Meta Sank 10% on Earnings. Microsoft Didn't Blink. Here's Why.

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But we're probably in the second inning of the game. The risk is there that the whole thing is is a bunch of BS and it falls apart. We do not believe that. We do not believe that. We think we're in the second inning of a ninninging game and this is real. Hi everyone. Welcome to another episode of Bits and Dips the interview. My name is Steve Erlick. I'm the head of research at Sharplink and also your host. We've got a terrific show for you today. [music] But as always before we dive in, just a little bit of housekeeping. Nothing that you hear or see on this program is financial [music] or investment advice. For full disclosures, please see unchained crypto.com/bitsands andbbits. And now, let's briefly pause to hear from one of our sponsors. This episode is brought to you by Cape, America's privacy first mobile carrier.

Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off six months at cape.co/unchained. >> All right, welcome back. So, [music] I've got a terrific program for you today, a terrific guest. I have Chris Galipo. He is the head [music] market strategist at Franklin Temple at the Franklin Templeton Institute. So, welcome Chris. >> Thank you, Steve. Thanks for having me. >> Yeah. Um, got a lot to talk about today and I'm really excited to have you because um, you're I think uh, I guess a self-described permeable. Um, there's a lot of FUD out there, fear, uncertainty, and doubt. I know you're not a crypto native, so maybe you're not up to date on all the lingo, but there's a lot of

concern about all the uncertainty in the world, the Iran conflict, oil spiking, tariffs, uh, worries about just, um, like an unending spending spree of of capex from from the MAG7 and and sort of the the big AI hyperscalers. and you've been pretty consistent um throughout the year that uh fears of sort of the market topping out are are overblown. And we're going to explore [snorts] uh all of that today. But before we do, uh just really briefly, can you just uh for anyone in my audience that doesn't know who you who you who you are um what you do explain what you do with the Franklin Templeton Institute?

>> Yeah, sure. Happy to. First of all, I am not a permable just so we're clear on that. Um, we can go into it later, but I do my my best to be objective and unbiased. And having spent 25 years as an analyst and a PM, you're never perma anything, right? You're you're working with the data. Um, so Franklin Templeton Institute is a part of Franklin Templeton, the or the asset manager. We run about $2 trillion. The institute is really uh the thought leadership part of the organization. So in my role as uh as head strategist, I spend most of my time in the US working with our US clients.

So it falls under my purview to build and outline uh our investment views and opinions usually for a 12-month window. Um I I will comment, you know, on a weekly basis within that 12-month time frame and just try and keep our clients uh updated on on what we see, what we think, what's happening. like this is a great week to be on because there's a lot going on. But you're right. I mean, for calendar uh 26, we've been bullish, we've been right. Um we could even take it back to longer than that and I think the themes or the pillars of that argument are still in place, but I and this will be a great conversation because we can cover everything you just mentioned.

>> Yeah. So, let's start with the news from yesterday. Uh I mean it was Kevin Worch's second uh meeting uh chairing the Fed and uh it seemed my impression from kind of watching at least the beginning of his press conference after the the rate announcement which was basically to help hold the hold things steady for at least another two months. Uh he seemed to be taking a bit of a a validatory victory lap seeing how like rates were going up on their own, the market was deciding and the Fed didn't have to use forward guidance, didn't have to do all these things. and then and then he started talking and the market did not seem to like that. So, I I'd love to just first get your your impressions on sort of how his remarks

went and and the the quick drop and and the the rise especially in the 30-year after that happened. >> Oh, I I think I agree. I I generally agree with what you were what you just said where he he spent a lot of time talking about and this is the second time he's spoken obviously and he spent a lot of time talking about almost retooling the Fed's kit and pulling in different experts and building these task force task forces five of them to try and evaluate how they assimilate data and make decisions based on the data. I think that's going to take some time. But he did talk a lot about yesterday the bond work, you know, quote unquote doing the work for them.

