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In this Weekly Market Recap, Andrew Brill reflects on the interviews that took place on Wealthion over the past week in another Wealthion Weekly Market Recap!

Andrew Brill 0:00

Hello and welcome to wealthions weekly market recap. I'm your host, Andrew brill.

David Rosenberg of Rosenberg research, spoke with wealthy on and spoke about the US debt spending and the effect on the economy and the housing market. He also played Prime Minister of Canada and explain how he would stimulate the Canadian economy.

James Connor 0:26
And just to clarify something you said about GDP growth and also government spending, you're saying because the government has implemented so many programs and spent so much money, trillions and trillions of dollars with the inflation Reduction Act and the chips act and many other programs, it's not real growth, this is just a one off. And if we get a change in government come November, that could change drastically come 2025?

David Rosenberg 0:53
Well, I'm not gonna say it's not real growth, because government is part of the economy and government spending is part of GDP. What I am saying is that the impetus to headline GDP growth from government, and the antidote that provided from what the Fed has done was not something I would deem to be permanent, it was temporary. And so a lot of that showed up the last year's growth, which admittedly was anticipated the least strong. But the main point is that these are, whether it's government, whether it's double digit growth in credit cards, which that was a little bizarre, but it's over and the excess savings file, I mean, you don't know that the savings rate the personal savings rate, that decision between how are you going to treat your after tax dollar of earnings. I mean, the American consumer is now just saving three cents of every after tax dollar, they're earning their only saving three cents, historically, they saved eight to 10 cents. So, you know, a lot of that wild behavior, which really was a COVID impact of, you know, YOLO YOLO spending, you only live once YOLO. And Main Street is what FOMO is to Wall Street, revenge spending, anger spending, a lot of that went into services, that's basically dissipated. So that's the primary reason of course, and take a look. But people that say, Oh, well, interest rates don't matter anymore in the new economy. Sure. Tell that to anybody in the housing industry. Right now, in the United States, or Canada, for that matter. Housing is actually in a fundamental downtrend, south of the border, and not home prices, but housing activity, that filters into GDP, auto sales are going nowhere. When you look at the classic credit sensitive sectors of the economy, interest rates are biting. So that's really the big issue is that after a year in which the Fed rate hikes were more than offset by a lot of other things that were happening in the economy, which are just mentioned, those other things in the economy. They're done. But, as I said before, all the lags from what the Fed has done on interest rates, the reset of the economy fully to this new interest rate regime that has yet to take place. And that's what I think the macro bulls are missing in this picture.

James Connor 3:18
You brought up an interesting point about the housing market, both in the US and also Canada, I actually spoke to somebody recently who is involved in residential construction within the Greater Toronto Area. And his revenues are down 25% year over year. And he's he's what I would call a medium sized build there, but and I'm sure you also saw the lumber prices, they're down I believe, 30% in the last three months. So all of these things are starting to percolate through the system.

David Rosenberg 3:45
Right. And as you would expect, and it's even more remarkable in the Canadian context when you consider what immigration has done to demographics. But the Bank of Canada, I mean, I always like to say that, you know, GE Powell always compared himself to Paul Volcker throughout that entire tightening cycle. And if I remember correctly, Paul Volcker is renowned for being the ultimate inflation Dragonslayer. But he did that by creating the conditions for back to back recessions in the early 1980s. And I always said that Tim Acklam, resembled John Crowell, back in the late 1980s, early 1990s. And remember that housing is the most interest sensitive sectors of the economy the most credit sensitive, and I get this question all the time as to whether you know, well, the bank is starting to cut interest rates, well, that's going to reignite the housing market to which I say no, no, no, no, because it's not just the cost of credit that matters for housing. It's the availability of credit. And now as you're seeing the loan losses and the provisioning pile up on the Canadian banks, they're pulling in their horns, and that means they're tightening credit standards. And you can see that in the data below. As you look at mortgage growth, mortgage growth in Canada, which historically is usually running late, you know, near double digits, because we're so housing centric in this country, but mortgage growth and household credit growth in general is was running now basically, flat to negative in adjusted for inflation, like you're seeing actual contraction in Canada, in credit volume. So it's the availability of credit that matters as well. And bank, Canada staffers just put out a report showing that there's still a lot of mortgage borrowers who have yet to totally refinance into this much higher interest rate environment that we had in our hands a year ago, two years ago, three years ago, five years ago. So there's going to be a lot more pain. And what that means is that people are going to be compelled to either downsize or sell their property. So we're going to have any single already in the data, you're seeing it in the new listings data in Canada that you're seeing, and this is something that's brand spanking new, just in the past few months, is a new listings relative to sales have really picked up quite a bit. That is going to put downward pressure on home prices. And at the same time, it's going to lead to because of that, more supply coming on the market, which is of course is going to put a cap on what residential real estate can really provide for the Canadian economy over the course at least over the next year.

