Inflation sticky like old pine sap… Another round of China meetings. Universal Basic Income –hints and whispers. And our guest …
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Horowitz & Company from seed through harvest [music] cultivating financial success. >> [music] >> Inflation is as sticky as old pine sap. Another round of China meetings happening. We're not really figuring too much will happen there. Universal basic income. That's something hints and whispers about that is all over the place and a warm welcome back. For this week's guest Ed Easterling from Crestmont Research. All this and much more on episode number 973 >> [music] >> of The Disciplined Investor Podcast. >> [music] [music] >> And welcome to this episode of The Disciplined Investor Podcast. [music] Welcome back to all of you that have been here before and of course if you're new, well, thanks for joining us this time and hopefully you'll stick around for some time into the future to hear all the good things that we have all about education and finance and getting to that point of financial security and financial independence and most importantly staying and being disciplined in a investment and investment environment that is dare I say choppy interesting sometimes hard to handle. So today what I thought we'd do would we spend some time digging into staying with the area of the markets for the most part because at the top of the show I think it's important to really discuss what's going on sometimes. You know, last episode we talked about things related to um things that weren't necessarily basic investing principles not necessarily. We talked about you know, these ideas of AI and what's going to happen there and how potentially AI is going to be or or maybe isn't going to be a taker of jobs. You know, the next employer and taking us you me and all of us out of our positions. And um I think that the big issue right now is that we have to look past that like markets are doing because right now there is I dare say a relentless mix of optimism [snorts] and um innovation that's going on right now and I would say unusual economic headwinds that are really pushing and pulling things really dramatically. So when we talk about some of the things that are going on right now, here we are mid-May 2026 and the stock market is pretty much showing remarkable resilience. The S&P 500 is up solidly year-to-date. The NASDAQ is great. We're over 7,400 give or take a couple of points either direction on a daily basis but right at that level that nobody thought we were going to get to for some time. Analysts forecasting continued gains, right? Looking at targets like 7,600, 8,100 by the end of the year. I mean, at this pace, at this pace, there's the potential for us to getting there much quicker. That's really kind of amazing if you think about what's going on. The idea that here we are in uh a year where there's so many headwinds and so many things that are going against us, but in fact, what we're seeing is that the markets continue going higher. Why? Why? People want to know. What's going on? Why is it that we're seeing this continuation of the substantial amount of gains that are going on with all the negative things that could be construed as problematic for the markets. All these things that are going on right now, are they are they a problem? Yeah, they are a problem. Yeah, we have inflation, we have um wars, we have a never-ending geopolitical tensions around the world, continuation of a basically neutered Congress, and um this is not going to stop anytime soon. But, what is it? People want to know like, why? Why are earnings continuing to do better? Why? Why are are are stocks Well, it is all about that. It's all about the incredible ability for companies that are the best in class to do what they can to shut out the outside issues. And if they are issues that are going to be problematic, they will figure a ways around. They'll figure ways to actually make things happen. And earnings are what is driving markets right now. Corporate America is delivering. There's no question about that, and we saw that last quarter with a high amount of of companies, you know, 80 plus percent of companies beating S&P 500 and the S&P 500 beating earnings estimates, um, use percentage of beating revenue as well and we're seeing this robust growth and this continuation of, um, the AI tech resurgence, the the new capital spending, the infrastructure demands, the growth and the the requirements that are going into this from chips to cloud services to everything in between. And what's really, I think, pushing investors is that forward estimates continue to rise. We've seen that now we're double-digit earnings growth that are looking at the next year ahead and think, you know, somewhere 10 to 15% or more in some cases, actually, and that is actually helping in a dramatic way push the valuations of stocks to levels where we haven't seen them in a long time. And I'm sure that that when we talked to Ed today, he's going to talk about the Cape ratio, he's going to talk about the Crestmont, uh, you know, earnings, um, ratio and and his number, the summation. Companies are posting record profits in many cases. And at the same time they're providing record spending. That record spending is creating even greater profits and the potential for even further, I would say, leveraged pro uh, uh, profits in the future. It's a it's a classic earnings-driven rally that is going on right now and that is something to really take notice of and this is extending the bull rally that many thought might stall out. We thought there was going to be a problem entering this war and to our surprise, gladly so, the fact is that, uh, things are doing pretty well. Now, there's going to be a cliff coming. I guarantee you that. There is going to be a a moment in time that will happen in the future that is going to cause a big problem when it comes to this particular issue of can earnings continue at this breakneck pace for any long aided period of time in the future and at the same time is that going to allow for investors to keep looking through, looking past, or not even looking blindfolded, just buying into the markets right now. It's not all sunshine right now. There's no question that inflationary pressures are causing problems. They're back in the conversation big time after what we saw last week. The latest CPI showed that we're at 3.8% on a year-over-year basis, 2.8% if we strip out um food and energy, which is hard to do, but we can. And I think this is a really good reminder that the post-pandemic inflation hunt, this whole issue that we've been trying to really get under wraps for the last number of years, is still not dead. I start out by saying that it's sticky like pine tar. You ever dealt with pine tar, you know what I'm talking about. We just can't get rid of this and now we're at three-year highs for some of these numbers. So, you look at all this and you put it all into a a giant bowl, you shake it up, you mix it up, and you look at it and you're like, "Wow, what a mess." But in fact, despite all that, sentiment, not consumer sentiment, but investor sentiment stays bullish. Why? Earnings momentum. It gets back to the same situation. Earnings momentum is driving the markets right now. And this is kind of an AI super cycle that we're seeing right now that providing this powerful offset to all the problems that we're seeing and investors are willing to do whatever they got to do to get in on it as fast as possible. Forget the fact that, you know, ratios are high. Forget the fact that we're seeing that the PEG ratio, PE ratios, we're seeing that, you know, the the market itself and individual companies are off the charts in terms of historic numbers. It's this environment where we see, you know, bad news is good news, good news is good news, and everybody wants to believe that all this is going to end and be, you know, great on the other other side. And it may. It may be. And that brings me to something that's fascinating that happened just this week, and I think we need to talk about this. One of the things that is happening, we saw that that South Korea, South Korea has been on fire. I think it's up 175% on a year-over-year basis, up 78% last year, up 80% already this year. They have only a few companies, SK Hynix, Samsung, and a few others, that are really fueling this entire rally, but nonetheless, it's a rally that is bringing incredible amount, trillions of dollars of increased market cap. I think it's up to 3.1 trillion in their total market cap of their market, getting towards uh where where Germany is. And and that's a far cry from where they were just 2 years ago. This is a small country. They only have a finite number of things that they can really produce. And in fact, one of the problems that they're having, and why they were the hardest hit when the war happened, was that they rely basically on all of all, 100% of their oil from outside of their own country, thereby utilizing primarily the Straits of Hormuz for delivery, and that's causing a major energy crunch there. But again, it doesn't seem to matter when everybody's just looking to buy the chips companies. And that's why it is powering what's going on there. Now, last week what we saw was very interesting. There was some conversation going on. There was a um this very interesting idea that's been floating around for a long time called universal basic Income. Essentially, the deal is that if AI is going to take everybody's jobs, what are we going to all do for money? Well, the concept is that we'll have this this income stream that is paid for by the AI generation, by the generation of maybe the power in the power grid, or maybe the the the efficiencies that it creates through tax, etc., that the government will provide. Well, just this week they came out with something, the presidential advisor Kim Young-bom. He came out with this concept of a national dividend, or I think they even called it something like a a citizen's dividend. And that citizen's dividend is essentially a redistribution of the earnings of many of these companies from the AI and semiconductor space, and they're putting that into the public hands. Back to the public. So, it's kind of a a tax that goes back to the individuals. Now, South Korea is clearly ground zero for the surge in chip demand powering AI, and companies again like SK Hynix and and Samsung, they're printing money. I mean, they're just printing the money. Let's go Let's go go go go go go. Just giving it out uh to them, and they're just making bank. No question about that. But, the country built this industrial base over decades. And they're now saying, you know, "We have been building this infrastructure for such a long time for you to create the kind of profit you need to pay us back now, and the citizens of our country that pay the tax into this, and that we helped you do this with, are going to get the benefit." UBI. They're not calling it necessarily UBI, they're calling it a citizen's dividend. But, the question I ask is, how much of this is going to start spreading, the idea spreading that we have this very strange pop strange populist movement throughout the world that is both liberal and conservative, that is hard left and hard right, that is probably going to provide for a lot of conversation about how something like this should really play into the elections. And I would venture to say that there's going to be some talk about all these big money baggers making money, the Microsofts and the Metas and uh Nvidias of the world and AMD and even Intel that the government is now owns a piece of, how these companies should be actually thanking all of us and paying us back as individuals with a citizen's dividend. There's going to be talk about this. There's going to be talk about windfall profits, how this is a bad thing, and how companies aren't paying their fair share, and how again, we should redistribute this wealth, this boom to fund things like youth startups, real basic income plus, support for artists, um strong- stronger pensions, and even social investments, and even fortifying the municipalities around the country. That is something I think that's going to be extremely out there. Now, do I agree with it? That's another discussion entirely. This is not something I think is part of capitalism in any way, shape, or form, but it's going to get some play with the amount of money that's being generated right now is going to be something. Now, from a capitalism standpoint, what happened? Well, when this was announced, Korea was down 5%. Now, mind you, it's been up 3%, 4%, 5% day after day after day for the last month. So, a 5% hit, which is pretty substantial, may seem like a lot, but it's really not that big of a deal. Considering this idea, this this bold idea they're calling it that echoes this, you know, UBI, this universal basic income concept, um markets are not going to be happy with it. They're going to find this as a money grab of epic proportions that are being done to the companies that are the backbone of corporate America. And what's going to happen if that happens? I will tell you. Companies will start laying off more people, causing more problems. It's a problem. So, we're going to have to watch this very carefully. And as we head into 2026 and we get deeper and deeper into this year, the markets are telling us, "Hey, we like the earning story really a lot." Um I have a feeling that this UBI discussion is going to be out there through the midterms, probably. And other countries may even pick it up. But with inflation rearing its head as it is and with the confluence of the potential for a slowdown earnings, eventually it's probably going to end up being a dead end. So, this South Korea issue makes us think a little bit bigger. It makes us want to ask questions. I get it. And a lot of people who have not participated in the market upside want to think and want to know, "Hey, where's my Where's my potential in all this, right? Where am I going to make all the money from this? I see everybody else making money." Well, you know what? You should have invested in the markets. You should have invested in the AI companies. You should have invested in this in the solar uh the the semiconductor companies and everything else out there. So, we're going to talk more about this with our guest today, but I wanted to kind of give you some of the things that are going on that are pretty fascinating in the world of investing. Let's take a minute to talk about Interactive Brokers because, you know, you research your investments, right? You analyze markets, but have you researched your broker? For the past 3 years, Interactive Brokers individual clients average a 24.3% annual return, beating the S&P 500. Lower costs, competitive rates, and access to over 170 global markets helped investors keep more of what they