And so I've written about this extensively in the probably within the past four weeks every week where I was having a hard time understanding the movement in two-year yields, two-year note yields, which is has a phenomenal long-term track record of predicting Fed policy. Right. The bond market tells the Fed what to do, not the other way around. And so yesterday, to your point, he said, you know, two-year yields have already moved up. They're 50 60 basis points above the effective FF rate. That's the bond market telling the Fed, you need to raise rates, right? And that track record is almost it's almost perfect. At the same time, he also referred to the other variable that I watched and that I've written a lot

about, which is break even rates, which have gone through the floor, collapsed from March. And so that piece of market information is telling us we don't have to worry about inflation, but the two-year note yield is telling us we do and the Fed should move and not sit tight, right? So it can I found it confusing because it on one hand he's saying, hey, we rely on market-based indicators and the market is the best source of information which I agree with 100%. But yet the market is telling us this one thing visav two-year yields and you know I don't necessarily believe that right now. So, the reaction in the bond market was for two-year yields to come in, thinking that, okay, he's probably not going to move here. Well,

we didn't think he was going to move yesterday anyway, and he's probably not going to move in September either. And the 30-year bond is 30-year guy is saying, I'm from Missouri, right? You're talking a big game. Prove it. We don't believe it. And so, you had the curve twist steeper on that. Interestingly, 10ear yields really didn't do that much, right? But they're banging around 470 475 here. But I think that was the reaction. in the bond market and then you saw the reaction as soon as he was done talking it was a straight down move vortex you know in S&P futures and I think that's the stock market saying okay we don't know what to think here right because he's promoting this lack of forward guidance and at the same time he's saying we believe the market market

based proxies are the best and we want to retool while we're kind we're going to build the plane while we're flying it the one thing the stock market doesn't like Steve uncertainty and they and they got and they got it yesterday. >> Yeah. I I like your analogy of sort of like retooling the plane as you're flying it because Kevin Worsham steps in and I know this is the first time you and I have spoken but uh he steps in at a really challenging spot because it's it's sort of a roshock's test reading the economy reading the labor market all this macro certainty as to what is the right thing to do visav rates right >> um he has to find a way to establish consensus at the FOMC which is harder now because I mean I forget I can't I don't remember exactly how many of the

most recent votes have had the sense But um I mean it's really broken with decades of precedent and then you have a president who wants us to quote unquote have the lowest rates in the world >> and like and Kevin Worsh I mean he has to navigate all of that. >> I mean I I wonder I don't know if you've ever had a chance to speak with him if you ever met him but like what do you think his like how do you think he's weighing all those different things because clearly like if he's not getting guidance from the White House I mean he understands what the White House wants. >> Yeah. Um, and so raising rates would be theoretically problematic from a political point of view, but at the same point in time, there's so many different ways you can read the economy. And

that's what he said yesterday. You know, Steve was asked directly by one of the uh reporters in the room. You know, we've got it. We've got another inflation data point this morning. How much do you do you actually believe in this 2% target? Is core PCE your measure? And he basically said, "Yes, it is. We but but but we're open to evaluating everything and not just going to be relying on that although we do we are anchored to the 2% number. Now so there's a whole host of things and sources of information market based and otherwise that he that he can look at. I'll I'll give him the benefit of the doubt, right? Because I personally am a big believer in the the market or the Marquettes are the collection of intelligence from around the world and

different pieces of information, right? They are always the best reflection of you know what's known and noble right now. Uh the the dot plot if you look at that and test it, it has no predictive value, right? It's not really useful. He's right on that. Um, as for as for Trump, I agree with what you said. Wars has come out and stated kind of like JPOW did. We're not going to be swayed by that. We need to be independent. Okay, I get it. I hope that's accurate and true. But I think he is willing, it seemingly anyway, he's willing to be patient here and see what the data tells us on a go forward basis and kind of bring in these other groups of what he called, you know, worldclass experts to

evaluate and go back to first principles. That's that's his favorite term, right? It's go back to first principles and assume that we know nothing and build and build it up that way. >> We'll see how it plays out. every new Fed chair gets tested and I think he got tested yesterday. I think there are other things that are that are going on in the equity market that had really nothing to do with yesterday that we can talk about that in a minute. >> Yeah. >> So, I think it's kind of a he is it does seem like they're they're they're building the plane while they're flying it, which doesn't seem to be the approach that you'd want as a market participant, right? Where we want information and we want some sort of we want to understand the process. we want want to understand what sort of data

you're using, what's the frequency, what's the source, what can we expect and he's he's kind of pulled that away and that's not easy for for markets to digest. >> Yeah. And I before we move on to some of the other topics that he just alluded to, I I want to just um double click on sort of his revised or I guess yeah, I mean his new approach to communication um the reduction of forward guidance. I I know that it really became a big thing during the the great financial crisis like carried on during PAL and I I've said many times on the show that I think part of it is just perhaps maybe Congress abdicating its own responsibility because of like just like how clouded up it's been from a policy point of view that the Fed has to become even more ever present in our lives. But

