Gold Performance: Gold has surged over 50% this year, outperforming the stock market despite the ongoing AI boom, raising questions about its role as a safe haven asset during technological advancements.
Market Concentration: The S&P 500's concentration in a few large tech stocks, now termed the MAG 7, is reminiscent of past market cycles and could persist, challenging the notion of mean reversion in market concentration.
Labor Market vs. Stock Market: Despite a slowing labor market, the stock market remains resilient, driven by strong corporate fundamentals and investor focus on forward-looking economic indicators rather than immediate labor statistics.
International Stocks: International and emerging market stocks are outperforming U.S. stocks, partly due to a weaker U.S. dollar and improved shareholder value strategies in non-U.S. companies.
AI Investment Bubble: There is ongoing debate about whether the current AI investment surge constitutes a bubble, with comparisons to the late 1990s tech bubble, though current tech companies show strong earnings support.
Fiscal Dominance and Gold: The rise in gold prices is attributed to central bank buying and concerns over fiscal dominance, where fiscal policy overshadows monetary policy, suggesting a shift towards hard assets like gold and Bitcoin.
Investment Strategies: A barbell investment approach, combining U.S. tech giants with international stocks, is suggested as a way to diversify and hedge against potential market shifts.
Transcript
Welcome back to Ask the Compound, the show where you ask and we answer. I'm your host, Ben Carlson. Everyone and their brother thinks we are now in a full-fledged AI bubble. Maybe we are, maybe we aren't. We'll see. If this is a bubble, it's a very bizarre one. Gold is up more than 50% this year alone. One of the yellow metals best years ever. So, what's going on here? Why is a relic like gold up so much during a technological boom? We have a great guest host on the show today to help answer this question and more. You don't want to miss this one. Stick around. [Music] Okay, our email here is ask the compound showow@gmail.com. If you have a question, please feel free to ask. If you're in the live chat, ask us a question there, too. We'll answer it on the spot. On today's show, we ask answer questions about how does the market concentration in the S&P 500 end? Why doesn't the stock market seem to care about the labor market just yet? Why are international stocks being the pants off of US stocks this year? Why is gold outperforming? And finally, how do you recognize an asset bubble in real time? And how do you define it? Today's show is sponsored by Rocket Money. Maybe you have a solid handle on your budget. Maybe your spreadsheet says you should have an extra thousand left over each month. But if your bank account isn't reflecting that something's off, Rocket Money can help. They track every dollar. They uncover hidden spending. They take control of your finances. U I use it all the time in the app. The desktop is nice, too. So, Rocket Money is a personal finance app that helps you find and cancel unwanted subscriptions, of which there are many. monitors your spending and helps lower your bill so you can grow your savings. Uh, it's great because you see all your expenses in one place. You see what's coming up next. You see stuff you forgot about. I have a million subscriptions. It's easy. Rocket Money has saved users over $2.5 billion, including over 880 million in cancelled subscriptions alone. Their 10 million users save up to $740 a year when they use all the app's premium features. I had Rocket Money negotiate one of my bills for me a couple months ago. It was easy. I didn't have to do anything. Cancel those unwanted subscriptions and reach your financial goals faster with RocketMoney. Go to rocketmoney.comc today. That's rocketmoney.comc to learn more or just download the mobile app. All right, great show today. Great guest host. Duncan, let's get to it. >> Yeah, I'm excited about this one. >> All right, up first today we got investors have been concerned about stock market concentration for years. The S&P 500 keeps getting more concentrated, but the biggest stocks also have the fundamentals to back it up. How does this resolve itself? Is a more concentrated market the new normal? >> All right, so let's bring our very special guest in to help us today, the director of global macro at Fidel Investments, Urin. >> Hey, Urin. >> Hi. >> All right, so the MAG 7 now makes up something like 36% of the S&P. It seems like people have been warning about concentration since remember when it used to be just the fang stocks. Yep. >> And that has graduated. Now it's MAG7 and I'm sure it'll change it to some other name. you have a great chart that shows the waiting of the top 50 versus the bottom 450. And so the top 50 currently is like almost twothirds of the total. Uh and I I love how you show how that there's this this back and forth in yin and yang. And I think a lot of people assume well the way that this resolves itself is the concentration goes back down. But I think the first part of this chart that you showed in the 60s and the 70s, how long those big conglomerate stocks, the Nifty50 stocks controlled the market, um that's a possibility today, too, that maybe this is just the new normal. What do you think? >> Yeah, I it it could very well be. And if you look at that middle part of the chart, you know, you're looking at the late 90s, obviously the the tech bubble. Um and I I believe one of the big uh Wall Street houses, you know, did a study maybe a year or so ago um saying that, you know, when you have concentration risk, which obviously we do, seven stocks 36%. That if it mean reverts, you know, it's going to drag the market down. I mean, there's just really no no way around it, right? If if seven stocks 36% go down, uh the market the index is going to go down. Like even if 70% of the stocks in the S&P were going up, the index itself would go down. And when you have this big indexing effect, right, in late 90s it was uh the big index funds. Now it's of course it's ETFs. Um you know it's going to be it's it's not going to be a a happy situation. But you look at you know 50s 60s7s um this kind of concentration can persist for decades literally. Uh and it was a normal feature of the market. uh you know 50 60 70 years ago and so we can't really bet on that mean reversion and so like what do you do right you can't you're not going to go down cap just because you think this is like a PE ratio that has to reset lower it can really persist and these days you have this kind of phenomenon where uh companies that are are are like coming up um they'll just get bought by those big companies right and so in a a smaller companies don't have much of a chance to really compete with them because they just get swallowed up. >> And and it seems like that the government has shown no impetus to to break these companies up, right? I think that's one of the things people in the 2010s thought like, wait a minute, just wait till the government steps in and breaks them up. Uh it doesn't seem like anyone wants I don't think consumers want that. It doesn't seem the government wants that. So, you're right. And they've effectively created this oligopoly where with the AI trade, they're all sort of just investing in one another and almost propping themselves up even even higher. So they're becoming stronger it seems as time goes on. >> Yeah. And you get this sort of vendor financing thing that we're seeing now in AI and you know I know we're going to talk about this a little bit later but it makes you it makes you wonder about the late 90s you know when like Cisco was vendor financing uh different companies but um yeah you know these companies have giant networks they have very big modes. I mean, you know, if if you if you invent the next iPhone tomorrow, you know, good luck disrupting Apple. Like, it's like, you know, how is that going to happen? These companies have gigantic modes and networks and so, uh, unless they get regulated away. Um, it's likely that they're going to stay really big unless just the world changes and the AI boom maybe turns to a bubble and then it sort of disappears, but even then, it's probably not going to disappear. Um so we you know we may have to get used to this but it's very important because if you're an investor you're in a diversified portfolio and you know the US has dominated the rest of the world but that really is because of the mag 7 right if you take the rest of the world uh relative to the US relative to the cap weighted uh S&P 500 it continues to underperform relative to the equal weighted cap equal weighted index it's actually held its own so um the fact that's a small number of companies have such a big weight in the S&P uh really distorts a lot of other relationships that actually would be working right now if it wasn't for this phenomenon. >> Yeah, if you look at the top 10 it, you know, I know it changes every day depending on who's up and who's down, but when Oracle had their big comeuppance a couple weeks ago, it was nine of the top 10 names were tech and it it was like all these tech people and then then Warren Buffett over here still holding the ground. But uh it's so tech dominated these days and technology is such a big part of everything we do and if if the AI trade and the AI investments work, it's not like that's going to to slow down or reverse anytime soon, right? So maybe it's new tech stocks that come up, but it it makes sense that we could see this concentration in these big efficient cash flow producing machines. >> Yeah. And and the AI boom of course is is enormous, right? and um uh and it requires a lot of capital investment. It's it's sort of like a a winner take all type of market um uh where the big players they feel like you know it's it's do or die. We need to own this. We need to come up with this killer app and in order to do that we need a lot of power, a lot of chips, a lot of boxes and this and that. And so that's why there is this race going on and we see it in the in the in the capital spending numbers. And so it's pretty relentless and it is different in that sense from the internet boom. I mean you needed like routers and Cisco routers and Dell computers and all that stuff back then as well. But the the the level of capital intensity of this one is pretty u is pretty enormous. >> All right, Doug, let's do another one. >> All right. And all this AI stuff and uh you still don't have your little her earpiece then that you've wanted. You know >> that's what I'm waiting for. I just want Scarlett Johansson in my ear as my personal assistant. Is that too much to ask? >> I have a feeling you'll get it. You'll get it at some point. Okay. >> Uh up next, we got the labor market continues to slow as the stock market charges higher. Why doesn't the stock market care about the slowing labor market yet? >> All right. So, we're the numbers we're seeing is like fewer job openings, right? Fewer jobs created. Hiring is slowing to a crawl in a lot of places. And the stock market doesn't seem to care. It's also funny that the