James Connor 6:20
And, David, if you were Prime Minister tomorrow, what would be the first three things you would do to stimulate the economy and make it stronger again?

David Rosenberg 6:28
I mean, believe it or not, you know, Canada, at the federal level has a lot more latitude to do things to stimulate them than the US does. I mean, I mean, the US, I mean, look, the America is the reserve currency, but their debt ratio is so far above ours. I mean, it's I think it's almost triple A, and our deficit to GDP ratio is pretty, pretty low, especially on the g7. Ladder. But it wouldn't do it through spending. That's for sure. We have too much big government in this country to begin with. And that's one of the things that concerns me is that over this past decade, the corporate share the business share. No look, I am an unabashed capitalist, I believe in, in, in the free enterprise system. And so I think that there's always a problem when the business sector share GDP is going down and the government share GDP is going up. That's why productivity is a big problem in this country, we have to rely on immigration to boost growth, because we can't do it through productivity, because we have a government that doesn't try to promote capital formation. Do you do that by cutting taxes. So you do it by cutting top marginal rates, you can do it through depreciation allowances. I think that finally Canada, we have to cobble together with the provinces to reduce interprovincial barriers to trade. But I think that, you know, what you want to do is in look, we have massive direct investment outflows out of the country. And you see this, by the way to take, you know, go interview Canadian hockey teams, they can't attract that. There's a reason I mean, the orders came close. However, you speak to cunneen, hockey teams, they can't compete with American hockey teams, because the tax regime in this country is crazy. So that's the first thing I would do is I would do fundamental tax reform that would reduce that would reduce the tax burden. And I would prevent the deficit from spiraling by cutting spending, not the growth cutting spending outright. It's incredible that all the spending that was supposed to be temporary coming out of COVID is meant to stay on the books. I think the spending level is like 30% higher than what the government was predicting it was going to be even when COVID was hitting it was supposed to be temporary. But you see, in the in the government sector, no spending is ever temporary. Now, this wasn't the case of the 90s under a different liberal regime. But let's face it, John Christian and Paul Martin were were fiscal conservatives and the Labour Party. And that's what we have to get back to. So I would say, classic classic reduction of the government share of the economy, let the business sector flourish and allow their share of the economy to grow. And broad base broad based top marginal tax rate reductions. That's exactly what I would do on on day one.

Andrew Brill 9:24
Portfolio Manager and chief strategist at simplify Michael Green join Anthony Scaramucci on speak up and talked about the economy from the perspective of the top 10%. He also touched on the debt crisis, and also gave some investment advice.

Michael Green 9:43
So, you know, the interesting thing about the deficit is unfortunately, there's really two separate sources to it. One is one that Pete Peterson has been warnings about for a very long time, which is the growth of entitlements. We're now here with the retirement of the baby boomers, and that's accelerating that's creating the nondescript veterinary expenses, things like Medicare and Social Security to begin to rise significantly against the collections, there's not really much we can actually do about that other than tell people, you're going to have to deal with less, right, we could lower cost of living allowances, we could restrict availability, or push retirement ages later, similar to things we did in 1986. But candidly, we dithered and we didn't do that, and now it's probably too late to address many of those. The second source of the deficit is actually a very interesting one, right? It is simply a function of the increase in interest rates. So the actual interest payments on the national debt have now begun to exceed defense spending, they will soon surpass almost all other types of expenses. And we obviously can't change that by not paying those. But it is really a choice that we've made around this idea. We're going to fight inflation, through raising interest rates. Now, we'll talk about this later. I think that's a terrible policy. I understand why they think it's working. But the challenge is that when you use, you know, the easiest way to think about what you're doing with the interest rate is it's almost like a, you know, imagine a scale right or a seesaw, we're trying to move the fulcrum or moving something that affects everyone. And what we're really trying to do is address some targeted issues. And as a result, it's furthering this bifurcation in the economy.