uh you kind of just hinted on it. Markets don't like uncertainty. So I mean he wants to rely on data. he doesn't want to sort of be the the Wizard of Oz like managing things behind the curtain, but uh didn't seem to hit the right note yesterday. >> I I agree. I mean, I I listened to the whole thing and I walked out thinking, "What did he just say? What should I believe?" And I think that was the general con you read the notes. I'm not an economist. You read the notes from the street this morning, even last night after the press conference. And that's that was the general consensus. right now. I think the market is might have overreacted a little bit yesterday, shaking it off a little bit. Now, look, I'll be honest with you. Is I'm only interested in what the Fed does if

they're starting on a new rate hike cycle or they're about to start a new rate cut cycle. Those are the only real pivot points that I care about. I'm speaking as an equity guy. I care a lot more about, you know, fundamentals, i.e. earnings and earning season, than I do really anything that War said yesterday. Granted, I stipulate I thought he was confusing and not not yesterday was not helpful. I think he's got a he's got a heavy lift now to restore his credibility, right? We'll see how it plays out. Okay. All right. Well, we're going to talk about a lot more. Uh but before we do, we have to take one more quick break.

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number to every app that asks. Go to cape.co/chained and use code unchained for 33% off your first six months. >> All right, welcome back. I'm speaking with Chris Gallipo, uh, head market strategist at the Franklin Templeton Institute. Uh, we just spent a lot of time talking about the yesterday's FOMC meeting and and Kevin Worsh perhaps not meeting the moment, but he'll get another chance in two months, but there's much more happening in equities markets and and the macro landscape than just what happened yesterday at the Fed.

So, let let's get into it. Uh, I want to talk about Iran and just sort of the the I guess the um I'm not torture how to say it, just the the quagmire that we're finding ourselves in. And like how you read the way the market is responding. I mean big surges in oil over the winter, early spring, although it didn't reach the the eye watering levels that I think some were afraid of. Uh markets kept going up for the most part because of just excitement about AI. Um, there was a deal that many people did not expect to last and and surprise surprise, it did not. And now we're seeing strikes renewed again. Oil is starting to peak up, but it hasn't reached those lofty levels from February and March. But there's the fear of a

further regional conflration. I mean, the Red Sea is now part of the conflict. Egypt's being attacked. Like, how are you reading all of this? Like, what what kind of questions are you getting from your clients? So the the playbook for any sort of conflict is generally goes as follows. We've mapped out I've mapped out every major geopolitical event globally going back to 1929 all of them. And I so I got in the business in 1991. I've seen a a lot of them, right?

>> But I've seen see World War II, the Great Depression, all that sort of thing. >> Yeah. If you look at the data, here's what the data shows you from the start of the conflict, you pick the conflict, right? Wars, acts of terrorism, um, bubbles, black swans like COVID. You pick the start date and then you measure out equity returns three months from the start date, 6 months, 12 months. Here's what you'll see in the data. that 12 months out from every major conflict that we've seen since 1929, the S&P is up 11% on average with a 76% hit rate of positive returns. So that data set alone tells you that investors should not

react to some sort of political or geopolitical event. Now that's really easy to say and in practice that is not easy to do, right? So, we've just seen a couple here since Trump has been elected. The tariff debacle and now this situation in the Middle East, right? And the questions that I get from our clients are they run the gamut as you might imagine, Steve. But people see this and they're like, "Oh my god, this the world's going to end, right? And this is going to be terrible for the economy. It's going to cause a recession." No, it doesn't. It never does. There there are three instances in that whole data set going back 75 years.

Three time periods where the returns out one year were negative. Those three periods are as follows. The Arab oil embargo 7374. The tech bubble exacerbated by 9/11 and then the GFC. So two bubbles. One situation where we have you know shortage of gasoline and gas lines in the US. None of those are likely. We're not in a bubble. We're not going to run out of gas. And the other thing in all three of those scenarios, the Fed was raising rates. Now, we might run into the raising rates thing later this year, but over time, the stock market focuses on primarily on one variable, and that is corporate profitability, i.e. corporate

earnings. That is what matters. So if you measure the relationship going back to 1950 to right now and you measure the correlation between S&P price movement and S&P 500 reported earnings that correlation is 0.98. You want me to shorten the time frames I can. You want me to pick different indices? I have. The correlations are all above 085. That is the variable that matters. And so for this year, you go through uh the crisis in the Middle East, you get the spike in oil. The playbook in any geopolitical conflict is sell the spike in oil, which is exactly what I wrote and told our clients that worked, right? The but the reason the stock market has hung in