stock market really hasn't blinked once since the government shutdown and uh doesn't seem to care. I I think the corporations, my take is the corporations are one of the our last functioning institutions in this country, but I guess that's for another day. But you have this you have this chart here about excess labor demand. Um and it's funny the the whole COVID labor demand was that's the outlier, right? It's usually the other way around. So what happened now that people are worried that job openings are are are less than the number of people looking for a job. That that's the norm. Correct. Like that's that's how things have have mostly always been. The co thing was was kind of an outlier. >> Yeah. So if if you look at the top panel of this chart, um it shows just like where the labor market is relative to normal condition. So you got the Joltz number in in the orange. So job openings versus job, you know, uh seekers. Uh the gray line is the unemployment rate relative to what we call nou the kind of the the the steady state uh rate of unemployment. And so the outlier like you like you said is that bump up in the orange line during COVID because what happened of course it was COVID the world the world shut down basically people got fired and then the US actually reopened fairly quickly much quicker than for instance China and Europe and other places and the labor wasn't there when when when the the economy reopened I remember very clearly I was I was jetting to u to the West Coast a lot during the lockdowns and I was I would fly you know JetBlue Boston to LAX and they just did not have the people and but everybody was hungry to travel. They wanted just it was like revenge travel or whatever you want to call it and you know they had to hire the people back on board them retrain them all this stuff. And so you had this very tight labor market where you had you know two job openings for every job seeker. You know people had left the labor force couple of million baby boomers left. Of course, the borders were closed and so you had this tight labor market and that needed to moderate which was the which is one of the reasons the Fed was raising rates. It was trying to kind of take the steam out of that and as the chart shows that's exactly what has happened. So the line is now completely in balance like both of those lines are at zero basically. Um so so the the job market is in balance and so there is no like looming recession at least not at this point from what we can see. People are generally employed. You know their wages are keeping up with inflation. Uh there's not that much debt. So the the the the jobs market is pretty good. The consumer is pretty good. And so the stock market is ignoring uh the soft jobs numbers because the economy is is fine. and labor market statistics generally are are backwardlooking. But again, you look at that chart and you see that this is always a pendulum that is swinging, right? Like the the the number doesn't go to zero and stay there for very long. And so the fact that this is coming from above zero is now at zero. Uh every other time that that's happened, it's eventually gotten below zero. And so this is getting the attention of course of policy makers. I think it's probably the main reason why uh Jay Powell at the Fed cut rates a few weeks ago because you wonder like what is the next step but so far uh the market is running on accelerating earnings revisions. You know the AI boom is of course a very big part of that that the capex cycle that comes from the one big beautiful bill is a part of that. So for the stock market, you know, you've got the bond yield at 410, you got the Fed easing, you got earnings estimates accelerating, you got a big AI boom story on top of that, and it's just looking at those things which are all glass half full. Um, and then, you know, it's sort of ignoring the soft jobs market because it hasn't gotten to a point where it's alarming and it may not get there, but you know, it's certainly one of the things we're looking at. I think the hard part for this for me to wrap my head around is the fact that to your point the job market was so strong in 2020 and 2022 and 2021 and you know you see these signs at McDonald's for $20 an hour and talk about right and they they couldn't find enough people and so how do you how do you differentiate between a job market that is normalizing because the unemployment rate is still 4.3%. The labor force participation ratio for the prime age is still higher than it was at any time in the 2010s. So if you look at those backward numbers it still seems pretty decent. And so it's it's hard to tell to your point the pendulum how far it'll swing because it could just be a normalization from what I think is probably the hottest job market we're ever going to see in our careers potentially. Right. >> Yeah. And again, not to go back to their chart again, but the the only other time we've seen this phenomenon was actually right after World War II or during World War II where there was such a demand for labor obviously to mobilize the economy and then you had the the after effect where you know people the GIS were coming back. they were getting regular jobs and there wasn't always a job there. So the numbers came down but from excessively high levels and that is different than a normal business cycle where companies are laying off from lower levels. So like the draw down in that in that line is is consistent with a typical downturn but because it started at such a high level it hasn't produced kind of the negative spiral that that you normally see. So, so maybe we avoid that. And certainly right now there aren't really any indications that um that it's going to get worse. Like jobless claims are well behaved. You know, we didn't have a non-farm payroll report last week, but the the states produced their own data and so far the economy appears to be in in balance and you know, hopefully it stays that way. >> Well, we've seem to have threaded every needle since the pandemic almost, right? We didn't have a recession from 9% inflation and that we didn't have a recession because the Fed took a rates from zero to five >> and uh maybe a slowing labor market we can thread that needle too. >> Yeah, absolutely. >> You have to knock on wood now. >> All right. All right. Don't want to >> but but to your point it is pretty remarkable, right? That the Fed went from 0 to five and 38. Inflation went from, you know, one and a half to nine. Um and the Fed really really hit hit the brakes. Um and and there's been no recession. I mean it's it's a remarkable thing that uh a soft landing at least so far could be achieved after such a severe cycle, right? This was that was not a tweaking of policy. That was slam on the brakes. Um and u and so you know it it shows you how resilient the economy has been and also how how uh less interest rate sensitive the economy has become. >> Yeah. Yeah. It is crazy. And obviously some people say, "Well, it's just the AI boom." But I guess we shall see. All right, let's do another question. >> Oh, okay. Up next, we got international stocks are finally outperforming this year. How much of this is a US dollar story? What else is causing the outperformance in 2025? >> So, it is interesting. I was looking this morning. I think emerging markets now are up 30% this year, right? The developed foreign stocks are up 27 28%. So, even in in what people think is this AI boom, uh, international stocks and emerging stocks are outperforming the US. Now, I think the the dollar is down, I don't know, 9 or 10%. Guys, maybe we can throw up his his chart on the dollar here. Um, so how much do you attribute this to the dollar falling versus other fund fundamental issues for foreign stocks? Um the dollar is certainly part of it but if you look at for instance the Msei Epha index which is the the non- US developed market index or the EM index um and you if you measure them in local currency terms rather than dollar terms it's the charts are pretty similar. So there's something more going on than just the the currency translation aspect. And so what I think is happening is that the fundamentals actually have become much more competitive especially for developed stocks. Uh and I'll I'll explain why. Right? So we look at uh when we look at equity valuation we look at a discounted cash flow model. Right? So you've got earnings growth in the numerator times what we call the payout. So the percentage of of >> guys throw that throw the payout chart up there. >> Yeah. So the percentage of earnings that get that get um shared if you will with shareholders by the company. So dividends and buybacks and then you discount that whole chain uh with a discount rate of course. And so in the past you know the US completely dominated right it had a better earnings growth story. It had a higher payout ratio like of about 90%. Um and the rest of the world just couldn't compete with that. So even though the rest of the world was very cheap uh you know cheap doesn't buy you anything as long if there's not a catalyst but in the last even year but really the last couple of years that has changed and what has changed is that even though growth is still sluggish in Europe and Japan companies have become much more savvy at unlocking shareholder value right so they're doing more buybacks and they're they're just getting they're getting smarter about about rewarding shareholders holders for buying their stock. So when you look at the growth in the payout right so dividends and buybacks uh in EHA so developed markets the payout has grown more in the last five years than it has in the US and the payout ratio for EPHA is 75% just like it is in the US. So now you have two regions that are producing about the same growth rates and the same ratios of payouts to earnings. Uh but one group is trading at 16 times earnings and the other one is trading at 25 times earnings. You know now you have a real catalyst for mean reversion after 10 years of total US dominance. So, this is a really great story um because for investors, you know, you want to fish from the biggest pond possible. You want to have as many things on the menu as you can get and and if you know, the Max 7 is of course it's great. the US is exceptional, but you want to have you want to be able to spread your your your assets around because if that rotation risk in the MAX7 does ever start to, you know, show show itself, you want to be able to to be in other places and and right now uh especially developed, but also emerging to some degree are are proving to be com uh you know, viable competitors. Let me put it. >> So, you do a lot of you do a lot of traveling. Uh, I know you said you just got back from from Europe. Do you get the sense that US corporations have essentially pulled the rest of the world kicking and screaming to be more shareholder friendly? Because I've seen a lot of the the Japan has talked a lot about this, how they they really want to set some standards in place for their companies to Yeah. be more shareholder friendly. Is is it just that they've seen, hey, listen, the US is now 65 70% of global stock markets. We need to