earn. The broker you choose matters. Interactive Brokers, member SIPC. Learn more at ibkr.com/performance. That's ibkr.com/performance. Let me talk about our guest for a second here and tell you who he is. His name is at Easterling. He's a founder and president of Crestmont Holdings based in Oregon. It's an investment management research for firm that publishes provocative research on the financial markets at crestmontresearch.com. He has over 30 years of alternative investment experience including financial markets, private equity, and business operations. So, at Easterling, man, it's been a while. What's going on over in Crestmont? Well, uh things going well here. I think we're sitting we're watching all the different factors we have uh kind of driving this market uh to new highs and just wondering uh what where the where the trend is headed and what the risks are underneath it. Uh you know what? Let's let's let's you and I go back down memory lane for a second and let's talk about a month or two ago. With all the things that you now know to be true. But looking back, which we didn't know, is there some kind of space in between reality of what we know and what it seems we should have known. In other words, let me say that a different way. War, inflation, higher oil, um tariffs being turned back, blah blah blah blah blah. All of that stuff, that uncertainty, did not call for at that time markets to new highs. But yet here we are. So, a little splaining needs to be done. I think that's a good place to start. So, so tell me what what is it? Is it just the incredible bleed of CAPEX from the tech, the extraordinary amount of stimulus that's being brought to everybody right now from the excess amount from the one big beautiful bill act and the withholding allowance that's been given back tax returns and on top of that the fact of the matter is that um tariffs are now being repaid back to companies. Is that the three things? It's got to be more than that, doesn't it? I mean, it's kind of crazy. Um and and then and then investor psychology and the the just a sense that we've got um uh this this this bull trend that has a lot of momentum behind it. You know, if maybe kind of getting into this just put in perspective. Remember, I'm watching this as a as a market climatologist. So, I think in terms of multiple years or decade as opposed to the short run. At the same time, trying to weigh these things that you just mentioned that are things that all kind of juice the market in the short term. Um they often come with with trade-offs and and >> [clears throat] >> and um I think the effect of that is sometimes when you kind of juice it up front you do have a period that sort of compensates for that on the back end. But, when I think about it on a on a long-term basis, many of the things that you just mentioned and those are [clears throat] things that are that are affecting the market and the market's perception are not things that are going to endure for another decade or longer. Yeah, the these are these are short-term phenomena and and trying to gauge the long-term from the short-term is like trying to say that it's cold outside we're entering a new ice age. Right, which by the way, doesn't mean that we shouldn't take advantage of this short-term move. It's just we need to recognize that at some point it's it's not going to be long-term sustainable. Does it seem to you that almost every down stroke of the market is like a bat signal to investors to start getting their money ready and throwing it hard into the markets. It seems like there's more investor sentiment that turns positive right off the bottom in a big way than anything that I've ever seen in in in a long time. This has happened by the way consecutive times over the last decade, let's call it, than the last 30 years that I've been looking at markets or last 200 years that I've been studying markets. Absolutely. I think um Again, that's part of the resilience that's in the market. As we see things bounce back so quickly, we look at it forecasts for earnings growth, double digits in and and more. Um We we uh despite the fact that we get these rising inflation reports, I think there's kind of a tendency to to want to see that as temporary. And so, we look past it. I think that's what leads investors to take advantage of every bargain opportunity. So, you've I think long argued that and as you're telling me that markets they they move in these long cycles. So, when we look at these cycles and you study these cycles as a market climatologist, as a market watcher, uh two questions. Where do you think we are in that cycle today potentially? Now, you want to use a baseball term, you want to use some other percentage, fine. And and with that, what do you think maybe is the biggest mistake investors are making as a result? I would say right now um a lot of the factors Now, and by the way, when we talk about this markets roaring ahead, we're going to see above average returns, it doesn't necessarily mean that the offset to that are negative returns or crashes. Okay. What it does mean historically is that we had above average periods and below average periods, and the average rarely happens. Okay. >> So, one of the consequences here could be just an extended period of below average, which would still be disappointing, especially if people are are budgeting based upon this level of return. Now, you said where do we where are we Let's see, sports analogies. By the By the way, I'm I'm not the right guy to bring up sports analogies with. Yep. >> But I I I would say we're long in the game. Uh when you look at all the factors of where the economy is, you look at the profit margins, uh you look at at at asset valuations, both homes and stock market and other assets. Um Things are late cycle. So, I mean, let's use a clock. Are we at 6:00 p.m.? Are we at 3:00 p.m.? We at 9:00 p.m.? Well, clocks have a fixed dial. And I think in the market uh um you know, I I think maybe this is a discussion about Icarus more so than it is the clock. Icarus has moved past that point of of no return, but it can go a lot further before the sun will melt off those wings. And so, this market could have a lot more beneath it to keep it going. And is that your >> but but it could but the alternative is it could not. So, go ahead. Yeah, I mean, I I agree. I mean, I understand that there is a lot of investor uh sentiment that's positive, which got By the way, blows in the face of consumer sentiment, which is fascinating. Uh and it blows in the face of what we're seeing from the long haul higher potential cost of fuel CPI, which we'll get into a second, uh inflation and and but but I think you know, what you're saying to me is that I think the undertone of what you're saying is what is likely the the the right thing is like, you know what? There's no reason to panic just yet. I I think that's Oh, absolutely. With the um there's no reason to at the Oh, there's no reason to panic. And matter of fact, and good investors never panic because they they're prudent going in. Right. >> And and they're always established in a way that they can be resilient against pullbacks. And >> [clears throat] >> They know you can't always avoid losing money, but you can certainly be more resilient to the risk. But valuations, right? Valuations is something you talk about a lot. It's something that you really focus in on. That's part of your your your process, right? So >> Absolutely. And I would and I typically focus on on price-earnings ratio and and dividend yield and other measures of valuation, but as you've seen, you can pull a list of the top 10 valuation methods what measures, whether it's Tobin's Q, whether it's market value to sales, market value assets, all of that out there. All those measures are elevated. Like every single one, right? Every single one. Absolutely. Now, the question is is it justified? And there are two key factors that drive that valuation level. One is the growth rate of earnings, and the second is the inflation rate. And both are moving higher. The inflation rate is is is elevated. It you know, every attempt we get to get it back to that price stability level below 2% is hasn't been successful. So, I think jury's out on that one, at least for in the near term, certainly for the next year or so. In terms of of growth rate of earnings, they have posted growth rates that are far in excess of the economic growth. What that translates into is profit margins, and profit margins are near record levels right now. And from a business cycle standpoint, that tends to suggest late in cycle, not early in cycle. Why is that? As companies, you know, if business is good, companies are expanding, sales are positive, profit margins increase. When things at some point margins get large enough that it brings in new competitors. When new new competitors come in or less efficient competitors, they get the competitive factor drives those margins back down, and that wipes out the the marginal player, and then the business cycle starts over again. So >> So This is This is this What's interesting is there's a tale of many stories here. Where we see an incredible amount of CapEx being spent, whether it's circular financing, vendor financing, or direct financing. I don't care how it is, but the bottom line is we have huge, I mean, enormous. We're not talking about 100 million. We're talking about multiple hundreds of billions of dollars being spent on stuff has leakage, by the way, in that. And that ends up somehow in the markets, but it also ends up in the hands of players that it will be increasing their prices, which will then be forcing the other players that are spending the money to increase their spend because they need this. They are not walking away from like, "Oh, you know what? I don't know if we need that chip." Nope, they're buying it anyway, regardless of the price, no matter how how um tough it is to get. They're going to go, and they're going to oversubscribe to it because they don't want it going up. They're buying more than they need to make sure they have the compute. We got that. Fine. That's That's one story. And that is uh impacting the biggest of the big companies in a lot of different ways, but because it is that, and we have a market cap weighted indices out there, that's a good thing. Okay, fine. We hear from We hear last week from a company like I think it was last week or the week before, Whirlpool. They come out, and they talk about I some horrible numbers, by the way, and their outlook is terrible, and they are saying that the war in Iran is creating a depression recessionary mindset that they haven't seen in a very long time by their customers. People are just not buying. Now, it's I don't know, it's just not buying their goods, not buying their washing machines and their dryers and the I wouldn't cuz I think they stink, by the way. I just got rid of all my Whirlpools. That's a different discussion, but nonetheless, maybe something's there. And then And then finally, we see another example on the other side of a company like Shake Shack. Shake Shack came out with earnings couple weeks back a week and a half back I think it was and what was interesting about that was if you really just take a moment just a second and think about it and you think about you know Shake Shack what what's happening. Shake Shack is uh they're down they were down huge on their number uh the lowest they've been I think that high of Shake Shack back um about a year ago was what uh 130 currently trading at 68. They're in the market with burgers that's what Shake Shack does right? Plus other things are but they're in the market of burgers and they put tomatoes on it all those prices are skyrocketing beef prices out of control not to mention GLP-1s that are stopping people from eating a lot of this stuff so they are in that too. So we got a weird market environment that doesn't seem to want to go down very much for anything but yet underneath it there's a rotation and weird things happening. I think part of it is there's a complacency uh that's been driven by the fact that uh um you know economically we haven't been been bitten with a recession with a real recession in such a long time. Matter of fact uh put it in perspective the last recession technically was the two-month recession at the at the start of COVID and I don't think anybody thinks that was a cathartic a kind of a typical you know reset recession. Mhm. Right? Mhm. So what that does is it takes us back to the start of that period um which would have been essentially the at the 2009 at the end of the '07-'09 recession. So to put this in perspective and I think I think a lot of people consider that the what happened in the technical two-month recession during 2020 to be let's call it a footnote kind of COVID-caused. If we look at the current expansion as having started in in 2009 and run to present matter of fact we're now over 200 months 200 >> without a recession. Put that in perspective Without without without a declared recession. Without a declared without without a without a cathartic recession. Again, I'd like to There was a declared recession at the COVID. NBER did declare that 2 months. Right. Uh February of of 2020 to April. 2 months. February to March, March to April. As a as a recession period. But but I would I would consider that from an from an economic standpoint that the economy that that was a that was not a cathartic. It wasn't a reset. Matter of fact, if anything, ironically, that recession probably caused more dislocation than it corrected. >> Yeah. Cuz you know, recessions happen because prices get out of line, profits get out of line, spending gets out of line, capital gets out of Things get out of line. Labor gets too tight. And that's what drives recessions. So, the last time we had one of those was the '07-'09 period. The longest recession in history, if we again excluding the current period, was 120 months. And then before that, 106 months. I mean, so we're nearly twice as long as the historically long recession. I'm sorry, expansion. >> Expansion. Yeah, I was thinking what you what was that? I don't remember. I don't remember seeing 10 years. Okay. Expansion, exactly. Expansion. So, expansion longest longest expansion in history prior to the current, 10 years, round number. Yes. And and I think the message there is that it time does not drive time does not drive a recession. Dislocations drive recessions. So, I'm not suggesting for that because we're long in the tooth on time that we're due for a recession. What I'm saying is that that it has been a long time and if we look at the the dislocations that are out there, some of the things you just mentioned, magnitude of of what some would consider irrational spending on creating data centers and and power plants, etc. to just a power AI. If AI doesn't turn it an AI, like dot com, could could change life as we know it. But, if it doesn't create profitability and perpetual profitability, it won't or at least sufficient profitability, it it won't have paid for the it won't justify the all the expense that went into it. >> Yeah. You know, it's interesting. I think I was thinking about just the other day about this whole idea of the chip cycle. And um again, a couple weeks ago AMD came out with their numbers and they came out with a stellar report. Just absolutely beautiful. And one of the things they talked about was and what they stock went up so much was that over the next uh 3 or years, they're predicting about a 35% increase in revenue year over year for the next X amount of years. And what's interesting about that was and why people got so excited and off-sided about it was just in November, they were predicting about 17% of increase. Now, if you stop for a second and think about that. They were thinking 17% increase year over year for a number of years. And just 6 months later, was that Wait. Hold on a second. November, December, January, February, March. 