Anthony Scaramucci 11:23
So I want to step back, before we get into your investment strategy, which I think is so important for our viewers and listeners, I just want you to talk a little bit about the economy, if you don't mind. Your view of the economy right now, maybe sprinkle in a little bit of deficit weary or not weary? I know you've presented before the Fed before. Tell us what you think.

Michael Green 11:44
Well, I mean, this is an interesting situation, it ties in with we were talking before a little bit about political polarization, I would suggest that there's a similar polarization that's now emerged within the US economy, where if you happen to have cash, if you happen to have assets, you're doing extraordinarily well. And so anyone kind of in the 10th percentile and above, is really experiencing a fantastic environment. Those who are below that and are not benefiting from those underlying dynamics are starting to feel more and more stressed the cost of living the inflation impacts them significantly more, because they have lower capability to save some more of their dollars get spent, they pay more the penalty associated with the inflation increase with the price level increase that we've seen, they also don't benefit from much higher interest rates that have dramatically increased the cash that's available to those who had been saving in a low interest rate environment, right. So by saving, I simply mean, typically just getting older, right? So we've actually created a condition under which it's not just kind of the 10th percentile, but it is really this split of, do you have assets have you saved for retirement, and suddenly, you're receiving an unexpected windfall from a dramatic increase in interest rates, even as those who are younger in life who need the jobs who need to borrow in order to obtain the capital goods that they'd like to have things like houses, things like cars, etc, are really suffering in this environment. And so I think it contributes to the political polarization, where nobody really has a shared common experience anymore, right? It's really bad. If you're, you know, below the 75th percentile, and you are young, and it's very bad if you are, you know, a, you know, an older person who has an accumulated assets, because you're watching your accumulated reserves and things like social security, covering less and less of your underlying bills.

Anthony Scaramucci 13:33
Give our investors some ideas about your investment discipline, the way you think about investing, and maybe some actionable things that they can do. And again, you don't have to be specific in terms of a stock, but I'm talking more about way of thinking.

Michael Green 13:50
Well, I think that there's a couple of things you know, today, we actually had data that came out that showed on the Conference Board expectations that consumers expect the stock market to continue to soar, even as they expect the economy to continue to weaken, right business performance continue to deteriorate. This is not dissimilar to you know, the general perspective that people seem to have at this point that the stock market has largely divorced itself from the reality of the economy that they're experiencing. The irony, of course, is very much like the late 1990s period. We're seeing an extraordinary bifurcation. There's that word again between the haves and have nots in the stock market, there are very few number of mega cap companies that are rising rapidly. This is pulled cap weighted indices higher even as metrics like the Russell 2000 equal weighted or the s&p 500. Equal weighted have languished, right with relative underperformance in the case of the Russell small companies are actually down on a year to day basis with the s&p up irritate 15% the Russell 2000 equal weight is down about 6%. So we've got this bifurcation of Burning across all regions, across sizes and company attributes as well, anyone who walks down the main street of their local town will see symptoms of this in the, you know, lack of occupancy and retail establishments. I was just in Manhattan, it's astonishing to see vacant storefronts on Fifth Avenue at the time of the stock market is at all time highs, it feels completely insane. But it is very much something that we're experiencing. And Walgreens just announced today that they're closing 2200 stores, right? And then we turn around and we look at things like same store sales, and we say, Oh, those are going up, right? Things must be fantastic. Well, you reduce the denominator, it gets a lot easier, right? So you know, when you think about all of these things, in terms of how to influence your behavior, the most important thing is, in my opinion, always to stop and say, Can I get what I need? At the lowest possible risk? Right. And I would encourage a lot of people to look at the pool of opportunities that are out there today. And off of the asset base that we have. Many investors are remarkably well served with simply buying high quality corporate debt, or by buying bonds. And the key question there is this one of inflation, right? That's what we just don't know. And so that's creating uncertainty, it's leading to people engaged in all sorts of synthetic creation of fixed income instruments. Let me just explain what that means. I'm sure many of your listeners have been exposed to things like call overriding strategies, right? These would be funds that engage in owning the underlying and then selling a call option against it right. Many of your listeners have probably recently been exposed to things called Buffer funds. Right? A buffer fund is simply I bought, I buy a zero coupon Bill effectively ready discounted bill with a one year to maturity. And then I use the so if I spend $1 on that I spent $100 notional, right. So if I buy a face value bond that is discounted by the current 5%, I'm going to pay 95 cents on the dollar for that, I then take that remaining five cents, and I buy a call spread, right. So I'm effectively giving up the return on my bond, so that I can gain the potential for a slightly higher return if the stock market were to go up. All of these are super interesting types of strategies. But at the end of the day, what you need to recognize is you're giving up that 5%. Right. And so that's one of the key questions that I challenge people I do this with institutional investors on a very regular basis. Are you actually getting your needs met by that 5%? And if so, why are you taking significant additional risk?

