AI Bubble Watch: Has the Hype Gone Too Far? — ft. Josh Brown

and Alyssa are always trying to outdo each other.

When Alyssa got a small water bottle, Mike showed up with a four-litre jug.

When Mike started gardening, Alyssa started beekeeping.

Oh, come on.

They called a truce for their holiday and used Expedia Trip Planner to collaborate on all the details of their trip.

Once there, Mike still did more laps around the pool.

Whatever.

You were made to outdo your holidays.

We were made to help organize the competition.

Expedia, made to travel.

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Today's number: 20.

That's how many dogs participated in the World Dog Surfing Championships in Pacifica, California, this month.

The winner was a chocolate Labrador from Brazil named Cacao.

When asked how the waves were, Cacao responded, rough.

Why am I laughing at that?

that?

Welcome to Prof G Markets.

We are back from vacation with one of our worst jokes possibly in history, but we're very excited about it.

We've been out for two weeks.

Somehow, Scott is actually still on vacation.

He should be coming back very, very soon.

But I am very glad to say that we have an incredible stand-in, the one and only Josh Brown, filling in for him today.

So, Josh, thank you very much for joining me again on Profit Markets, our very first show back.

Very excited to have you on.

I'm so excited to be here.

I wish I were on vacation, but since I'm not, this is the next best thing.

Did you take any vacation this summer?

I think I saw some stories of you jet skiing around.

I don't know where you were.

Were you on vacation?

That's all day, every day.

I'm from the south shore of Long Island.

We're born on a jet ski, but I went to, I did Lake Como and Milan earlier this summer.

It was pretty cool.

Oh, amazing.

What were the highlights from Lake Como?

You know what?

The lake itself is the only highlight that you need.

The hotels are fabulous, obviously.

Gran Tremezzo and Pasalaqua are two of the most beautiful hotels I've ever seen.

But like you literally jump in the lake and it's crystal clear, you know, it's a mountain lake and it's pristine and it's worth the trip.

All right.

Well, I'm glad you got your rest.

Let's get into this episode.

Today we're discussing the latest tech sell-off and we're also discussing why private funds are entering 401ks or might be entering 401ks.

So let's get started.

Now is the time to buy it

you have plenty of the world.

AI may be hitting its first real wall.

An MIT study released last week found that quote 95% of organizations are getting zero return on their generative AI investments.

Adding to the unease, Open AI CEO Sam Altman recently warned in an interview that we may already be in bubble territory.

Meanwhile, Meta just announced a restructuring of its AI division with potential downsizing ahead.

These reports fueled fear in the market and triggered a sell-off in U.S.

tech, sending every mega cap stock on a multi-day decline.

The NASDAQ fell more than 3%

and the S ⁇ P 500 shed $1 trillion

in value.

So a pretty significant sell-off here.

We've had three main drivers for the sell-off, three main catalysts.

First, were Sam Altman's comments, where in this interview with The Verge, he said,

Are we in a phase where investors as a whole are overexcited about AI?

My opinion is yes, end quote.

That was really what got investors spooked.

Second, we had this Meta news.

It was a New York Times article about Meta.

According to the New York Times, Meta is considering downsizing its AI division.

And then, third, was this MIT study, this report from a research group at MIT called NANDA, this AI research group.

And their report found, as I said, that 95% of organizations are getting zero return from their investments in generative AI.

So those three stories were really what set this off.

That's what caused this sell-off.

Josh, let's just start with your reactions, your reactions to the sell-off that we saw in tech last week.

So these things do tend to happen in threes.

So I like hearing you run down that list of no, it's I'm not even joking.

So

one of my formative experiences 25 years ago was being a young retail stockbroker trading all of the stocks related to the original dot-com boom.

And

there were literally three events that happened all within close proximity to each other

that I don't want to say caused the top to be formed and then the subsequent 85% crash in the NASDAQ, But

they were like the most notable events that happened at the top.

So we can argue causation, correlation, but like

those specific moments, because there's an echo here to what you just laid out.

The first is micro strategy, the original micro strategy, not the Bitcoin treasury we know today.

Same company, same CEO,

had an accounting problem.