be more like them. Is that what's going on here? >> Yes, I think so. So, it's just the US of course has been doing this for a long time. Um and you know if if you add up kind of the supply and demand of of shares in the US. So IPOs and secondaries since 2009 which I is is I think which I believe is the is the secular bull market is when it started. IPOs and secondaries are about two and a half trillion cumulative since that 16 years ago. If you add up M&A and buybacks, which are again, you know, it's it's companies buying shares, retiring shares, either by buying their own shares or buying shares of other companies. That's that's about 25 trillion. So you have an almost 10:1 ratio of demand versus supply that has produced this incredible bull market, you know, where where we've had, you know, 16% kagers now for the last 16 years or so. the rest of the world has not been able to compete with that. And of course in Japan where things have been very slow for a very long time. Um I think companies were finally forced to just play the game. And so you know we have portfolio managers who are kind of out there kicking the tires. And the story I always hear is that, you know, they would be uh talking to a big Japanese company and 10 years ago if if the PE if the portfolio manager would ask the the the CEO like here you have this unprofitable division like why don't you just close it or sell it? And then the answer was oh my god we could never do that. Like that's against the culture. Like you just don't do that. And now it's like yeah we're doing that. So, it's it's just I think it's out of necessity because if the dollars or yen or euros are not flowing in, you're going to just be trading at chronically depressed valuations and it forces you to take some action. Especially if you know this behemoth in the US, 65% of of global uh market cap is is u is stealing the show, then eventually you got to pay attention. So even like regional banks in Europe and Japan who have always sort of been under the radar are buying back shares now. And it's not that they're super profitable, but they traded at such low valuations, you know, like half half half times book value or whatever that even if you go from half to full book value, that's a double, right? So So that's what's happening right now. >> It's funny because I I talked to a lot of financial advisor groups. So I've I've done a few talks in Europe. I was in Canada a couple weeks ago and they always say, "Listen, as advisers, we're probably 3 to seven years behind you guys too in terms of trying to get lower costs and more diversification because they they had most of them invested just in their home countries, right? They had a worse home country bias than us in a lot of ways." Um, and it kind of seems like the same story where they've they've figured out we have to play catch-up and we we have to have more money in US stocks. We have to have be more diversified and uh it seems like a similar story where they're realizing like we have to get on the same plane here as them. >> Yeah. and and like to me like a a barbell approach is you you own the cap weighted S&P which is essentially owning the MAG 7 um and then you own non- US developed stocks or just non US stocks. That's I think is a is a clever way of having your cake and eating it too. And if you're bearish on the dollar, you you that that that that trade is woven in there as well as as opposed to having MAG7 and like Russell 2000 where like it's it's really kind of a binary thing. So, uh so anyway, I'm I'm glad that the world has broadened out because we don't like narrow markets. It's just u it's a tough it's a tough game to play. >> Yeah, I agree. Something I find amazing is I've looked at multiple international stocks recently and they've gone straight up and the PE is like 15. >> Yeah. >> It's kind of funny compared to the US >> and they're they're higher dividend yields and I think their buybacks aren't as big over there. I think if you did a a shareholder yield, but on a dividend yield basis, they're much higher overseas. >> Yeah. But but it's interesting. So the the payout ratio is 75% for both sides of the pond. In the US, that 75% is twothirds buybacks, one-third dividends. Overseas, it's two/3s dividends, one-third buybacks. So, it's a different different split. >> Yeah. And and those dividends a lot of times just get written in stones in some ways. Like, it's hard to back out of those. >> They're sacred. Yeah. >> Yeah. All right. Let's do another question. >> Okay. Uh, if we're in a tech bubble, why is a relic like gold making new all-time highs on a regular basis? >> Okay, this question is for me. I I got to be honest. This this to me is one of the most bizarre aspects of the current boom. And I know there's good explanations for it. So gold is up 50% this year alone. So guys, put the chart on here. Chart on. This is gold is outperforming the NASDAQ 100 since the advent of Chat GPT, which was November 2022. Uh Yurian, take a look at this next chart I made this morning. So this is gold versus the S&P by decade. And you can see um maybe some of these decade starting ending points are cherrypicked, but most of the time when gold does well, the stock market struggles. when the stock market does well, gold struggles. It's it's kind of been a back and forth there. And then you have the 2020s where gold is booming, up almost 18% per year. And the S&P is booming up more than 15% per year. Um, so you guys can do chart off here. So, we've really never had a decade like this in the modern times, right, since we broke that gold peg or whatever. Um, we're gold and the stock market boom at the same time. So, I first of all, I'd like to know if you're surprised at all by this. And second of all, I just want to hear a good explanation for it because it it does seem like odd that I know not not every gold bug thinks the world is going to end, but there's some people who think like, hey, I hate the Fed. The financial system is going to implode, so I'm going to own gold. And it's bizarre to see that you could have that mentality working alongside the whole buy and hold long-term stuff goes up forever. It's uh that that dichotomy is really interesting to me. >> Yeah. So, um a couple of couple of points here. Uh I don't think gold has any the gold rally has anything to do with the AI boom, right? Like I think they are just two separate trains happening, you know, that that happen to be going in the same direction. Um so gold to me are like the anti-bonds. Um so if you look at a long history like a hundred years, uh bonds generally do better than gold. But when bonds do poorly, gold does extremely well. And of course when bonds do poorly usually they have an impact on equities as well right because the bonds are the safe asset and if their yield goes up or their um their P sorry so if their if their value if their yield goes up the PE in the stock market has to go down in order to compete with the safe asset. So that's how they're kind of related. So gold does well when bonds do not and equities generally don't do well when bonds are not doing well. um unless bonds are being financially repressed by QE and things like that. So, so gold I think is moving for several reasons. One is geopolitics. You know, I mean we saw Russia invading uh Ukraine a few years ago. Uh dollar reserved. You know, they'll they'll claim we're were weaponized um because assets were frozen. you know, if you're China and you see that and and you know that Taiwan is in the crosshairs, um you know, like are are you going to want to have a lot of your your reserves in dollars or are you going to are you going to >> So a lot of this is central bank buying, right? Not just retail. >> A lot of it is central bank buying. Um and so I think the gold trade, so gold used to trade in lock step with real yields. So if real yields went down or became negative, gold would go up, which makes perfect sense, right? If real yields are negative and you own bonds or cash, you're losing purchasing power. And of course, gold is a hard asset. So, it's there to preserve purchasing power. Uh but that's not what's not what's been happening in the last few years. So, gold is going up because the dollar's share of global reserves is going down. So, that's one reason. And then the other reason I think is this notion of the US going into a mode of fiscal dominance. Uh fiscal dominance means that fiscal policy dominates monetary policy. >> Let's let's throw your let's throw your chart up here because actually someone in the chat, Michael said, uh my take is that everything has to catch up with all the money that was printed so everything has to go up to meet the inflation. Um is this just a story of there's so much money floating around that it eventually ended up in gold as well? >> Uh yes. So um there there's a long we don't have the chart we don't have that chart up but there's a a good history that shows that when soft money like the money supply um grows faster than the average because money is being printed or there's inflation or what have you that the share of hard money gold and some people would argue Bitcoin these days will gain market share from the fiat money. So in other words, gold's above ground valuation which is around 22 trillion or so now uh will will will grow in in share against the money supply which actually is around 23 trillion right now. So if you add gold and bitcoin you got about 24 trillion and that's about equal the US M2 money supply. Of course, the global money supply is much greater than that. And so it's it's sort of so when you have excessive money or excessive inflation, hard money will will take share from soft money. And that's basically what we've been seeing since COVID. Um and you know, CO produced a $5 trillion, you know, uh fiscal impulse. And now the one big beautiful bill is another $5 trillion fiscal impulse. And that$5 trillion has to be financed. uh which means more treasuries and normally or not normally but during COVID the Fed was buying those treasuries but it's not doing that anymore. If anything it's shrinking its balance sheet. So um so I think what gold is sensing other than the geopolitical shift with central bank buying um is that in this regime which could last for many years you have large deficits chronically large deficits uh that need to be funded which means that rates have to go down and we see the political debate around the Fed you know maybe like becoming less independent and now you have the Steven Moran speech about like where's the neutral rate this and that. And so I think gold is just reading the tea leaf saying saying that okay in order for this fiscal dominance to take place you need financial repression. You need lower rates than are warranted by economic conditions maybe yield curve control uh by capping long rates uh doing QE and if that's the case real yields will come down and hard assets will will will steal the show. And I think that's what both gold and bitcoin are are saying here that they're basically saying we're heading into fiscal dominance. Um and um and and so equities are okay because it means that the economy will grow. Uh