The Mag 7 Trade Is Breaking… Here’s What Comes Next
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Gain an instant edge over Wall Street: https://stansberrydigest.com/ In this week’s Stansberry Investor Hour, Dan welcomes macro …
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Do you want to find out where we are in GLP1 drugs in the stock market today? This guy is going to tell you. And do you want to find out where we are with industrial stocks, small cap stocks, the S&P 500, and a lot more? Well, get out your pens and pencils because our guest today, David Cervantes, is a brilliant macro analyst. He's going to talk about all that and more. David, welcome back to the show. It's good to see you again. >> Dan, it's good to see you. It's been a long time. >> Yeah, been a couple years. And and I want to pick up right where we left off on stage in Las Vegas a couple years ago because I'll tell you something, David, you were the first guy like we we have a really smart couple of science guys and they were covering weight loss drugs. um before you sort of told me, but you were the first guy who told me, you know something, this is going to be enormous. It's going to change economies like United Airlines is going to save money on fuel and all the, you know, all kinds of things like that. You were the first and you told me a couple years ago and the topic came up recently. I'm like, wait a minute, I got to check back in with the first guy. So things have changed. these drugs have become huge. Um, where where are we now? Like where have we been? Where how where get me up to speed. Where are you on GLP-1 drugs these days? >> So the the answer is they are kind going through a classic, you know, kind of growth cycle um evolution. So what does that mean? First there's the introduction, then there's some adoption, and then there's kind of like, well, what does this really mean? And you know eventually it's it's it's it's a little cyclical. Um but healthc care is somewhat different in that regard because it's you know we all you know once these are lifetime things. Once you go on to GLP1 you're you're on it forever because you have to manage you know the the real underlying condition is diabetes right that doesn't go away. So you need to manage that. So you you'll be on that forever. Um but I think from from the you know the the macro sense um you know or the just the social sense they've gotten there's they've gone from you know adoption to like there's mass awareness now right celebrities are are using them you know I don't know how familiar you are with um Ariana Ariana Grande my you know I only know this my kids >> but but Ariana Grande she is I think in a a Broadway show and the character requires her to be really skinny. So Ariana Grande is using these GLP1s and she's a small person to begin with >> and she's using these GLP-1 drugs to really fit the fit the um um fit the bill literally the play bill um as they call it on Broadway. And so you know this is not just you know um medical use now there's professional applications you know for your >> pure weight loss right just pure weight loss >> pure weight loss no diabetes but you know it it um it it it um it works it gets the job done >> side effects are you know somewhat minimal for the most part >> and you know people I know I actually personally know people um who are non non-diabet etics in my demographic, you know, middle-aged males, um, otherwise healthy, who are using them as a way to, um, manage the dad bod, so to speak, to to to be thin and and healthy. >> Um, I'm I'm not there yet, but you know what? I might get there. And if I get there, then I'll I'll uh I'll get the jab, too. Um but um so that's kind of where we're going now where this is becoming more widespread, more adopted and we're seeing different applications than the original first you use use. Right? If original first use was diabetes, now it's beyond that and we're getting new evolutions of the drugs, more powerful, more sophisticated time releases, blah blah blah, micro doing just a lot of different iterations of these drugs. >> Yeah. So, am I ever going to pay less for a damn airline ticket once they start saving money on fuel? [laughter] >> You know, I it's Yeah, it'd be it'd be nice if you could. The problem is fuels, you know, with with what's happening right now in the Middle East, fuel is, you know, obviously up a lot. So, I think for now, you won't get any respite from from the from the large >> waste or the smaller waste people, [laughter] >> right? And we must point out that uh when we talked about this on stage in Vegas two years ago um you mentioned at least Eli Liy if not another stock but but Lily has performed substantially better than the market since then. So >> yeah. Yeah. That's Thank you. Um yeah, it's up uh I believe 70% since we that was on um October 23rd uh 2023. >> Um and that's up around 70% since then. S&P 500's up I think 23% in change since then. So it's substantial outperformance for sure. It worked out. The other one was Novo Nordis Nov I can't pronounce it. The uh >> the the the based in Copenhagen so >> um now they've they've had some different issues and they've pulled back but um it's still been a relative outperformer over the same time period. >> Right. All right. So good. That was good on you. I had to catch up. But um of course you have a you're a macro guy. You got a lot more than that on your mind. Um one of the things that one of the topics I was pleased that you forwarded to us is some the long anticipated rotation trade out of MAG 7 and into the industrials and the other you know S&P 493. This gets some discussion but you know um people finally doing it is kind of reassuring that maybe the world still works the way it always did. Yeah. No, it was it was I think a lot of people were frustrated especially you know um you know the val [clears throat] the value folks the you know trend people they were just like wait a minute you know all of a sudden their whole world view was turned upside down right you know mag 7 was just the only game in town for about basically since 2020 late 2022 >> when we avoided a recession um after the Fed hiked rates or started their rate hiking cycle >> and the and the yield curve inverted you know everyone was like What about this? Nothing worked except Mag 7. I mean, unless you were mag seven. I think there was some short time periods where like housing worked in 23. >> Um, you know, there were a few little things that worked, but for the most part, it was the only game in town for about 3 years, three and a half years. And that finally broke on October 28th of 2025. Um, and it's interesting because, um, I think that the catalyst was, uh, twofold. One is um the international names um which you know includes emerging markets includes you know world developed markets um they've been kind of the dump for the past you know almost decade right you know >> right yeah >> by by again buy value by by lower PE stocks in Latin America or Europe or wherever Asia >> and that didn't work either and then they they caught a bid in um early 25 and and the thought there was, [snorts] you know, um, everyone's up to their eyeballs in Mag 7. You know, I'm talking about global investors like the big sovereign wealth funds and and and these, you know, monster pools of capital. They're everyone's up to their eyeballs in in in Mag 7. And and, you know, um, yeah, at some point you you have enough. It's not so much about valuation as much as it is about investor preference and investor preference drives valuation. Um and and so I think people started looking at other things and then the the new administration obviously the chaos of that. Um but I think that the straw that broke the camel's back was um the capex expenditures for AI for the AI buildout. In other words, the Mag7s were they're a capital light, you know, well, maybe except um well, Microsoft and Google have huge labor pools, but you know, some Meta, relatively speaking, didn't have as as huge a labor pool. They're they're basically asset light margin operations that were scalable with >> Yeah. >> Yeah. And all of a sudden, you know, as as they start allocating these, you know, collectively what's almost a trillion dollars, I think it's three quarter trillion dollars in in capex and growing. I think people are saying, "Well, wait a minute. Those cash flows are no longer going to come to me. You know, there's no the buybacks are going to, you know, die down. Dividends are going to, you know, chopped up. The free cash flow is going to go to zero. They're going to become negative cash flow. I I can't hold this anymore. I can't I can't be at the allocation that I was regardless of the the valuation. I can't be at the same allocation if the risk pro the cash flow risk profile has changed. >> And David, importantly for me, balance sheet deterioration. I covered the moment when um I think it was Meta issued like 40 billion or something. I I think and they tipped over the whole mag seven into a net debt position. So I was like, "Okay, you know, because their balance sheets have been like loaded with cash. They they've borrowed more." >> Yeah. Absolute fortresses, but I'm like, "Well, you know, they're still pretty good, right?" Okay, let's not let's not, you know, sound the alarms. But that was a key moment for me. And I I think to add to that uh in terms of the balance sheet um you started getting some I think meta in particular >> started engaging in some you know funny offthebooks um you know lease backs or you know kind of offbalance sheet financing for some of this stuff. So that that always raises an eyebrow. You know, they call it, you know, capital structure, efficiency, you know, whatever. You put the lipstick on the pig, but at the end of the day, they still at the end of the day, they still own it, right? They're the credit. They're the credit. Now, I'm putting my my my old credit an analyst hat on >> from when I first started in the business. Um, but at the end of the day, they're they're the credit. So, when you have that kind of offbalance sheet going uh activity going on, then that impacts the credit and the and the rating and the expectations with the cash flows, etc., et etc. So, so I I think those three things kind of conspired um to really change how people were viewing their their positioning in Mag 7 at the expense of everything else. Um and on top of that, there was something else that happened with um emerging markets. their profit margins started catching up and and and a lot of that was driven by tech adjacent emerging markets. So they were really more developed than they were emerging. you know, places like, you know, Taiwan and South Korea with, you know, South Korea's got obviously Samsung and Highex and and um, you know, Taiwan's got Taiwan semiconductor. >> You know, all of a sudden they started having Mag 7 like type margins. You know, they they were no longer doing textiles and, you know, whatever cars and whatever. They were doing, you know, they were doing mag seven kind of stuff. And all of a sudden it's it's really you know you know what drives you know the for the fundamental people it's really the margin not just the profit but the margin because that that's your you know that reflects your productivity and your your return on capital and these margins start popping. So then you see things like you know South Korea last year I think did 95% the the EWY ETF did 95% last year. Um and you started getting these eye popping margins across the board and that really provided like well if I can find mag seven type margins at a lower cost at a lower valuation somewhere else then why not that's take that's the low hanging fruit >> and that was really kind of what started that whole run um in early 25 there's just kind of this you know this this confluence of events that really sparked that >> right so it's a it's a global non US-led trend as well but and and that becomes then a uh that that's that's that's that sounds like out of mag seven into you know global non US but um do you you also like the S&P 493 though right [snorts] >> correct I mean if you I mean I I haven't checked as of today because yeah today's just a crazy day but you know RSP the the equal weighted um S&P 500 um index RSP I think it's up like you know maybe as of closed yesterday 7% on the year versus as of yesterday I believe S&P was up maybe even slightly negative um if it was up it was less than the 1% and if it was down it was you know the in the basis point but my point is that vast outperformance between RSP the market cap um S&P 500 uh SPY um >> but you know then but then you you drill down into that and you see certain sectors really just outperforming things like you know industrials Right. So going back to the rotation, now it's industrials in the lead, now it's energy in the lead, now it's um now it's um uh utilities in the lead. >> Um so so you got these different pockets of strength within the non-mag 7 that are driving returns um which is a complete, you know, 180 from even six months ago, >> right? And energy was like second or third worst last year of the 11 sectors. Correct. >> Doing great. Um, and and I think what was I think was real estate the worst? I think real estate. >> Real estate. Real estate was the worst. It's doing okay this year. I actually have it XLR and I think it's up like my position is up around 9%. I think it's around 12 year to date. I don't know. But, you know, it's it's a I would call uh real estate kind of a um you know, second best performer compared to the the captain's uh energy, industrials, and materials. >> There you go. Yeah. I love energy. Um, [clears throat] so another thing that happened recently and like you're sort of one of my go-to guys on these kind of things. Um, and you did talk you did mention your u your early career spent, you know, assessing credit. There were some folks and I I admit to kind of being one of them, at least it sort of got my attention. um the news of Blue Owl uh you know selling a billion foreign assets um including to a fund that it manages for insurance companies um but you know they said they got just about par for everything and it wasn't you know they they claimed it wasn't a big deal but folks like um you know Muhammad Alaran and a couple other kind of big folks were saying hey this is a canary in the coal mine I think George Noble was another one >> um you And and then it was I still haven't looked it up. It was either Credit Swiss or somebody said, "We're expecting 15% default rates in private credit." So I was like, "Whoa." Okay. Right. >> All right. I need to talk to Dave about this, man. Uh what what do you see? Did