5 months later, they're talking about how there's going to be a doubling of that number over the next 4 years on an annual basis. These are big numbers we're talking about now. Mhm. But, I find it very fascinating that people seem to have forget the entire semiconductor cycle over history, which has been boom to bust, boom to bust, boom to bust, right? And uh you studied it, you know it, right? Semiconductors are definitely one of the most cyclical items out there. Right. What makes us so sure that in 6 months from now, they're not going to have a major tweak to their numbers? Just as easily as they had a major tweak to those cuz I think psychology is well, increase from 17 to 35, then maybe go from 35 to 50. But, what happens if there's another technology, lack of money, uh the list goes on and on. Have you thought about that? That's pretty interesting concept, right? Well, I I um um that and and other and and other factors that uh that that we have sort of extrapolated out, whether it's that earnings S&P 500 earnings growth at I mean, you know, projected to be more than 20% year over year. I mean, what happens when that gets revised back to something more realistic? At some point. And again, it doesn't mean we won't have a year or two or three of that, but what we won't have is 10 years of it. What we're very unlikely to have is 10 years of it. Well, that's Unless this time's different. >> That goes into a discussion of CAPE that I know you're very fond of talking about. I'd like you to do me a favor. I'd like you to spend a moment talking about cuz this is something that you is really in your in your bag of tricks, I think. The CAPE ratio, what it is, how you look at it. There's different ones to look at. CAPE 20, CAPE 10s, and all that, right? Different ones. But different periods, but basically this is the Shiller created device to figure out valuations that are really uh appropriate. Y- Well, yes. And and a and a a big element of this is that the uh earnings go through a a business cycle. And that business cycle can be 5 to 10 years. And so, CAPE is conservative and it uses 10-year period. And so, it looks at the earnings that happened over the last 10 years. The ups and downs, put them all together, inflation adjust them, and use that as your earnings base against the current valuation level. Because what what Shiller found was that at times when we have a soaring profit margin, >> [clears throat] >> that tends to understate PE, and then when you get the pullbacks in earnings, that tends to overstate because you've lowered the denominator in relation to valuation. So, the way to normalize that, or the way that he normalizes that, is by taking 10 years worth of earnings, inflation adjust them to present, and then use that as a as a denominator. And it's been a pretty good It's not been a It's not a trading signal in any way. Yeah, because it's it's so it's so it it's so long till something moves, right? Right. So, therefore, it it but it does tend to reflect the normalized longer-term trend of that of relative valuation. And so, that's that's where the that's where the CAPE is is useful is to put valuation in relative perspective. Um Crestmont has a different version. Um the Crestmont PE is based on looking at the relationship between the long-term relationship between um earnings and GDP. The economy. Mhm. And historically, those again, there's a business cycle that runs uh at at at a much more um a rapid pace than the economic cycle, but by looking at the normalized relationship between the two of those, um it like the CAPE, uh if anything, the two of them come at come at a normalized PE very differently. But what they do provide is a very they have a very high correlation between them because normalizing earnings gets out so much noise that can be distorting. The reason all this is important is that what Shiller has shown, what Crestmont has shown, is that the normalized PE is a pretty good predictor of longer-term returns. Forward forward returns. Of forward returns. >> Right. And cuz if you buy things at an expensive rate today, what you can count on is you will have a lower dividend yield that those cash dividends relative to a higher price will have a lower yield, right? That's just math. The second thing you can count on is that when you start with high valuations, your dividend yield is lower, your likelihood of expansion of PE becomes lower at higher levels, and therefore, your 5 and 10 and 20-year returns will typically be below average, and that's what history has shown. So, what what Shiller um uh uh believes about the CAPE and what I believe about the cross my PE and the cape are that they're good indicators of what we can expect for the next decade. Not necessarily what we can expect for the next few years or even five. Now you put your name on this, so you must have a lot of strong belief and and feeling that this is something that you could be proud of and something that you could actually rely on and something that when you talk about is not going to let you down. So what is it telling you exactly right now? It's telling us that we're set for a for a decade from this point of below average returns. Now could we say that 2 years ago? Oh, absolutely. And then if that's the case, just follow me here a second. If 2 years ago we believed we were going to have below average returns over the next decade, okay? Now we subtract 2 years, we're 8 years into that part of the decade, right? And we've had above average returns over the last 2 years. Does that mean we get below below average returns? The well, and the answer is yes because valuations are now higher than they were a few years ago. Um by the way, likewise, we could have not just 2 years ago, you could have 5 or 6 years ago when valuations had moved up to levels that were above historical um were in relatively high levels. One would have said then that they would have been below average. I think the biggest difference is, and you can look at some of Grantham's, you know, estimates and forecasts and others for returns, um they have gotten um markedly more negative because at at at higher higher valuations, um at some point well, so something has to change at some point or there's a there's a reckoning of valuation back to to to more rational levels. But it doesn't but again, it doesn't mean it takes a crash to do that. What it can mean is just a kind of a choppy muddle along period of below average returns that that the aggregate matter of fact, let's put in perspective. When the market pulled back even in in coming off of the 2000, we had a decade of the 2000s that was well below average returns. Right. Only when we got out into the into the 2010s and then we start to move valuations back up, did we start to see returns pick up and and the reason we've seen such significant multi-10 year returns over the last few years um the ends of 10-year periods being so high is we we now have a cape at at 31. We now have uh even reported PE without doing normalized is is over 25. And historically those those numbers would be around 15 or 16. Mhm. Mhm. Today the the it's interesting because there are a lot of beliefs and there's a lot of people that are creating predictions. You know, we have the Tom Lees of the world or the you know, that that they come on and say uh you know, we're going to have a whatever the number 7,800 of the S&P by the end of the year. Um and and he's been right. And I don't know by the way if the market's actually would have been down if he still would have these beliefs, right? This seems to be a constant bullishness and television and uh financial shows have a they they like it. And as a matter of fact, you know, you see a Jeremy Siegel come on the show when things are down and out, they bring on Jeremy Siegel cuz he's usually although lately he's been a little bit less um you know, exciting in terms of being bullishness. But there's all these people doing predictions on there. But I think you often emphasize the discipline side, which is good and that's why you're on the discipline investor podcast by the way. But what does discipline practically look like for investors in the next few years and what you would look to do as well as an investor. I think what it says is that uh we want to have a an exposed but a um uh uh relatively hedged in that in in of sorts uh position in the in the markets. Markets, whether it's bonds, stocks, etc. We need to to recognize that uh that there are ways to structure portfolios. Uh and again, I'm a market climatologist. Just I'm uh and as people found in Unexpected Returns, the book I wrote uh over a decade ago. It was 15 years ago. Um almost 20 years ago. I'm Time flies. Stop right there. You're going to It could be 30 by the time you're done. Go ahead. It does. It does. [laughter] So, um what what >> [clears throat] >> the the message uh I think it's that um again, we leave it to the experts to pick the way to structure portfolios, but the goal is to be able to to participate in the upside at a greater rate than you participate in the downside. To recognize that there are ways to structure portfolios, ways to diversify portfolios, diversify for risk. Um so that if we do have those pullbacks, we do have those storms, that we still um get a reasonable level of return and that we again, remember uh the first rule of investing is don't lose money. I in in realistically for many investors, it means lose less money because losing less money in a big downturn has a significant effect because the the losses are disproportionate to gains. If you lose 10%, you got to make 11% to make it up. But but if you lose um 50. 50. That's the one I always give people. I always say I give a quiz. This is my This is my baseline financial quiz for investors who just want to like let it all loose, you know what I mean? I say, "If you lose 50%, how much do you have to make back to get to to one?" You know what their answer is? You know what their answer is? It's 100. It's 100%. >> Well, you know what the answer usually is, right? 50, right? Of course. Yeah, and and and just like the Nasdaq investor that lost 80%. Okay? It takes 400% to make that back. I mean, it's just the it gets dispropor- the loss is disproportionate to gain. So, um it may not sound like a big difference, but if you if you can control if they're in a 20 or 30% drawdown market, if you can contain your losses to 10%, you're well positioned with 11% to get back to even, but the other portfolios that were just passively exposed have a long way to go. Yep. Yep. But I again, I'm I'm I'm I I shouldn't be saying things like that to the disciplined investor because obviously that's all what that's a big part of what discipline's about. >> that is the funny thing is, Bo, that that I this leads me to my next thought that I was thinking about as I'm talking to you here is when we talk about these disciplines, we talk about all the things that are going on, we talk about the news, we talk about the the flimflam trading and all that, and these crazy commercials that you see. I By the way, I'm pretty much off of most I I'm off of most uh regular news. You know, the regular news, big news station, off of that. Um CNBC is in the morning is just killing me. I I can't I can't deal with it anymore. Um there's some guests here and there or background or news and all. Bloomberg uh television, by the way, to me is the place If I want to know about investing issues and economy and global issues, non-pol- politics, I just Bloomberg's the place. It's just and most people have this, and I don't know why people aren't If that's what you want to do. The other stuff is all for entertainment, it seems to me. But my point is when we talk about these disciplines, we talk about, you know, what people do with predictions and and and what this means for people if we look at all the things that investors are looking at and that's what's widely accepted as the belief that's inherently ingrained with most investors today. What do you think that history will prove wrong? I think well, I think history will prove right that that there there was over optimism in this at this period. And that um um and it will prove that discipline is important for investing that that diversified approach is very important to investing and I'll I think some of that's being lost in this environment. You're talking about you know, irrational exuberance to a degree. Well, I'm I'm just thinking about some of the signs that are out there. I you know, one thing that I I came across my desk a week ago or so is the change that Standard & Poor's is proposing for IPOs. Uh they're talking about because of some of these you mentioned AI and all the spending etc. etc. Well, we know the AI companies lose a lot of money. But they're they have these huge valuations and so they're looking to go public. Well, they're likely they're going to wave the rule that requires that IPOs be profitable to get into the index. And they're going to they're going to delay they're going to accelerate the period of time from 12 months to 6 months that they have to wait. Well, this is what the NASDAQ is doing. The NASDAQ is appeasing SpaceX when they come out with with within I I I want to say it's 5 days or something crazy that they'll be included in the NASDAQ 100. And to me that is and and and you think about as well the um how much how concentrated the the index gains have been in a short list of stocks. So, we're reducing transparency. We we have this ultra high concentration of of effect that I think it's translated I think most people rather than looking at buying a a basket of 500 stocks, they what they're really getting is kind of half a basket of or more than half a basket of seven stocks and a basket of 493 stocks, but there there's a perception of diversification that doesn't exist because it's because it's so concentrated in