They disclosed it, and it was like a $400 stock that fell 300 points.

It was like shocking to

the investor class because they were trading 50 different stocks like MicroStrategy.

I think at that time it was a quote-unquote B2B internet software provider.

The professor would probably remember more of the details, but that was notable.

Within that same week or two period, this is March of 2000, Bill Gates came out and said he wouldn't buy his own stock,

Microsoft.

He was still the CEO at the time, and he was talking about how expensive valuations for tech stocks were.

And he included his own his own company.

Of course, nobody wanted to hear that.

You know, so you like, you had like these like touchstone events, and you can't really point to one of them and say that was the moment.

But in hindsight, you can go back and you can be like, ooh.

That, you know, we should have, we should have known, we should have, okay.

So the things that you laid out to me don't spell a death knell for the AI theme.

I, I, my personal belief is we could run into the end of the decade at least with all the momentum and the money that's been being spent, et cetera.

But I think the past couple of days stock price action in the market tells investors how over-owned this theme is and

how easy it is to now spook the herd.

It doesn't take much.

Like a rumor of Facebook Meta restructuring the way it's doing its AI hiring is like enough to, to

knock billions of dollars off all these semiconductor stocks and

hyperscaler stocks.

So I think we're like in kind of a fragile state now.

And I think it's okay.

Like stocks are supposed to be volatile.

So

the way I'm thinking about this is right now, if you're an investor or you're a money manager, you should not be out there hunting for your 21st AI stock.

Like the 20 you have is probably good.

And the last thing I want to say on this,

if you think

AI is going to be transformative for society, and if you are hugely bullish on the theme, and I know most people are, and with good reason,

with your next thought, you should consider the fact that everybody else agrees with you already.

Yeah.

Right.

There are currently 20

AI-specific ETFs publicly traded.

20.

They all own the same stocks.

They all own NVIDIA.

They all own Microsoft.

So 20 specific ETFs and all of them have been raising money this summer.

20.

And there are another 10 that are considered AI infrastructure.

So like they also own

utilities and power transmission lines, plus NVIDIA.

So you got 30 ETFs that investors are using to capitalize on the AI theme.

You got NVIDIA sitting with a $4 trillion market cap.

Broadcom is one of the biggest stocks.

That's like the stock that people buy because they missed NVIDIA.

Exactly.

AMD is hundreds of billions of market cap.

So like you are not by professing your bullishness for AI, you're not saying anything that anyone doesn't already know.

Yeah.

Just go, I mean, I'm glad you said that about these headlines.

I see these headlines and

it seems like a giant nothing burger to me.

I mean, let's just look at Sam Altman's full comment.

So he said, he said, quote, are we in a phase phase where investors as a whole are overexcited about AI?

My opinion is yes.

And that's the part that I quoted, and that's the part that the streets worried about.

He then directly followed that up.

He said, Is AI the most important thing to happen in a very long time?

My opinion is also yes.

So, you know, he's just making a rhetorical point in an interview.

To me, it doesn't say anything about

his long-term thesis on AI.

He also spoke, I mean, people are saying in the headlines,

I saw this headline on CNBC where it's like, Sam Altman sees a bubble in AI.

But he spoke, you know, he spoke very, very generally about bubbles.

He spoke very generally about the idea that, you know, bubbles happen and people get overexcited and, you know, stocks can get ahead of their skis.

It's very general stuff.

So to me, that I'm like, okay, whatever.

Then you have

the meta news.

And let me just read you the full quote from the New York Times article.

It said, quote, Meta is also looking at downsizing the AI division overall, which could include eliminating roles or moving employees to other parts of the company because it has grown to thousands of people in recent years, the people said.

Discussions remain fluid and no final decisions have been made on the downsizing.

So that's what they said about Meta.

Again, very soft news.

And then this MIT report.

I

do not understand this.

I don't understand since when did a small group of researchers researchers at MIT

putting together a little research project

possibly by undergrads I actually don't even know since when did they become the leading authority on the adoption of generative AI I mean these are the kinds of numbers I see in in consulting and research reports all the time you know these kind of broad numbers oh 95

of organizations they're not seeing a return like I've probably seen that like a million times on the internet and then I sort of think, okay, so MIT says that, fair enough.