there so well is we're probably not that impacted. I mean, Europe and Japan and other countries are more impacted. Those markets held in there pretty well, too. And the question is like the Russia Ukraine conflict to that as well, us being somewhat insulated, >> right? I mean, if you go to that one, then you've got the price of oil elevated north of 120 bucks for way longer than we've had in this Iran thing. I'm not saying it couldn't happen, and that wouldn't be [clears throat] a risk because it would be, but equity markets are focusing on earnings power. And so, if you look at Q1 earnings, right, Q1 earnings in the US were plus 25% year-on-year. That was mildly better than street consensus. And when I say mildly, I'm being sarcastic.

It was 100% better. So, that's the variable that really matters. And interesting interestingly enough if you go pointto point January 1 to right now this distance right the S&P is cheaper right now than it was at January on January 1 6800 747500 the tape is cheaper now on a multiple basis that's how strong the earnings growth has been Q2 you know it's a little bit mixed here last night was a little bit mixed with Facebook and Microsoft kind of two tales of the same coin but your earnings running ahead of expectations again for Q2. So I think that's the thing that folks need to focus on. It's easy to get caught up in the headlines and what you

see and what you read and the negative the constant negative drum beaten spin. Okay, I listen to it. Most of it has zero valid valid validity. Easy for me to say, right? That's why I rely on the data and I use the data to inform me, not the other way around. >> Yeah, I I know that. I mean, every geopolitical conflict is kind of like a snowflake. I actually used to be a intelligence analyst for the US military. So I I uh studied all those conflicts uh in very different ways. And uh >> I have questions for you then. [laughter] But um but I I I understand I mean even like looking past like the GFC I mean take a longer time horizon obviously the market has has more than recovered all those losses and and the Iran sorry the um Arab embargo I mean that was just a

one of one where we had to like bring down the the Nixon era inflation and it coincided with the the oil spike. But I'm I'm wondering if you can maybe just go a little bit deeper into that data. I mean when I hear numbers like averages and so on so forth. I mean you know as well as I do that like it can smooth over outliers it can smooth over like some other types of data. Is there anything else when you did that that research that could kind of maybe give a little more granularity into the or is it really just as simple as the market always comes back and perhaps today might be because of um tech productivity or there's a Fed put that makes sure that like the governments make sure the markets just

don't crash because it's bad politically. Maybe just add a little more to that please. >> Yeah. Um a couple things, right? So I gave you the mean. I I know the median number too. So it's right in line with it. I don't data mine, right? I think that's that's just ethically in incorrect. But let's say this in those three periods 7374 tech bubble GFC so kind of a one kind of black swan sort of and then two bubbles. If you took those out which I didn't in the data I just said if it took those out then the average goes plus 15 the median goes plus 18 and the hit rate goes plus 85. Right? So I but I didn't exclude it. I included it. I I think the data is just what it is. And I think the

the the explanation for it is what we just talked about. The explanation for it is if you've got earnings moving north by northeast, S&P prices or stock prices are also going to move north by northeast. The stock market follows earnings over time. The stock market leads earnings over time. It does. Look at semiconductors for example, right? Not to to get too far off off the tangent. Pick one. Let's pick the semiconductor index, pick Micron, doesn't matter. Micron and the and the socks index broke out a year ago. Okay, a year ago. That was the start of the information edge saying, "Hey, this AI spend is probably going to cause a lot of demand for compute and memory." So, smart money knew that. That's when the buying started. And then you get into

this frenzy here in the last month and a half, which was pure speculation, right? amplified by levered ETFs, single day options, uh, margin, right? Crowding, all of that, chasing performance. I told our clients a month ago, this this reminds me of March of 2000. So, I was a growth PM. Thought I had all the answers in March of 2000. Found out that I didn't. I confused my intelligence with a bull market. I knew that semi thing would end. It just came unwound completely, right? And so now the the froth and the risk is probably taken out there. But that's a really good example of stocks leading fundamentals. And if you plotted earnings growth for you picked the company over that, you know,

time frame from 12 months to three months ago, you would see that the stock those stock prices were right. But I think that's the notion um that's the thought and that's the reality that the stock market always comes back to earnings growth. And let's face it, corporate management teams are paid to continually produce better outcomes. If they do, generally stocks follow. If they don't, stocks go down, right? And the index can go down. The only thing that really puts earnings under pressure, Steve, is the Fed raising rates and breaking it and putting us into a recession. That's tech bubble.