but it it shows you why hard assets are doing well. And just one other aside, of course you and I can buy, you know, GLD or some other gold ETF or gold bullion, but I I think institutions um there's generally a like a distaste for gold because it's it gets dismissed as not a real asset. It doesn't produce a cash like Warren Buffett famously said. >> It fills an Olympic pool, right? Is that what he said? >> Exactly. And so uh so I think that it it it it allows this thing to run uh before it gets becomes a crowded trade for for a long time as opposed to everyone piling into AI stocks they can do that you know tomorrow. So I I kind of like the the charts in that sense but I think that's that's the phenomenon here. >> Are you surprised at all that Bitcoin hasn't really put a dent into the bid on gold? Because I >> that's what I was about to ask. I wondered if, you know, when Bitcoin really started growing and it became a multi-trillion dollar asset, is is that is the millennial gold thing going to cause people to not have the bid, but it doesn't seem like it's dented it the case at all. >> Um, I see gold and Bitcoin as different players on the same team. Um, you know, a central bank like the Chinese central bank is more likely to buy gold than than Bitcoin, uh, at least right now. And you know, Bitcoin had a huge huge run of course and it and it left gold behind. Um, and now gold is having its moment. And so I I don't think one is better than the other, but this notion that, you know, a lot of Bitcoin maxis have were talking about, I don't hear them so much anymore was that, you know, Bitcoin was just going to eat everything and it was just going to replace gold. And I think that that's silly. Like they're they're both viable assets in my in my mind. Um, and in a way, Bitcoin actually, you know, there's always a lot of talk about Bitcoin adoption by institutions and this and that. I think Bitcoin was adopted very quickly by many because it was easy to do, especially once the ETFs were launched. And like I said earlier, uh, gold, I think there is resistance to own it. People think it's a fad. They don't understand it. There's no way to measure it. And so maybe this is just mean reversion of gold catching up to Bitcoin rather than Bitcoin catching up to gold. >> Yeah, that makes sense. All we got one more question here. >> Okay, last but not least, there's been a a ton of AI bubble talk in recent weeks. That drum beat grows louder and louder the more these companies spend and the higher the stock prices go. How do you define an asset bubble? >> Do you do you really care if this is a bubble or not? like is that something that investors should spend their time worrying about? >> Um, you know, the so I I've been studying bubbles my whole career. Um, I I did a big deep dive on sort of these expensive meme stocks, if you want to call them that, back in 1999 during the the tech bubble. And you know, it's um it's it's it's a hard thing to to define um because like the internet bubble was a bubble, but the promises about the internet all came true. It's just, you know, they they got ahead of itself and and you it's hard to measure like to properly value something that is new. And so back then we were like looking at you know eyeball counts and things like that. >> So many of those companies were unprofitable. Hang on, throw the throw throw the chart up here. I got one more chart of yours and you show the Mag 7 along with their trailing EPS and their their payout. And this is the hard part I have wrapping my head around is the fact that the fundamentals are matching these these companies, >> right? That's the hard part is that these companies are cash flow producing machines and it's not like they're they're getting so far ahead of themselves. And maybe they can or they will if they overborrow and continue to overspend, but that's the hard part to me to handicap is is these are the biggest best companies in the world and they've been using their cash flow for much of this investment. So how do you how do you square that with the bubble talk? >> Yeah. No, exactly. So the MAG 7 uh as you can see in the chart, their earnings are are are are there to support the price. So most of the performance has come from earnings. they trade at about a 35 PE uh which of course is higher than the market which is trading at you know 25 but it's not it's not at crazy levels right so um the 1990s the late 90s the top 50 companies uh because I I looked at it as the nifty50 reborn were trading at 2x the multiple as the rest of the market and what happened from 98 to 2000 the bottom 450 stocks just kind of traded sideways and the top 50 went to the moon and their PE doubled to 40 relative to the 20 that the rest of the market was trading in. So you and then you had like the pets.com and that all of that stuff. Um and so you know that in in hindsight but even in real time was a bubble but again like I wrote about that in 1999 and these bubbles always go much longer than people think. And so now like I don't think we're in a bubble yet. Um we may go there, maybe we won't. I I look at the Goldman Sachs nonprofitable tech index or basket and that thing is really springing to life. Like those were the meme stocks back in 21. And so those are getting the the animal spirits. But at the top of the house, the mag seven, uh it's still a very solid thing. But but you get into these things that are harder to define. So like the vendor financing, it becomes circular, right? So Nvidia is is financing whatever open AI um and again unlike the internet um boom, this is a very capital inensive thing, right? I mean all the data centers, all the power, you know, by some estimates once once this thing is up and running and it's at, you know, fully functional, just the cost of maintaining like the data centers and all this stuff, it's going to be like a trillion dollars a year, right? So, so you better come up with some killer app that is going to be multiples of that. And so I think it becomes that's where it becomes harder to kind of know where this is going to land. Like if this is going to be free software that everyone's going to use to increase their productivity, then who's paying the trillion dollars in in overhead, right? So, so we don't know how this thing is going to end. Um it's hard to identify a bubble. The fact that everyone is talking about a bubble tells me that it probably is very early, uh if if at all. But the nonprofitable tech is is kind of my my exhibit A right now to see not what the Mag Seven are doing, but what the rest is doing in terms of companies promising to be the next killer app, but even though we don't even know if they're even doing anything. And so it gets it it always becomes very fuzzy like that. and and so uh the fact that that's happening you know is is is justifiably making people uh you know take note and and wondering whether it is a bubble or not. >> I always I always go back to the Tom Cruz quote from cocktail Brian Flanigan. He says everything ends badly otherwise it wouldn't end. Um but you know and a lot of people look at the dotcom bubble and see like that's the obvious you know parallel here but the I think you talked about this in one of your pieces like the 50s and 60s bull market kind of ended with a whimper than a rather than a thud. it didn't really have this earthshattering crash to end it. So, and that was a much different scenario obviously. Um, but you can come up with a potential outcome where this thing doesn't end in some earthshattering crash, right? And because these companies are so big and profitable and and strong and have these these wide moes. So, uh you know, if it comes a full-fledged bubble and things go crazy, of course, in haywire. Um, but there's there's certainly a a way out of this without seeing some crazy crash, right? >> Yes. No, a agreed. Like the the secular bull market that ended in the late60s ended with a whimper and it was inflation that essentially uh killed the excessive valuations if they were even excessive. You know, it it inflation is the valuation killer for any asset, right? But right now inflation is at 3%. So it's it's not an issue right now. Um and we just don't have the valuations to say, "Oh my god, this is crazy." Right? like if the MAG7 or the top 50 stocks were trading at a 50 PE, >> right, >> or more, uh then you really start to to wonder. >> But you know, the the the spread the PE spread between the top 50 and the bottom 450, it's like 25%. Uh previous secular bull markets ended when that premium was more like a 100%. And so we're we're nowhere's near those kinds of valuation excesses. >> Okay, one more question for me. Um, are you having fun in the current market environment? Because I'm enjoying this just the whole dichotomy of what's going on and people trying to explain it and people trying to predict it and um I think it's a if you can step back from it a little bit, I think it's a lot of fun. >> No, I I agree. It is it is fun and it's you know markets are are always a four-dimensional puzzle that can never be solved. like we can never solve the puzzle and if we think we did there'll be a new a new you know angle that needs to be explored or or solved but it's it's always fun it's a great challenge to to kind of find the interplay between uh you know interest rates monetary policy the next big thing like AI you know geopolitics um you know what we're now seeing in like basically state capitalism right um and uh trying to make sense of that and to to and to cut through the signal to noise ratio and to really come down to okay these are the three or four things that we really need to know and focus on. Um that's it's always a great like intellectual challenge to be able to do that and the markets are so dynamic that there's always a puzzle to be solved uh even if it's unsolvable. >> All right. I was going to throw in on that last topic. Uh, real quick, when people call this a bubble and and talk about, you know, routers and modems from the previous bubble and and we laying fiber optic cable, it's like fiber optic cable doesn't have to be replaced every year or two, you know, it's to me it's quite different when you're talking about GPUs and all the kind of the stuff that AI is using. But yeah. >> Yeah. So, they better get a return on it, right? >> Yes. >> Well, that's true, too. Yeah. >> Yeah. So, you're in Tell everyone where they can sign up for your weekly newsletters, the weekly asset allocation review, which I'm a subscriber. Where do they where do they find out? >> Uh, yes. So, every Sunday I I publish and it ends up usually by Monday afternoon on LinkedIn with a with a uh a link to X. So, whether you're on X or LinkedIn, um that's where you can find me. >> Perfect. And if you follow your on Twitter, uh he's got to be the best chef in the whole Wall Street game, right? Your pictures of your food always look amazing. Um, >> remember if you have a question for us, email us ask the compound show@gmail.com. Thanks everyone in the live chat for following along and we'll see everyone next week. >> Thanks everyone. [Music] [Music] [Music]
Why Is Gold Outperforming the Stock Market?