Anthony Scaramucci 17:40
That's smart.

Michael Green 17:41

Andrew Brill 17:42
Concerned about over leveraged Banks was a topic covered by Jonathan Wellum of rock link, he talked about the impact that will have on personal and commercial loans. He also touched on the unsustainability of the US debt and how much longer it can continue.

James Connor 18:00
So I'm curious about the comments you made about the Canadian banks and why you have such a low weighting in them. And I guess you're you're really concerned about the leverage that they they currently have. And I want to dive deeper into that. And when you look at the Canadian banks, it's a huge range in terms of performance this year, Royal Bank is up 5% on the year, but TD Bank is down I believe, 12 to 15% on the year. But maybe you can give us some more detail on why you're so concerned and and what's happening within their loan portfolios. And do you see the risk coming from the residential side or commercial? Or both?

Jonathan Wellum 18:33
Yeah, I think it both. And it's interesting to see the divergence, no question Royal Bank is well, bank has been much more disciplined and they didn't when you know, back about a year ago, two years ago, I guess we started looking at the average amortization period of mortgages, and it started to really start stretching out. And you've I'm sure, you know, talk to people who have talked about this already. And so what the banks were doing is basically negotiating with clients and allowing them to extend them the amortization period in order to deal with increasing interest rates. And we look at that, and we go, You know what, that's not a good thing. When you've got, you know, 18 20% of the mortgage is amortized over 35 years now, that's more renting than it is ownership. And so you started to get a little worried about that. So from our perspective, given the the housing bubble, or certainly very high prices of housing, and then the fact that you've had so many people topping up and buying homes at high valuations and low interest rates, and then you've got this revaluation of interest rates that makes the the personal or the retail side of the business, very vulnerable. And we think that again, even if it doesn't blow up, and I'm not, you know, we're not they're not looking at this as Armageddon, Armageddon could hit, you know, at any time for a whole bunch of other reasons. But it's just going to be just going to be more and more loan losses and write downs and there's not going to be the growth is going to be really hard to come by. And so there's going to be under pressure and when you're leveraged, you know, to I'll do one. That's that just puts pressure on the commercial side. Also, we talked to, you know, we're, you know, we have a commercial, we rent here in Burlington, we talked to a number of the large real estate agents in this area. And boy, it is abysmal when it comes to top tier office space and running around here in Burlington, all through the area. And a lot of these big buildings are like half full, people are working from home, the larger companies have, you know, changed work patterns for their employees. And there's a lot of stress. So the industrials, pretty solid, tier two offices, so So but there's just pockets where this problems and the banks are walking, you know, they're making it very difficult for to renegotiations they're walking for mortgages, I was just talking to a real estate agent a couple of days ago. And she says, it's amazing people will line up a mortgage with with a bank, and the next scene over for the enclosed will back out, they're really watching other loans book very carefully. So that's good in one sense. I mean, they're Trump banks trying to protect themselves. But I think in terms of looking for asset appreciation and growth, we just look at it as dead money, it's just going to be very difficult. Now, that's a general statement, we've seen that there are differences Royal Bank did not get into the extending and larger amortization periods as much as as Bank of Montreal and CIBC, TD did a little bit more of that. So the banks have, you know, a little bit different allocations there. The other thing is that, you know, TD, of course, got caught in the, the money laundering situation, United States, which is probably what's taking them down a little bit more than that. So you always got something that can, you know, an exogenous sort of factor that can hit one bank over another one, but I think just overall retail situation is just gonna be under pressure, and then the commercial doesn't help it at all. And so that softness, I think will make it makes them unattractive. At best, in fact, in Canada, some of the best best performing up until the fact that up until they announced the Canadian, Canadian western bank purchasing the National Bank was doing very well and continues to plod along. And it's interesting, because, you know, they're sort of more of a basic fee base kind of business, they're not involved in a lot of heavy extensive lending and international operations, like the other the other bank. So and that's a new blow up, I'm just looking at them as leverage is, you know, whenever you're leveraged a lot, and if things don't work out, well, mortgages, certainly are underwater, it's a lot more Canadians underwater, housing prices have easily dropped 20% all around the area where I am, and I'm looking at, you know, people who bought, you know, two, three years ago or down in some cases, 25% from the peak if they bought right at the wrong time, that's just as that's gonna have to run through the system. And part of the part of that, also, James is looking at, you know, 15 years of almost negative in zero to negative interest rates. And, you know, we're going to pay up for that. And so we just don't want to be in businesses that could be more vulnerable to that, that payment problem. And, and get going back to more of an equilibrium in the marketplace.