That's GFC, right? A little different with COVID. But same concept, but it's usually the Fed that breaks it that causes earnings degradation and puts us into a recession. And and you know what? The stock market moves before that. It knows. It knows the earnings degradation is coming and the stock market rallies six months prior before the end of the actual recession as dated by the NBER. Right? That's this is these are all examples of why I don't rely too much on economists or economic data or what the Fed says. The stock market tells you if you're paying attention and know where to look.

>> Okay. So, let's talk a little bit more about AI. I mean, as as you mentioned, and anyone watching this, I'm sure, has is well aware, I mean, earnings have have generally been very very good. Uh but there are concerns and I think sort of the like the two sides of the coin you mentioned between Meta and Microsoft I mean going in opposite directions I I think that's a really good sort of microcosm of sort of the the different approaches someone can read what's happening. So maybe just expand on that a little bit please. Yeah. So, I listened to both the calls last night and you know what what put face uh Meta sorry in the penalty box was hey we raised our capex spend they didn't raise it by a lot they raised the lower end by five by 5 billion which seems like

monopoly money to us right but they raised it they g and they talked a lot they gave us a lot of qualitative explanation but they really I didn't see any proof um in terms of revenue growth or maybe no clarification on the timeliness of of discernable ROI. I I didn't hear that. Now, maybe other people did. I didn't hear it. That's why the stock's down 10%. So, they raised their capex guidance and Q3 revenue guide was a little below the midpoint. I know these are nitpicky things, but this is what the street reacts. >> And and from my opinion, I don't mean to interrupt you, but I mean, just given how poorly their initial LLMs were received, it seems like the from my perspective, the burden is higher for them to prove that they're able to kind of catch up and overtake, especially

with some of the Chinese competitors. >> Yeah. And then right after that call, I got right on Microsoft's call, right? I can of course see all the earnings, revenue versus consensus, uh margins, so on and so forth. And the number one metric we're looking for with Microsoft is Azure growth, right? Uh cloud growth. And that number was super strong. Um that was the first thing I thought, okay, that's really what we wanted to hear about. Microsoft's management, the the quantitative information that they gave us and the tone in which they delivered it was, you know, having listened to earnings calls for 35 years, you you pick up on these things over time, they were confident. You could tell they maintained their capex guidance. So, they didn't raise it. And and so that's the that's the worry

around sucking out all the free cash flow generation from these unbelievable companies here in the last six, eight months or a year where if you and I were talking two years ago and you said, "Hey, do you think Microsoft, Google, Amazon, and Meta are going to blow through all their free cash flow?" My answer would be no way. They just did and they're in the market borrowing more. Right? So investors have called time out on that. Time out on that. And you know, I'll lead you to another concept that we've been pounding on here for the last 18 months, but those were the differences to me anyway in the calls last night and why one stock is down and one stock is up.

>> Yeah, it's really interesting because when we hear about these big tech companies, I mean, going back to um like the fang and uh I forget some of the other acronyms that that were there. I mean, they were enormously profitable, had had very very very low capex and like unlimited free cash flow. um a big inversion now because of how I mean the revenues are great but I mean like Google went to public markets for the first time in in in decades. I mean these companies are raising tens of billions of dollars in the debt market. I know Oracle was recently downgraded to like one one ring above above junk status >> and yeah I mean free cash flow is all of a sudden it's it's a big deal. Maybe for some of my my viewers, some of my

listeners that are just trying to get their hand their arms around all this, could you maybe just talk about how from your perspective like you think about these different buckets to sort of ascertain the health of of a company because it's hard sometimes I think to distinguish between like Microsoft and Oracle and like >> it t so it t it I'll do my best in a nutshell from a high level. So it takes you need to consider a lot of different variables, right? Zuckerberg for example last night talked about total addressable market on and on okay we get that right that's why the spend and then there's not nearly enough compute demand and all that sort. So you factor in comments like that, you you look at the company's balance sheet. What I always

focused on, especially as a growth manager of owning these names and liking these names, you know, over decades is how much confidence do I have in the run rate and revenue? Tell me about COGS. How, you know, I need to know where the margin numbers are likely to go. I don't really care about the tax rate because it doesn't move that much, but I'm trying to get my arms around all of the different things that will impact net income. Factor in buybacks, what's the earnings power going to look like? And so there are a lot of levers you can pull on an income statement, right? You can reduce expenses to boost margins. You can have an an earnings beat because the tax rate was lower. There's there's all kinds of manufacturing, right? You buy sh you buy outstanding shares back and the EPS number goes up. So you can