Summary
Transcript
Welcome back to Ask the Compound, the show where you ask and we answer. I'm your host, Ben Carlson. Everyone and their brother thinks we are now in a full-fledged AI bubble. Maybe we are, maybe we aren't. We'll see. If this is a bubble, it's a very bizarre one. Gold is up more than 50% this year alone. One of the yellow metals best years ever. So, what's going on here? Why is a relic like gold up so much during a technological boom? We have a great guest host on the show today to help answer this question and more. You don't want to miss this one. Stick around. [Music] Okay, our email here is ask the compound showow@gmail.com. If you have a question, please feel free to ask. If you're in the live chat, ask us a question there, too. We'll answer it on the spot. On today's show, we ask answer questions about how does the market concentration in the S&P 500 end? Why doesn't the stock market seem to care about the labor market just yet? Why are international stocks being the pants off of US stocks this year? Why is gold outperforming? And finally, how do you recognize an asset bubble in real time? And how do you define it? Today's show is sponsored by Rocket Money. Maybe you have a solid handle on your budget. Maybe your spreadsheet says you should have an extra thousand left over each month. But if your bank account isn't reflecting that something's off, Rocket Money can help. They track every dollar. They uncover hidden spending. They take control of your finances. U I use it all the time in the app. The desktop is nice, too. So, Rocket Money is a personal finance app that helps you find and cancel unwanted subscriptions, of which there are many. monitors your spending and helps lower your bill so you can grow your savings. Uh, it's great because you see all your expenses in one place. You see what's coming up next. You see stuff you forgot about. I have a million subscriptions. It's easy. Rocket Money has saved users over $2.5 billion, including over 880 million in cancelled subscriptions alone. Their 10 million users save up to $740 a year when they use all the app's premium features. I had Rocket Money negotiate one of my bills for me a couple months ago. It was easy. I didn't have to do anything. Cancel those unwanted subscriptions and reach your financial goals faster with RocketMoney. Go to rocketmoney.comc today. That's rocketmoney.comc to learn more or just download the mobile app. All right, great show today. Great guest host. Duncan, let's get to it. >> Yeah, I'm excited about this one. >> All right, up first today we got investors have been concerned about stock market concentration for years. The S&P 500 keeps getting more concentrated, but the biggest stocks also have the fundamentals to back it up. How does this resolve itself? Is a more concentrated market the new normal? >> All right, so let's bring our very special guest in to help us today, the director of global macro at Fidel Investments, Urin. >> Hey, Urin. >> Hi. >> All right, so the MAG 7 now makes up something like 36% of the S&P. It seems like people have been warning about concentration since remember when it used to be just the fang stocks. Yep. >> And that has graduated. Now it's MAG7 and I'm sure it'll change it to some other name. you have a great chart that shows the waiting of the top 50 versus the bottom 450. And so the top 50 currently is like almost twothirds of the total. Uh and I I love how you show how that there's this this back and forth in yin and yang. And I think a lot of people assume well the way that this resolves itself is the concentration goes back down. But I think the first part of this chart that you showed in the 60s and the 70s, how long those big conglomerate stocks, the Nifty50 stocks controlled the market, um that's a possibility today, too, that maybe this is just the new normal. What do you think? >> Yeah, I it it could very well be. And if you look at that middle part of the chart, you know, you're looking at the late 90s, obviously the the tech bubble. Um and I I believe one of the big uh Wall Street houses, you know, did a study maybe a year or so ago um saying that, you know, when you have concentration risk, which obviously we do, seven stocks 36%. That if it mean reverts, you know, it's going to drag the market down. I mean, there's just really no no way around it, right? If if seven stocks 36% go down, uh the market the index is going to go down. Like even if 70% of the stocks in the S&P were going up, the index itself would go down. And when you have this big indexing effect, right, in late 90s it was uh the big index funds. Now it's of course it's ETFs. Um you know it's going to be it's it's not going to be a a happy situation. But you look at you know 50s 60s7s um this kind of concentration can persist for decades literally. Uh and it was a normal feature of the market. uh you know 50 60 70 years ago and so we can't really bet on that mean reversion and so like what do you do right you can't you're not going to go down cap just because you think this is like a PE ratio that has to reset lower it can really persist and these days you have this kind of phenomenon where uh companies that are are are like coming up um they'll just get bought by those big companies right and so in a a smaller companies don't have much of a chance to really compete with them because they just get swallowed up. >> And and it seems like that the government has shown no impetus to to break these companies up, right? I think that's one of the things people in the 2010s thought like, wait a minute, just wait till the government steps in and breaks them up. Uh it doesn't seem like anyone wants I don't think consumers want that. It doesn't seem the government wants that. So, you're right. And they've effectively created this oligopoly where with the AI trade, they're all sort of just investing in one another and almost propping themselves up even even higher. So they're becoming stronger it seems as time goes on. >> Yeah. And you get this sort of vendor financing thing that we're seeing now in AI and you know I know we're going to talk about this a little bit later but it makes you it makes you wonder about the late 90s you know when like Cisco was vendor financing uh different companies but um yeah you know these companies have giant networks they have very big modes. I mean, you know, if if you if you invent the next iPhone tomorrow, you know, good luck disrupting Apple. Like, it's like, you know, how is that going to happen? These companies have gigantic modes and networks and so, uh, unless they get regulated away. Um, it's likely that they're going to stay really big unless just the world changes and the AI boom maybe turns to a bubble and then it sort of disappears, but even then, it's probably not going to disappear. Um so we you know we may have to get used to this but it's very important because if you're an investor you're in a diversified portfolio and you know the US has dominated the rest of the world but that really is because of the mag 7 right if you take the rest of the world uh relative to the US relative to the cap weighted uh S&P 500 it continues to underperform relative to the equal weighted cap equal weighted index it's actually held its own so um the fact that's a small number of companies have such a big weight in the S&P uh really distorts a lot of other relationships that actually would be working right now if it wasn't for this phenomenon. >> Yeah, if you look at the top 10 it, you know, I know it changes every day depending on who's up and who's down, but when Oracle had their big comeuppance a couple weeks ago, it was nine of the top 10 names were tech and it it was like all these tech people and then then Warren Buffett over here still holding the ground. But uh it's so tech dominated these days and technology is such a big part of everything we do and if if the AI trade and the AI investments work, it's not like that's going to to slow down or reverse anytime soon, right? So maybe it's new tech stocks that come up, but it it makes sense that we could see this concentration in these big efficient cash flow producing machines. >> Yeah. And and the AI boom of course is is enormous, right? and um uh and it requires a lot of capital investment. It's it's sort of like a a winner take all type of market um uh where the big players they feel like you know it's it's do or die. We need to own this. We need to come up with this killer app and in order to do that we need a lot of power, a lot of chips, a lot of boxes and this and that. And so that's why there is this race going on and we see it in the in the in the capital spending numbers. And so it's pretty relentless and it is different in that sense from the internet boom. I mean you needed like routers and Cisco routers and Dell computers and all that stuff back then as well. But the the the level of capital intensity of this one is pretty u is pretty enormous. >> All right, Doug, let's do another one. >> All right. And all this AI stuff and uh you still don't have your little her earpiece then that you've wanted. You know >> that's what I'm waiting for. I just want Scarlett Johansson in my ear as my personal assistant. Is that too much to ask? >> I have a feeling you'll get it. You'll get it at some point. Okay. >> Uh up next, we got the labor market continues to slow as the stock market charges higher. Why doesn't the stock market care about the slowing labor market yet? >> All right. So, we're the numbers we're seeing is like fewer job openings, right? Fewer jobs created. Hiring is slowing to a crawl in a lot of places. And the stock market doesn't seem to care. It's also funny that the stock market really hasn't blinked once since the government shutdown and uh doesn't seem to care. I I think the corporations, my take is the corporations are one of the our last functioning institutions in this country, but I guess that's for another day. But you have this you have this chart here about excess labor demand. Um and it's funny the the whole COVID labor demand was that's the outlier, right? It's usually the other way around. So what happened now that people are worried that job openings are are are less than the number of people looking for a job. That that's the norm. Correct. Like that's that's how things have have mostly always been. The co thing was was kind of an outlier. >> Yeah. So if if you look at the top panel of this chart, um it shows just like where the labor market is relative to normal condition. So you got the Joltz number in in the orange. So job openings versus job, you know, uh seekers. Uh the gray line is the unemployment rate relative to what we call nou the kind of the the the steady state uh rate of unemployment. And so the outlier like you like you said