that blue owl thing mean anything to you? >> Um it really depends on on where on the where we are in the cycle. In other words, a lot of this stuff happens in the kind of in the in the in the weeds of the of the industry and no one bats an eye when things are fine. It's when things start getting a little messy and they're like, "Wait, you did what?" And so, what am I getting at things like go let's go back to the before the global financial crisis and you know you had things like bankowned hedge funds, right? you know, a lot of bank banks were running prop desks. Um, and then and and they were cross-selling to each other and CLLO's and crossc collateral and this and this and this and no one knew what the hell you know had what >> or if they knew they look they were blind will w willfully blind looked the other way and then you had things like um you know um when when the blowup started right the um the bear sterns internal hedge funds and then the uh sock gen trader Jerome Carll um all these kind of things start popping up and I think people have pts and rightfully So, but I think people have PTSD and they're like, "Wait a minute. I've seen that." And there's never one cockroach. There's never one cockroach. So, when you get a blueout type situation, and then [snorts] you know, the situation is a little suspicious to begin with, but then it comes with a bunch of um you know, you know, assumptions or um um kind of explainers that kind of don't pass the sniff test. Then you start thinking, okay, there there's definitely more to this. And that that's kind of where I think the market is right now given everything else that's happening. In other words, why is it linked to everything else? Well, a lot of these loans, you know, are to, you know, middle market software companies. Uh these software companies are at risk of the, you know, AI AI disruption trade. So, you know, then it sparks bigger concerns about the cycle and how invested are we into the cycle, right? the AI AI capex cycle has basically been the dominant macro factor over the past year. Um, you know, a lot of parts of the economy aren't doing so great, but AI is really just this, you know, when you got a trillion dollars in in capex commitments. There's money flowing through the pipelines. People are building data centers are buying copper. They're buying they're buying stuff to to make these things, right? These things don't just make themselves out of out of nothing. So, you know, uh, that's been the dominant driver. So if it's all linked to AI and is AI going to eat itself and you know my my personal take is it won't but right now where we are in the cycle it's kind of starting to feel late cyclly right you got again going back to who are the leaders typically you know the sectors that lead now are defensives you know late cycle it's defensive sectors that are leading >> right all all the growth stuff starts getting you know thrown out with you know babies out with the bathwater growth stuff so tech is getting hit software is getting hit so conduction now you latest their latest to get hit. Um, and you you run in the defensive late cycle. And at first it was kind of like, well, this doesn't make any sense. And and and now it's starting to make a little more sense if you assume that the cycle we're in late cycle. That's not my um that's not my my view. But for now, investors are hiding. And I think that's accentuated by what's what's happening with, you know, Iran and and and some of this geopolitical stuff. But going going back to blue alowl, um you know, go going back to blue alowl, you know, I was looking at credit spreads over the weekend, >> and there's one one spread I look at a lot. It's it's I call it the the the trash spread. It's the spread between the dominant high yield index, just you know, whatever hy um and and and and triple C's, kind of the lowest rated credits. And you know, my two reference points are um the Silicon Valley Bank blow up in March of 2023 and then li Liberation Day, April 2025. Okay. So, what happened then was when high yield blew out, the whole complex blew out. You know, high high grade and then the the lowest branch of of um of high grade triple B. I think it's triple B minus. Um and then high high yield blew out and everything just went out went out here. What's happening today investment grades been bit you know it's pulled back a little bit but a few basis points doesn't match anywhere the movement of those two prior macro prices. High yields pulled back obviously a little more but nowhere near the movement that we got back then either. The only one that's pulled out that's blown out a lot is is triple C. So that's kind of been the driver of the the spread between the lowest of the low and and the dominant high yield index. They're not they're not blowing out together. So I know this is a four-letter word, but for now it's contained. Um >> Oh no. Oh no. Oh no. That's it. It's gone. It's over. >> Contained. Oh no. for for now. Well, you know, it hasn't bled it hasn't bled over to the the broader, you know, high yield uh complex is my is my point. I mean, is it contain? I don't know. But it it has it bled out to the broader complex. The answer is the answer is no. >> Right. Yeah. We It's funny because the last podcast that we recorded, we were talking with um a friend of mine and he and we both howled at the word contained. We were just, you know, we can't wait till somebody says contained. We both said and I'm like, of all the people to say it, you know, you're like the last one I expected. But but I was I was thinking essentially the same thing. I was thinking, okay, so in other words, the market is saying, >> no, this the the stress isn't as great as, you know, March um you know, 2023. Just take that date. >> Yeah. >> So, so that's reasonable. I mean, you know, the market says what it says at any minute. We're not we don't we're not predicting what it's going to say 6 months from now. We're just saying what it says right now. >> Correct. Correct. Right now, the market is telling us, look, [clears throat] may maybe there's obviously some some stuff that, you know, people got in over their skis on risk and they're going to get, you know, carded out. They'll take they'll get their mark they'll their marks will get marked down and they'll have not great returns or whatever. Uh that's that's the law of the market. That's what it does. Mhm. >> Um but right now it's it doesn't look to be, you know, systemic um for now. Um >> and if I wanted to craft a narrative, I could say, well, okay, if Triple C is getting hit, that's how it starts, right? The worst garbage gets hit first and then, you know, they don't really um they don't really shoot the generals till it's all over, you know. So, but >> correct, >> I could if I wanted to craft that, but there's really no need to. I mean, we all we all know sort of what's happened in credits basically since the financial crisis, right? I mean, you know, banks and on to everybody else. >> So, so yes and no. It it got pushed out of banks, but I mean, this money is coming from somewhere. >> It's not just coming from from investors. A lot a lot of these, you know, the blue types, they have lines to the banks, >> right? So, so, so even though it's private credit, >> it still has the capacity to infect the banking system and and credit intermediation. And at that point, you know, we learned from previous crisis, they're not going to let that happen. They just won't. They're not going to let that happen. It it is it's it's it's political at that point. Why? Because that that means if if the if the banking system gets infected, then you're going to have a labor market problem. And a labor market problem is pissed-off unemployed voters. And nobody, no politician, no regulator wants a pissed-off unemployed voter. >> And that's the >> Yeah. >> Yeah. Since time in memorial, too. I mean we we this is the great this is one of the great conflicts of the ages uh you know in terms of finance and economics right there's like whatever you want to call it banks and bond markets on one side and the currency on the other and guess which one they always pick to save you know and guess which one they always use to s you know I mean it goes that way every single time and and you're right if you know if if banks get in serious serious serious trouble because they've gotten too deep into private credit. Um, we know exactly what's going to happen. >> Exactly. >> So, >> correct. >> Correct. Now, the the only the the only hope is that, >> you know, I mean, some of the post GFC regulations were watered down a bit um because they were, you know, they were seen as impeding the flow of credit and blah blah blah. Um but you know the you know hopefully um and this is not my area of expertise at all but hopefully there's enough teeth left in the regulations that have kept places from getting in over their skis on private on private credit and and maintaining collateral. Now the the big the big thing you can't stop though is fraud, right? as we learned in the global as we learned during the GFC once there's outright fraud that gets institutionalized when when people learn how to game the system like they did with the credit ratings and they did with you know calling you know all these you know crappy radioactive Frankenstein pools of capital AAA >> and and it's [clears throat] enabled by institutionalized fraud where various actors are all you know engaging in this behavior even if unwilling ly then advised to do so. >> Yeah. That then that's that's a different that's a different game. That that's a different game, you know, once there's fraud and institutionalized fraud. >> Sure. And and and no one would be surprised if you know in a trend this powerful if if there was uh you know something like the Enron of private credit somewhere. Um >> Correct. >> that played out. Yeah. >> Correct. Correct. >> Yep. And so Okay. So we so we've established that, you know, they're going to save banks and bond markets and they're going to use the currency to do it. Um, a lot of people love love love to talk a big gloomy doomy game about the US dollar. >> Oh boy. >> I was one of them for a little while, but I never got totally gloomy and doomy about it. I was just long gold and and and bought >> Yeah. bought a certain amount of of the narrative that you know the fiat will continue to deteriorate over time. That's been a long long long trend. Um but the US dollar like uh I mean I'm I've I'm like a full-on you know um Brent Johnson milkshake guy at this point. You it's it it it's really really really hard not to do business in US dollars still. >> Yeah. And I and I think you know I think you know maybe was five years ago there was the Bitcoin was going to take over right now that's just been shot in the head right where you know what's in the latest you know with especially now like what's what's Bitcoin done? I don't really follow that much but I know it's done nothing good. >> Um it it's gold's even gold's out outperformed you know um Bitcoin I believe. Um, so this that's not Bitcoin is not even um you know a part of this conversation I think but broadly speaking um you know the I was it's funny you mentioned this because I was actually at a uh conference in San a currency conference in San Diego and the headline speaker was actually um Governor uh Waller I met Waller had dinner with him um a few other participants uh got invited to this dinner got don't ask me how or why but um Waller was there Katherine Man from the Bank of England was there. Um they had a few um admirals from the US Navy um there you know giving strategic thoughts and and this whole thing the the basic you know question they sought to answer is is it over for the dollar and if not when >> and the the general consensus was as long as we maintain our geopolitical alliances the dollar will be fine. Um it's re that's really what it comes down to the geopolit you know why because it gets kind of touchyfey feely you know everyone says oh the you know we got the military we got this blah blah blah blah blah yeah we do have those things we you know we do control the swift you know the the the wire the global wire system for dollars or for currency >> you know but at the end of the day it comes down to one of these things called you know trust and your your allies have to trust you enough to use your currency >> right >> and [clears throat] and and you as long as we're the cleanest shirt in a you know in in the laundry. >> Yeah. Whatever. Whatever. Or you know the the best house on the bad block. >> And as long as our allies continue to say you know what fine you know that's the best one and you know you might not be great but you're not awful at least and we'll continue to use your currency. That's really >> David. Try this one on prettiest mare at the glue factory. What do you think? There you go. >> There you go. Yeah. Exactly. Oh my god. Don't don't sit around my daughter. She's equestrian, so she might start crying. Um, >> yeah. [laughter] Yeah. Yeah. Kind of an animal lover myself. So, >> I made a I made a I made a glue joke once and she literally was in tears. I'm like, "Oops, that will never do that again." [laughter] >> But but but um the the dollar just going back to more, you know, you know, trust is kind of touchy feely, but getting back to more, you know, tangible things. Yeah, it really there really is no alternative. Um, and here here's here's here's why. Outside of the normal caveats of, you know, the military, it's really we have the deepest most liquid capital markets in the world. Like you could go buy, you know, two billion in treasuries and you might move the market a tick or you know, whatever, but it's no one's going to squat an eyelash if you go and and bid on two yards of treasuries on on the on the run stuff. It's not a big deal. >> You can't do that anywhere else. You'll you'll destabilize the country if you do that. I It's probably I'm exaggerating a little bit, but you really can't >> you you really can't um do that anywhere else. Um and and that's a function of how big our economy is, how how large our um you know, our our our consumption is. You know, we're the we're the we're the we're the the the consumer of last resort for the world, right? everyone's looking to ship in what they have to sell into the US. So by definition, if everyone's looking to sell to us, there's only one way we can pay them in dollars. That's our currency. We can't pay them anything else. So once they accept dollars, then everyone's sitting on dollars and that's how everyone transacts. That's how everyone trades. That's just the bottom line. And it's unlike according to