked well. So then extrapolation comes in and I've seen this before. I've been doing this 40 years and the danger at a bubble peak to extrapolate. Remember who did the extrapolating no matter how smart you are was Chuck Prince >> you know back in June 2007 who told us we should just stay dancing till the music stops. But I don't even think he knew the music was going to stop 3 months later. So we have concentration risk in the market. We have concentration risk in the sense that over half the market now John Bolo the 1970s I mean the pioneer at Vanguard with the you know the Vanguard ETF said said this this will never become more than 20% of the market. It's now over 50%. And then on top of that concentration risk layer layer on concentration risk we have 72% of the US household financial asset mix in equities. Yeah that's higher than we had in the late 1990s. It's a lot higher than it was back in 2007, but that was more of a housing and credit bubble than an equity bubble, but everything got caught up in it. All these markets are somehow correlated. Only 8% of the household portfolio, Adam, is in bonds. Is in the is in the stuff that Lazy Hunt and Van Hoington do for a living, 8%. But like, who who wants bonds really? Are you going to go to your neighbor's cocktail party and talk about your treasury position? I mean, don't you want to make friends and have people talk to you? I mean, so boring bonds 8 72% uh the rest basically mostly in cash 72%. So the but on top of that I mentioned the demographics. Look, uh, over 60% of the baby boomer asset mix is in equities. >> So, double what it should be. Well, you know, you start to think that. So, we're going to stress test this. That's what I mean is that I don't spend my time. No, I write it daily. So, I'm in the current analysis. However, the bulk of what I spend my day doing is thinking not about what are the headlines today or tomorrow. What will the headlines be? 3 6 9 and 12 months from now. That is what consumes me when people say what keeps you up at night. It's what are the headlines going to say between now and the next 12 months? >> And I I'm really worried. I'm worried about the complacency. I'm worried about the hubris. I'm worried about the fact that the reason we got to a 72% share of the asset mix in risk is because nobody took any profits. Nobody took chips off the table. Nobody diversified. Nobody rebalanced in the past three years. That has me nervous. And we're going to stress test the system. When I say the system, I'm not talking about systemic risk. I'm talking about society. I'm talking about the fact that for the first time, now look, you know as well as I do, we will have a bare market. The market cycle is not dead. The business cycle is not dead. Mother Nature is not dead. And I don't know when the next bare market's going to start. I know that we're a lot closer to it today than we've been any other time in the past three years. And what has me nervous is the positioning the positioning of the general retail investing public. And when I talk about this to people in a room, Adam, their eyes just glaze over or they're looking out the window. Um and um but the median age of the boomer is 70. Okay. You know, back in um the tech rack it was 45 70 today. The first of the boomers are turning 80 and they have way too much risk >> and and way too little time. >> They're not they're not they're not they're not my kids, right, in their 20s and 30s. Like time is not on their side. So, um, a lot of stuff is going to happen. Okay. Uh, and and and don't forget what stress will this put on the social security system. Uh, when people see that what they'll have to recalibrate, uh, their golden years in retirement to a totally different lifestyle expectation they have on their minds right now. That's going to have, you see, and the problem here is that you're as an economist, you're always thinking about second round impacts. I think I'm probably tell you the truth more worried about the second round impacts of the stuff I'm talking about right now than I am about the impact of the overinvestment in AI which of course is is natural if you don't get over investment haven't seen it already it's the first time that's ever happened because that is a natural fallout uh from this type of a shift we have in in the technology curve there's nothing we're seeing Adam that we haven't seen before right I think That's true. Um, and so Erggo, it's going to play out much the same. It's just that from the demographics and the concentration risk on household portfolios, especially the boomers, the 78 million picking a python that's driven everything in our lifetime, right? From politics to economics to finance. Well, we're going to stress test society and then there'll be second impacts. This is what could cause this when we get the recession and the bare market could cause a double waterfall uh from the impact this is going to have on