is that bump up in the orange line during COVID because what happened of course it was COVID the world the world shut down basically people got fired and then the US actually reopened fairly quickly much quicker than for instance China and Europe and other places and the labor wasn't there when when when the the economy reopened I remember very clearly I was I was jetting to u to the West Coast a lot during the lockdowns and I was I would fly you know JetBlue Boston to LAX and they just did not have the people and but everybody was hungry to travel. They wanted just it was like revenge travel or whatever you want to call it and you know they had to hire the people back on board them retrain them all this stuff. And so you had this very tight labor market where you had you know two job openings for every job seeker. You know people had left the labor force couple of million baby boomers left. Of course, the borders were closed and so you had this tight labor market and that needed to moderate which was the which is one of the reasons the Fed was raising rates. It was trying to kind of take the steam out of that and as the chart shows that's exactly what has happened. So the line is now completely in balance like both of those lines are at zero basically. Um so so the the job market is in balance and so there is no like looming recession at least not at this point from what we can see. People are generally employed. You know their wages are keeping up with inflation. Uh there's not that much debt. So the the the the jobs market is pretty good. The consumer is pretty good. And so the stock market is ignoring uh the soft jobs numbers because the economy is is fine. and labor market statistics generally are are backwardlooking. But again, you look at that chart and you see that this is always a pendulum that is swinging, right? Like the the the number doesn't go to zero and stay there for very long. And so the fact that this is coming from above zero is now at zero. Uh every other time that that's happened, it's eventually gotten below zero. And so this is getting the attention of course of policy makers. I think it's probably the main reason why uh Jay Powell at the Fed cut rates a few weeks ago because you wonder like what is the next step but so far uh the market is running on accelerating earnings revisions. You know the AI boom is of course a very big part of that that the capex cycle that comes from the one big beautiful bill is a part of that. So for the stock market, you know, you've got the bond yield at 410, you got the Fed easing, you got earnings estimates accelerating, you got a big AI boom story on top of that, and it's just looking at those things which are all glass half full. Um, and then, you know, it's sort of ignoring the soft jobs market because it hasn't gotten to a point where it's alarming and it may not get there, but you know, it's certainly one of the things we're looking at. I think the hard part for this for me to wrap my head around is the fact that to your point the job market was so strong in 2020 and 2022 and 2021 and you know you see these signs at McDonald's for $20 an hour and talk about right and they they couldn't find enough people and so how do you how do you differentiate between a job market that is normalizing because the unemployment rate is still 4.3%. The labor force participation ratio for the prime age is still higher than it was at any time in the 2010s. So if you look at those backward numbers it still seems pretty decent. And so it's it's hard to tell to your point the pendulum how far it'll swing because it could just be a normalization from what I think is probably the hottest job market we're ever going to see in our careers potentially. Right. >> Yeah. And again, not to go back to their chart again, but the the only other time we've seen this phenomenon was actually right after World War II or during World War II where there was such a demand for labor obviously to mobilize the economy and then you had the the after effect where you know people the GIS were coming back. they were getting regular jobs and there wasn't always a job there. So the numbers came down but from excessively high levels and that is different than a normal business cycle where companies are laying off from lower levels. So like the draw down in that in that line is is consistent with a typical downturn but because it started at such a high level it hasn't produced kind of the negative spiral that that you normally see. So, so maybe we avoid that. And certainly right now there aren't really any indications that um that it's going to get worse. Like jobless claims are well behaved. You know, we didn't have a non-farm payroll report last week, but the the states produced their own data and so far the economy appears to be in in balance and you know, hopefully it stays that way. >> Well, we've seem to have threaded every needle since the pandemic almost, right? We didn't have a recession from 9% inflation and that we didn't have a recession because the Fed took a rates from zero to five >> and uh maybe a slowing labor market we can thread that needle too. >> Yeah, absolutely. >> You have to knock on wood now. >> All right. All right. Don't want to >> but but to your point it is pretty remarkable, right? That the Fed went from 0 to five and 38. Inflation went from, you know, one and a half to nine. Um and the Fed really really hit hit the brakes. Um and and there's been no recession. I mean it's it's a remarkable thing that uh a soft landing at least so far could be achieved after such a severe cycle, right? This was that was not a tweaking of policy. That was slam on the brakes. Um and u and so you know it it shows you how resilient the economy has been and also how how uh less interest rate sensitive the economy has become. >> Yeah. Yeah. It is crazy. And obviously some people say, "Well, it's just the AI boom." But I guess we shall see. All right, let's do another question. >> Oh, okay. Up next, we got international stocks are finally outperforming this year. How much of this is a US dollar story? What else is causing the outperformance in 2025? >> So, it is interesting. I was looking this morning. I think emerging markets now are up 30% this year, right? The developed foreign stocks are up 27 28%. So, even in in what people think is this AI boom, uh, international stocks and emerging stocks are outperforming the US. Now, I think the the dollar is down, I don't know, 9 or 10%. Guys, maybe we can throw up his his chart on the dollar here. Um, so how much do you attribute this to the dollar falling versus other fund fundamental issues for foreign stocks? Um the dollar is certainly part of it but if you look at for instance the Msei Epha index which is the the non- US developed market index or the EM index um and you if you measure them in local currency terms rather than dollar terms it's the charts are pretty similar. So there's something more going on than just the the currency translation aspect. And so what I think is happening is that the fundamentals actually have become much more competitive especially for developed stocks. Uh and I'll I'll explain why. Right? So we look at uh when we look at equity valuation we look at a discounted cash flow model. Right? So you've got earnings growth in the numerator times what we call the payout. So the percentage of of >> guys throw that throw the payout chart up there. >> Yeah. So the percentage of earnings that get that get um shared if you will with shareholders by the company. So dividends and buybacks and then you discount that whole chain uh with a discount rate of course. And so in the past you know the US completely dominated right it had a better earnings growth story. It had a higher payout ratio like of about 90%. Um and the rest of the world just couldn't compete with that. So even though the rest of the world was very cheap uh you know cheap doesn't buy you anything as long if there's not a catalyst but in the last even year but really the last couple of years that has changed and what has changed is that even though growth is still sluggish in Europe and Japan companies have become much more savvy at unlocking shareholder value right so they're doing more buybacks and they're they're just getting they're getting smarter about about rewarding shareholders holders for buying their stock. So when you look at the growth in the payout right so dividends and buybacks uh in EHA so developed markets the payout has grown more in the last five years than it has in the US and the payout ratio for EPHA is 75% just like it is in the US. So now you have two regions that are producing about the same growth rates and the same ratios of payouts to earnings. Uh but one group is trading at 16 times earnings and the other one is trading at 25 times earnings. You know now you have a real catalyst for mean reversion after 10 years of total US dominance. So, this is a really great story um because for investors, you know, you want to fish from the biggest pond possible. You want to have as many things on the menu as you can get and and if you know, the Max 7 is of course it's great. the US is exceptional, but you want to have you want to be able to spread your your your assets around because if that rotation risk in the MAX7 does ever start to, you know, show show itself, you want to be able to to be in other places and and right now uh especially developed, but also emerging to some degree are are proving to be com uh you know, viable competitors. Let me put it. >> So, you do a lot of you do a lot of traveling. Uh, I know you said you just got back from from Europe. Do you get the sense that US corporations have essentially pulled the rest of the world kicking and screaming to be more shareholder friendly? Because I've seen a lot of the the Japan has talked a lot about this, how they they really want to set some standards in place for their companies to Yeah. be more shareholder friendly. Is is it just that they've seen, hey, listen, the US is now 65 70% of global stock markets. We need to be more like them. Is that what's going on here? >> Yes, I think so. So, it's just the US of course has been doing this for a long time. Um and you know if if you add up kind of the supply and demand of of shares in the US. So IPOs and secondaries since 2009 which I is is I think which I believe is the is the secular bull market is when it started. IPOs and secondaries are about two and a half trillion cumulative since that 16 years ago. If you add up M&A and buybacks, which are again, you know, it's it's companies buying shares, retiring shares, either by buying their own shares or buying shares of other companies. That's that's about 25 trillion. So you have an almost 10:1 ratio of demand versus supply that has