engineer earnings. You cannot engineer the statement of cash flows, right? And so to to me uh maybe not so much as a growth investor, but certainly if you're a value investor, you're looking at that a lot, right? But in this case where you have the, you know, I'd argue the bestrun companies on the planet blowing through all of their capex, lending it to each other or backing deals in a circular fashion is a concern. I'm not saying it's not a concern. Like that does concern me because if this whole notion that you know the the models are evolving you know by the minute by the hour getting stronger can update themselves and right and everything that we that we know at the moment and

therefore going to demand these data centers and all this compute power if that if something goes wrong there and they now they're levered right I don't I shouldn't talk about their um you know interest expense ratios because I don't know them off the top of my head. But if when you take out the cash flow to meet obligations, that is a risk, right? So that's that's the bare kind of argument. I guess you could make the counter argument by saying, "Hey, Chris and Steve, if they're running one of these companies, they probably wouldn't be blowing through their their cash flow generation and and investing all this money in this unless they completely believed it." High conviction. Doesn't mean we're right, but I think that's what that's what the management teams do

believe. >> Yeah. Yeah. I'm glad you kind of brought up the circular nature of it. I I I think the pjorative connotation that I've seen thrown around is sometimes like a degree of incestuousness between all these companies, but at the same point like they're complimentary and there's a certain level of scale you have to have to to play in that arena. So like where else could they really where else could they really go? But it does like if things if this breaks like it could be calamitous just because of how closely entwined they are to each other. like who ends up holding the bag if something goes wrong? And would one bring down everyone? Uh I know that's a question. I don't know if that's a question you get, but that's a question that that that I often get asked.

>> Yeah. Um it's hard to say, but that's you're you're you're talking about the domino effect. Once someone falls, it's kind of, you know, boom, boom, boom, boom, and everybody goes down. Look, anything can happen in our business. We know that. Any stock can go to zero. We know that. I've seen that. I've owned stocks and thankfully sold them and watched them go to zero. So that that can happen. uh our our our take on this honestly our bottomup fundamental take on the whole thing the whole AI spend and where we are in in baseball terms we we were talking before we got on there you're a Phillies fan I'm a Red Sox fan so in baseball terms we're probably in the second inning of this and you know don't take my word for it listen go listen to earnings calls and listen to companies all all different cap sizes

all different industries all different sectors I promise you right to the listeners. Anyone can listen to an earnings call from a public company. Go to their investor relations website, click on the webcast and listen, right? Read the transcript if you want. On every earnings call already this year, and this has been this quarter, sorry, but this has been true for probably the last 12 months. Every company talks about how they're using AI in their business, whether it's to improve efficiency productivity ultimately profitability, to make things faster and better for their customers, to improve their service levels. We've heard that for a year. I hear that in every single earnings call. So, this is not going away. The the the use case is tangible.

And now you've got large public companies talking about, hey, we're not just thinking about this, we're using it. and oh by the way we can demonstrate improvements in efficacy by a whole host of measures but what we really look for is ha has that improved you know operating income and so we're starting to hear that now I think Microsoft did a really good job last night and their call meta didn't we'll see what Amazon and Apple say tonight right but we're probably in the second inning of the game the risk is there that the whole thing is is a bunch of BS and it falls apart we do not believe that. We do not believe that. We think we're in the second inning of a ninninging game and this is real. Now, that's that's that's

okay conceptually that might not line up to making money in the stocks, which is a completely different >> Yeah. >> completely different game. >> Yeah. It's it's it's funny and you have to take into account like SGNA and like like all the I mean, I know this is probably a bad example, but I mean, think about like DraftKings or FanDuel. I mean, these companies, they don't they're not profitable because they spend so much money acquiring customers and keeping them. It's It's it's interesting. Although I wonder >> companies like Pelaton. >> Yeah. >> Callaway Golf. Revolutionary companies. Doesn't mean the stock price stocks going up, you know.

>> Yeah. Yeah. It's it's kind of interesting. I wonder too if at some point like I know these aren't like G said banks, but I wonder if there's like some they get so big and they're so consequential to the industry that we need to find some way to sort of Yeah. to be the fail and then or or have some sort of u like resolution plan in case something like that like that happens. like the like the tarp setup in 089. >> No, no, no. It's um I'm blanking on the word. It's um it'll come back to me after after we're done, but basically almost having like a like a living will for a company or something like that.