Bank of International Settlements, last time I looked, I thought it was 12 or 13 trillion of US dollar borrowings outside the US, >> you know. >> Oh, I'm sure it's bigger than that. I'm sure it's it's it's huge. >> Yeah. >> Right. So, so everyone's, you know, as we've you know, we have these current account um current account deficits, but we have account we have also have, you know, capital account surpluses. In other words, we are basically, you know, the intermediary of choice for everybody else's economic choices. We everyone wants to sell us their stuff. We give them our we give them our funny money currency. They take it and they buy more things with it. And it's great. It's the exorbitant privilege. And I know it's we're kind of going political now and some people think it's bad and the burden of empire, but you know, listen, our our our economic well-being is directly tied to that privilege. We can borrow and fund ourselves much cheaper than we otherwise would. >> So, I wish we could sort of um you know, inject this into the veins of the of the dollar doomer crowd. You know, they I don't know, maybe I find it particularly irritating because I I see a path where the dollar strengthens. Dollar and gold can strengthen at the same time, you know. >> Sure. >> They're not there. I I understand seeing them as opposites, you know. I think of of gold more priced in dollars than anything else, >> right? >> Um but [clears throat] uh if I don't know, it's it's become it's almost become a pet peeve. It's it's a serious pet peeve for Brent Johnson. I'm sure you know who he is. But >> yeah, yeah, I've met Brent. >> It's becoming a bit of one for me as well. uh because I feel like I understand it better every time I talk to somebody like you and then you know. >> Right. >> Right. >> Well, it's kind of up there too with the um you know the um the deficit people, right? You know, we're we're mortgaging we're mortgaging our children's future and you know, we're leading them poorer. You know, I'm telling you, you know, I'm I'm I'm 53 years old. told I'm a child I'm a child of the 80s you know and I remember watching that national debt clock and I was told you're going to be poorer than the next generation blah blah blah blah you look at GDP you know growth between then I mean I think when I was in undergrad US GDP was under$5 trillion back in the stone ages now it's you know 30 trillion you can you can deflate it within you know whatever but still real real living standards have improved since I was a kid that's just a fact >> and it's and and re regardless of the debt, they've improved. So the real yard stick isn't, you know, the the the funny money piling up, it's how do you live? Are you better off today than you were 30 or 40 years ago? I say, hell yes. The average person, even the poor pe, you know, the poorer or the poor are better off today than they were 40 years ago. The the the rising tide did lift all the boats regardless of the deficit. But my my my favorite thing is, you know, the biggest trick the devil ever pulled was convincing people that governments pay back their debts. They don't. They just roll them over. They roll them over and defl and deflate them. That's it. >> Endlessly. Yeah. Endlessly. >> That's fine. And governments have, you know, in theory, you know, infinite time horizon. You and I don't have that privilege. We at some point will, you know, kick over. But governments don't, unless it's a real revolution, but that's a whole different thing. But, you know, effectively governments can just do this in perpetuity until they're until they're no longer a functioning government. But that's Yeah. Again, that's that's hopefully not in our lifetime. >> Yeah. I hope we I hope we don't get there. I hope the the you know, the bugaloo as some people call it never happens. >> Yeah. No, we we don't want that. God help us all. Yeah. So, [snorts] >> so I see I feel like we skipped a topic because you would also um in the email you sent us you mentioned US small caps. Is that part of the out of mag seven or what do you think of what what's going on there? >> Yeah. So you know I I think um you know particularly people of you know you know earlier schools of thought you know when I went to grad school or undergrad you know we're all taught you know French FMA factors and and and value and and you know CFA curriculum and and and you know small caps back in the you know 80s and 90s they they they had some outperformance because of you know some structural factors you know the you know the the illi liquidity premium for example you you were paid extra to hold a less liquid asset right um so all these kind of rationalizations came up and and a whole generation or or two you know came up the ranks of like oh my god this is the real thing and and and it kind of stopped working um after pretty much going into the global financial crisis um small caps they would have these bouts of outperformance And it always just slumped back >> and and I think there are some just like there were structural drivers to that outperformance back in the day >> in the 80s and 90s and maybe early 2000s. There are some structural factors that have changed the way um the small cap market. The first one is regulatory. >> What happened after uh do and all the regulations do you know um was it DoddFrank part? I don't remember but obviously all these regulations came up after the um.com right to avoid another Enron to avoid another MCI woolcom to avoid all these bad things and and that [snorts] >> that kind of um made the cost of capital more expensive public capital became very expensive and this is why we've had this boom in private equity because private capital is cheaper you don't have to you know if you're a small company you have to now have an army of lawyers is preparing your filings every quarter. You have to have all these, you know, back-end systems reporting blah blah blah. And I'm not make saying it's good or bad. I'm just saying it is what it is. And that represents a a higher burden for small companies, right? So the cost of the cost of public capital went up, the cost of private capital went down. What that means is that private actors were able to go after the better companies and and roll them up into their private equity portfolios. So you you what happened was private market I'm sorry public markets were left with the ugly ducklings of small companies. So, you know, now you have, you know, you think about, you know, some of the most successful companies that we we have, some of the, you know, most celebrated brands are private. You know, Cargill, they they basically run, you know, our food supply, they're private, right? You know, In-N-Out Burger, you know, they're private. Um, Bies, they're private. you know, all these all these um kind of brand name enterprises that are now at scale. >> Before they need it, they needed public access to public capital to fund their expansions. Now you don't need that. Now you can go to KKR, Blackstone, whoever, and they can, you know, drop $2 billion into an emerging startup or whatever. Not a big don't even bat an eye with that, right? That wasn't the case before. before you had to go to the public markets and and and seek capital publicly. So you've got this, you know, collection of kind of fddy, ugly duckling companies in the small cap space that nobody wants and therefore they they kind of suffer persistent underperformance. And occasionally you you get a you get a kind of a bounce. Usually you get the bounce coming out of a downturn. You know, small caps relative to the larger caps get just completely annihilated and the value they're just screaming value and you throw some money at them. And then the other thing is, you know, uh public uh small cap companies are heavily reliant on on debt, right? They're really levered. So they're very sensitive to credit spreads, that trash spread I was telling you about earlier. So as as things kind of normalize, credit spreads and their cost of, you know, debt funding goes down and that really helps them out. So those are the two times when small caps really just kill, you know, kill it and do do really really well. You know, back in 2021 was the last time small caps had a massive outperformance, right? Versus big caps coming out of COVID. Um and then we've had some, you know, some movements. Um, so I've been kind of um, you know, not really a fan of small caps for a while. >> Mhm. >> Um, and it's really just kind of a tactical play coming out of some kind of downturn. Like for example, depending on how this thing with Iran turns out and how deep it goes, then that might represent an opportunity. And, you know, as we discussed, the trash spreads blown out a little bit. Um, so again, between the the spread and coming out of a kind of a sell-off, that might represent an opportunity. But I I just think it's it's fundamentally like a broken asset class. And I think a lot of people from our generation that, you know, maybe at one point either made a lot of money or we were just told in class that that's the way to go. >> They a lot of people haven't gotten their heads around it. >> Yeah. >> They haven't they haven't really come out. They're still they're still they're still waiting for Elvis to come out, you know? >> Yeah. >> And it's not just stopped working, [laughter] right? >> It's just Yeah. And it's just one of those generational things that like my god it just people just they have trouble moving on. And I think that's the problem with small caps is that the the the the regulatory structure changed the market structure which changed the return pay the return payoff >> right and uh this you're reminding me I just I just remembered sometime in the past I want to say two or three years um [snorts] I [clears throat] read uh I think it was an interview with Jeremy Granthm and he said they use the Russell 2000 as like a perpetual short opportunity. They're always hedging everything else by being short the Russell 2000. He said we're we're short the Russell 2000 almost all the time. >> Yeah. >> You know, because it's loaded with garbage basically. And he says, you know, sometimes the the earnings from the entire index will be net negative. >> Yep. >> You know, it's frequently that. So, [snorts] >> you know, it's just um it's it's becomes a perfect vehicle for them to hedge with. But >> and and and if you're a if you're a decent, you know, a decent small emerging company, >> most likely you're in software, most likely you've been bought out, you've been rolled up, you know, that that's kind of what has happened. So, it's just there's just like this, you know, private equity has really become this sucking machine for the the better ones and then, you know, the the dance floors left all the ugly ducklings. >> Let's do this. We um we do two things for our listeners, you know. We we uh teach how to fish and then we offer them a fish. Some people don't like to talk about the stuff they currently own or currently recommend. If that's you, that's fine. We can move on. But if is there anything that you any current trade that you think is a pretty good idea and you know all the caveats, this is not investing advice, etc., etc., etc., um that you like right now. Is there a current trade that you like right now? >> Yeah, absolutely. I'm happy to go through the whole go through the whole position book if you wish. Um, >> love it. >> But, you know, >> yeah, full full full disclosure, you know, nothing to hide. And obviously, a lot of my subscribers are watching this, so you know, let's look if I if I come up with any any funny business, they're going to call me out, right? So, I have every incentive to be transparent and honest with both, you know, the the wins and and the losses. So, >> right. >> Um, before we go there though, and I promise I I will, this is not a diversion tactic. I want to go back and talk about something we haven't talked about yet because this is part of the process for taking us to where we got or to where I am now. Okay. >> Okay. >> Aside from the rotation trade which I started talking about back in uh 1 of November. >> Mhm. >> Um I started talking about um the labor market. Um, and the labor market's really important because not just for the economy, but for policy. And you know, when we started getting these low non-farm payroll prints, um, the assumption was that, oh, oh, holy crap. Um, employment is going to shoot up. That's it. It's over. And I said, no, it's not over. That's not going to happen. Because, um, and this is not a political statement. This is a mechanical. It is what it is. Uh the administration's immigration policy has shrunk the labor market. You know, demographics is destiny. Um you get, you know, uh GDP grows in in two ways. >> Size, you know, size of your labor pool and productivity. That's it. So if if you start um shrinking your um labor market um you you don't need to hire as many people to keep uh unemployment stable. So I said, you know, we could it's very possible that we could see negative NFP prints, negative job growth, and still have a lower unemployment rate, which is goes back to this concept that people just can't wrap their heads around. >> Yeah. >> And and I I actually um discussed that with uh Guy Burgerer who's the former um chief economist of LinkedIn. So he's he's a labor market economist. Like he's he's a real egghehead. Real smart real smart guy, right? I'm just a I'm just a wannabe, but he he's a you know legit um labor market economist. >> And we we we discuss the mechanics of shrinking the labor market >> and how that impacts everything. And you know, this this kind sounds like an abstraction, but here's here's what I'm getting at. If you tighten your labor market and you lower um unemployment, >> Mhm. >> you know, even though you have layoffs and a soft, you know, kind of on the surface softening, but really a hardening labor market, that that that could provide an an inflationary impulse. That was one that was one thing that we discussed. Mhm. >> The the the other thing that um I started picking up on was um you know after the pandemic you know our supply chains had all screwed up right and we started having bullhip effects. What's a bullhip effect? you you you because you were so uncertain about your supply chains, you overordered and you overinventoried. >> Y >> and then so you'd have a burst of of orders and then you'd wait a long time to deplete them and then you after that you'd over orderer again. So we had this kind of like this sine wave of of of um activity there and this is why the ISM data [clears throat] became very unreliable because it was just kind of like well it's just noisy. we we don't