its in its in its gains. I had a guest I had a guest on a couple weeks ago that talked about this. We talked about this cuz I talk about this a lot. I talk about this this this cuz it's still to this day hard for me to wrap my head around the market cap weighted index concept with all these big companies being the largest of them, right? >> Yes. And and with people, like you said, thinking it's diversified, but but he said something to me that was really I was like, "Mhm, you know, that makes a lot of sense." Cuz we were talking about momentum investing. And we're talking about trend following. And trend following always was like this idea that I read about Michael Covel's book, you know, the the turtle traders and all that. I I read about this and a few others out there and I'm I was like, "Ah, I don't get it." I literally I don't get it. And uh he said something to me, I think it was Was it Meb? I don't know. It was somebody I forgot it was the last couple weeks. I'm not sure who it was exactly, but anyway, the idea was this, that if you want to do the ultimate trend following or maybe it was Howard Lindzon. If you want to do the ultimate trend following, just follow an S&P 500 market cap weighted because what's happening is the larger companies are getting larger. And you're following that trend as they get larger. And technically, the S&P 500, the Nasdaq 100, the is the ultimate trend following tool, if you think about it, for the for the lazy trend follower. Because of the current market dynamic. >> Yeah, cuz the current market dynamic and the way that of the construction of the constituents inside of that particular index. I I don't know why S&P Do you know why Do you have any inkling why S&P's going to do this? Oh, I think that they it's it's trying to um include some of these major companies in the index. So, you're talking about the Anthropic, the SpaceX, uh and and OpenAI potentially? Exactly. Yeah. And they're going to And they're going to disband their rule I wonder wonder how that is going to impact I guess index traders it doesn't matter to, but how that's going to impact S&P benchmarking funds That seems like a pretty drastic move on their part. Well, and and the third component that they're going to wave also is normally they have a that they require that there be more than at least at least 10% of the of the stock of the company be publicly traded. And they're going to wave that requirement, too. I mean, it it's I think it's it's the kind of measures that if we talked about the things that they S&P would be known for for for being more of a stalwart of of a prudent index, right? Not not a more uh aggressive space like we find the Nasdaq to be. That but S&P I think they're trying to be competitive, they're trying to be relevant, and they're trying to include the types of companies that that I think are driving market valuations today. That could bite them in the ass pretty good, though. I I think um And Absolutely. And if And if I was to place my bet on that, I would say it would bite their ass more than the event of longer term. If in fact the waving the rights waving the ability See, what's going to happen is that investors are going to get pretty pissed off that in the Nasdaq 100 SpaceX is going to be allowed to enter into it, especially with the current structure. If you read anything recently about the structure of how the share class are on the, you know, lack of friendliness to shareholders in this deal compared to what Elon Musk owns. What's interesting about this is if they're allowed in five five days or whatever it is some short period of time before the lockup periods expire, the rug pull is going to be on the public markets that is going to be pulled by the insiders on this deal because you have fully valued deal, $1.5 trillion plus or minus a few trillion of of this it's a total rug pull potentially. Absolutely. You know, the I think when they make that change it they're moving away from another tenant and that is you know, we used used to be that everyone looked at as reported earnings, GAAP earnings as the true earnings of a company because that's what's really available after it's all over with to pay dividends, etc. Right? And to retain in earnings. >> Sure. And it was a couple of decades ago that that operating earnings became really popular. Wall Street said, "You know what? Why don't we add back the non-recurring stuff since it's non-recurring?" Well, I spent couple of decades in private equity and when we would value companies the one thing we wouldn't do is add back all the non-recurrings because for some reason companies you seem to have more different kinds of non-recurrings the next year and a different kind of non-recurring the following year. Sure. And so you need to we need to recognize that the businesses by definition have certain amount of that element and if you add it back in belief that it is going to be a suddenly going to be available perpetually to pay dividends or going to be available to to to retain in earnings and it's it's mistaken and I think what we just talked about here was they're going to bring companies in, they're going to have losses, but I'm they don't believe that they're going to be perpetual losses and so pretty soon operating earnings is going to get more and more visibility to compensate for some of these very large companies that have got very large losses. They'll they'll make the case that as reported earnings with those big losses in there aren't relevant anymore because these are companies that are distorting the index. Mhm. Mhm. That's just sort of it. I I Anyway, I I I think that to me it's it's it's emblematic uh that we might be um toward the later stage psychologically in of the kinds of things that we saw back in the '90s, the things that we saw in the '20s. Yeah. It is a a sign of frothiness when uh companies that have a decade of not century-old process decide that for the reason of competitiveness uh in a hypercompetitive world that they're going to wave some of they're they're going to take off some of the guardrails in a sense. That's I think that's that that's the key. And um again, none of this pretends and all even our discussion and I want to be really careful that that um as we talk about some of the risks on the horizon that they're not it it it they do not appear to be on the near horizon. >> Yeah. No, I get that. Uh at the same time, history has shown us that um that they don't a lot of times they don't appear on the far horizon. They just suddenly show up on the near horizon. Right. They just They just pop up. And and and it's often it's it's often not because one thing happens, but because several things happen at the same time to to cause that, you know, it's uh it's some factor you know, you you cuz you you mentioned some things on this discussion and I've seen some of the articles as well about there are certain retailers that are reporting um some challenging short-term trends that are beginning to appear. Mhm. Um some of the things that you mentioned early off that are driving this, whether it's uh some of the leftover spending from uh 4 or 5 years ago, uh inflation reduction act, etc. Big beautiful bill. Uh you know, there's just a uh I think there's a lot of there's a lot of spending that has a very short-term it's very I'm sorry. It has a short-term very stimulative effect. And we're probably seeing some of the effects from that right now. Mhm. Crazy. Good stuff. So, uh in closing and let's talk about uh of course we'll have the information on Crestmont and Ed on the show notes for episode number 973 over on the disciplinedinvestor.com. Uh so, make sure to get your butts over there and check it out by the way. But, we got this inflation situation. We got we talked about a little bit. We talked about the practicality of uh valuations and looking at either the Crestmont model or the Cape model, which both have their their similarities and differences significantly that showing both that and of your other research, whether it's any of the metrics you look at was seen you know pretty highly elevated, which again doesn't mean necessarily that that that elevation has to we don't have to have a crash for that elevation to come back to normal levels, but we have to see potentially which that could do it, but it also could be just a longer period of time of just a slow down, if you will. Just slowing the the process. So, that's something you mentioned. Um But, one thing you didn't talk about uh I don't think was we didn't talk about very much was this record level of debt that is now in the markets. It's a pervasive situation that has been um I I think the the propagation of debt that we've had, whether it's private credit, whether it's corporate debt, whether it's government debt, but the uh the the the acceptance of utilizing not just debt, by the way, but extreme debt. For years, Ed, we scoffed. I don't know if you were a scoffer like me, but we laughed and chuckled and looked at Greece and Italy and the pigs. Ah. Look at Oh my god, how Oh. They got 200 to you know one or two to one GDP to to to to um you know price to earnings or whatever particular measure we use GDP to debt or whatever you know whatever or or or even the GDP um um the debt to GDP I I I'm thinking this there was like so many different things and we would laugh. But we got to stop and look at ourselves in the mirror, don't we? Well, I think there are two things there. First is uh the debt that we have out there. The question is what did we get for it? And I think that the dilemma is that it isn't that we're looking at and seeing all kinds of productive assets as a result of we're looking at a lot of programs where that money went that the money spent. And it's not necessarily paying dividends. Um I'm I'm concerned about the debt, but I'm highly concerned about the trend in the increase in debt. The deficit. Yeah. The deficits that we're seeing that are appearing uh at the at the at at national, state, and local levels. And and how the trend is toward raising taxes, fees, and other things to pay for that. Which is just going to take it's a it's a it's a vicious cycle of pulling out that purchasing power. Pulling out that product that investment power for for um to meet consumption needs. And I think that's that's the farmer eating the seed corn. That's not a good thing to do. Yeah, we call that cannibalism. Another way to look at it. You know, you could probably eat your own arm for a little while and it'll just be be >> [laughter] >> probably nutritious, but after a while things get a little bit hairy, don't they? They do. They do. So, I I I think that's uh and and unfortunately right now it doesn't seem that that from all sides uh that there's there are there are small elements of of fiscal responsibility that are trying to influence the process, but I think there's a much larger constituency that sees um that has a desire to continue Yeah, good stuff. Ed Easterling, always a pleasure. Glad that you're going to be entering into Is this that where are we now? We're getting into the rainy season yet? No, not yet, right? Oh, no, it's too far over Oregon. Yeah. Oh, no, actually we're heading into the dry season. So we're on the west side of Oregon and here we're we're now moving from from a kind of a we've had a somewhat drier than average spring, but our summer times people don't realize up here summer gets very dry, almost no rain in July and August. Our our fields go brown. Really? Trees stay green, but the fields go brown and then then we get the rain back again in September and then we get most of our rain over the winter. So Aside from me talking to somebody in another country, we are probably the furthest apart distance-wise. South Florida to Western Oregon. Yes. >> [laughter] >> We have I could be probably I don't know would it be just as close for me talking to somebody in in London? I don't know. It's probably close. How do you think we'd be close? No. One thing we do have in common is your weather is relatively temperate although on the warm side. >> Yeah. But right and and our weather over here is also relatively temperate. We we don't get a lot of days on the western side of Oregon. We don't get very many freezing days and we don't get very many really hot days because we're we get this we get the Pacific Ocean right near us and so that brings cooler air in at night and uh and then during the winter it brings warmer air in because it's coming across the ocean. You do any fishing over there? There is some fishing out here. A lot good really good fishing. What What kind of What kind of stuff is caught there? Is there yellowfin tunas? Yellowtail? A lot lot of lot of tuna. You can go um You got the Pacific selfish? You'll have trout. Oh yeah, steelheads, yeah. Yeah. I was in not too far well, far but not too far farther than it is for me, but for you I was in Alaska about 8 months ago and just had a great time with the halibut and the salmon. Oh, at Alaska's great fishing. I've been there a couple of times. And did you camp out or did you stay in a lodge? I You know me, I'm staying at a lodge. I could camp out, >> [laughter] >> but at this age at this point I'm like, ah, I don't want to stay at a camp out. I'll stay at a lodge. Which by the way was not like a lodge. It was it was in between camping and a lodge. Okay. So, it was great. Good stuff. Hey, thanks for coming aboard the Disciplined Investor Podcast. We'll do it again soon. Andrew, you got it. All the best. >> And another week and another great podcast guest, great discussion about what's going on around the world, especially with UBI and the things that are make you go, "Hmm, what's going on with that?" But nonetheless, we have a lot to talk about now and through the end of the year. We have a whole slew of fantastic guests that are lined up for this show. We have great conversations, great education, information, all the things [music] you need to be successful in this crazy market, crazy world of investing. Stay tuned, stay here, the Disciplined Investor [music] Podcast. I'll see you next week. >> [music] >> This podcast is intended for informational purposes only and does not constitute [music] personalized investment advice. Investing involves risk, including the possible loss of principal, and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests [music] and may not necessarily reflect those of Horowitz & Company Inc., an investment advisor registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horowitz & Company is properly registered or is excluded from registration requirements. Any mention of third-party companies, products, or services is provided for informational purposes only and does not constitute an endorsement. 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TDI Podcast: The Next Phase (#973)
Summary
Inflation sticky like old pine sap… Another round of China meetings. Universal Basic Income –hints and whispers. And our guest …Transcript