the savings and spending function for a very wide swad population called the baby boomer class of which I'm one of them. I'm just not positioned the way everybody else is. >> All right. So, um this is a rich vein here. So, um, your your warning of us sort of sleepwalking into the next bare market. Um, we're we're not, as you said, you try to warn people about it and their eyes just glaze over because David, of course, the market's just going to go up forever. And as a baby boomer, why wouldn't I have even more of my wealth in the stock market because it only goes up, right? Um, so I totally get the risk that you're talking about there. Um, and the uh the the the ripple effect that would have across the economy and and one of the things I've sort of warned people about too is like we talk about this massive wealth transfer that's going to happen from the boomer generation to their children. And that will happen, but I'm not sure that wealth transfer is going to be nearly as big as everybody's counting on for two reasons. One, a lot of it could get vaporized in what you're talking about should that happen. And then secondly, with, you know, costs of all sorts of things going up, especially medical care and end of life medical care, and the boomers seem to be really enjoying spending this money, >> um, that there just might be a lot less left over of the 80 trillion or whatever it is right now. Maybe only 40 trillion gets passed along. It's still a lot, but it's not nearly as much as right now everyone's just assuming is going to make the transfer. So, I do agree that's a really big risk. Let me ask my longer term question for you. um which is uh in addition to that risk right now the societal trajectory is that that top 10% is taking more and more of the spoils right so even though the economy is you know flattish right now to more and more people it feels recessionary right yet we haven't had um uh you know the the large unemployment ment, you know, large job layoffs and stuff that we might get if we end up going into the type of recession you think could ensue from the popping of the AI bubble. Um, but but let me ask you this. um with that being sort of the trajectory where um this this K-shaped economy has fewer and fewer people at the top with more and more of the spoils and so more and more of the people at the bottom get less and less of of the fruits of of the economy. Um and let's assume AI does what it's it's uh everyone expects it to do, which is to start really displacing labor, right? How worried are you about kind of the trajectory of society here where it does seem to be coming increasingly even in capitalist societies like America and Canada that it's really becoming a a a system of halves and have nots with with a fewer and fewer people being fortunate enough to be in the halves category. Well, I I think that you made a really great point and um this K-shaped economy that you're talking about is um has been with us for decades and it's getting worse. No, I I might be Canadian. Uh but I'm a hardcore capitalist. Okay, I'm a capitalist with a heart, >> but I am a I am a capitalist and want to be very careful that you don't get to extremes. Uh, you know, when I talk about income or wealth inequalities to people, they get the wrong idea. They think I'm turning into a socialist. But, you know, democracy and capitalism are always dancing on a very tenuous pin and uh it's a very fragile relationship. Uh I mean look what's happening. Look at the New York mayoral race. >> Mhm. >> And that's that that's spread. It's going to spread. Uh you're seeing it in other cities too. There is a uh a wide divide in the United States. Uh and uh you once again can't extrapolate between, you know, Donald Trump and the Republicans empowering Congress today to what that's going to look like two or four years from now. Um and so when you're looking at what's happening in New York City and imagine that we would have ever had and Madame is going to win probably in a landslide, I think it's it's too late. People have made up their minds. a socialist mayor in the world's financial capital. I mean, you and I have been talking about extremes and divergences throughout this whole call. Uh, think about that for a second and then think about where that's going to lead us, but think about what brought us here. And, you know, frankly, um, I got a lot of hate mail from a report that I wrote several months ago because I was always a Ronald Reagan disciple. uh and I was looking through reams of data uh post World War II and I was always a big advocate for Ronald Reagan and for the tax reform and I would say that I was probably wrong uh on that aspect of it because it was in the early 80s where that income disparity really started to accelerate and it didn't matter who was in office democ rat or Republican and it just kept on going under Bill Clinton uh Bill Clinton um you know cut capital gains taxes