you know we can't trust these this survey data anymore because pure you know we don't know if this is real activity or just pure just kind of panic ordering. So we went you know we went through different iterations of that cycle. Okay. Finally we got down to like a real understing of inventories and then companies started um um building inventories again you know kind I call it the great restocking. So then we had the ISM print in January which came out really strong. We got another one yesterday for manufacturing again very strong. [snorts] Um so now we got two things going going back to what else you know now I'm bringing all together. We've got a a stronger than expected labor market. We've got a kind of a restocking boom that's coming up and that is going to be inflationary and you know a few weeks ago you know people are throwing around two cuts maybe three Fred Governor Steven Miran is looking at four cuts you know Trump wants wants a billion cuts and and >> it's just it's just not going to happen and and my my my weekend note uh this past weekend was it's none and done. We're not getting any cuts this year and and we shorted the bond market. We shorted Zen, the 10-year Treasury future new um on Monday morning. That's that's done phenomenally well. Look, I'm sure I got partially lucky, right? you know there's kind of timing is always tough but you know I I think there's a consensus shift from you know um you know we're going to get cuts to we are not going to get cuts this year that's starting to get um priced in >> we've we so so the macro backdrop is one of a stronger labor market than expected a kind of a restocking boom that's starting Right. >> Obviously, the stuff with Iran kind of throws throws everything off because that's just, you know, who knows where that goes. Um, so I'm not going to go there because I have no I don't I don't have a political crystal ball. These are political decisions that are made at, you know, >> right? >> Calling it like you see it. I got it. >> Right. Correct. So So that's kind of the macro backdrop for, you know, what I'm positioned for. So >> All right. >> The rotation, the stronger labor market, and the restocking boom. That's kind of the the the three-legged stool for how I'm thinking about the economy and for how I think things will evolve in the markets. So, let's let's get let's get after it. If the Fed has gone from u potentially two cuts to no cuts, then that means one thing means higher rates. We we've gotten that I think on Friday the 10-year Treasury closed at 394. As of before I got on the show, it was at 410. So that's kind of a pretty big move, especially given what's happening with Iran. You know, everyone's thinking, "Oh my god, safe haven bid. This is going to get, you know, bid hard." Like, no, they're not. >> Um, so, um, a little more inflation, less cuts. Um, in terms of the restocking boom, who's really going to benefit? So, it's going to be a lot of these middle market, um, smids, so small, not not small caps, uh, medium caps. So logistics, logistics companies are going to do really well. You know, aerospace systems for the military, things that do um you know, um warehousing, all the things that are get involved in in in industrial um uh restocking are going to do well. Um so that's kind of one leg. Um the other one is higher rates and then this kind of rush to safety for the dollar means um you know the the big international trade that was going on for the past uh 18 plus months is on pause. I mean this morning emerging markets got hit. Uh South Korea I think was you know down at 1.10% overnight. Um all all these emerging market high-f flyers that everyone was looking at just getting completely whacked. Um so the the the international trade is going to face some stress. So that's the second thing. >> Um and then the third thing is um I think the you know that's going to bleed over into commodities as well. You know gold which is you know obviously had some safe haven bid um element to it >> is today getting hit really hard. The miners are getting hit really hard. I think GDX is down you know high single digits. I know for sure GDXJ is down um in the uh double digits around 11 12% at be last time I checked. So, you know, strong dollar, um less international, um more uh 493, more um middle market, um I would call it companies that do stuff, right? Less less software, less tech companies that do stuff that build stuff that things you actually need. And then on top of that, there's the kind of the reshoring agenda, administration. I mean, I don't know how that well that's going. I'm not going to consider consider that one. But the bottom line is um you know those those are the big things that are happening and if you can latch on to those trends >> I mean I don't I don't do a lot of single name stuff. I just don't have the um the capac the time to do that. But >> you [snorts] know sector stuff u defense is going to do is going to do great uh both European defense as well as American defense. >> Um yeah so that's kind of the the basic way I'm I'm viewing the world and allocating capital. Okay. So, I use ITA for defense. I got >> That's what I'm using. >> Yeah. And XLI [clears throat] for industrials. I've used >> I've got I've got XLI as well. Yeah. >> Um what did I I actually did buy um I did did a little bit of the XUS trade and I I think I bought VGK, the European ETF at one point, which did okay. Um and what else did we say? Oh, like those sort of small mid logistics firms. I mean, there's there's a transportation ETF or two out there. Um, I I I'm glad you brought that up actually. Just I wonder if we could do a little little uh detour here just for a minute. I thought it was so weird that this company algorithm came out with this white paper that said, well, you know, we've we've reduced um the number of miles basically that trucks go empty, right? they're empty 30 to 35% of their miles and we've done trials on our technology in India and we've got that below 10%. Right? So trucking companies then could be potentially become much more efficient. You'd think that would be good for trucking [laughter] companies. >> So they hammered the trucking stocks that day. I thought it was weird. >> That's the truck the trucking stocks. But if you look at you know the the actual suppliers uh Trinity Industries TRN >> Yeah. um you know they do they they they they work with railroads and help them with their logistics and also truck companies but there's there's a whole um you know there's a whole universe of those names that are doing spectacular. >> Yeah. Well yeah right up until that day and actually since then they've recovered they were screaming because we thought well okay you know that this is um an industry that needs uh some some efficiencies worked into it. AI should help, etc., etc. And and especially and like railroads are are going to use this. I mean, they're on fixed routes. It's ideal. Like it's made for AI, right? >> Right. >> Um uh and you know, less so, but still trucking as well. [clears throat] Um you know, just just in terms of uh filling up the back of the thing as as I mentioned a moment ago, >> right? >> So So it really good. And that was that was actually one of my notes I wrote about last fall was that you know >> you know just kind of a from a more egghehead type view about productivity. >> You know it's it's going to be nuance kind like kind of like the internet right I mean you know we we when we started we we took over like everyone was like oh my god email and this dumbest thing and you know we'll we'll never we'll never get rid of the didn't Paul Kugman say we'll never get rid of the facts. >> That was his something goofy like that right. So, so it's it's going to be it's it's going to be kind of like, you know, really it's going to happen in a way that people don't really appreciate. It's going to be like, "Oh, AI can do this, you know." And here's a here's a funny example. Okay, really funny example. My sister yesterday, she's doing a a bathroom renovation. >> She emailed me. She said, "Hey, what do you think? This this countertop I like this vanity for the bathroom. Um, but I don't like the the countertop. I think it look better than whatever this kind of marble. I don't know. She said, "What do you think?" I'm like, "I don't know." But you know what I did? I I downloaded the picture. I loaded it up into Gemini um Google's AI agent. And I said, you know, um simulate this this vanity with, you know, whatever color marble top. And I said, "That looks great." Right? So So that that facilitated her purchase decision. She didn't have to spend hours of her time driving around different showrooms. she could just like mess around with this thing and make a decision >> and hit the buy button a lot faster >> and that helps the end vendor of that whatever they're selling. So, it's it's going to happen like that. These kind of like weird use cases where like, oh man, let me check with the robot >> and it'll it it's going to and then these things compound. >> Yeah. >> And then you look back five years and you're like you're like, oh my god, five years ago we were actually doing this. My god, we're idiots. >> Yeah. So, for a couple for a while now, we've been using this thing that shows up on Amazon in places where, you know, if you want um I don't know, some household item or even like a handbag or something, you can you can use, you know, your phone to place it on, >> you know, wherever you want it in the room or in front of you and see how big it is and how it fits in with the decor or or whatever um or the color or whatever it is you're looking at. And I'm like, that is cool. And yeah, I may never leave the house again, you know, except to just, you know, for the sake of getting outside. >> Um, I think that's cool. I think it's really cool. >> So there's there's going to be a lot of um, you know, adoption at the micro scale that we're not going to appreciate, but at the enterprise scale is really going to boost. You know, that's been a kind of key thesis of mine is that eventually it, you know, in other words, S&P 500 margins were at, you know, I think pushing 14%. And everyone was saying, "Oh, it's just all because of mag 7." So at at the macro aggregate level, yeah, it's all mag 7. But, you know, we can still get to 15 16% at some point >> if the other 493 adopt some of these tools and integrate them into their enterprises and make workflows more efficient. >> And it's it's happening. It's going to happen. You can't it's yeah to when and and what at what speed and how it's deployed, but it's going to happen. And that's why I became, you know, another reason I came became very bullish on the 493. you know, I swapped out my S&P 500 um market cap exposure, got an RRSP, and that's, you know, that's it's going to do well. >> Yeah, I agree. All right, David, it's time for our final question. >> It's the same question for every guest, no matter what the topic, even if >> Yeah, same question. >> I I forgot. I forgot. So, >> it works better that way [laughter] actually if you forget. >> Yeah, >> same question. No matter what the topic, if you've already said the answer, feel free to repeat it. Question is simple. It's for our listeners benefit. If you could give them one thought today, one takeaway, what would you like that to be? >> The US business cycle is going to be longer than you think because we have World War II size deficits being pumped into the economy and p uh public deficits are private sector surpluses that make their way into the private economy. it is for the next few years as long as we're running these deficits is gonna be nearly impossible to kill the business cycle. We might have some scares, we might have some, you know, whatever, you know, even liberation day, whatever. But it's so far it's been a teflon economy. And that's in large part because there are trillions upon trillions upon trillions of dollars flowing from the public sector into the private sector as a surplus. >> All right. Sounds good. Hey, I'm I'm on board with that, man. That sounds kind of good. >> It's it's it's money. I mean, it's it's just it's it's a pot. It's it is imagine, you know, how do they make fuagra? They they stuff a goose with full of corn and whatever. So, that's the same way. We have economic fuagra. We're just stuffing the system with money. Now, there'll be a hangover. There'll be a payback period, but for now, >> absolutely, >> it's going to go a lot longer than you think. >> Yeah. And it's And I'm not like I'm not a fan of big government. That's not the point. We're just talking mechanics here. >> Make money. That's the point. >> Yep, that is the point. All right. Listen, man. It's always a pleasure to talk to you. Thanks for making time for us. >> Thanks for having me, Dan. It's a pleasure to see you. >> Well, I always enjoy talking with my friend David Cervantes. He's one of the most brilliant macro analysts that I have met in the last 10 years, probably. and he's the first guy who ever told me that GLP-1 drugs were going to be this really important economic force in the world. And of course, he's right. And and he recommended Eli Liy a couple years ago. It's up 70% more than triple the S&P 500. I I I think that constitutes being right. Okay. Uh and of course today he mentioned being long the equal weight S&P 500 ETF, RSP, and he mentioned being long the industrials XLI. I' I've recommended that one, too. And he's also long XLR, the real estate ETF, which was last year's worst performer in the S&P 500 sectors. So, maybe it's going to get a nice rebound trade this year. And I think he's up on that trade as well. So, lots of good ideas. And if you want to find out more about David and and all his ideas and his wisdom on the economy, you can go to pinbrookcap.com. You can also follow him on Twitter on or now called X.com. I have to call it X where I follow him on X.com. I love him. He's got lots of great ideas and he's a voice of sanity about macroeconomic themes. Too many people are driven by their politics. As you heard in the interview, David is like, look, this is not a political thing. It's just the mechanics of what politicians do and we want to make money, right? as we underscored at the end of the interview, it's about making money. It's not about expressing a political view. He's brilliant at that and you need someone who's brilliant at that. Okay, so it was another fun interview, another fun episode of the Stanberry Investor Hour. Hope you enjoyed it as much as we did. And remember to like, subscribe, and sign up for our daily elet. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanbury [music] Research, its parent company or affiliates.