James Connor 23:02
Yeah, I had a conversation with somebody recently who's investing in numerous condos in downtown Toronto. And she, I think, she said she has a portfolio of six condos. And she's losing money on six of them, because her rent is $3,000 a month, but her expenses are over $4,000 a month. And, and then of course, there's the big reset associated with the valuation of the condo, right. So maybe it was worth $1,000,000 3 years ago. And now it's down to 750. So that's another big problem that's coming in. As you know, there's dozens and dozens of condos being built in downtown Toronto, or in the Greater Toronto Area. And that's the, that's going to be another major issue. And two or three years from now, when people take over these condos, right, when they first bought them, they were worth a million bucks, let's just say and now they're going to be worth 750. So they're taking a big hit.

Jonathan Wellum 23:55
Well, in many of these cities, they're not governed well. So the cities aren't governed well, who wants to live downtown, I mean, this is this, there's a big shift going on. And so that's another factor that the safety and the cleanliness, and you do want to be living in these downtown facilities. So if you just start to move that market, just a certain percentage out, it really moves the value of these properties in a significant way. And so, yeah, we're, again, those are all the reasons why we're just looking at it and saying, You know what, it's just, it's easier to go somewhere else. You know, you can spend hours and hours and days and running all your spreadsheets and Excel spreadsheets and so forth. And I'm not sure it really gets to, it adds a lot more value. And so we just say, Hey, let's go somewhere else. And it's like Warren Buffett, I think and when Charlie Munger used to say they have that pile that little that inbox on their desk, no, too hard. And so we look at some of these banks we go, you know, is are they really going to make much money in the next few years or they're gonna go sideways at best or maybe have some some challenges? Let's go somewhere else where we don't have to think about it. And we're quite happy to do that. In terms of what we're what we're we're Investing anyway, that's the that's the benefit of being way off the index. And just looking for a handful of companies that you like, we don't have to be in one sector, we can just stay clear of it one.

James Connor 25:11
So let's talk about the US economy now. Because really one of the only things that's really saving the Canadian economy is still the strength of the US economy. But it appears to be slowing also, q1 GDP was recently revised to 1.3%, down from 1.6%. And then there's a number of companies that are coming out and saying, the consumer isn't spending money like they used to Starbucks, for example, came out with weak quarterly numbers, saying the consumer in both the US and China were spending a lot less they're not getting as much traffic into their stores. McDonald's also came out with and said the same thing. And I'm sure you heard about McDonald's implementing the new $5 meal program. They're trying to get people back into their stores. And then when you look at the price of oil, in spite of what's happening in the Middle East, it's hanging in between 70 and $80 a barrel, maybe that's a reflection of a weakening, weakening economy. I read recently about lumber being down 30% In the last three months, what's your sense of the US economy here? Do you think there's reason for concern?