This episode is sponsored by Interactive Brokers and world events unfold in real time. Now you can trade them. With IBKR prediction markets trade election climate and economic outcomes alongside stocks, options and bonds all on one integrated platform. There are simple yes or no contracts priced to reflect the market's view of probability. If your prediction is right, you receive $1 per contract and earn interest on your position while you're invested. IBKR markets turn market expectations into actionable trades. Prediction contracts are not suitable for all investors. Learn more at ibkr.com/predictions. The Disciplined [music] Investor is all about you, your money and the markets. Sit back and get ready for this edition of The Disciplined Investor Podcast. This episode [music] of The Disciplined Investor is sponsored by Horowitz & Company. If you're looking for a portfolio [music] manager, look no further. Horowitz & Company from seed through harvest [music] cultivating financial success. >> [music] >> Inflation is as sticky as old pine sap. Another round of China meetings happening. We're not really figuring too much will happen there. Universal basic income. That's something hints and whispers about that is all over the place and a warm welcome back. For this week's guest Ed Easterling from Crestmont Research. All this and much more on episode number 973 >> [music] >> of The Disciplined Investor Podcast. >> [music] [music] >> And welcome to this episode of The Disciplined Investor Podcast. [music] Welcome back to all of you that have been here before and of course if you're new, well, thanks for joining us this time and hopefully you'll stick around for some time into the future to hear all the good things that we have all about education and finance and getting to that point of financial security and financial independence and most importantly staying and being disciplined in a investment and investment environment that is dare I say choppy interesting sometimes hard to handle. So today what I thought we'd do would we spend some time digging into staying with the area of the markets for the most part because at the top of the show I think it's important to really discuss what's going on sometimes. You know, last episode we talked about things related to um things that weren't necessarily basic investing principles not necessarily. We talked about you know, these ideas of AI and what's going to happen there and how potentially AI is going to be or or maybe isn't going to be a taker of jobs. You know, the next employer and taking us you me and all of us out of our positions. And um I think that the big issue right now is that we have to look past that like markets are doing because right now there is I dare say a relentless mix of optimism [snorts] and um innovation that's going on right now and I would say unusual economic headwinds that are really pushing and pulling things really dramatically. So when we talk about some of the things that are going on right now, here we are mid-May 2026 and the stock market is pretty much showing remarkable resilience. The S&P 500 is up solidly year-to-date. The NASDAQ is great. We're over 7,400 give or take a couple of points either direction on a daily basis but right at that level that nobody thought we were going to get to for some time. Analysts forecasting continued gains, right? Looking at targets like 7,600, 8,100 by the end of the year. I mean, at this pace, at this pace, there's the potential for us to getting there much quicker. That's really kind of amazing if you think about what's going on. The idea that here we are in uh a year where there's so many headwinds and so many things that are going against us, but in fact, what we're seeing is that the markets continue going higher. Why? Why? People want to know. What's going on? Why is it that we're seeing this continuation of the substantial amount of gains that are going on with all the negative things that could be construed as problematic for the markets. All these things that are going on right now, are they are they a problem? Yeah, they are a problem. Yeah, we have inflation, we have um wars, we have a never-ending geopolitical tensions around the world, continuation of a basically neutered Congress, and um this is not going to stop anytime soon. But, what is it? People want to know like, why? Why are earnings continuing to do better? Why? Why are are are stocks Well, it is all about that. It's all about the incredible ability for companies that are the best in class to do what they can to shut out the outside issues. And if they are issues that are going to be problematic, they will figure a ways around. They'll figure ways to actually make things happen. And earnings are what is driving markets right now. Corporate America is delivering. There's no question about that, and we saw that last quarter with a high amount of of companies, you know, 80 plus percent of companies beating S&P 500 and the S&P 500 beating earnings estimates, um, use percentage of beating revenue as well and we're seeing this robust growth and this continuation of, um, the AI tech resurgence, the the new capital spending, the infrastructure demands, the growth and the the requirements that are going into this from chips to cloud services to everything in between. And what's really, I think, pushing investors is that forward estimates continue to rise. We've seen that now we're double-digit earnings growth that are looking at the next year ahead and think, you know, somewhere 10 to 15% or more in some cases, actually, and that is actually helping in a dramatic way push the valuations of stocks to levels where we haven't seen them in a long time. And I'm sure that that when we talked to Ed today, he's going to talk about the Cape ratio, he's going to talk about the Crestmont, uh, you know, earnings, um, ratio and and his number, the summation. Companies are posting record profits in many cases. And at the same time they're providing record spending. That record spending is creating even greater profits and the potential for even further, I would say, leveraged pro uh, uh, profits in the future. It's a it's a classic earnings-driven rally that is going on right now and that is something to really take notice of and this is extending the bull rally that many thought might stall out. We thought there was going to be a problem entering this war and to our surprise, gladly so, the fact is that, uh, things are doing pretty well. Now, there's going to be a cliff coming. I guarantee you that. There is going to be a a moment in time that will happen in the future that is going to cause a big problem when it comes to this particular issue of can earnings continue at this breakneck pace for any long aided period of time in the future and at the same time is that going to allow for investors to keep looking through, looking past, or not even looking blindfolded, just buying into the markets right now. It's not all sunshine right now. There's no question that inflationary pressures are causing problems. They're back in the conversation big time after what we saw last week. The latest CPI showed that we're at 3.8% on a year-over-year basis, 2.8% if we strip out um food and energy, which is hard to do, but we can. And I think this is a really good reminder that the post-pandemic inflation hunt, this whole issue that we've been trying to really get under wraps for the last number of years, is still not dead. I start out by saying that it's sticky like pine tar. You ever dealt with pine tar, you know what I'm talking about. We just can't get rid of this and now we're at three-year highs for some of these numbers. So, you look at all this and you put it all into a a giant bowl, you shake it up, you mix it up, and you look at it and you're like, "Wow, what a mess." But in fact, despite all that, sentiment, not consumer sentiment, but investor sentiment stays bullish. Why? Earnings momentum. It gets back to the same situation. Earnings momentum is driving the markets right now. And this is kind of an AI super cycle that we're seeing right now that providing this powerful offset to all the problems that we're seeing and investors are willing to do whatever they got to do to get in on it as fast as possible. Forget the fact that, you know, ratios are high. Forget the fact that we're seeing that the PEG ratio, PE ratios, we're seeing that, you know, the the market itself and individual companies are off the charts in terms of historic numbers. It's this environment where we see, you know, bad news is good news, good news is good news, and everybody wants to believe that all this is going to end and be, you know, great on the other other side. And it may. It may be. And that brings me to something that's fascinating that happened just this week, and I think we need to talk about this. One of the things that is happening, we saw that that South Korea, South Korea has been on fire. I think it's up 175% on a year-over-year basis, up 78% last year, up 80% already this year. They have only a few companies, SK Hynix, Samsung, and a few others, that are really fueling this entire rally, but nonetheless, it's a rally that is bringing incredible amount, trillions of dollars of increased market cap. I think it's up to 3.1 trillion in their total market cap of their market, getting towards uh where where Germany is. And and that's a far cry from where they were just 2 years ago. This is a small country. They only have a finite number of things that they can really produce. And in fact, one of the problems that they're having, and why they were the hardest hit when the war happened, was that they rely basically on all of all, 100% of their oil from outside of their own country, thereby utilizing primarily the Straits of Hormuz for delivery, and that's causing a major energy crunch there. But again, it doesn't seem to matter when everybody's just looking to buy the chips companies. And that's why it is powering what's going on there. Now, last week what we saw was very interesting. There was some conversation going on. There was a um this very interesting idea that's been floating around for a long time called universal basic Income. Essentially, the deal is that if AI is going to take everybody's jobs, what are we going to all do for money? Well, the concept is that we'll have this this income stream that is paid for by the AI generation, by the generation of maybe the power in the power grid, or maybe the the the efficiencies that it creates through tax, etc., that the government will provide. Well, just this week they came out with something, the presidential advisor Kim Young-bom. He came out with this concept of a national dividend, or I think they even called it something like a a citizen's dividend. And that citizen's dividend is essentially a redistribution of the earnings of many of these companies from the AI and semiconductor space, and they're putting that into the public hands. Back to the public. So, it's kind of a a tax that goes back to the individuals. Now, South Korea is clearly ground zero for the surge in chip demand powering AI, and companies again like SK Hynix and and Samsung, they're printing money. I mean, they're just printing the money. Let's go Let's go go go go go go. Just giving it out uh to them, and they're just making bank. No question about that. But, the country built this industrial base over decades. And they're now saying, you know, "We have been building this infrastructure for such a long time for you to create the kind of profit you need to pay us back now, and the citizens of our country that pay the tax into this, and that we helped you do this with, are going to get the benefit." UBI. They're not calling it necessarily UBI, they're calling it a citizen's dividend. But, the question I ask is, how much of this is going to start spreading, the idea spreading that we have this very strange pop strange populist movement throughout the world that is both liberal and conservative, that is hard left and hard right, that is probably going to provide for a lot of conversation about how something like this should really play into the elections. And I would venture to say that there's going to be some talk about all these big money baggers making money, the Microsofts and the Metas and uh Nvidias of the world and AMD and even Intel that the government is now owns a piece of, how these companies should be actually thanking all of us and paying us back as individuals with a citizen's dividend. There's going to be talk about this. There's going to be talk about windfall profits, how this is a bad thing, and how companies aren't paying their fair share, and how again, we should redistribute this wealth, this boom to fund things like youth startups, real basic income plus, support for artists, um strong- stronger pensions, and even social investments, and even fortifying the municipalities around the country. That is something I think that's going to be extremely out there. Now, do I agree with it? That's another discussion entirely. This is not something I think is part of capitalism in any way, shape, or form, but it's going to get some play with the amount of money that's being generated right now is going to be something. Now, from a capitalism standpoint, what happened? Well, when this was announced, Korea was down 5%. Now, mind you, it's been up 3%, 4%, 5% day after day after day for the last month. So, a 5% hit, which is pretty substantial, may seem like a lot, but it's really not that big of a deal. Considering this idea, this this bold idea they're calling it that echoes this, you know, UBI, this universal basic income concept, um markets are not going to be happy with it. They're going to find this as a money grab of epic proportions that are being done to the companies that are the backbone of corporate America. And what's going to happen if that happens? I will tell you. Companies will start laying off more people, causing more problems. It's a problem. So, we're going to have to watch this very carefully. And as we head into 2026 and we get deeper and deeper into this year, the markets are telling us, "Hey, we like the earning story really a lot." Um I have a feeling that this UBI discussion is going to be out there through the midterms, probably. And other countries may even pick it up. But with inflation rearing its head as it is and with the confluence of the potential for a slowdown earnings, eventually it's probably going to end up being a dead end. So, this South Korea issue makes us think a little bit bigger. It makes us want to ask questions. I get it. And a lot of people who have not participated in the market upside want to think and want to know, "Hey, where's my Where's my potential in all this, right? Where am I going to make all the money from this? I see everybody else making money." Well, you