But isn't this exactly the kind of thing that investors on Wall Street are supposed to be tracking themselves?

I mean, isn't it literally the job of the buy-side analyst to look at the companies that he or she is covering and figure out, okay, this is the return that they're getting on their Gen AI investments.

I mean, this is what we're all supposed to be focusing on.

And then suddenly MIT comes out and says this little research number.

A few media outlets pick it up because let's be honest, it's a fun story.

And then suddenly we see this drawdown in the NASDAQ.

We see the S ⁇ P lose a trillion dollars in value.

And I just think it's fascinating that this is what brought down the markets.

And I agree with your point where it's like, you know, this indicates that there's a level of sensitivity in the markets right now, which is interesting.

But I think back to a month, two months ago, you know, it wasn't a missile strike on Iran that brought down the markets.

It wasn't the president firing the chief of the BLS

for supposedly falsifying national economic data.

It wasn't even the reintroduction of tariffs.

I mean, we saw, you know, some small corrections, but the level of correction that we're seeing in tech itself, it didn't really compare to this.

I don't understand that.

How is it that it was this little obscure research report from a little division out of MIT?

How is it that that spooked the markets?

I think it's because all of the gains in the market this year have come from the AI infrastructure theme.

There's nothing, there's no other show in town.

Even the GLP1 stocks have been falling.

Like nothing else is working.

So then people say, all right, well, what are the top performing sectors this year?

Utilities,

tech, communication services, and financial.

I think financial is neck and neck for the third spot.

All of those are directly related to earnings growth that's coming from the AI infrastructure build out.

The utilities is obvious.

I don't need to explain it.

These stocks have just undergone a once-in-a-century re-rating.

They're all at 52-week highs.

They all look unbelievable.

And the story that they're telling investors is that they are submitting formal proposals to their regulators for a rate increase.

And the justification for the rate increase is the fact that they need to spend money, capex, in order to keep pace with the demand coming from the hyperscalers for more electrification needed to facilitate the ubiquitous use of AI.

There's one particular utility called Dominion, which I wrote about recently for CNBC.

Dominion is like this 100-year-old company, sleepy, boring utility, right?

And it just so happens they're based in a place called Loudoun County, which is the cloud data capital of the world.

It's in Virginia.

And the reason it's there is because a million years ago, AOL was based outside of DC.

And that's where, like, the first, they weren't calling them data centers back then.

This predates even cloud computing, but like that's where the first cluster of this stuff started to be built.

And then Yahoo came and then Google came.

Now Amazon has spent $50 billion there.

So like this is an example of a utility that is completely transforming itself because of demand coming from hyperscaler AI infrastructure.

And that's why the utilities are leading the market.

Why tech is working?

That's obvious.

Why communication services is working?

That's obvious.

Keep in mind, Meta is in that sector.

Alphabet's in that sector.

Why financials?

Why are financials so good?

Because Wall Street came alive this year.

We have IPOs, Corweave, Figma,

bullish, believe it or not,

Circle.

Like all of a sudden, the amount of activity, private equity, private credit,

underwriting, MA is back.

There are deals again.

Like, that's why the financials are, but all of this is coming as a result of the AI buildout and then the ripple effect coming.

So you asked the question, like, I don't understand.

We're shooting at Iran and nobody cares, but an MIT study and a Facebook rumor

surface that could be negative for the AI theme and the NASDAQ loses a trillion in value.

That's why it's the whole thing.

There's nothing else going on.

GDP growth is

sluggish.

No offense to anyone who believes otherwise or they think the data is fake.

The labor market is okay, but not as good as it was last year, right?

Wage growth is gone.

So now you have price growth, you have inflation, but no wage growth.

Not a great recipe.

That's probably why we're going to put a communist in the mayor's office in New York.

Like, what other stories are out there?

What else is happening in the economy?

And the answer is nothing.

It's the high-end consumer who owns stocks out there spending with abandon.

The reason they're able to do so is because their portfolios are absolutely juiced by record insane amounts of CapEx being spent on AI.