Okay. >> So, that but maybe I'm getting too far too far a field there. Um okay, I want to ask you a couple of really good discussion here. I want to ask you a couple of questions. Um I'd love to hear your thoughts on prediction markets. Um I mean they they've become very common place. Um I know they're closely associated with crypto. Poly market um is is built on top of blockchain rails. Uh Cali is not. Um Poly Market accepts a stable coin. I'm Poly Market accepts a stable coin if I misspoke. Cali does not. But they've gotten very popular as a way to either make money based on like good market intelligence. uh hopefully not insider trading, although that's kind of a fine

line when it comes to to prediction markets, but also it's being used as a hedging tool or as a way to read the industry, read where certain like macro factors are headed. Uh I don't know if you've had a chance to to look into it yet. Um but I'd love to get your thoughts. >> So, I haven't I have not looked into that personally. Of course, I'm I'm aware of all the prediction markets. Here's what I think's interesting. Let let's talk let's step back for a second and talk about the concept of markets having predictive value right because I believe that 100%. Worsh seems to believe that in my career I've seen that many many times. And so there's a great

book that listeners can go to Amazon and buy. It's called the wisdom of crowds. And so the wisdom of crowds has nothing to do with investing. I think actually the last chapter might be on the stock market, but the wisdom of crowds starts out in the first chapter by a bunch of folks trying to guess how much a cow weighs or a steer weighs and then it leads you from that point forward and goes through industrial changes and revolutions through medicine and science and discovery. And what the book proves beyond a reasonable doubt, not that we're in court here, but what the book proves is that the collective wisdom of a group of people from different

backgrounds, not associated with each other, the group conclusion, Steve and I and 500 people, guess how many jelly beans are in the jar. And in the crowd, there were two jelly bean jar counter experts. and the rest of us are just I'm an e I'm an equity guy. Steve's a you know Bitcoin guy and a and a journalist. The sum total of all of our wisdom will be more precise than the jelly bean expert counter, the two of them that are in the room. So the sum total of the wisdom of all the folks in the room is more powerful and more accurate than the quote unquote one or two experts in the room on any subject over all time periods. And so if you believe that, and

I do, and it's been proven, then I think the prediction market um prediction markets probably have some sort of predictive value because what do you actually have there, right? You've got people betting with their own money for an outcome that they believe in. Now, I don't know if they're going to be right or wrong, but [snorts] they believe it. And the movement of money matters. That is the stock market. The same thing, right? money moving because you believe you've got some information edge or source of information or differentiated viewpoint that is not well represented in the stock price and therefore you're an aggressive buyer and then the news starts to filter out other people get it

and the stock keeps going up and lo and behold there's the fundamentals you know 6 months 8 months 12 months two month two years three years afterwards >> so I haven't studied it a lot but I think conceptually I'm into >> yeah conceptually It makes a lot of sense and I mean I agree with everything that you you said. I mean, I think the issue uh at least with prediction markets and I actually stopped being a full-time journalist before I had a chance to really dive into it, but uh I mean numerous studies have come out from Blue, the Wall Street Journal, etc. that it's like like these things are being driven by a few hedge funds that like can can manipulate the the angles can manipulate the the prices and it's it's not necessarily just the wisdom of the

of the crowd and like [clears throat] a a representative sample of 500 people and like that's sort of the the difference between like like aspirationally and reality and and the goal is to to marry the two because I I certainly I certainly get that and yeah there's a lot of value in something like this. Uh the other piece I I'm I still am fascinated about and I did do a couple stories on this is sort of how insider trading works in prediction markets because these are swaps contracts and they don't have the same insider trading laws as um as some sort of like securities contract. It actually in a way it rewards people with inside information because commodity markets are more decentralized but then there's limits because like nobody agrees that um a US soldier betting on Madura being um displaced before the end of December

is a good idea. But it's it's really fascinating and it just leads to my bigger question for you which is um you're obviously bullish um now to the end of the year for all the reasons that we that we just discussed but um I I guess two questions. One, what do you think I mean maybe a Fed rate hiking cycle, but but what do you think would change your mind? And um for for listeners here and again this is almost an entirely macro show. My show usually is a mix of crypto and macro, but um for my viewers and and listeners that want to maintain a bullish posture but do want to hedge, what do you think um in a not official financial advice point of