know what? You should have invested in the markets. You should have invested in the AI companies. You should have invested in this in the solar uh the the semiconductor companies and everything else out there. So, we're going to talk more about this with our guest today, but I wanted to kind of give you some of the things that are going on that are pretty fascinating in the world of investing. Let's take a minute to talk about Interactive Brokers because, you know, you research your investments, right? You analyze markets, but have you researched your broker? For the past 3 years, Interactive Brokers individual clients average a 24.3% annual return, beating the S&P 500. Lower costs, competitive rates, and access to over 170 global markets helped investors keep more of what they earn. The broker you choose matters. Interactive Brokers, member SIPC. Learn more at ibkr.com/performance. That's ibkr.com/performance. Let me talk about our guest for a second here and tell you who he is. His name is at Easterling. He's a founder and president of Crestmont Holdings based in Oregon. It's an investment management research for firm that publishes provocative research on the financial markets at crestmontresearch.com. He has over 30 years of alternative investment experience including financial markets, private equity, and business operations. So, at Easterling, man, it's been a while. What's going on over in Crestmont? Well, uh things going well here. I think we're sitting we're watching all the different factors we have uh kind of driving this market uh to new highs and just wondering uh what where the where the trend is headed and what the risks are underneath it. Uh you know what? Let's let's let's you and I go back down memory lane for a second and let's talk about a month or two ago. With all the things that you now know to be true. But looking back, which we didn't know, is there some kind of space in between reality of what we know and what it seems we should have known. In other words, let me say that a different way. War, inflation, higher oil, um tariffs being turned back, blah blah blah blah blah. All of that stuff, that uncertainty, did not call for at that time markets to new highs. But yet here we are. So, a little splaining needs to be done. I think that's a good place to start. So, so tell me what what is it? Is it just the incredible bleed of CAPEX from the tech, the extraordinary amount of stimulus that's being brought to everybody right now from the excess amount from the one big beautiful bill act and the withholding allowance that's been given back tax returns and on top of that the fact of the matter is that um tariffs are now being repaid back to companies. Is that the three things? It's got to be more than that, doesn't it? I mean, it's kind of crazy. Um and and then and then investor psychology and the the just a sense that we've got um uh this this this bull trend that has a lot of momentum behind it. You know, if maybe kind of getting into this just put in perspective. Remember, I'm watching this as a as a market climatologist. So, I think in terms of multiple years or decade as opposed to the short run. At the same time, trying to weigh these things that you just mentioned that are things that all kind of juice the market in the short term. Um they often come with with trade-offs and and >> [clears throat] >> and um I think the effect of that is sometimes when you kind of juice it up front you do have a period that sort of compensates for that on the back end. But, when I think about it on a on a long-term basis, many of the things that you just mentioned and those are [clears throat] things that are that are affecting the market and the market's perception are not things that are going to endure for another decade or longer. Yeah, the these are these are short-term phenomena and and trying to gauge the long-term from the short-term is like trying to say that it's cold outside we're entering a new ice age. Right, which by the way, doesn't mean that we shouldn't take advantage of this short-term move. It's just we need to recognize that at some point it's it's not going to be long-term sustainable. Does it seem to you that almost every down stroke of the market is like a bat signal to investors to start getting their money ready and throwing it hard into the markets. It seems like there's more investor sentiment that turns positive right off the bottom in a big way than anything that I've ever seen in in in a long time. This has happened by the way consecutive times over the last decade, let's call it, than the last 30 years that I've been looking at markets or last 200 years that I've been studying markets. Absolutely. I think um Again, that's part of the resilience that's in the market. As we see things bounce back so quickly, we look at it forecasts for earnings growth, double digits in and and more. Um We we uh despite the fact that we get these rising inflation reports, I think there's kind of a tendency to to want to see that as temporary. And so, we look past it. I think that's what leads investors to take advantage of every bargain opportunity. So, you've I think long argued that and as you're telling me that markets they they move in these long cycles. So, when we look at these cycles and you study these cycles as a market climatologist, as a market watcher, uh two questions. Where do you think we are in that cycle today potentially? Now, you want to use a baseball term, you want to use some other percentage, fine. And and with that, what do you think maybe is the biggest mistake investors are making as a result? I would say right now um a lot of the factors Now, and by the way, when we talk about this markets roaring ahead, we're going to see above average returns, it doesn't necessarily mean that the offset to that are negative returns or crashes. Okay. What it does mean historically is that we had above average periods and below average periods, and the average rarely happens. Okay. >> So, one of the consequences here could be just an extended period of below average, which would still be disappointing, especially if people are are budgeting based upon this level of return. Now, you said where do we where are we Let's see, sports analogies. By the By the way, I'm I'm not the right guy to bring up sports analogies with. Yep. >> But I I I would say we're long in the game. Uh when you look at all the factors of where the economy is, you look at the profit margins, uh you look at at at asset valuations, both homes and stock market and other assets. Um Things are late cycle. So, I mean, let's use a clock. Are we at 6:00 p.m.? Are we at 3:00 p.m.? We at 9:00 p.m.? Well, clocks have a fixed dial. And I think in the market uh um you know, I I think maybe this is a discussion about Icarus more so than it is the clock. Icarus has moved past that point of of no return, but it can go a lot further before the sun will melt off those wings. And so, this market could have a lot more beneath it to keep it going. And is that your >> but but it could but the alternative is it could not. So, go ahead. Yeah, I mean, I I agree. I mean, I understand that there is a lot of investor uh sentiment that's positive, which got By the way, blows in the face of consumer sentiment, which is fascinating. Uh and it blows in the face of what we're seeing from the long haul higher potential cost of fuel CPI, which we'll get into a second, uh inflation and and but but I think you know, what you're saying to me is that I think the undertone of what you're saying is what is likely the the the right thing is like, you know what? There's no reason to panic just yet. I I think that's Oh, absolutely. With the um there's no reason to at the Oh, there's no reason to panic. And matter of fact, and good investors never panic because they they're prudent going in. Right. >> And and they're always established in a way that they can be resilient against pullbacks. And >> [clears throat] >> They know you can't always avoid losing money, but you can certainly be more resilient to the risk. But valuations, right? Valuations is something you talk about a lot. It's something that you really focus in on. That's part of your your your process, right? So >> Absolutely. And I would and I typically focus on on price-earnings ratio and and dividend yield and other measures of valuation, but as you've seen, you can pull a list of the top 10 valuation methods what measures, whether it's Tobin's Q, whether it's market value to sales, market value assets, all of that out there. All those measures are elevated. Like every single one, right? Every single one. Absolutely. Now, the question is is it justified? And there are two key factors that drive that valuation level. One is the growth rate of earnings, and the second is the inflation rate. And both are moving higher. The inflation rate is is is elevated. It you know, every attempt we get to get it back to that price stability level below 2% is hasn't been successful. So, I think jury's out on that one, at least for in the near term, certainly for the next year or so. In terms of of growth rate of earnings, they have posted growth rates that are far in excess of the economic growth. What that translates into is profit margins, and profit margins are near record levels right now. And from a business cycle standpoint, that tends to suggest late in cycle, not early in cycle. Why is that? As companies, you know, if business is good, companies are expanding, sales are positive, profit margins increase. When things at some point margins get large enough that it brings in new competitors. When new new competitors come in or less efficient competitors, they get the competitive factor drives those margins back down, and that wipes out the the marginal player, and then the business cycle starts over again. So >> So This is This is this What's interesting is there's a tale of many stories here. Where we see an incredible amount of CapEx being spent, whether it's circular financing, vendor financing, or direct financing. I don't care how it is, but the bottom line is we have huge, I mean, enormous. We're not talking about 100 million. We're talking about multiple hundreds of billions of dollars being spent on stuff has leakage, by the way, in that. And that ends up somehow in the markets, but it also ends up in the hands of players that it will be increasing their prices, which will then be forcing the other players that are spending the money to increase their spend because they need this. They are not walking away from like, "Oh, you know what? I don't know if we need that chip." Nope, they're buying it anyway, regardless of the price, no matter how how um tough it is to get. They're going to go, and they're going to oversubscribe to it because they don't want it going up. They're buying more than they need to make sure they have the compute. We got that. Fine. That's That's one story. And that is uh impacting the biggest of the big companies in a lot of different ways, but because it is that, and we have a market cap weighted indices out there, that's a good thing. Okay, fine. We hear from We hear last week from a company like I think it was last week or the week before, Whirlpool. They come out, and they talk about I some horrible numbers, by the way, and their outlook is terrible, and they are saying that the war in Iran is creating a depression recessionary mindset that they haven't seen in a very long time by their customers. People are just not buying. Now, it's I don't know, it's just not buying their goods, not buying their washing machines and their dryers and the I wouldn't cuz I think they stink, by the way. I just got rid of all my Whirlpools. That's a different discussion, but nonetheless, maybe something's there. And then And then finally, we see another example on the other side of a company like Shake Shack. Shake Shack came out with earnings couple weeks back a week and a half back I think it was and what was interesting about that was if you really just take a moment just a second and think about it and you think about you know Shake Shack what what's happening. Shake Shack is uh they're down they were down huge on their number uh the lowest they've been I think that high of Shake Shack back um about a year ago was what uh 130 currently trading at 68. They're in the market with burgers that's what Shake Shack does right? Plus other things are but they're in the market of burgers and they put tomatoes on it all those prices are skyrocketing beef prices out of control not to mention GLP-1s that are stopping people from eating a lot of this stuff so they are in that too. So we got a weird market environment that doesn't seem to want to go down very much for anything but yet underneath it there's a rotation and weird things happening. I think part of it is there's a complacency uh that's been driven by the fact that uh um you know economically we haven't been been bitten with a recession with a real recession in such a long time. Matter of fact uh put it in perspective the last recession technically was the two-month recession at the at the start of COVID and I don't think anybody thinks that was a cathartic a kind of a typical you know reset recession. Mhm. Right? Mhm. So what that does is it takes us back to the start of that period um which would have been essentially the at the 2009 at the end of the '07-'09 recession. So to put this in perspective and I think I think a lot of people consider that the what happened in the technical two-month recession during 2020 to be let's call it a footnote kind of COVID-caused. If we look at the current expansion as having started in in 2009 and run to present matter of fact we're now over 200 months 200 >> without a recession. Put that in perspective Without without without a declared recession. Without a declared without without a without a cathartic recession. Again, I'd like to There was a declared recession at the COVID. NBER did declare that 2 months. Right. Uh February of of 2020 to April. 