And if you pull that leg of the stool away, there's no way we would have had a 30% recovery off the Liberation Day lows in April.

No chance.

Not a chance.

If you don't have that leg of the stool, there aren't two other legs.

And that's what the market is very precariously balancing itself upon.

Well, I think that really sums it up.

And I think that is very concerning.

I think that is probably what is most concerning: is it does emphasize the extent to which the entire market is dependent and reliant upon this AI story.

And so,

yeah, an MIT report comes out, and suddenly people get very nervous.

I mean, by the way, I'm almost shocked by the lack of conviction that investors seem to have.

The fact that this report comes out and then they say, oh, our thesis is wrong.

That to me is a little bit crazy.

Well,

in fairness, we're talking about a 2% move but the nasdaq has like tripled yes in in recent years it's not they haven't reversed their their their their opinions but there has certainly been a vibe shift in ai in the last two or three days i agree we're seeing it in the markets we're also seeing it online chatter people saying oh is the ai story is it is it not going to happen the sam altman thing is notable but i think people don't understand what he's saying

He's not saying there's a bubble in AI.

He's saying there's a bubble in other people investing in things that might compete with him.

He's still going to raise money in the private market at a $500 billion market cap.

You know, he is.

He's going to, he'll break every record on the books for a privately held company that only two years ago was like a not-for-profit.

He's going to raise money at a half a trillion dollar valuation.

So, what he's basically saying is he sees a lot of other people funding things that could represent a challenge to ChatGPT and other products at Open AI, and they're destined to fail.

And that's

read between the lines.

What he's basically saying is, we own this, and all these other valuations people are paying for other startups

are going to look foolish.

He's not going to say it the way I'm saying it, but that's what he means.

Yeah, no, I think that's definitely right.

But

just going back to what you say there about the reliance, the dependence in the markets on AI, just some data here.

So the top 10 stocks in the SP right now now account for 40% of the entire market cap of the SP, 25%

of the entire earnings of the SP.

NVIDIA alone makes up 8% of the SP.

It's the largest single stock concentration in over 40 years.

We've seen this just unbelievable CapEx spending, leading AI companies spending a 10x increase in CapEx in the past three years.

This This is basically the AI market.

This is the entire stock market.

This is all that anyone cares about.

And

I just, as a money manager yourself, I mean, how are you supposed to kind of defend against that?

You can't just get off of the AI train.

There's clearly a bunch of AI hype that's happening.

And that's sort of what Sam Altman is alluding to a little bit.

But how are you supposed to sort of protect yourself and keep those two things in your head at the same time?

One, yeah, of course we've got to invest in AI.

AI is the next thing.

Two, at the same time, what does it mean that this MIT report is

shaking investors' confidence at least a little bit?

I think Palantir is a really powerful example of the case that we make with our clients.

And just to back up,

we're not bears on AI.

And, you know, we're, we've been invested in this theme the entire way up.

Obviously, these are some of the biggest stocks in the world.

I've been bullish and talking about NVIDIA and long NVIDIA personally for 11 years now.

So like I'm not, I don't want to give people the impression that I'm like predicting a crash.

But we're very sober when we talk to clients about the possibility that there could be a hiccup along the way or something worse.

And, you know, we preach diversification, which seems really quaint right now, but.

like Fanny Pax, it will come back into style eventually.

It always does.

It could be many, many years between now and when that happens.

Um, we're managing uh six and a half billion dollars for over 4,000 families, and people have a lot of money at risk in the stock market with good reason.

People are going to have very long lifespans, and they need to earn above-inflation returns.

And our job is to help people

get from A to Z, and Z could be a long way off.

So, we have to take risk.

We have no choice, but we want to take intelligent risks.

I was talking to a client yesterday,

extraordinarily wealthy person, very successful,

way more successful than I am.

But one of the things that we're talking about, you know, he's saying, look, I understand diversify, et cetera, but it seems like none of these other stocks matter anymore.

And he had a really good point.

I remember a time where like Target would report earnings.

The markets would almost shut down because everybody would want to hear what the CEO had to say about the Outlook and the consumer.

But

no one even notices anymore.