The Mag 7 Trade Is Breaking… Here’s What Comes Next
Summary
Gain an instant edge over Wall Street: https://stansberrydigest.com/ In this week’s Stansberry Investor Hour, Dan welcomes macro …Transcript
Do you want to find out where we are in GLP1 drugs in the stock market today? This guy is going to tell you. And do you want to find out where we are with industrial stocks, small cap stocks, the S&P 500, and a lot more? Well, get out your pens and pencils because our guest today, David Cervantes, is a brilliant macro analyst. He's going to talk about all that and more. David, welcome back to the show. It's good to see you again. >> Dan, it's good to see you. It's been a long time. >> Yeah, been a couple years. And and I want to pick up right where we left off on stage in Las Vegas a couple years ago because I'll tell you something, David, you were the first guy like we we have a really smart couple of science guys and they were covering weight loss drugs. um before you sort of told me, but you were the first guy who told me, you know something, this is going to be enormous. It's going to change economies like United Airlines is going to save money on fuel and all the, you know, all kinds of things like that. You were the first and you told me a couple years ago and the topic came up recently. I'm like, wait a minute, I got to check back in with the first guy. So things have changed. these drugs have become huge. Um, where where are we now? Like where have we been? Where how where get me up to speed. Where are you on GLP-1 drugs these days? >> So the the answer is they are kind going through a classic, you know, kind of growth cycle um evolution. So what does that mean? First there's the introduction, then there's some adoption, and then there's kind of like, well, what does this really mean? And you know eventually it's it's it's it's a little cyclical. Um but healthc care is somewhat different in that regard because it's you know we all you know once these are lifetime things. Once you go on to GLP1 you're you're on it forever because you have to manage you know the the real underlying condition is diabetes right that doesn't go away. So you need to manage that. So you you'll be on that forever. Um but I think from from the you know the the macro sense um you know or the just the social sense they've gotten there's they've gone from you know adoption to like there's mass awareness now right celebrities are are using them you know I don't know how familiar you are with um Ariana Ariana Grande my you know I only know this my kids >> but but Ariana Grande she is I think in a a Broadway show and the character requires her to be really skinny. So Ariana Grande is using these GLP1s and she's a small person to begin with >> and she's using these GLP-1 drugs to really fit the fit the um um fit the bill literally the play bill um as they call it on Broadway. And so you know this is not just you know um medical use now there's professional applications you know for your >> pure weight loss right just pure weight loss >> pure weight loss no diabetes but you know it it um it it it um it works it gets the job done >> side effects are you know somewhat minimal for the most part >> and you know people I know I actually personally know people um who are non non-diabet etics in my demographic, you know, middle-aged males, um, otherwise healthy, who are using them as a way to, um, manage the dad bod, so to speak, to to to be thin and and healthy. >> Um, I'm I'm not there yet, but you know what? I might get there. And if I get there, then I'll I'll uh I'll get the jab, too. Um but um so that's kind of where we're going now where this is becoming more widespread, more adopted and we're seeing different applications than the original first you use use. Right? If original first use was diabetes, now it's beyond that and we're getting new evolutions of the drugs, more powerful, more sophisticated time releases, blah blah blah, micro doing just a lot of different iterations of these drugs. >> Yeah. So, am I ever going to pay less for a damn airline ticket once they start saving money on fuel? [laughter] >> You know, I it's Yeah, it'd be it'd be nice if you could. The problem is fuels, you know, with with what's happening right now in the Middle East, fuel is, you know, obviously up a lot. So, I think for now, you won't get any respite from from the from the large >> waste or the smaller waste people, [laughter] >> right? And we must point out that uh when we talked about this on stage in Vegas two years ago um you mentioned at least Eli Liy if not another stock but but Lily has performed substantially better than the market since then. So >> yeah. Yeah. That's Thank you. Um yeah, it's up uh I believe 70% since we that was on um October 23rd uh 2023. >> Um and that's up around 70% since then. S&P 500's up I think 23% in change since then. So it's substantial outperformance for sure. It worked out. The other one was Novo Nordis Nov I can't pronounce it. The uh >> the the the based in Copenhagen so >> um now they've they've had some different issues and they've pulled back but um it's still been a relative outperformer over the same time period. >> Right. All right. So good. That was good on you. I had to catch up. But um of course you have a you're a macro guy. You got a lot more than that on your mind. Um one of the things that one of the topics I was pleased that you forwarded to us is some the long anticipated rotation trade out of MAG 7 and into the industrials and the other you know S&P 493. This gets some discussion but you know um people finally doing it is kind of reassuring that maybe the world still works the way it always did. Yeah. No, it was it was I think a lot of people were frustrated especially you know um you know the val [clears throat] the value folks the you know trend people they were just like wait a minute you know all of a sudden their whole world view was turned upside down right you know mag 7 was just the only game in town for about basically since 2020 late 2022 >> when we avoided a recession um after the Fed hiked rates or started their rate hiking cycle >> and the and the yield curve inverted you know everyone was like What about this? Nothing worked except Mag 7. I mean, unless you were mag seven. I think there was some short time periods where like housing worked in 23. >> Um, you know, there were a few little things that worked, but for the most part, it was the only game in town for about 3 years, three and a half years. And that finally broke on October 28th of 2025. Um, and it's interesting because, um, I think that the catalyst was, uh, twofold. One is um the international names um which you know includes emerging markets includes you know world developed markets um they've been kind of the dump for the past you know almost decade right you know >> right yeah >> by by again buy value by by lower PE stocks in Latin America or Europe or wherever Asia >> and that didn't work either and then they they caught a bid in um early 25 and and the thought there was, [snorts] you know, um, everyone's up to their eyeballs in Mag 7. You know, I'm talking about global investors like the big sovereign wealth funds and and and these, you know, monster pools of capital. They're everyone's up to their eyeballs in in in Mag 7. And and, you know, um, yeah, at some point you you have enough. It's not so much about valuation as much as it is about investor preference and investor preference drives valuation. Um and and so I think people started looking at other things and then the the new administration obviously the chaos of that. Um but I think that the straw that broke the camel's back was um the capex expenditures for AI for the AI buildout. In other words, the Mag7s were they're a capital light, you know, well, maybe except um well, Microsoft and Google have huge labor pools, but you know, some Meta, relatively speaking, didn't have as as huge a labor pool. They're they're basically asset light margin operations that were scalable with >> Yeah. >> Yeah. And all of a sudden, you know, as as they start allocating these, you know, collectively what's almost a trillion dollars, I think it's three quarter trillion dollars in in capex and growing. I think people are saying, "Well, wait a minute. Those cash flows are no longer going to come to me. You know, there's no the buybacks are going to, you know, die down. Dividends are going to, you know, chopped up. The free cash flow is going to go to zero. They're going to become negative cash flow. I I can't hold this anymore. I can't I can't be at the allocation that I was regardless of the the valuation. I can't be at the same allocation if the risk pro the cash flow risk profile has changed. >> And David, importantly for me, balance sheet deterioration. I covered the moment when um I think it was Meta issued like 40 billion or something. I I think and they tipped over the whole mag seven into a net debt position. So I was like, "Okay, you know, because their balance sheets have been like loaded with cash. They they've borrowed more." >> Yeah. Absolute fortresses, but I'm like, "Well, you know, they're still pretty good, right?" Okay, let's not let's not, you know, sound the alarms. But that was a key moment for me. And I I think to add to that uh in terms of the balance sheet um you started getting some I think meta in particular >> started engaging in some you know funny offthebooks um you know lease backs or you know kind of offbalance sheet financing for some of this stuff. So that that always raises an eyebrow. You know, they call it, you know, capital structure, efficiency, you know, whatever. You put the lipstick on the pig, but at the end of the day, they still at the end of the day, they still own it, right? They're the credit. They're the credit. Now, I'm putting my my my old credit an analyst hat on >> from when I first started in the business. Um, but at the end of the day, they're they're the credit. So, when you have that kind of offbalance sheet going uh activity going on, then that impacts the credit and the and the rating and the expectations with the cash flows, etc., et etc. So, so I I think those three things kind of conspired um to really change how people were viewing their their positioning in Mag 7 at the expense of everything else. Um and on top of that, there was something else that happened with um emerging markets. their profit margins started catching up and and and a lot of that was driven by tech adjacent emerging markets. So they were really more developed than they were emerging. you know, places like, you know, Taiwan and South Korea with, you know, South Korea's got obviously Samsung and Highex and and um, you know, Taiwan's got Taiwan semiconductor. >> You know, all of a sudden they started having Mag 7 like type margins. You know, they they were no longer doing textiles and, you know, whatever cars and whatever. They were doing, you know, they were doing mag seven kind of stuff. And all of a sudden it's it's really you know you know what drives you know the for the fundamental people it's really the margin not just the profit but the margin because that that's your you know that reflects your productivity and your your return on capital and these margins start popping. So then you see things like you know South Korea last year I think did 95% the the EWY ETF did 95% last year. Um and you started getting these eye popping margins across the board and that really provided like well if I can find mag seven type margins at a lower cost at a lower valuation somewhere else then why not that's take that's the low hanging fruit >> and that was really kind of what started that whole run um in early 25 there's just kind of this you know this this confluence of events that really sparked that >> right so it's a it's a global non US-led trend as well but and and that becomes then a uh that that's that's that's that sounds like out of mag seven into you know global non US but um do you you also like the S&P 493 though right [snorts] >> correct I mean if you I mean I I haven't checked as of today because yeah today's just a crazy day but you know RSP the the equal weighted um S&P 500 um index RSP I think it's up like you know maybe as of closed yesterday 7% on the year versus as of yesterday I believe S&P was up maybe even slightly negative um if it was up it was less than the 1% and if it was down it was you know the in the basis point but my point is that vast outperformance between RSP the market cap um S&P 500 uh SPY um >> but you know then but then you you drill down into that and you see certain sectors really just outperforming things like you know industrials Right. So going back to the rotation, now it's industrials in the lead, now it's energy in the lead, now it's um now it's um uh utilities in the lead. >> Um so so you got these different pockets of strength within the non-mag 7 that are driving returns um which is a complete, you know, 180 from even six months ago, >> right? And energy was like second or third worst last year of the 11 sectors. Correct. >> Doing great. Um, and and I think what was I think was real estate the worst? I think real estate. >> Real estate. Real estate was the worst. It's doing okay this year. I actually have it XLR and I think it's up like my position is up around 9%. I think it's around 12 year to date. I don't know. But, you know, it's it's a I would call uh real estate kind of a um you know, second best performer compared to the the captain's uh energy, industrials, and materials. >> There you go. Yeah. I love energy. Um, [clears throat] so another thing that happened recently and like you're sort of one of my go-to guys on these kind of things. Um, and you did talk you did mention your u your early career spent, you know, assessing credit. There were some folks and I I admit to kind of being one of them, at least it sort of got my attention. um the news of Blue Owl uh you know selling a billion foreign assets um including to a fund that it manages for insurance companies um but you know they said they got just about par for everything and it wasn't you know they they claimed it wasn't a big deal but folks like um you know Muhammad Alaran and a couple other kind of big folks were saying hey this is a canary in the coal mine I think George Noble was another one >> um you And and then it was I still haven't looked it up. It was either Credit Swiss or somebody said, "We're expecting 15% default rates in private credit." So I was like, "Whoa." Okay. Right. >> All right. I need to talk to Dave about this, man. Uh what what do you see? Did that blue owl thing mean anything to you? >> Um it really depends on on