with Bob Rubin and um under Obama. Obama had I think more Goldman Sachs people in his cabinet than any other president in history. Uh, and uh, we got Donald Trump who's uh, it's hard to really pin him as in any specific corner, but the first thing he did when he got into power in Trump 1.0 was go through this uh, huge corporate income tax cut, which everybody loved. The point I'm making is that up until Reagan got elected and you looked at um productivity growth per year from like 1950 to 1986, which is when the the Tax Reform Act was passed. And productivity growth averaged 2% per year. and real wages average 2% per year. So the proletariat were at least getting their marginal returns from the sweat they were putting in. They were getting paid their productivity and the owners of capital were getting an annualized growth of 2% per year in real terms. So everybody was sharing in the spoils equally owners of capital and labor. And then something happened in the mid1 1980s. Okay. So what we're talking about is something that's not new. It's just when you compound things every year for four decades, it gets too big to manage. So what's happened is that since the mid1 1980s and it's getting worse is that productivity growth hasn't slowed. Do you know without the with the internet or Microsoft going public and all the Apple iPhones, what are we up to 200 of them? uh productivity growth since the mid 80s has averaged 2% per year. >> Right. But the >> real real workbased pay has only gone up 1% per year. >> Exactly. Yeah. Absolutely. >> So what's happened is that that's why when you look at these things called like economists look at labor market experts look at genie coefficients these classic measures of income inequality. It's out of control. It has me nervous because we've hit an extreme an extreme. And so there's something wrong, I got to say, with the compensation, incentive, and tax system, and it's going to blow up. And you're 100% right. So now we have the situation where um you got this not just K-shaped, this is capital K. And >> yeah, >> this is not a time to put your CFA hat on, okay? This is a time to understand history and to understand the fragile relationship between capitalism and democracy. Right? And we can't let things as capitalists. You see this is exactly what Markx and Engles were talking about. Okay? They were talking about that capitalism will end up eating itself. And once again, this is tough to a Wall Street crowd. This is a tough message. you know, we want all we want all we want our spoils. Um, but it's it's reached um a level of unevenness that is really unhealthy and unstable. Um, and so as it stands right now, 100% right. I mean, you're seeing it like I said before, you know, what's driving the economy right now is the stock market. I I made a mistake before. I said the S&P is not the GDP. Well, the S&P the the wealth effect on spending is virtually unprecedented. That's what I said before. The savings rate's dropping like a stone. Um because people believe that the stock of equities and this is in a certain percentage of the population is going to be their golden goose and I'm going to spend all my income now. And that's how you get this uh this poten village this illusion that we got this consumer resilience in an environment and I say this over and again consumer resilience in an environment where real disposable income think about that real disposable income a lot of that income is what you know what politicians call the quotes the hardworking American it's you know that's how you run your campaigns on real incomes are going down part of that I think is of course that inflation stop falling at the margin. Maybe it's gone up or it's been stable, but nominal incomes are disinflating. So, real incomes after tax have been going. Most people don't even know that. They don't even know that real after tax income from April to today has actually been negative, but yet consumer spending has been positive. Positive 2.6 at an annual rate, not a small number because of the wealth effect. >> That's the tip right there. Yeah. That's the top of the K driving that. Yeah. So, um, all right, David. Well, look, um, I very much appreciate you going into this territory with me and we could talk about it for a lot longer. And actually, if you don't mind, maybe next time you come on, we'll reserve a little bit more time to talk about sort of, you know, if you were in charge, what type of reforms you would like to see to keep capitalism from going off the rails here. Is as I'm sort of thinking of you as a capitalist with a heart who'd like to keep his head, right? >> [laughter] >> Um >> unlike Maria Unlike Maria Antuinette. >> Exactly. Exactly. So how do we how do we all make sure that uh you know this doesn't end up in in a a French Revolution style ending here. Um and I just want to note too everything you're saying is if the status quo trajectory continues and and