Jonathan Wellum 26:15
Yeah, I mean, it's under a lot of pressure. I mean, I think that when we look at the US economy, we again, we look at the businesses and how they're reporting, and as you've pointed out, you've you've, you've given us a number of companies, and we said the same thing where it's discretionary spending, it is down, it's under a lot of pressure. And in certain states, it's even worse. So if you actually look at the states that are, you know, higher taxation levels, higher regulation, so those those areas are even even doing worse. And so no, I think the US is definitely slowing. And that would be expected, you've gone from almost zero interest rates up to 5%. And so that's being priced in the only the thing that's really helped the US is just these massive, you know, deficits, and they're spending a lot of money, a lot of stimulation, you know, immigrants, these people flood flooding across the borders, money being spent at the municipal level, state level to support those initiatives and so forth. And, and they've got a couple of words, which obviously stimulate, you know, more and more deficit spending. With if it wasn't for that, I think no, the US would be much worse off and the numbers would be, would be worse. And you know, it'd be in a recession. And also, I think, you know, from our perspective, we look to individuals, we have a lot of respect for David Rosenberg, who looks under the hood on these things. And look, you know, you start looking at the employment numbers, and you realize, and not really as healthy as they're saying, and even the CPI numbers, we don't really take those as the ultimate judge of inflation. Inflation is definitely running higher than that, and so forth. So we put all of that together, we go, you know, what, it's tougher, the companies are having a tougher time growing their earnings, unless you're in certain areas that are that are favored, the stock market is being driven by fewer and fewer companies, small cap companies have not done well, this year. They're under a lot of pressure. And so it's a very split market. And I think that that's the Fed is seeing some of that, and that will, that will give them some incentives to see if they can, you know, sort of knock rates down a little bit in the debt. And, you know, again, we talked about this, other people talk about it, it's just not sustainable, and what's not sustainable will not be sustained. The fact that they've continued to be able to pull this forward and get away with this does not mean that they can continue to get away with it in the future. And so with a 35, almost one point $36 trillion deficit, you know, what, three 4%, that's over a trillion dollars a year in interest now. And so these things are just really putting a lot of pressure on the on the US economy also. And I think a lot will depend on the election. Also in the fall. I mean, clearly, you've got quite a different worldview going on between Biden and Trump. And, and Trump clearly is much more growth oriented cutting regulations, cutting taxation, but if, you know, if, God forbid, the Democrats were elected again, in that country, I mean, they've got taxation going up automatically, the Trump cuts from previously they get these all of a sudden will kick in. And Biden seems convinced that taxation should go up. And that would be, I think, devastating to the growth prospects in the US. So we're just watching that and just that's why we're being very careful. That's why we're in companies that we think can weather you know, more pressure and very poor decision making on the part of the politicians and, and also have global franchise and so they can make money, not just one country or two countries, but make money around the world and are sort of perched on long term trends. So you know, I think the US is, is going to be increasing under more and more pressure, economically, and we've already seen I mean, we've seen that already.

Andrew Brill 29:40
Ben Laidler from eToro was preparing us for a market shakeup, although he is bullish for the end of the year. Like Jonathan welcome. He is concerned about the future bond auctions and the size of the debt. He also thinks cryptocurrency is here to stay and could become more mainstream in time.

I want to touch on energy for a minute because we do need energy to power AI. And we saw the same thing. And there's been a lot of talk about it. Look, you know, we need data centers, we need power to power this. They're talking about uranium and all this stuff to power the AI that we're all going to us. The question becomes, we saw the same thing in bubble, oh, everybody's going to need a computer, everybody's going to be on the internet, we need the power. But then that sort of, you know, there was that peak, and then it kind of dropped off a cliff, are we looking at the same thing here, as far as power goes for AI?

Ben Laidler 30:36
So we're certainly having an explosion of data center activity. It's helped make utilities surprisingly, one of the best sector performers, you know, so far this year, despite being perceived as defensive, despite has been sort of rate sensitive, has done very well. The International Energy Agency is out there saying that data center demand is gonna go from two to 3% of total electricity demand to sort of double that over the next two, three years, which is basically a New Japan that, you know, chat GPT uses 10 times as much power for a search as Google does, you know, so there's all these sort of supportive stats out there. So I think, you know, that demand is coming. I think what we miss is, is a couple of things. So one, you know, there will be efficiencies. Along the way, there will be new ways of doing things along the way. I'm not sure we can just extrapolate things forward a and the, in terms of the market impact. I think just going back to sort of analogy. Where we got it wrong in was on the valuations not on the fundamentals, basically everything we said on the fundamentals of the internet, becoming a thing and taking over the world and driving revenues and everything else. All happens. We were just grotesquely overpaying for is, you know, Cisco 110 times you know, if that's your Nvidia comparison back then and video, Pete Atari, Cisco peaked at 110 times price earnings ratio, and it's never recovered, even though revenues are up seven or eight times. So the revenues delivered but valuation was wrong. And that's what's different sort of this time round. You know, I think we AI is moved from hype to reality, you're seeing that in the numbers. And we're certainly not overpaying for it yet. I mean, in video, which is the sort of poster child is what 45 times PE, absolutely not cheap. But neither is on those, you know, stratospheric valuations we saw back in, in the dot com, boom and bust.