where on the where we are in the cycle. In other words, a lot of this stuff happens in the kind of in the in the in the weeds of the of the industry and no one bats an eye when things are fine. It's when things start getting a little messy and they're like, "Wait, you did what?" And so, what am I getting at things like go let's go back to the before the global financial crisis and you know you had things like bankowned hedge funds, right? you know, a lot of bank banks were running prop desks. Um, and then and and they were cross-selling to each other and CLLO's and crossc collateral and this and this and this and no one knew what the hell you know had what >> or if they knew they look they were blind will w willfully blind looked the other way and then you had things like um you know um when when the blowup started right the um the bear sterns internal hedge funds and then the uh sock gen trader Jerome Carll um all these kind of things start popping up and I think people have pts and rightfully So, but I think people have PTSD and they're like, "Wait a minute. I've seen that." And there's never one cockroach. There's never one cockroach. So, when you get a blueout type situation, and then [snorts] you know, the situation is a little suspicious to begin with, but then it comes with a bunch of um you know, you know, assumptions or um um kind of explainers that kind of don't pass the sniff test. Then you start thinking, okay, there there's definitely more to this. And that that's kind of where I think the market is right now given everything else that's happening. In other words, why is it linked to everything else? Well, a lot of these loans, you know, are to, you know, middle market software companies. Uh these software companies are at risk of the, you know, AI AI disruption trade. So, you know, then it sparks bigger concerns about the cycle and how invested are we into the cycle, right? the AI AI capex cycle has basically been the dominant macro factor over the past year. Um, you know, a lot of parts of the economy aren't doing so great, but AI is really just this, you know, when you got a trillion dollars in in capex commitments. There's money flowing through the pipelines. People are building data centers are buying copper. They're buying they're buying stuff to to make these things, right? These things don't just make themselves out of out of nothing. So, you know, uh, that's been the dominant driver. So if it's all linked to AI and is AI going to eat itself and you know my my personal take is it won't but right now where we are in the cycle it's kind of starting to feel late cyclly right you got again going back to who are the leaders typically you know the sectors that lead now are defensives you know late cycle it's defensive sectors that are leading >> right all all the growth stuff starts getting you know thrown out with you know babies out with the bathwater growth stuff so tech is getting hit software is getting hit so conduction now you latest their latest to get hit. Um, and you you run in the defensive late cycle. And at first it was kind of like, well, this doesn't make any sense. And and and now it's starting to make a little more sense if you assume that the cycle we're in late cycle. That's not my um that's not my my view. But for now, investors are hiding. And I think that's accentuated by what's what's happening with, you know, Iran and and and some of this geopolitical stuff. But going going back to blue alowl, um you know, go going back to blue alowl, you know, I was looking at credit spreads over the weekend, >> and there's one one spread I look at a lot. It's it's I call it the the the trash spread. It's the spread between the dominant high yield index, just you know, whatever hy um and and and and triple C's, kind of the lowest rated credits. And you know, my two reference points are um the Silicon Valley Bank blow up in March of 2023 and then li Liberation Day, April 2025. Okay. So, what happened then was when high yield blew out, the whole complex blew out. You know, high high grade and then the the lowest branch of of um of high grade triple B. I think it's triple B minus. Um and then high high yield blew out and everything just went out went out here. What's happening today investment grades been bit you know it's pulled back a little bit but a few basis points doesn't match anywhere the movement of those two prior macro prices. High yields pulled back obviously a little more but nowhere near the movement that we got back then either. The only one that's pulled out that's blown out a lot is is triple C. So that's kind of been the driver of the the spread between the lowest of the low and and the dominant high yield index. They're not they're not blowing out together. So I know this is a four-letter word, but for now it's contained. Um >> Oh no. Oh no. Oh no. That's it. It's gone. It's over. >> Contained. Oh no. for for now. Well, you know, it hasn't bled it hasn't bled over to the the broader, you know, high yield uh complex is my is my point. I mean, is it contain? I don't know. But it it has it bled out to the broader complex. The answer is the answer is no. >> Right. Yeah. We It's funny because the last podcast that we recorded, we were talking with um a friend of mine and he and we both howled at the word contained. We were just, you know, we can't wait till somebody says contained. We both said and I'm like, of all the people to say it, you know, you're like the last one I expected. But but I was I was thinking essentially the same thing. I was thinking, okay, so in other words, the market is saying, >> no, this the the stress isn't as great as, you know, March um you know, 2023. Just take that date. >> Yeah. >> So, so that's reasonable. I mean, you know, the market says what it says at any minute. We're not we don't we're not predicting what it's going to say 6 months from now. We're just saying what it says right now. >> Correct. Correct. Right now, the market is telling us, look, [clears throat] may maybe there's obviously some some stuff that, you know, people got in over their skis on risk and they're going to get, you know, carded out. They'll take they'll get their mark they'll their marks will get marked down and they'll have not great returns or whatever. Uh that's that's the law of the market. That's what it does. Mhm. >> Um but right now it's it doesn't look to be, you know, systemic um for now. Um >> and if I wanted to craft a narrative, I could say, well, okay, if Triple C is getting hit, that's how it starts, right? The worst garbage gets hit first and then, you know, they don't really um they don't really shoot the generals till it's all over, you know. So, but >> correct, >> I could if I wanted to craft that, but there's really no need to. I mean, we all we all know sort of what's happened in credits basically since the financial crisis, right? I mean, you know, banks and on to everybody else. >> So, so yes and no. It it got pushed out of banks, but I mean, this money is coming from somewhere. >> It's not just coming from from investors. A lot a lot of these, you know, the blue types, they have lines to the banks, >> right? So, so, so even though it's private credit, >> it still has the capacity to infect the banking system and and credit intermediation. And at that point, you know, we learned from previous crisis, they're not going to let that happen. They just won't. They're not going to let that happen. It it is it's it's it's political at that point. Why? Because that that means if if the if the banking system gets infected, then you're going to have a labor market problem. And a labor market problem is pissed-off unemployed voters. And nobody, no politician, no regulator wants a pissed-off unemployed voter. >> And that's the >> Yeah. >> Yeah. Since time in memorial, too. I mean we we this is the great this is one of the great conflicts of the ages uh you know in terms of finance and economics right there's like whatever you want to call it banks and bond markets on one side and the currency on the other and guess which one they always pick to save you know and guess which one they always use to s you know I mean it goes that way every single time and and you're right if you know if if banks get in serious serious serious trouble because they've gotten too deep into private credit. Um, we know exactly what's going to happen. >> Exactly. >> So, >> correct. >> Correct. Now, the the only the the only hope is that, >> you know, I mean, some of the post GFC regulations were watered down a bit um because they were, you know, they were seen as impeding the flow of credit and blah blah blah. Um but you know the you know hopefully um and this is not my area of expertise at all but hopefully there's enough teeth left in the regulations that have kept places from getting in over their skis on private on private credit and and maintaining collateral. Now the the big the big thing you can't stop though is fraud, right? as we learned in the global as we learned during the GFC once there's outright fraud that gets institutionalized when when people learn how to game the system like they did with the credit ratings and they did with you know calling you know all these you know crappy radioactive Frankenstein pools of capital AAA >> and and it's [clears throat] enabled by institutionalized fraud where various actors are all you know engaging in this behavior even if unwilling ly then advised to do so. >> Yeah. That then that's that's a different that's a different game. That that's a different game, you know, once there's fraud and institutionalized fraud. >> Sure. And and and no one would be surprised if you know in a trend this powerful if if there was uh you know something like the Enron of private credit somewhere. Um >> Correct. >> that played out. Yeah. >> Correct. Correct. >> Yep. And so Okay. So we so we've established that, you know, they're going to save banks and bond markets and they're going to use the currency to do it. Um, a lot of people love love love to talk a big gloomy doomy game about the US dollar. >> Oh boy. >> I was one of them for a little while, but I never got totally gloomy and doomy about it. I was just long gold and and and bought >> Yeah. bought a certain amount of of the narrative that you know the fiat will continue to deteriorate over time. That's been a long long long trend. Um but the US dollar like uh I mean I'm I've I'm like a full-on you know um Brent Johnson milkshake guy at this point. You it's it it it's really really really hard not to do business in US dollars still. >> Yeah. And I and I think you know I think you know maybe was five years ago there was the Bitcoin was going to take over right now that's just been shot in the head right where you know what's in the latest you know with especially now like what's what's Bitcoin done? I don't really follow that much but I know it's done nothing good. >> Um it it's gold's even gold's out outperformed you know um Bitcoin I believe. Um, so this that's not Bitcoin is not even um you know a part of this conversation I think but broadly speaking um you know the I was it's funny you mentioned this because I was actually at a uh conference in San a currency conference in San Diego and the headline speaker was actually um Governor uh Waller I met Waller had dinner with him um a few other participants uh got invited to this dinner got don't ask me how or why but um Waller was there Katherine Man from the Bank of England was there. Um they had a few um admirals from the US Navy um there you know giving strategic thoughts and and this whole thing the the basic you know question they sought to answer is is it over for the dollar and if not when >> and the the general consensus was as long as we maintain our geopolitical alliances the dollar will be fine. Um it's re that's really what it comes down to the geopolit you know why because it gets kind of touchyfey feely you know everyone says oh the you know we got the military we got this blah blah blah blah blah yeah we do have those things we you know we do control the swift you know the the the wire the global wire system for dollars or for currency >> you know but at the end of the day it comes down to one of these things called you know trust and your your allies have to trust you enough to use your currency >> right >> and [clears throat] and and you as long as we're the cleanest shirt in a you know in in the laundry. >> Yeah. Whatever. Whatever. Or you know the the best house on the bad block. >> And as long as our allies continue to say you know what fine you know that's the best one and you know you might not be great but you're not awful at least and we'll continue to use your currency. That's really >> David. Try this one on prettiest mare at the glue factory. What do you think? There you go. >> There you go. Yeah. Exactly. Oh my god. Don't don't sit around my daughter. She's equestrian, so she might start crying. Um, >> yeah. [laughter] Yeah. Yeah. Kind of an animal lover myself. So, >> I made a I made a I made a glue joke once and she literally was in tears. I'm like, "Oops, that will never do that again." [laughter] >> But but but um the the dollar just going back to more, you know, you know, trust is kind of touchy feely, but getting back to more, you know, tangible things. Yeah, it really there really is no alternative. Um, and here here's here's here's why. Outside of the normal caveats of, you know, the military, it's really we have the deepest most liquid capital markets in the world. Like you could go buy, you know, two billion in treasuries and you might move the market a tick or you know, whatever, but it's no one's going to squat an eyelash if you go and and bid on two yards of treasuries on on the on the run stuff. It's not a big deal. >> You can't do that anywhere else. You'll you'll destabilize the country if you do that. I It's probably I'm exaggerating a little bit, but you really can't >> you you really can't um do that anywhere else. Um and and that's a function of how big our economy is, how how large our um you know, our our our consumption is. You know, we're the we're the we're the we're the the the consumer of last resort for the world, right? everyone's looking to ship in what they have to sell into the US. So by definition, if everyone's looking to sell to us, there's only one way we can pay them in dollars. That's our currency. We can't pay them anything else. So once they accept dollars, then everyone's sitting on dollars and that's how everyone transacts. That's how everyone trades. That's just the bottom line. And it's unlike according to Bank of International Settlements, last time I looked, I thought it was 12 or 13 