2 months. February to March, March to April. As a as a recession period. But but I would I would consider that from an from an economic standpoint that the economy that that was a that was not a cathartic. It wasn't a reset. Matter of fact, if anything, ironically, that recession probably caused more dislocation than it corrected. >> Yeah. Cuz you know, recessions happen because prices get out of line, profits get out of line, spending gets out of line, capital gets out of Things get out of line. Labor gets too tight. And that's what drives recessions. So, the last time we had one of those was the '07-'09 period. The longest recession in history, if we again excluding the current period, was 120 months. And then before that, 106 months. I mean, so we're nearly twice as long as the historically long recession. I'm sorry, expansion. >> Expansion. Yeah, I was thinking what you what was that? I don't remember. I don't remember seeing 10 years. Okay. Expansion, exactly. Expansion. So, expansion longest longest expansion in history prior to the current, 10 years, round number. Yes. And and I think the message there is that it time does not drive time does not drive a recession. Dislocations drive recessions. So, I'm not suggesting for that because we're long in the tooth on time that we're due for a recession. What I'm saying is that that it has been a long time and if we look at the the dislocations that are out there, some of the things you just mentioned, magnitude of of what some would consider irrational spending on creating data centers and and power plants, etc. to just a power AI. If AI doesn't turn it an AI, like dot com, could could change life as we know it. But, if it doesn't create profitability and perpetual profitability, it won't or at least sufficient profitability, it it won't have paid for the it won't justify the all the expense that went into it. >> Yeah. You know, it's interesting. I think I was thinking about just the other day about this whole idea of the chip cycle. And um again, a couple weeks ago AMD came out with their numbers and they came out with a stellar report. Just absolutely beautiful. And one of the things they talked about was and what they stock went up so much was that over the next uh 3 or years, they're predicting about a 35% increase in revenue year over year for the next X amount of years. And what's interesting about that was and why people got so excited and off-sided about it was just in November, they were predicting about 17% of increase. Now, if you stop for a second and think about that. They were thinking 17% increase year over year for a number of years. And just 6 months later, was that Wait. Hold on a second. November, December, January, February, March. 5 months later, they're talking about how there's going to be a doubling of that number over the next 4 years on an annual basis. These are big numbers we're talking about now. Mhm. But, I find it very fascinating that people seem to have forget the entire semiconductor cycle over history, which has been boom to bust, boom to bust, boom to bust, right? And uh you studied it, you know it, right? Semiconductors are definitely one of the most cyclical items out there. Right. What makes us so sure that in 6 months from now, they're not going to have a major tweak to their numbers? Just as easily as they had a major tweak to those cuz I think psychology is well, increase from 17 to 35, then maybe go from 35 to 50. But, what happens if there's another technology, lack of money, uh the list goes on and on. Have you thought about that? That's pretty interesting concept, right? Well, I I um um that and and other and and other factors that uh that that we have sort of extrapolated out, whether it's that earnings S&P 500 earnings growth at I mean, you know, projected to be more than 20% year over year. I mean, what happens when that gets revised back to something more realistic? At some point. And again, it doesn't mean we won't have a year or two or three of that, but what we won't have is 10 years of it. What we're very unlikely to have is 10 years of it. Well, that's Unless this time's different. >> That goes into a discussion of CAPE that I know you're very fond of talking about. I'd like you to do me a favor. I'd like you to spend a moment talking about cuz this is something that you is really in your in your bag of tricks, I think. The CAPE ratio, what it is, how you look at it. There's different ones to look at. CAPE 20, CAPE 10s, and all that, right? Different ones. But different periods, but basically this is the Shiller created device to figure out valuations that are really uh appropriate. Y- Well, yes. And and a and a a big element of this is that the uh earnings go through a a business cycle. And that business cycle can be 5 to 10 years. And so, CAPE is conservative and it uses 10-year period. And so, it looks at the earnings that happened over the last 10 years. The ups and downs, put them all together, inflation adjust them, and use that as your earnings base against the current valuation level. Because what what Shiller found was that at times when we have a soaring profit margin, >> [clears throat] >> that tends to understate PE, and then when you get the pullbacks in earnings, that tends to overstate because you've lowered the denominator in relation to valuation. So, the way to normalize that, or the way that he normalizes that, is by taking 10 years worth of earnings, inflation adjust them to present, and then use that as a as a denominator. And it's been a pretty good It's not been a It's not a trading signal in any way. Yeah, because it's it's so it's so it it's so long till something moves, right? Right. So, therefore, it it but it does tend to reflect the normalized longer-term trend of that of relative valuation. And so, that's that's where the that's where the CAPE is is useful is to put valuation in relative perspective. Um Crestmont has a different version. Um the Crestmont PE is based on looking at the relationship between the long-term relationship between um earnings and GDP. The economy. Mhm. And historically, those again, there's a business cycle that runs uh at at at a much more um a rapid pace than the economic cycle, but by looking at the normalized relationship between the two of those, um it like the CAPE, uh if anything, the two of them come at come at a normalized PE very differently. But what they do provide is a very they have a very high correlation between them because normalizing earnings gets out so much noise that can be distorting. The reason all this is important is that what Shiller has shown, what Crestmont has shown, is that the normalized PE is a pretty good predictor of longer-term returns. Forward forward returns. Of forward returns. >> Right. And cuz if you buy things at an expensive rate today, what you can count on is you will have a lower dividend yield that those cash dividends relative to a higher price will have a lower yield, right? That's just math. The second thing you can count on is that when you start with high valuations, your dividend yield is lower, your likelihood of expansion of PE becomes lower at higher levels, and therefore, your 5 and 10 and 20-year returns will typically be below average, and that's what history has shown. So, what what Shiller um uh uh believes about the CAPE and what I believe about the cross my PE and the cape are that they're good indicators of what we can expect for the next decade. Not necessarily what we can expect for the next few years or even five. Now you put your name on this, so you must have a lot of strong belief and and feeling that this is something that you could be proud of and something that you could actually rely on and something that when you talk about is not going to let you down. So what is it telling you exactly right now? It's telling us that we're set for a for a decade from this point of below average returns. Now could we say that 2 years ago? Oh, absolutely. And then if that's the case, just follow me here a second. If 2 years ago we believed we were going to have below average returns over the next decade, okay? Now we subtract 2 years, we're 8 years into that part of the decade, right? And we've had above average returns over the last 2 years. Does that mean we get below below average returns? The well, and the answer is yes because valuations are now higher than they were a few years ago. Um by the way, likewise, we could have not just 2 years ago, you could have 5 or 6 years ago when valuations had moved up to levels that were above historical um were in relatively high levels. One would have said then that they would have been below average. I think the biggest difference is, and you can look at some of Grantham's, you know, estimates and forecasts and others for returns, um they have gotten um markedly more negative because at at at higher higher valuations, um at some point well, so something has to change at some point or there's a there's a reckoning of valuation back to to to more rational levels. But it doesn't but again, it doesn't mean it takes a crash to do that. What it can mean is just a kind of a choppy muddle along period of below average returns that that the aggregate matter of fact, let's put in perspective. When the market pulled back even in in coming off of the 2000, we had a decade of the 2000s that was well below average returns. Right. Only when we got out into the into the 2010s and then we start to move valuations back up, did we start to see returns pick up and and the reason we've seen such significant multi-10 year returns over the last few years um the ends of 10-year periods being so high is we we now have a cape at at 31. We now have uh even reported PE without doing normalized is is over 25. And historically those those numbers would be around 15 or 16. Mhm. Mhm. Today the the it's interesting because there are a lot of beliefs and there's a lot of people that are creating predictions. You know, we have the Tom Lees of the world or the you know, that that they come on and say uh you know, we're going to have a whatever the number 7,800 of the S&P by the end of the year. Um and and he's been right. And I don't know by the way if the market's actually would have been down if he still would have these beliefs, right? This seems to be a constant bullishness and television and uh financial shows have a they they like it. And as a matter of fact, you know, you see a Jeremy Siegel come on the show when things are down and out, they bring on Jeremy Siegel cuz he's usually although lately he's been a little bit less um you know, exciting in terms of being bullishness. But there's all these people doing predictions on there. But I think you often emphasize the discipline side, which is good and that's why you're on the discipline investor podcast by the way. But what does discipline practically look like for investors in the next few years and what you would look to do as well as an investor. I think what it says is that uh we want to have a an exposed but a um uh uh relatively hedged in that in in of sorts uh position in the in the markets. Markets, whether it's bonds, stocks, etc. We need to to recognize that uh that there are ways to structure portfolios. Uh and again, I'm a market climatologist. Just I'm uh and as people found in Unexpected Returns, the book I wrote uh over a decade ago. It was 15 years ago. Um almost 20 years ago. I'm Time flies. Stop right there. You're going to It could be 30 by the time you're done. Go ahead. It does. It does. [laughter] So, um what what >> [clears throat] >> the the message uh I think it's that um again, we leave it to the experts to pick the way to structure portfolios, but the goal is to be able to to participate in the upside at a greater rate than you participate in the downside. To recognize that there are ways to structure portfolios, ways to diversify portfolios, diversify for risk. Um so that if we do have those pullbacks, we do have those storms, that we still um get a reasonable level of return and that we again, remember uh the first rule of investing is don't lose money. I in in realistically for many investors, it means lose less money because losing less money in a big downturn has a significant effect because the the losses are disproportionate to gains. If you lose 10%, you got to make 11% to make it up. But but if you lose um 50. 50. That's the one I always give people. I always say I give a quiz. This is my This is my baseline financial quiz for investors who just want to like let it all loose, you know what I mean? I say, "If you lose 50%, how much do you have to make back to get to to one?" You know what their answer is? You know what their answer is? It's 100. It's 100%. >> Well, you know what the answer usually is, right? 50, right? Of course. Yeah, and and and just like the Nasdaq investor that lost 80%. Okay? It takes 400% to make that back. I mean, it's just the it gets dispropor- the loss is disproportionate to gain. So, um it may not sound like a big difference, but if you if you can control if they're in a 20 or 30% drawdown market, if you can contain your losses to 10%, you're well positioned with 11% to get back to even, but the other portfolios that were just passively exposed have a long way to go. Yep. Yep. But I again, I'm I'm I'm I I shouldn't be saying things like that to the disciplined investor because obviously that's all what that's a big part of what discipline's about. >> that is the funny thing is, Bo, that that I this leads me to my next thought that I was thinking about as I'm talking to you here is when we talk about these disciplines, we talk about all the things that are going on, we talk about the news, we talk about the the flimflam trading and all that, and these crazy commercials that you see. I By the way, I'm pretty much off of most I I'm off of most uh regular news. You know, the regular news, big news station, off of that. Um CNBC is in the morning is just killing me. I I can't I can't deal with it anymore. Um there's some guests here and there or background or news and all. Bloomberg uh television, by the way, to me is the place If I want to know about investing issues and economy and global issues, non-pol- politics, I just Bloomberg's the place. It's just and most people have this, and I don't know why people aren't If that's what you want to do. The other stuff is all for entertainment, it seems to me. But my point is when we talk about these disciplines, we talk about, you know, what people do with predictions and and and what this means for people if we look at all the things that investors are looking at and that's what's widely accepted as the belief that's inherently ingrained with most investors today. What do you think that history will prove wrong? I think well, I think history will prove right that that there there was over optimism in this at this period. And that um um and it will prove that discipline is important for investing that that diversified approach is very important to investing and I'll I think some of that's being lost in this environment. You're talking about you know, irrational exuberance to a degree. Well, I'm I'm just thinking about some of the signs that are out there. I you know, one thing that I I came across my desk a week ago or so is the change that Standard & Poor's is proposing for IPOs. Uh they're talking about because of some of these you mentioned AI and all the spending etc. etc. Well, we know the AI companies lose a lot of money. But they're they have these huge valuations and so they're looking to go public. Well, they're likely they're going to wave the rule that requires that IPOs be profitable to get into the index. And they're going to they're going to delay they're going to accelerate the period of time from 12 months to 6 months that they