I I asked you a question which we don't really have time to get into but is what if AI delivers on its promise of like replacing millions of workers, right? It just makes things way even worse, right? It it it definitely it definitely does. And that this is and I've been writing about it, Adam, just quickly. AI is not going to increase output. When we're talking about increasing is it AI is not making us smarter, right? Um it's not making us smarter. Do do do do do do do do do do do do do do do do do do do do do do you know that um uh I got my own staff telling me that they they have uh they're seeing I'm not going to say who but other people that they they could tell they they run these I don't know these models that can tell how much of a paper was written by AI. Do you do you know this? You can actually tell >> um >> it's making it it's speeding up speeding us up. It's making us faster. Okay. AI is not making us smarter. When they talk about the productivity boom, it's not about that output is going to be accelerating. It's the denominator. It's going to be labor saving. Labor saving. And that was the one thing I got to say in that University of Michigan index, and I don't think I had the chart ready for you. However, one in five Americans now fear a job loss over the next five years. So, what's keeping this glue together for the consumer is that top 10% being fueled by the stock market. Outside of that, we probably would be in a consumer recession right now. All right. Well, okay. Well, look, just to to get down to brass tax here, which is we don't know whether we're in [clears throat] early 1999 or heading into 2001, right? So, does the party in the stock market continue for another year plus from here or not? So, how does all this in your mind translate into, you know, is there an investing strategy that that you think is appropriate given the moment we're in, given what we know? >> Yes, there is. >> I don't get the sense from you. >> I don't Well, the thing is that I I look, I I don't It's like uh if somebody says, let's say your greatgrandfather said, "I got out of the market in 1928." Would you say to him, "What a you're such a You you missed the last leg in 1929. You're such an idiot. But if I told you like the thing is that when I was at Merryill, I was a goat. Then I was a hero, but I was two years early. >> But you know, there's the thing about bull markets and you build up the hubris over time because bull markets are escalators going up over time and elevators, bare markets are elevators that just go straight down. And then we got the two because you know we're talking a lot of you know we spend most of this time talking about big picture things and fundamentals and divergences and dichotoies. Sentiment is so important. Human behavior. I'll tell you the one thing AI is not going to change any more than the internet changed or anything more than transistors changed or semiconductors is these two basic emotions of fear and greed. And I'll tell you after spending time at Mother Merrill in 0809 in Midtown that fear is a more primal greed. But we are in Gordon Gecko right now. I'm going to tell you right now, um, nobody's going to be able to time this thing. I am playing the Baron Nathan Rothschild playing the middle of the cycle. I played the middle of the cycle. Uh, and no matter no matter what your view is on what inning we're in, Adam, we are not in the middle 60%. >> So, I definitely am not recommending people right now chasing nickels in front of the steamroller. Okay? No, I would not be doing that. But if you don't want to partner with your beloved portfolio, people fall in love with your portfolio. I say fall in love with your partner, your portfolio like your forecast won't always love you back. But I'd say I would be selling call options. If I don't want to sell my equity portfolio, sell call options. Other than that, do some sector rotation to at least get the beta citicality and risk down. That means maybe having more of a focus on utilities and consumer staples and healthcare. I have no problem with that. Um I think I I I like the Treasury market. I think bond yields will be going down. The yield curve will steepen. I think that in the next year actually when you look at the convexity and how far rates can come down across the curve, you probably could make 10% uh in the bond market. I got to tell you, Adam, when I tell people you can make 10% of the bond market, when I tell that to people today, you know what they say to me? >> They on. >> Is that all you got? >> Yeah. >> Uh, and so, and I would be saying, look, um, we're we're going through a a very much needed correction in gold and silver right now. It probably is going to continue, [snorts] but that is a secular bull market. You're going to for those people that were kicking themselves and missed uh the there's been multiple legs. I mean the bull market in gold actually started in uh uh late 1999 