view or way? Uh what would you recommend? >> All right. So the the the variables you need to be aware of here and monitor in terms of equity space is the earnings picture. What does that look like? How is that progressing? You also need to be aware of and be able to measure, are we at peak earnings? Because if that is the case, the stock market will sniff that out. Companies will report good numbers, stock prices will go down, then it'll spread to everything and you say, well, this doesn't make any sense. And it makes sense because you're at peak earnings, right? And the multiples might look low because you're at peak earnings. Um, the Fed usually is the problem that ends up breaking the profitability cycle. Uh, so I think we're okay here through the balance of the year. I think actually the action

has not been everyone wants to talk about AIC. That's what everyone wants to talk about, right? Let me look to my left here for one second just so everyone's aware. The MAG7 through last night's close is down 5% on the year. The S&P is up eight. So the MAG7 is lagging the S&P by 13%. The average stock, the unweed unweed S&P is up 14%. So the MAG 7 is almost 20% behind the average stock. Right? why they're worried about the circular spend, the free cash flow burn rate, and right when are we going to see some earnings growth on that? So, just as a sidebar, um the rest of the market's actually great to hedge yourself. I mean, there are multiple ways you can do it. Um you can

use options, right? Again, as Steve alluded to earlier, this is not advice. Do your homework. Understand what a put option is, what a call option is, how they work, what's the risk, all that sort of stuff. Um, you know, you've got an probably an even easier way to do it today, Steve, than we've ever had. You can use inverse ETFs versus the S&P 500 unlevered to twice levered, you know. >> Yeah. My my audience is very familiar with those in particular. Uh, inverse ETFs focus on strategy. That's one that's a a big >> All right. Right. That makes sense. So, my advice my advice to everyone listening is this. Believe me when I tell you, I've made every mistake you could ever want to make in 30 years of managing money. and I've made them with a lot of zeros. I don't care which way

you trade. I don't care which vehicle you use. Do this for yourself. Stop-loss good till canceled. And if you don't know what that means, then you shouldn't be trading. That's like buying a stock or taking a position and not using a stop-loss order. It's like driving a car without breaks. And I'm pretty confident you wouldn't do that. So, if you don't understand that, learn it. Use them. Protecting your capital. You need your capital to continue to trade. And if it's taken away and a levered ETF can take it away quickly, you're in trouble. >> Yeah. No, that's a good point. And then it's funny when I hear conversations like this. I don't know if you ever watched the show Parks and Recreation, if that was something.

>> Abby, >> but um uh uh Aziz Sensari's character, Tom Hammerford, he was talking once about betting on horses, and he's he's like, "I I always win." And you know why? Because I bet on all the horses. And uh and and and sometimes like maybe that's just the easiest way to do. I know money managers like sometimes they can beat the S&P, sometimes they can't, but um but maybe the safest thing to do sometimes is to just uh is to just bet on all the horses and uh and do that. Uh all right. So So we need to we're getting close to wrapping up, but I want to give you a chance to share any any final thoughts. um if you have any contrarian opinions, if you have any really good ideas and and also where people can learn more about the work that you do.

>> Yeah, I I think we've covered a lot of the ideas. You know, the mo the highest conviction call that we've made to clients in the last 18 months is a very simple notion that the stock market was going to move away from mag 7 dominance. That's where all the earnings growth was. That's where all the performance was from 2020 to the start of 2025. We told our clients that picture is changing. Earnings power is spreading out. True in the US, right? So don't be overrelyant on one asset class or size or style. Like as Steve just said, spread it out, right? That's been our advice for almost two years. That has been an unmititigated home run. That's the first thing. I think that's going to continue, right? So how do you implement

that? Wait for the market to pull back, right? Get days like yesterday. I don't think you have to chase it here. I don't think you have to chase. So you use pullbacks to your advantage, put capital to work, be diversified, right? Same thing outside the US. Get some EM nice pullback here, right? This the semi unwind has caused a big pullback in EM. Buy it. Japan, same thing. Um I think, you know, I think there's a lot of people that think we're we're, you know, everyone's waiting for the next shoe to drop. [music] They've been telling me that for two years. They've been telling me that for most of my career. Final final thought. The world doesn't end that often.

>> That is a good way to end it. All right. Well, um, Chris, we have to let you go. Really enjoyed having you on. We'll have to have you back. U, thank you to everybody for watching and listening. Heat.

Heat.