produced this incredible bull market, you know, where where we've had, you know, 16% kagers now for the last 16 years or so. the rest of the world has not been able to compete with that. And of course in Japan where things have been very slow for a very long time. Um I think companies were finally forced to just play the game. And so you know we have portfolio managers who are kind of out there kicking the tires. And the story I always hear is that, you know, they would be uh talking to a big Japanese company and 10 years ago if if the PE if the portfolio manager would ask the the the CEO like here you have this unprofitable division like why don't you just close it or sell it? And then the answer was oh my god we could never do that. Like that's against the culture. Like you just don't do that. And now it's like yeah we're doing that. So, it's it's just I think it's out of necessity because if the dollars or yen or euros are not flowing in, you're going to just be trading at chronically depressed valuations and it forces you to take some action. Especially if you know this behemoth in the US, 65% of of global uh market cap is is u is stealing the show, then eventually you got to pay attention. So even like regional banks in Europe and Japan who have always sort of been under the radar are buying back shares now. And it's not that they're super profitable, but they traded at such low valuations, you know, like half half half times book value or whatever that even if you go from half to full book value, that's a double, right? So So that's what's happening right now. >> It's funny because I I talked to a lot of financial advisor groups. So I've I've done a few talks in Europe. I was in Canada a couple weeks ago and they always say, "Listen, as advisers, we're probably 3 to seven years behind you guys too in terms of trying to get lower costs and more diversification because they they had most of them invested just in their home countries, right? They had a worse home country bias than us in a lot of ways." Um, and it kind of seems like the same story where they've they've figured out we have to play catch-up and we we have to have more money in US stocks. We have to have be more diversified and uh it seems like a similar story where they're realizing like we have to get on the same plane here as them. >> Yeah. and and like to me like a a barbell approach is you you own the cap weighted S&P which is essentially owning the MAG 7 um and then you own non- US developed stocks or just non US stocks. That's I think is a is a clever way of having your cake and eating it too. And if you're bearish on the dollar, you you that that that that trade is woven in there as well as as opposed to having MAG7 and like Russell 2000 where like it's it's really kind of a binary thing. So, uh so anyway, I'm I'm glad that the world has broadened out because we don't like narrow markets. It's just u it's a tough it's a tough game to play. >> Yeah, I agree. Something I find amazing is I've looked at multiple international stocks recently and they've gone straight up and the PE is like 15. >> Yeah. >> It's kind of funny compared to the US >> and they're they're higher dividend yields and I think their buybacks aren't as big over there. I think if you did a a shareholder yield, but on a dividend yield basis, they're much higher overseas. >> Yeah. But but it's interesting. So the the payout ratio is 75% for both sides of the pond. In the US, that 75% is twothirds buybacks, one-third dividends. Overseas, it's two/3s dividends, one-third buybacks. So, it's a different different split. >> Yeah. And and those dividends a lot of times just get written in stones in some ways. Like, it's hard to back out of those. >> They're sacred. Yeah. >> Yeah. All right. Let's do another question. >> Okay. Uh, if we're in a tech bubble, why is a relic like gold making new all-time highs on a regular basis? >> Okay, this question is for me. I I got to be honest. This this to me is one of the most bizarre aspects of the current boom. And I know there's good explanations for it. So gold is up 50% this year alone. So guys, put the chart on here. Chart on. This is gold is outperforming the NASDAQ 100 since the advent of Chat GPT, which was November 2022. Uh Yurian, take a look at this next chart I made this morning. So this is gold versus the S&P by decade. And you can see um maybe some of these decade starting ending points are cherrypicked, but most of the time when gold does well, the stock market struggles. when the stock market does well, gold struggles. It's it's kind of been a back and forth there. And then you have the 2020s where gold is booming, up almost 18% per year. And the S&P is booming up more than 15% per year. Um, so you guys can do chart off here. So, we've really never had a decade like this in the modern times, right, since we broke that gold peg or whatever. Um, we're gold and the stock market boom at the same time. So, I first of all, I'd like to know if you're surprised at all by this. And second of all, I just want to hear a good explanation for it because it it does seem like odd that I know not not every gold bug thinks the world is going to end, but there's some people who think like, hey, I hate the Fed. The financial system is going to implode, so I'm going to own gold. And it's bizarre to see that you could have that mentality working alongside the whole buy and hold long-term stuff goes up forever. It's uh that that dichotomy is really interesting to me. >> Yeah. So, um a couple of couple of points here. Uh I don't think gold has any the gold rally has anything to do with the AI boom, right? Like I think they are just two separate trains happening, you know, that that happen to be going in the same direction. Um so gold to me are like the anti-bonds. Um so if you look at a long history like a hundred years, uh bonds generally do better than gold. But when bonds do poorly, gold does extremely well. And of course when bonds do poorly usually they have an impact on equities as well right because the bonds are the safe asset and if their yield goes up or their um their P sorry so if their if their value if their yield goes up the PE in the stock market has to go down in order to compete with the safe asset. So that's how they're kind of related. So gold does well when bonds do not and equities generally don't do well when bonds are not doing well. um unless bonds are being financially repressed by QE and things like that. So, so gold I think is moving for several reasons. One is geopolitics. You know, I mean we saw Russia invading uh Ukraine a few years ago. Uh dollar reserved. You know, they'll they'll claim we're were weaponized um because assets were frozen. you know, if you're China and you see that and and you know that Taiwan is in the crosshairs, um you know, like are are you going to want to have a lot of your your reserves in dollars or are you going to are you going to >> So a lot of this is central bank buying, right? Not just retail. >> A lot of it is central bank buying. Um and so I think the gold trade, so gold used to trade in lock step with real yields. So if real yields went down or became negative, gold would go up, which makes perfect sense, right? If real yields are negative and you own bonds or cash, you're losing purchasing power. And of course, gold is a hard asset. So, it's there to preserve purchasing power. Uh but that's not what's not what's been happening in the last few years. So, gold is going up because the dollar's share of global reserves is going down. So, that's one reason. And then the other reason I think is this notion of the US going into a mode of fiscal dominance. Uh fiscal dominance means that fiscal policy dominates monetary policy. >> Let's let's throw your let's throw your chart up here because actually someone in the chat, Michael said, uh my take is that everything has to catch up with all the money that was printed so everything has to go up to meet the inflation. Um is this just a story of there's so much money floating around that it eventually ended up in gold as well? >> Uh yes. So um there there's a long we don't have the chart we don't have that chart up but there's a a good history that shows that when soft money like the money supply um grows faster than the average because money is being printed or there's inflation or what have you that the share of hard money gold and some people would argue Bitcoin these days will gain market share from the fiat money. So in other words, gold's above ground valuation which is around 22 trillion or so now uh will will will grow in in share against the money supply which actually is around 23 trillion right now. So if you add gold and bitcoin you got about 24 trillion and that's about equal the US M2 money supply. Of course, the global money supply is much greater than that. And so it's it's sort of so when you have excessive money or excessive inflation, hard money will will take share from soft money. And that's basically what we've been seeing since COVID. Um and you know, CO produced a $5 trillion, you know, uh fiscal impulse. And now the one big beautiful bill is another $5 trillion fiscal impulse. And that$5 trillion has to be financed. uh which means more treasuries and normally or not normally but during COVID the Fed was buying those treasuries but it's not doing that anymore. If anything it's shrinking its balance sheet. So um so I think what gold is sensing other than the geopolitical shift with central bank buying um is that in this regime which could last for many years you have large deficits chronically large deficits uh that need to be funded which means that rates have to go down and we see the political debate around the Fed you know maybe like becoming less independent and now you have the Steven Moran speech about like where's the neutral rate this and that. And so I think gold is just reading the tea leaf saying saying that okay in order for this fiscal dominance to take place you need financial repression. You need lower rates than are warranted by economic conditions maybe yield curve control uh by capping long rates uh doing QE and if that's the case real yields will come down and hard assets will will will steal the show. And I think that's what both gold and bitcoin are are saying here that they're basically saying we're heading into fiscal dominance. Um and um and and so equities are okay because it means that the economy will grow. Uh but it it shows you why hard assets are doing well. And just one other aside, of course you and I can buy, you know, GLD or some other gold ETF or gold bullion, but I I think institutions um there's generally a like a distaste for gold because it's it gets dismissed as not a real asset. It doesn't produce a cash like Warren Buffett