trillion of US dollar borrowings outside the US, >> you know. >> Oh, I'm sure it's bigger than that. I'm sure it's it's it's huge. >> Yeah. >> Right. So, so everyone's, you know, as we've you know, we have these current account um current account deficits, but we have account we have also have, you know, capital account surpluses. In other words, we are basically, you know, the intermediary of choice for everybody else's economic choices. We everyone wants to sell us their stuff. We give them our we give them our funny money currency. They take it and they buy more things with it. And it's great. It's the exorbitant privilege. And I know it's we're kind of going political now and some people think it's bad and the burden of empire, but you know, listen, our our our economic well-being is directly tied to that privilege. We can borrow and fund ourselves much cheaper than we otherwise would. >> So, I wish we could sort of um you know, inject this into the veins of the of the dollar doomer crowd. You know, they I don't know, maybe I find it particularly irritating because I I see a path where the dollar strengthens. Dollar and gold can strengthen at the same time, you know. >> Sure. >> They're not there. I I understand seeing them as opposites, you know. I think of of gold more priced in dollars than anything else, >> right? >> Um but [clears throat] uh if I don't know, it's it's become it's almost become a pet peeve. It's it's a serious pet peeve for Brent Johnson. I'm sure you know who he is. But >> yeah, yeah, I've met Brent. >> It's becoming a bit of one for me as well. uh because I feel like I understand it better every time I talk to somebody like you and then you know. >> Right. >> Right. >> Well, it's kind of up there too with the um you know the um the deficit people, right? You know, we're we're mortgaging we're mortgaging our children's future and you know, we're leading them poorer. You know, I'm telling you, you know, I'm I'm I'm 53 years old. told I'm a child I'm a child of the 80s you know and I remember watching that national debt clock and I was told you're going to be poorer than the next generation blah blah blah blah you look at GDP you know growth between then I mean I think when I was in undergrad US GDP was under$5 trillion back in the stone ages now it's you know 30 trillion you can you can deflate it within you know whatever but still real real living standards have improved since I was a kid that's just a fact >> and it's and and re regardless of the debt, they've improved. So the real yard stick isn't, you know, the the the funny money piling up, it's how do you live? Are you better off today than you were 30 or 40 years ago? I say, hell yes. The average person, even the poor pe, you know, the poorer or the poor are better off today than they were 40 years ago. The the the rising tide did lift all the boats regardless of the deficit. But my my my favorite thing is, you know, the biggest trick the devil ever pulled was convincing people that governments pay back their debts. They don't. They just roll them over. They roll them over and defl and deflate them. That's it. >> Endlessly. Yeah. Endlessly. >> That's fine. And governments have, you know, in theory, you know, infinite time horizon. You and I don't have that privilege. We at some point will, you know, kick over. But governments don't, unless it's a real revolution, but that's a whole different thing. But, you know, effectively governments can just do this in perpetuity until they're until they're no longer a functioning government. But that's Yeah. Again, that's that's hopefully not in our lifetime. >> Yeah. I hope we I hope we don't get there. I hope the the you know, the bugaloo as some people call it never happens. >> Yeah. No, we we don't want that. God help us all. Yeah. So, [snorts] >> so I see I feel like we skipped a topic because you would also um in the email you sent us you mentioned US small caps. Is that part of the out of mag seven or what do you think of what what's going on there? >> Yeah. So you know I I think um you know particularly people of you know you know earlier schools of thought you know when I went to grad school or undergrad you know we're all taught you know French FMA factors and and and value and and you know CFA curriculum and and and you know small caps back in the you know 80s and 90s they they they had some outperformance because of you know some structural factors you know the you know the the illi liquidity premium for example you you were paid extra to hold a less liquid asset right um so all these kind of rationalizations came up and and a whole generation or or two you know came up the ranks of like oh my god this is the real thing and and and it kind of stopped working um after pretty much going into the global financial crisis um small caps they would have these bouts of outperformance And it always just slumped back >> and and I think there are some just like there were structural drivers to that outperformance back in the day >> in the 80s and 90s and maybe early 2000s. There are some structural factors that have changed the way um the small cap market. The first one is regulatory. >> What happened after uh do and all the regulations do you know um was it DoddFrank part? I don't remember but obviously all these regulations came up after the um.com right to avoid another Enron to avoid another MCI woolcom to avoid all these bad things and and that [snorts] >> that kind of um made the cost of capital more expensive public capital became very expensive and this is why we've had this boom in private equity because private capital is cheaper you don't have to you know if you're a small company you have to now have an army of lawyers is preparing your filings every quarter. You have to have all these, you know, back-end systems reporting blah blah blah. And I'm not make saying it's good or bad. I'm just saying it is what it is. And that represents a a higher burden for small companies, right? So the cost of the cost of public capital went up, the cost of private capital went down. What that means is that private actors were able to go after the better companies and and roll them up into their private equity portfolios. So you you what happened was private market I'm sorry public markets were left with the ugly ducklings of small companies. So, you know, now you have, you know, you think about, you know, some of the most successful companies that we we have, some of the, you know, most celebrated brands are private. You know, Cargill, they they basically run, you know, our food supply, they're private, right? You know, In-N-Out Burger, you know, they're private. Um, Bies, they're private. you know, all these all these um kind of brand name enterprises that are now at scale. >> Before they need it, they needed public access to public capital to fund their expansions. Now you don't need that. Now you can go to KKR, Blackstone, whoever, and they can, you know, drop $2 billion into an emerging startup or whatever. Not a big don't even bat an eye with that, right? That wasn't the case before. before you had to go to the public markets and and and seek capital publicly. So you've got this, you know, collection of kind of fddy, ugly duckling companies in the small cap space that nobody wants and therefore they they kind of suffer persistent underperformance. And occasionally you you get a you get a kind of a bounce. Usually you get the bounce coming out of a downturn. You know, small caps relative to the larger caps get just completely annihilated and the value they're just screaming value and you throw some money at them. And then the other thing is, you know, uh public uh small cap companies are heavily reliant on on debt, right? They're really levered. So they're very sensitive to credit spreads, that trash spread I was telling you about earlier. So as as things kind of normalize, credit spreads and their cost of, you know, debt funding goes down and that really helps them out. So those are the two times when small caps really just kill, you know, kill it and do do really really well. You know, back in 2021 was the last time small caps had a massive outperformance, right? Versus big caps coming out of COVID. Um and then we've had some, you know, some movements. Um, so I've been kind of um, you know, not really a fan of small caps for a while. >> Mhm. >> Um, and it's really just kind of a tactical play coming out of some kind of downturn. Like for example, depending on how this thing with Iran turns out and how deep it goes, then that might represent an opportunity. And, you know, as we discussed, the trash spreads blown out a little bit. Um, so again, between the the spread and coming out of a kind of a sell-off, that might represent an opportunity. But I I just think it's it's fundamentally like a broken asset class. And I think a lot of people from our generation that, you know, maybe at one point either made a lot of money or we were just told in class that that's the way to go. >> They a lot of people haven't gotten their heads around it. >> Yeah. >> They haven't they haven't really come out. They're still they're still they're still waiting for Elvis to come out, you know? >> Yeah. >> And it's not just stopped working, [laughter] right? >> It's just Yeah. And it's just one of those generational things that like my god it just people just they have trouble moving on. And I think that's the problem with small caps is that the the the the regulatory structure changed the market structure which changed the return pay the return payoff >> right and uh this you're reminding me I just I just remembered sometime in the past I want to say two or three years um [snorts] I [clears throat] read uh I think it was an interview with Jeremy Granthm and he said they use the Russell 2000 as like a perpetual short opportunity. They're always hedging everything else by being short the Russell 2000. He said we're we're short the Russell 2000 almost all the time. >> Yeah. >> You know, because it's loaded with garbage basically. And he says, you know, sometimes the the earnings from the entire index will be net negative. >> Yep. >> You know, it's frequently that. So, [snorts] >> you know, it's just um it's it's becomes a perfect vehicle for them to hedge with. But >> and and and if you're a if you're a decent, you know, a decent small emerging company, >> most likely you're in software, most likely you've been bought out, you've been rolled up, you know, that that's kind of what has happened. So, it's just there's just like this, you know, private equity has really become this sucking machine for the the better ones and then, you know, the the dance floors left all the ugly ducklings. >> Let's do this. We um we do two things for our listeners, you know. We we uh teach how to fish and then we offer them a fish. Some people don't like to talk about the stuff they currently own or currently recommend. If that's you, that's fine. We can move on. But if is there anything that you any current trade that you think is a pretty good idea and you know all the caveats, this is not investing advice, etc., etc., etc., um that you like right now. Is there a current trade that you like right now? >> Yeah, absolutely. I'm happy to go through the whole go through the whole position book if you wish. Um, >> love it. >> But, you know, >> yeah, full full full disclosure, you know, nothing to hide. And obviously, a lot of my subscribers are watching this, so you know, let's look if I if I come up with any any funny business, they're going to call me out, right? So, I have every incentive to be transparent and honest with both, you know, the the wins and and the losses. So, >> right. >> Um, before we go there though, and I promise I I will, this is not a diversion tactic. I want to go back and talk about something we haven't talked about yet because this is part of the process for taking us to where we got or to where I am now. Okay. >> Okay. >> Aside from the rotation trade which I started talking about back in uh 1 of November. >> Mhm. >> Um I started talking about um the labor market. Um, and the labor market's really important because not just for the economy, but for policy. And you know, when we started getting these low non-farm payroll prints, um, the assumption was that, oh, oh, holy crap. Um, employment is going to shoot up. That's it. It's over. And I said, no, it's not over. That's not going to happen. Because, um, and this is not a political statement. This is a mechanical. It is what it is. Uh the administration's immigration policy has shrunk the labor market. You know, demographics is destiny. Um you get, you know, uh GDP grows in in two ways. >> Size, you know, size of your labor pool and productivity. That's it. So if if you start um shrinking your um labor market um you you don't need to hire as many people to keep uh unemployment stable. So I said, you know, we could it's very possible that we could see negative NFP prints, negative job growth, and still have a lower unemployment rate, which is goes back to this concept that people just can't wrap their heads around. >> Yeah. >> And and I I actually um discussed that with uh Guy Burgerer who's the former um chief economist of LinkedIn. So he's he's a labor market economist. Like he's he's a real egghehead. Real smart real smart guy, right? I'm just a I'm just a wannabe, but he he's a you know legit um labor market economist. >> And we we we discuss the mechanics of shrinking the labor market >> and how that impacts everything. And you know, this this kind sounds like an abstraction, but here's here's what I'm getting at. If you tighten your labor market and you lower um unemployment, >> Mhm. >> you know, even though you have layoffs and a soft, you know, kind of on the surface softening, but really a hardening labor market, that that that could provide an an inflationary impulse. That was one that was one thing that we discussed. Mhm. >> The the the other thing that um I started picking up on was um you know after the pandemic you know our supply chains had all screwed up right and we started having bullhip effects. What's a bullhip effect? you you you because you were so uncertain about your supply chains, you overordered and you overinventoried. >> Y >> and then so you'd have a burst of of orders and then you'd wait a long time to deplete them and then you after that you'd over orderer again. So we had this kind of like this sine wave of of of um activity there and this is why the ISM data [clears throat] became very unreliable because it was just kind of like well it's just noisy. we we don't you know we can't trust these this survey data anymore because pure you know