Andrew Brill 32:28
Ben, what about the deficit? I mean, we're looking at over $35 trillion. I think within the next few days, there's another there's another bond auction, the two year the 10 year, I believe, maybe even a five year in there. And the prices are in the upper fours at this point. So if you're on a fixed income, and you have money put away you say, okay, you know what, maybe this isn't so bad, I know what I'm getting. But there's gonna come a point where these bond auctions are going to fail, because they need to raise so much money. And this is gonna be huge problem for us.

Ben Laidler 33:04
So it's a problem, I don't think it becomes a market problem. Until it does, and that sounds flippant, but, you know, the absolute numbers are not too terrifying, you know, US debt to GDP 120%. There are plenty of places in the world, most of Europe, certainly Japan that have much higher numbers than that. But your point, I think it's a the direction of travel, that we're running that sort of deficit 6% of GDP when the economy is frankly booming. And you don't normally see these deficits outside of, you know, recession. So that's a concern and be, you know, we're about to go into an election, neither candidate is addressing this, well, neither party, neither Congress is addressing this. And what this means is ultimately the market will address it, and the bond vigilantes will see a comeback, and they will address it, the struggle is, you know, is that tomorrow, or is that in 10 years time? I I can't answer that, but I definitely think it's one of these sort of tail risks you need to you need to be thinking about and it's absolutely a government problem. When we've basically seen corporates and consumers you know, deleverage over the last sort of five to 10 years. It's you know, government is the one that's still there with its with its checkbook open and again, if they're not going to close it, the market ultimately will will close it for them.

Andrew Brill 34:31
So I want to ask you about cryptocurrency before I leave you I know you guys are into cryptocurrency, we saw it look earlier in the year was probably around 26,000 around around that number with jumped over 70,000 Now it's right around 60 It's the volatility that you're talking about. But that's the nature of cryptocurrency. Where do you see this going? And you know, it's not going anywhere, but at this point, I guess it trades like an equity And is it there is possibility of cryptocurrency becoming more mainstream?

Ben Laidler 35:06
I think that's the long term story. And I think if you're bullish, that's why you're bullish. This is, you know, the youngest, smallest and most retail owned of all the asset classes. And if you believe as I do that we're at the early stage of this sort of gradual adoption cycle that should drive value over time. We've seen the Bitcoin ETF this year, we have the theory of ETFs coming. We've had the Bitcoin hobbying, we have a number of institutionalization sort of landmarks coming, we have regulations coming at the end of the year, which are going to make it easier for US companies to own crypto, and basically none of them do today, we have global regulations coming making it easier for banks to own crypto on the first of January next year. So I think all this is just part of this gradual institutionalization. I've absolutely no idea where crypto is gonna be the next, you know, days, weeks, months, but I think that long term story remains remains very positive. And despite all this volatility, it was the best performing asset class last year, it's the best performing asset class this year. You know, you need to manage that volatility. Diversification is the only sort of free lunch in finance. And that applies in spades to to crypto, but I think I think the long term outlook remains pretty positive.

Andrew Brill 36:29
Obviously, all these things you mentioned, are vehicles and avenues for crypto to be adopted as a currency, if you will, is is you see it getting there? Obviously, you're bullish on crypto, and you think it's going to get there. But it's going to be a few years, if not longer down the road.