with the Washington agreement. Um this has been a long secular bull market in gold. Just people recently have woken up to it. Um but I think that a lot of the work we've done is saying that gold the the peak in gold will go to or through $6,000 an ounce. I got my reasons why. Uh silver will go along for the ride. Um so uh we like the precious metals complex. You're going to you're getting another opportunity right now. So you can actually uh I think add some exposure uh to gold and silver and the miners during this corrective period. Uh I'd say that don't be zero8 equities. I'm not zero8 equities. I just have a very low waiting and it's very concentrated in the most defensive parts uh of the market. And I'd be diversifying geographically too. The valuations when I'm talking about there being bubbles. There's no bubble in in Japan. I'll tell you right now, Japan with this new coalition government uh because we were in the Japanese equity market. We took profits uh several months ago. Now we're looking at getting back in. There's other parts of the world uh that look very interesting to us. Global aerospace defense that's got visibility. Uh that's an area uh Canadian pipelines. So, I think what you want to do is get out of your passive ETFs, which is just blind investing. You don't want to be doing that anywhere close to a peak. And when I divine close, I don't care if it's within a year. Be thematic and invest in your highest conviction ideas and in areas that have visibility that won't kill you if the AI trade rolls over or we go into a bare market. So I would say just basically manage your risk. Manage your risk. That's the problem with this passive ETF investing. The era of managing risk. Uh I almost feel like telling young people why do your CFA? >> Uh they they teach you about riskadjusted returns. People don't care about that. They care about gross returns and driving 300 miles an hour down the freeway. That is not how you build wealth over time. And I would just say one other thing. One other thing. survival's kit to investing in a bubble is make sure you have liquidity. Have liquidity because every bubble bursts I am 99.999% convinced we are in a market bubble. It's a price bubble. At some point the pin will prick the bubble. This is how it's played out over the millennia. And it's the people that have liquidity that can pick up the pieces at the bottom. >> That that's well that's how you build that. Well, that is how you build wealth over time. You know, you're not trying to time the market, but you're trying to um at least like I said, nothing's black or white, but you got to play the shades of gray. And as I said, you know, the wind, you know, when you're at a 2SD multiple across the board, >> um, the wind's in your face. Make sure that you have a liquidity buffer. Okay. I would suggest that I'm not going to time it, but in the next 12 months, you're going to wish that you did. >> Okay? And and just to bring it back to Baron von Rothschild again, so he said, "Play the middle of the cycle. That's how you get rich over time." He's also the one that we said buy when there's blood in the streets and that's you can only do if you have liquidity. >> That's 100% right. Yeah. Play play the middle 60%. That that is prudent diligent investing. It's hard it's hard to preach because of the Gordon Gecko factor, right? Um and the extrapolation which you always get at Bubble Peaks into the future and we're living it. Look, it's not as if I I'm Look, I've been doing this 400 years, but I've been doing it for 40 years, so I've been through this rodeo before. >> Mhm. >> Um, so, uh, I'd say that there's ways you can protect the portfolio without having to sell everything. Uh, there's ways that you can influence the beta and cyclicality of the portfolio. Uh, without actually having to take down your equity position, just re just just reposition within your existing position. But uh I would say um bonds I I would be hiding in bonds. When I hear people saying 10% you expect 10% in in the total return in the 10-year Treasury and I get back that's all you got. That is when you know that we are in a really funky unsustainable sentiment driven market environment. >> All right. Well, we will have to leave it on there. David, uh, thank you so much, folks. Please express your appreciation for David giving, um, so much of his his overall analysis, but also, uh, really detailing out a great way to stay riskmanaged in a a uh, you know, highly uh, uncertain and perhaps vulnerable market like this. Um, but but please show them that by hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. David, I can't thank you enough, my friend. Great job this time. And um look, we'll have you back on um either very late this year or early in Q1 to kind of call an audible for us on where you see things. >> Excellent. >> All right. Very much appreciate it, my friend. Everybody else, thanks so much for watching.