we don't know if this is real activity or just pure just kind of panic ordering. So we went you know we went through different iterations of that cycle. Okay. Finally we got down to like a real understing of inventories and then companies started um um building inventories again you know kind I call it the great restocking. So then we had the ISM print in January which came out really strong. We got another one yesterday for manufacturing again very strong. [snorts] Um so now we got two things going going back to what else you know now I'm bringing all together. We've got a a stronger than expected labor market. We've got a kind of a restocking boom that's coming up and that is going to be inflationary and you know a few weeks ago you know people are throwing around two cuts maybe three Fred Governor Steven Miran is looking at four cuts you know Trump wants wants a billion cuts and and >> it's just it's just not going to happen and and my my my weekend note uh this past weekend was it's none and done. We're not getting any cuts this year and and we shorted the bond market. We shorted Zen, the 10-year Treasury future new um on Monday morning. That's that's done phenomenally well. Look, I'm sure I got partially lucky, right? you know there's kind of timing is always tough but you know I I think there's a consensus shift from you know um you know we're going to get cuts to we are not going to get cuts this year that's starting to get um priced in >> we've we so so the macro backdrop is one of a stronger labor market than expected a kind of a restocking boom that's starting Right. >> Obviously, the stuff with Iran kind of throws throws everything off because that's just, you know, who knows where that goes. Um, so I'm not going to go there because I have no I don't I don't have a political crystal ball. These are political decisions that are made at, you know, >> right? >> Calling it like you see it. I got it. >> Right. Correct. So So that's kind of the macro backdrop for, you know, what I'm positioned for. So >> All right. >> The rotation, the stronger labor market, and the restocking boom. That's kind of the the the three-legged stool for how I'm thinking about the economy and for how I think things will evolve in the markets. So, let's let's get let's get after it. If the Fed has gone from u potentially two cuts to no cuts, then that means one thing means higher rates. We we've gotten that I think on Friday the 10-year Treasury closed at 394. As of before I got on the show, it was at 410. So that's kind of a pretty big move, especially given what's happening with Iran. You know, everyone's thinking, "Oh my god, safe haven bid. This is going to get, you know, bid hard." Like, no, they're not. >> Um, so, um, a little more inflation, less cuts. Um, in terms of the restocking boom, who's really going to benefit? So, it's going to be a lot of these middle market, um, smids, so small, not not small caps, uh, medium caps. So logistics, logistics companies are going to do really well. You know, aerospace systems for the military, things that do um you know, um warehousing, all the things that are get involved in in in industrial um uh restocking are going to do well. Um so that's kind of one leg. Um the other one is higher rates and then this kind of rush to safety for the dollar means um you know the the big international trade that was going on for the past uh 18 plus months is on pause. I mean this morning emerging markets got hit. Uh South Korea I think was you know down at 1.10% overnight. Um all all these emerging market high-f flyers that everyone was looking at just getting completely whacked. Um so the the the international trade is going to face some stress. So that's the second thing. >> Um and then the third thing is um I think the you know that's going to bleed over into commodities as well. You know gold which is you know obviously had some safe haven bid um element to it >> is today getting hit really hard. The miners are getting hit really hard. I think GDX is down you know high single digits. I know for sure GDXJ is down um in the uh double digits around 11 12% at be last time I checked. So, you know, strong dollar, um less international, um more uh 493, more um middle market, um I would call it companies that do stuff, right? Less less software, less tech companies that do stuff that build stuff that things you actually need. And then on top of that, there's the kind of the reshoring agenda, administration. I mean, I don't know how that well that's going. I'm not going to consider consider that one. But the bottom line is um you know those those are the big things that are happening and if you can latch on to those trends >> I mean I don't I don't do a lot of single name stuff. I just don't have the um the capac the time to do that. But >> you [snorts] know sector stuff u defense is going to do is going to do great uh both European defense as well as American defense. >> Um yeah so that's kind of the the basic way I'm I'm viewing the world and allocating capital. Okay. So, I use ITA for defense. I got >> That's what I'm using. >> Yeah. And XLI [clears throat] for industrials. I've used >> I've got I've got XLI as well. Yeah. >> Um what did I I actually did buy um I did did a little bit of the XUS trade and I I think I bought VGK, the European ETF at one point, which did okay. Um and what else did we say? Oh, like those sort of small mid logistics firms. I mean, there's there's a transportation ETF or two out there. Um, I I I'm glad you brought that up actually. Just I wonder if we could do a little little uh detour here just for a minute. I thought it was so weird that this company algorithm came out with this white paper that said, well, you know, we've we've reduced um the number of miles basically that trucks go empty, right? they're empty 30 to 35% of their miles and we've done trials on our technology in India and we've got that below 10%. Right? So trucking companies then could be potentially become much more efficient. You'd think that would be good for trucking [laughter] companies. >> So they hammered the trucking stocks that day. I thought it was weird. >> That's the truck the trucking stocks. But if you look at you know the the actual suppliers uh Trinity Industries TRN >> Yeah. um you know they do they they they they work with railroads and help them with their logistics and also truck companies but there's there's a whole um you know there's a whole universe of those names that are doing spectacular. >> Yeah. Well yeah right up until that day and actually since then they've recovered they were screaming because we thought well okay you know that this is um an industry that needs uh some some efficiencies worked into it. AI should help, etc., etc. And and especially and like railroads are are going to use this. I mean, they're on fixed routes. It's ideal. Like it's made for AI, right? >> Right. >> Um uh and you know, less so, but still trucking as well. [clears throat] Um you know, just just in terms of uh filling up the back of the thing as as I mentioned a moment ago, >> right? >> So So it really good. And that was that was actually one of my notes I wrote about last fall was that you know >> you know just kind of a from a more egghehead type view about productivity. >> You know it's it's going to be nuance kind like kind of like the internet right I mean you know we we when we started we we took over like everyone was like oh my god email and this dumbest thing and you know we'll we'll never we'll never get rid of the didn't Paul Kugman say we'll never get rid of the facts. >> That was his something goofy like that right. So, so it's it's going to be it's it's going to be kind of like, you know, really it's going to happen in a way that people don't really appreciate. It's going to be like, "Oh, AI can do this, you know." And here's a here's a funny example. Okay, really funny example. My sister yesterday, she's doing a a bathroom renovation. >> She emailed me. She said, "Hey, what do you think? This this countertop I like this vanity for the bathroom. Um, but I don't like the the countertop. I think it look better than whatever this kind of marble. I don't know. She said, "What do you think?" I'm like, "I don't know." But you know what I did? I I downloaded the picture. I loaded it up into Gemini um Google's AI agent. And I said, you know, um simulate this this vanity with, you know, whatever color marble top. And I said, "That looks great." Right? So So that that facilitated her purchase decision. She didn't have to spend hours of her time driving around different showrooms. she could just like mess around with this thing and make a decision >> and hit the buy button a lot faster >> and that helps the end vendor of that whatever they're selling. So, it's it's going to happen like that. These kind of like weird use cases where like, oh man, let me check with the robot >> and it'll it it's going to and then these things compound. >> Yeah. >> And then you look back five years and you're like you're like, oh my god, five years ago we were actually doing this. My god, we're idiots. >> Yeah. So, for a couple for a while now, we've been using this thing that shows up on Amazon in places where, you know, if you want um I don't know, some household item or even like a handbag or something, you can you can use, you know, your phone to place it on, >> you know, wherever you want it in the room or in front of you and see how big it is and how it fits in with the decor or or whatever um or the color or whatever it is you're looking at. And I'm like, that is cool. And yeah, I may never leave the house again, you know, except to just, you know, for the sake of getting outside. >> Um, I think that's cool. I think it's really cool. >> So there's there's going to be a lot of um, you know, adoption at the micro scale that we're not going to appreciate, but at the enterprise scale is really going to boost. You know, that's been a kind of key thesis of mine is that eventually it, you know, in other words, S&P 500 margins were at, you know, I think pushing 14%. And everyone was saying, "Oh, it's just all because of mag 7." So at at the macro aggregate level, yeah, it's all mag 7. But, you know, we can still get to 15 16% at some point >> if the other 493 adopt some of these tools and integrate them into their enterprises and make workflows more efficient. >> And it's it's happening. It's going to happen. You can't it's yeah to when and and what at what speed and how it's deployed, but it's going to happen. And that's why I became, you know, another reason I came became very bullish on the 493. you know, I swapped out my S&P 500 um market cap exposure, got an RRSP, and that's, you know, that's it's going to do well. >> Yeah, I agree. All right, David, it's time for our final question. >> It's the same question for every guest, no matter what the topic, even if >> Yeah, same question. >> I I forgot. I forgot. So, >> it works better that way [laughter] actually if you forget. >> Yeah, >> same question. No matter what the topic, if you've already said the answer, feel free to repeat it. Question is simple. It's for our listeners benefit. If you could give them one thought today, one takeaway, what would you like that to be? >> The US business cycle is going to be longer than you think because we have World War II size deficits being pumped into the economy and p uh public deficits are private sector surpluses that make their way into the private economy. it is for the next few years as long as we're running these deficits is gonna be nearly impossible to kill the business cycle. We might have some scares, we might have some, you know, whatever, you know, even liberation day, whatever. But it's so far it's been a teflon economy. And that's in large part because there are trillions upon trillions upon trillions of dollars flowing from the public sector into the private sector as a surplus. >> All right. Sounds good. Hey, I'm I'm on board with that, man. That sounds kind of good. >> It's it's it's money. I mean, it's it's just it's it's a pot. It's it is imagine, you know, how do they make fuagra? They they stuff a goose with full of corn and whatever. So, that's the same way. We have economic fuagra. We're just stuffing the system with money. Now, there'll be a hangover. There'll be a payback period, but for now, >> absolutely, >> it's going to go a lot longer than you think. >> Yeah. And it's And I'm not like I'm not a fan of big government. That's not the point. We're just talking mechanics here. >> Make money. That's the point. >> Yep, that is the point. All right. Listen, man. It's always a pleasure to talk to you. Thanks for making time for us. >> Thanks for having me, Dan. It's a pleasure to see you. >> Well, I always enjoy talking with my friend David Cervantes. He's one of the most brilliant macro analysts that I have met in the last 10 years, probably. and he's the first guy who ever told me that GLP-1 drugs were going to be this really important economic force in the world. And of course, he's right. And and he recommended Eli Liy a couple years ago. It's up 70% more than triple the S&P 500. I I I think that constitutes being right. Okay. Uh and of course today he mentioned being long the equal weight S&P 500 ETF, RSP, and he mentioned being long the industrials XLI. I' I've recommended that one, too. And he's also long XLR, the real estate ETF, which was last year's worst performer in the S&P 500 sectors. So, maybe it's going to get a nice rebound trade this year. And I think he's up on that trade as well. So, lots of good ideas. And if you want to find out more about David and and all his ideas and his wisdom on the economy, you can go to pinbrookcap.com. You can also follow him on Twitter on or now called X.com. I have to call it X where I follow him on X.com. I love him. He's got lots of great ideas and he's a voice of sanity about macroeconomic themes. Too many people are driven by their politics. As you heard in the interview, David is like, look, this is not a political thing. It's just the mechanics of what politicians do and we want to make money, right? as we underscored at the end of the interview, it's about making money. It's not about expressing a political view. He's brilliant at that and you need someone who's brilliant at that. Okay, so it was another fun interview, another fun episode of the Stanberry Investor Hour. Hope you enjoyed it as much as we did. And remember to like, subscribe, and sign up for our daily elet. Opinions expressed on this program are solely those of the contributor and do not necessarily reflect the opinions of Stanbury [music] Research, its parent company or affiliates.