Ben Laidler 36:49
I think this is always two steps forward, sort of one step back. But you know, I do think you had a big step forward this year. I mean, the Bitcoin ETFs, which make it easier for people to own crypto and the world's biggest capital market, as we just sort of talked about, you see 15 billion of inflows into bitcoin so far this year. That's going to come for Aetherium. You've had, you know, sort of orange lights given by the SEC. So I think that's fully coming. And as I say, I think you'll have a lot more of these catalysts still to come. Companies basically don't use crypto today. The regulations will make that easier. Banks been very nervous. I think that will change. Ultimately, I think you'll see a central bank confessing to owning sort of Bitcoin as part of it sort of currency reserves. I think gold is what 15% of gold global currency reserves, you know, right now. So I guess what I find, you know, again, bitcoins been around or crypto has been around for only 10 years. This is a tiny asset class in global perspective, it's dominated by retail investors today. I just think there's so many different avenues that this could sort of develop over time.

Andrew Brill 37:58
Finally, next week on the training floor, Jon Najarian discuss the NVIDIA stock split and how that worked and also explained a reverse stock split. He's still bullish on AI despite the recent pullbacks.

John, let's start here with Nvidia. It's now two weeks since the stock split, a one on a roll going up about 70% Since the split but it's now coming back to Earth.

Jon Najarian 38:22
Yeah, well, Andrew, Nvidia, it's all about AI. I mean, this stock rocked to the upside after that 10 For one stock split now was that the primary driver, it did make the stock accessible to a lot more investors. We all know that when you do a one for 10 stock split, you're going to have 10 times as many shares at 1/10 of the price. So basically, nothing changed. It's the same thing. By the way, when you do a reverse stock split. And people are doing that I'll touch on it in a sec. But when you're doing a stock split a traditional stock split, it's because your share price has run to a point where it is unattainable for some people to be able to trade it, invest in it and so forth. Classic example, Warren Buffett's Berkshire Hathaway, it's in the hundreds of 1000s of dollars. That's per share, folks, one share a single share will set you back more than the most expensive home in 90% of America. That's the way that stock operates. And Warren Buffett has no intention of cutting that one. So they have a baby Berkshire that trades at a fraction of that and even that is pretty expensive. But these days with these trillion dollar monsters, like Nvidia and for instance an up and coming trillion dollar monster like Broadcom, symbol Avi, Gio, you've got people that are doing these 10 For one stock splits, because an $800 stock, a $1,300 stock is just too difficult, again for most people to trade to invest in, and so forth. And it's not just for the investor class, that the Board of Directors decides to do these stock splits. They do it because of their employees as well. Because, as you might imagine, some of these employees can become crazy rich through their stock ownership plans, good for them. But the access for them trading out of the shares, hedging these shares, all that sort of stuff is just as difficult as it is for Joe and Jane, who have never worked for Broadcom, never worked for Nvidia. So they do these stock splits to make the stocks more attainable, more easily, hedge double and so forth. Now, reverse stock splits are pretty much the opposite. We've seen that with the likes of OLED See, Virgin Galactic, for instance. Now this was a stock that people were big believers in, even though it just took people to the just under outer space, if you will, Blue Origin. Jeff Bezos, his other company, along with Elon Musk's SpaceX can both take you out into space. But Virgin Galactic doesn't have the ability to even take you out into space, and the stock has fallen and fallen and fallen to where it's under $1? Well, it's gonna get delisted, from the exchanges, if it doesn't trade back up over that $5 level. And so what they do is they do a reverse stock split, which is the exact opposite Andrew, of what Nvidia is doing a one for 10 stock split means, like I said, 10 times as many shares at 1/10 the price. So if you run that the opposite direction, if you've got a 33 cent stock, and you'd like to make it a $3.30 cent stock, you're doing a one for 10, reverse stock split, in which case, you're going to get the stock price 10 times higher, but you're going to have a significant different move than Nvidia with 10 times as many shares nope, 1/10 as many shares. So two different ways of looking at stock splits one, the traditional stock split the other a one for 10, or even a one for 30 to get the stock back up over a minimum listing level are things that people do out of both desperation and the desire to keep that stock listed on the big exchanges rather than going to bulletin boards and so forth. Additionally, there are a lot of firms, hedge funds, and endowments and things like that, where they have a mandate to not trade stocks that are under $5. A share is that a lot. It's not a lot. But a lot of people adopt that. And they simply will not trade a stock that isn't at least $5 a share. So several reasons why these reverse stock splits are very popular and people are out there soliciting from their board of directors and opinion that lets them do a one for 10 or a one for 30 reverse stock split which is what Virgin Galactic is going through.

Andrew Brill 43:51
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