famously said. >> It fills an Olympic pool, right? Is that what he said? >> Exactly. And so uh so I think that it it it it allows this thing to run uh before it gets becomes a crowded trade for for a long time as opposed to everyone piling into AI stocks they can do that you know tomorrow. So I I kind of like the the charts in that sense but I think that's that's the phenomenon here. >> Are you surprised at all that Bitcoin hasn't really put a dent into the bid on gold? Because I >> that's what I was about to ask. I wondered if, you know, when Bitcoin really started growing and it became a multi-trillion dollar asset, is is that is the millennial gold thing going to cause people to not have the bid, but it doesn't seem like it's dented it the case at all. >> Um, I see gold and Bitcoin as different players on the same team. Um, you know, a central bank like the Chinese central bank is more likely to buy gold than than Bitcoin, uh, at least right now. And you know, Bitcoin had a huge huge run of course and it and it left gold behind. Um, and now gold is having its moment. And so I I don't think one is better than the other, but this notion that, you know, a lot of Bitcoin maxis have were talking about, I don't hear them so much anymore was that, you know, Bitcoin was just going to eat everything and it was just going to replace gold. And I think that that's silly. Like they're they're both viable assets in my in my mind. Um, and in a way, Bitcoin actually, you know, there's always a lot of talk about Bitcoin adoption by institutions and this and that. I think Bitcoin was adopted very quickly by many because it was easy to do, especially once the ETFs were launched. And like I said earlier, uh, gold, I think there is resistance to own it. People think it's a fad. They don't understand it. There's no way to measure it. And so maybe this is just mean reversion of gold catching up to Bitcoin rather than Bitcoin catching up to gold. >> Yeah, that makes sense. All we got one more question here. >> Okay, last but not least, there's been a a ton of AI bubble talk in recent weeks. That drum beat grows louder and louder the more these companies spend and the higher the stock prices go. How do you define an asset bubble? >> Do you do you really care if this is a bubble or not? like is that something that investors should spend their time worrying about? >> Um, you know, the so I I've been studying bubbles my whole career. Um, I I did a big deep dive on sort of these expensive meme stocks, if you want to call them that, back in 1999 during the the tech bubble. And you know, it's um it's it's it's a hard thing to to define um because like the internet bubble was a bubble, but the promises about the internet all came true. It's just, you know, they they got ahead of itself and and you it's hard to measure like to properly value something that is new. And so back then we were like looking at you know eyeball counts and things like that. >> So many of those companies were unprofitable. Hang on, throw the throw throw the chart up here. I got one more chart of yours and you show the Mag 7 along with their trailing EPS and their their payout. And this is the hard part I have wrapping my head around is the fact that the fundamentals are matching these these companies, >> right? That's the hard part is that these companies are cash flow producing machines and it's not like they're they're getting so far ahead of themselves. And maybe they can or they will if they overborrow and continue to overspend, but that's the hard part to me to handicap is is these are the biggest best companies in the world and they've been using their cash flow for much of this investment. So how do you how do you square that with the bubble talk? >> Yeah. No, exactly. So the MAG 7 uh as you can see in the chart, their earnings are are are are there to support the price. So most of the performance has come from earnings. they trade at about a 35 PE uh which of course is higher than the market which is trading at you know 25 but it's not it's not at crazy levels right so um the 1990s the late 90s the top 50 companies uh because I I looked at it as the nifty50 reborn were trading at 2x the multiple as the rest of the market and what happened from 98 to 2000 the bottom 450 stocks just kind of traded sideways and the top 50 went to the moon and their PE doubled to 40 relative to the 20 that the rest of the market was trading in. So you and then you had like the pets.com and that all of that stuff. Um and so you know that in in hindsight but even in real time was a bubble but again like I wrote about that in 1999 and these bubbles always go much longer than people think. And so now like I don't think we're in a bubble yet. Um we may go there, maybe we won't. I I look at the Goldman Sachs nonprofitable tech index or basket and that thing is really springing to life. Like those were the meme stocks back in 21. And so those are getting the the animal spirits. But at the top of the house, the mag seven, uh it's still a very solid thing. But but you get into these things that are harder to define. So like the vendor financing, it becomes circular, right? So Nvidia is is financing whatever open AI um and again unlike the internet um boom, this is a very capital inensive thing, right? I mean all the data centers, all the power, you know, by some estimates once once this thing is up and running and it's at, you know, fully functional, just the cost of maintaining like the data centers and all this stuff, it's going to be like a trillion dollars a year, right? So, so you better come up with some killer app that is going to be multiples of that. And so I think it becomes that's where it becomes harder to kind of know where this is going to land. Like if this is going to be free software that everyone's going to use to increase their productivity, then who's paying the trillion dollars in in overhead, right? So, so we don't know how this thing is going to end. Um it's hard to identify a bubble. The fact that everyone is talking about a bubble tells me that it probably is very early, uh if if at all. But the nonprofitable tech is is kind of my my exhibit A right now to see not what the Mag Seven are doing, but what the rest is doing in terms of companies promising to be the next killer app, but even though we don't even know if they're even doing anything. And so it gets it it always becomes very fuzzy like that. and and so uh the fact that that's happening you know is is is justifiably making people uh you know take note and and wondering whether it is a bubble or not. >> I always I always go back to the Tom Cruz quote from cocktail Brian Flanigan. He says everything ends badly otherwise it wouldn't end. Um but you know and a lot of people look at the dotcom bubble and see like that's the obvious you know parallel here but the I think you talked about this in one of your pieces like the 50s and 60s bull market kind of ended with a whimper than a rather than a thud. it didn't really have this earthshattering crash to end it. So, and that was a much different scenario obviously. Um, but you can come up with a potential outcome where this thing doesn't end in some earthshattering crash, right? And because these companies are so big and profitable and and strong and have these these wide moes. So, uh you know, if it comes a full-fledged bubble and things go crazy, of course, in haywire. Um, but there's there's certainly a a way out of this without seeing some crazy crash, right? >> Yes. No, a agreed. Like the the secular bull market that ended in the late60s ended with a whimper and it was inflation that essentially uh killed the excessive valuations if they were even excessive. You know, it it inflation is the valuation killer for any asset, right? But right now inflation is at 3%. So it's it's not an issue right now. Um and we just don't have the valuations to say, "Oh my god, this is crazy." Right? like if the MAG7 or the top 50 stocks were trading at a 50 PE, >> right, >> or more, uh then you really start to to wonder. >> But you know, the the the spread the PE spread between the top 50 and the bottom 450, it's like 25%. Uh previous secular bull markets ended when that premium was more like a 100%. And so we're we're nowhere's near those kinds of valuation excesses. >> Okay, one more question for me. Um, are you having fun in the current market environment? Because I'm enjoying this just the whole dichotomy of what's going on and people trying to explain it and people trying to predict it and um I think it's a if you can step back from it a little bit, I think it's a lot of fun. >> No, I I agree. It is it is fun and it's you know markets are are always a four-dimensional puzzle that can never be solved. like we can never solve the puzzle and if we think we did there'll be a new a new you know angle that needs to be explored or or solved but it's it's always fun it's a great challenge to to kind of find the interplay between uh you know interest rates monetary policy the next big thing like AI you know geopolitics um you know what we're now seeing in like basically state capitalism right um and uh trying to make sense of that and to to and to cut through the signal to noise ratio and to really come down to okay these are the three or four things that we really need to know and focus on. Um that's it's always a great like intellectual challenge to be able to do that and the markets are so dynamic that there's always a puzzle to be solved uh even if it's unsolvable. >> All right. I was going to throw in on that last topic. Uh, real quick, when people call this a bubble and and talk about, you know, routers and modems from the previous bubble and and we laying fiber optic cable, it's like fiber optic cable doesn't have to be replaced every year or two, you know, it's to me it's quite different when you're talking about GPUs and all the kind of the stuff that AI is using. But yeah. >> Yeah. So, they better get a return on it, right? >> Yes. >> Well, that's true, too. Yeah. >> Yeah. So, you're in Tell everyone where they can sign up for your weekly newsletters, the weekly asset allocation review, which I'm a subscriber. Where do they where do they find out? >> Uh, yes. So, every Sunday I I publish and it ends up usually by Monday afternoon on LinkedIn with a with a uh a link to X. So, whether you're on X or LinkedIn, um that's where you can find me. >> Perfect. And if you follow your on Twitter, uh he's got to be the best chef in the whole Wall Street game, right? Your pictures of your food always look amazing. Um, >> remember if you have a question for us, email us ask the compound show@gmail.com. Thanks everyone in the live chat for following along and we'll see everyone next week. >> Thanks everyone. [Music] [Music] [Music]