have to wait. Well, this is what the NASDAQ is doing. The NASDAQ is appeasing SpaceX when they come out with with within I I I want to say it's 5 days or something crazy that they'll be included in the NASDAQ 100. And to me that is and and and you think about as well the um how much how concentrated the the index gains have been in a short list of stocks. So, we're reducing transparency. We we have this ultra high concentration of of effect that I think it's translated I think most people rather than looking at buying a a basket of 500 stocks, they what they're really getting is kind of half a basket of or more than half a basket of seven stocks and a basket of 493 stocks, but there there's a perception of diversification that doesn't exist because it's because it's so concentrated in its in its in its gains. I had a guest I had a guest on a couple weeks ago that talked about this. We talked about this cuz I talk about this a lot. I talk about this this this cuz it's still to this day hard for me to wrap my head around the market cap weighted index concept with all these big companies being the largest of them, right? >> Yes. And and with people, like you said, thinking it's diversified, but but he said something to me that was really I was like, "Mhm, you know, that makes a lot of sense." Cuz we were talking about momentum investing. And we're talking about trend following. And trend following always was like this idea that I read about Michael Covel's book, you know, the the turtle traders and all that. I I read about this and a few others out there and I'm I was like, "Ah, I don't get it." I literally I don't get it. And uh he said something to me, I think it was Was it Meb? I don't know. It was somebody I forgot it was the last couple weeks. I'm not sure who it was exactly, but anyway, the idea was this, that if you want to do the ultimate trend following or maybe it was Howard Lindzon. If you want to do the ultimate trend following, just follow an S&P 500 market cap weighted because what's happening is the larger companies are getting larger. And you're following that trend as they get larger. And technically, the S&P 500, the Nasdaq 100, the is the ultimate trend following tool, if you think about it, for the for the lazy trend follower. Because of the current market dynamic. >> Yeah, cuz the current market dynamic and the way that of the construction of the constituents inside of that particular index. I I don't know why S&P Do you know why Do you have any inkling why S&P's going to do this? Oh, I think that they it's it's trying to um include some of these major companies in the index. So, you're talking about the Anthropic, the SpaceX, uh and and OpenAI potentially? Exactly. Yeah. And they're going to And they're going to disband their rule I wonder wonder how that is going to impact I guess index traders it doesn't matter to, but how that's going to impact S&P benchmarking funds That seems like a pretty drastic move on their part. Well, and and the third component that they're going to wave also is normally they have a that they require that there be more than at least at least 10% of the of the stock of the company be publicly traded. And they're going to wave that requirement, too. I mean, it it's I think it's it's the kind of measures that if we talked about the things that they S&P would be known for for for being more of a stalwart of of a prudent index, right? Not not a more uh aggressive space like we find the Nasdaq to be. That but S&P I think they're trying to be competitive, they're trying to be relevant, and they're trying to include the types of companies that that I think are driving market valuations today. That could bite them in the ass pretty good, though. I I think um And Absolutely. And if And if I was to place my bet on that, I would say it would bite their ass more than the event of longer term. If in fact the waving the rights waving the ability See, what's going to happen is that investors are going to get pretty pissed off that in the Nasdaq 100 SpaceX is going to be allowed to enter into it, especially with the current structure. If you read anything recently about the structure of how the share class are on the, you know, lack of friendliness to shareholders in this deal compared to what Elon Musk owns. What's interesting about this is if they're allowed in five five days or whatever it is some short period of time before the lockup periods expire, the rug pull is going to be on the public markets that is going to be pulled by the insiders on this deal because you have fully valued deal, $1.5 trillion plus or minus a few trillion of of this it's a total rug pull potentially. Absolutely. You know, the I think when they make that change it they're moving away from another tenant and that is you know, we used used to be that everyone looked at as reported earnings, GAAP earnings as the true earnings of a company because that's what's really available after it's all over with to pay dividends, etc. Right? And to retain in earnings. >> Sure. And it was a couple of decades ago that that operating earnings became really popular. Wall Street said, "You know what? Why don't we add back the non-recurring stuff since it's non-recurring?" Well, I spent couple of decades in private equity and when we would value companies the one thing we wouldn't do is add back all the non-recurrings because for some reason companies you seem to have more different kinds of non-recurrings the next year and a different kind of non-recurring the following year. Sure. And so you need to we need to recognize that the businesses by definition have certain amount of that element and if you add it back in belief that it is going to be a suddenly going to be available perpetually to pay dividends or going to be available to to to retain in earnings and it's it's mistaken and I think what we just talked about here was they're going to bring companies in, they're going to have losses, but I'm they don't believe that they're going to be perpetual losses and so pretty soon operating earnings is going to get more and more visibility to compensate for some of these very large companies that have got very large losses. They'll they'll make the case that as reported earnings with those big losses in there aren't relevant anymore because these are companies that are distorting the index. Mhm. Mhm. That's just sort of it. I I Anyway, I I I think that to me it's it's it's emblematic uh that we might be um toward the later stage psychologically in of the kinds of things that we saw back in the '90s, the things that we saw in the '20s. Yeah. It is a a sign of frothiness when uh companies that have a decade of not century-old process decide that for the reason of competitiveness uh in a hypercompetitive world that they're going to wave some of they're they're going to take off some of the guardrails in a sense. That's I think that's that that's the key. And um again, none of this pretends and all even our discussion and I want to be really careful that that um as we talk about some of the risks on the horizon that they're not it it it they do not appear to be on the near horizon. >> Yeah. No, I get that. Uh at the same time, history has shown us that um that they don't a lot of times they don't appear on the far horizon. They just suddenly show up on the near horizon. Right. They just They just pop up. And and and it's often it's it's often not because one thing happens, but because several things happen at the same time to to cause that, you know, it's uh it's some factor you know, you you cuz you you mentioned some things on this discussion and I've seen some of the articles as well about there are certain retailers that are reporting um some challenging short-term trends that are beginning to appear. Mhm. Um some of the things that you mentioned early off that are driving this, whether it's uh some of the leftover spending from uh 4 or 5 years ago, uh inflation reduction act, etc. Big beautiful bill. Uh you know, there's just a uh I think there's a lot of there's a lot of spending that has a very short-term it's very I'm sorry. It has a short-term very stimulative effect. And we're probably seeing some of the effects from that right now. Mhm. Crazy. Good stuff. So, uh in closing and let's talk about uh of course we'll have the information on Crestmont and Ed on the show notes for episode number 973 over on the disciplinedinvestor.com. Uh so, make sure to get your butts over there and check it out by the way. But, we got this inflation situation. We got we talked about a little bit. We talked about the practicality of uh valuations and looking at either the Crestmont model or the Cape model, which both have their their similarities and differences significantly that showing both that and of your other research, whether it's any of the metrics you look at was seen you know pretty highly elevated, which again doesn't mean necessarily that that that elevation has to we don't have to have a crash for that elevation to come back to normal levels, but we have to see potentially which that could do it, but it also could be just a longer period of time of just a slow down, if you will. Just slowing the the process. So, that's something you mentioned. Um But, one thing you didn't talk about uh I don't think was we didn't talk about very much was this record level of debt that is now in the markets. It's a pervasive situation that has been um I I think the the propagation of debt that we've had, whether it's private credit, whether it's corporate debt, whether it's government debt, but the uh the the the acceptance of utilizing not just debt, by the way, but extreme debt. For years, Ed, we scoffed. I don't know if you were a scoffer like me, but we laughed and chuckled and looked at Greece and Italy and the pigs. Ah. Look at Oh my god, how Oh. They got 200 to you know one or two to one GDP to to to to um you know price to earnings or whatever particular measure we use GDP to debt or whatever you know whatever or or or even the GDP um um the debt to GDP I I I'm thinking this there was like so many different things and we would laugh. But we got to stop and look at ourselves in the mirror, don't we? Well, I think there are two things there. First is uh the debt that we have out there. The question is what did we get for it? And I think that the dilemma is that it isn't that we're looking at and seeing all kinds of productive assets as a result of we're looking at a lot of programs where that money went that the money spent. And it's not necessarily paying dividends. Um I'm I'm concerned about the debt, but I'm highly concerned about the trend in the increase in debt. The deficit. Yeah. The deficits that we're seeing that are appearing uh at the at the at at national, state, and local levels. And and how the trend is toward raising taxes, fees, and other things to pay for that. Which is just going to take it's a it's a it's a vicious cycle of pulling out that purchasing power. Pulling out that product that investment power for for um to meet consumption needs. And I think that's that's the farmer eating the seed corn. That's not a good thing to do. Yeah, we call that cannibalism. Another way to look at it. You know, you could probably eat your own arm for a little while and it'll just be be >> [laughter] >> probably nutritious, but after a while things get a little bit hairy, don't they? They do. They do. So, I I I think that's uh and and unfortunately right now it doesn't seem that that from all sides uh that there's there are there are small elements of of fiscal responsibility that are trying to influence the process, but I think there's a much larger constituency that sees um that has a desire to continue Yeah, good stuff. Ed Easterling, always a pleasure. Glad that you're going to be entering into Is this that where are we now? We're getting into the rainy season yet? No, not yet, right? Oh, no, it's too far over Oregon. Yeah. Oh, no, actually we're heading into the dry season. So we're on the west side of Oregon and here we're we're now moving from from a kind of a we've had a somewhat drier than average spring, but our summer times people don't realize up here summer gets very dry, almost no rain in July and August. Our our fields go brown. Really? Trees stay green, but the fields go brown and then then we get the rain back again in September and then we get most of our rain over the winter. So Aside from me talking to somebody in another country, we are probably the furthest apart distance-wise. South Florida to Western Oregon. Yes. >> [laughter] >> We have I could be probably I don't know would it be just as close for me talking to somebody in in London? I don't know. It's probably close. How do you think we'd be close? No. One thing we do have in common is your weather is relatively temperate although on the warm side. >> Yeah. But right and and our weather over here is also relatively temperate. We we don't get a lot of days on the western side of Oregon. We don't get very many freezing days and we don't get very many really hot days because we're we get this we get the Pacific Ocean right near us and so that brings cooler air in at night and uh and then during the winter it brings warmer air in because it's coming across the ocean. You do any fishing over there? There is some fishing out here. A lot good really good fishing. What What kind of What kind of stuff is caught there? Is there yellowfin tunas? Yellowtail? A lot lot of lot of tuna. You can go um You got the Pacific selfish? You'll have trout. Oh yeah, steelheads, yeah. Yeah. I was in not too far well, far but not too far farther than it is for me, but for you I was in Alaska about 8 months ago and just had a great time with the halibut and the salmon. Oh, at Alaska's great fishing. I've been there a couple of times. And did you camp out or did you stay in a lodge? I You know me, I'm staying at a lodge. I could camp out, >> [laughter] >> but at this age at this point I'm like, ah, I don't want to stay at a camp out. I'll stay at a lodge. Which by the way was not like a lodge. It was it was in between camping and a lodge. Okay. So, it was great. Good stuff. Hey, thanks for coming aboard the Disciplined Investor Podcast. We'll do it again soon. Andrew, you got it. All the best. >> And another week and another great podcast guest, great discussion about what's going on around the world, especially with UBI and the things that are make you go, "Hmm, what's going on with that?" But nonetheless, we have a lot to talk about now and through the end of the year. We have a whole slew of fantastic guests that are lined up for this show. We have great conversations, great education, information, all the things [music] you need to be successful in this crazy market, crazy world of investing. Stay tuned, stay here, the Disciplined Investor [music] Podcast. 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