There were times where, like, McDonald's and Home Depot and like, these were like bellwether, like, what, what is the state of the consumer?

Let's tune in and listen.

These earnings reports in the last week, they just come and go

because they're not the thing that's driving earnings.

When you talk about the size of the hyperscalers in the SP 500, like what percent they make up,

proportionally, the earnings earnings growth is even bigger.

The earnings growth is coming from a very select group of stocks.

They happen to be so gigantic that it's meaningful for the overall index.

And then you start talking about like, oh, Freeport McMoran is a bellwether for copper demand and nobody gives a shit.

I don't even think its market cap is 20 billion.

So like, it almost doesn't matter.

The amount of the amount that NVIDIA's market cap moves in a day is larger than 400 companies in the S ⁇ P 500.

So

people say, like, oh, try to connect the dots, the stock market, the economy.

From my perspective, they've never been further apart.

So I don't think the main street economy is bad.

I just don't think it looks anything like what the S ⁇ P has done over the last couple of years.

And people struggle with that disconnect.

So our message, you know, to get to the answer to your question in a very roundabout way, but our message, Ed, is

the market that we're in right now is not the market that we're always going to be in.

This year, the factor with the most import to returns is momentum.

Fine, we all understand that, but that's not every year.

Some years it's dividend yield, some years it's balance sheet quality, some years it's competitive moat, some years it's it's value, some years it's it's a size factor, and small cap does better than large cap.

It's been a minute, but it happens.

The purpose of maintaining diversification is you always have to say you're sorry, but you also never have to say you're sorry.

You are not going to be able to race NVIDIA and Broadcom with a portfolio year after year and not eventually pay the penalty.

So I mentioned Palantir.

His company put up one of the most insanely good earnings reports I have ever seen.

I'm doing this 28 years.

Insane on every metric, the rate at which they're adding corporate customers, the rate at which they're adding government contracts, the growth of cash flow, the growth of profit, the growth of profit margin.

You look at this report, and then the CEO comes on the call, and he's like, fuck you to the haters.

Literally, that's what he did.

The stock has now erased the entirety of its post-earnings pop.

It had this massive move where like...

Down like 10%, right?

Something crazy.

So like every growth manager who owns stocks and didn't own Palantir basically had to buy it that day or get fired, right?

And then, like, within a week, that entire post-earnings pop disappears.

What is the message?

The message is, yeah, we already know how good AI is.

We already get it.

We already know how good Palantir is.

That's why it's a $400 billion market cap on revenue of $4 billion.

We get it.

Everybody gets it.

There's no one left to figure it out.

So

that's really what we're trying to get across to clients.

It's not saying we're bearish on AI.

It's just like, dude, how much more do you think could possibly be in the tank, given that everyone agrees?

But I think

some people would say that sounds a little bit like a bubble.

It is a bubble,

but it could be 1997.

It doesn't have to be March of 2000 yet.

Of course, it's a bubble.

There's a capex bubble every generation.

It's not that rare.

It's not that unique.

We had them in the 50s.

We had them in the 60s and the 70s.

But it always happens.

It's happening again.

No big deal.

It's not a signal to sell everything and hide.

Not every CapEx bubble has to result in a generational crash.

You could just have a bear market follow this.

And what if it starts three years from now?

Think of all the money that you are missing out on making, worrying about it's a bubble, it's not a bubble.

The answer remaining that the diversification is key, I assume, is basically where you ultimately land.

But again, it's an interesting thing because a lot of people, as you say these days, are saying, well, diversification is for losers.

You might as well be in the SP 10.

If I listen, I have some clients where if I listened to them, their portfolio would be like 30% NVIDIA, 30% Palantir.

And by the way,

they would have won big.

The problem is, what does that look when this ends?

What does that look like?

And I want to say one thing about the bubble idea,

and then we can move on.

The 2000 bubble burst,

it's really important.

I was talking to a venture capitalist who was about my age.

We both had roughly the same experience when we started in the 90s.

It was about...

I don't know, let's call it $450 billion in market cap in the stocks

that we tend to identify with the 2000 bubble.

Like it was not large.

$450 billion in market cap.

The combined profits of all of those companies was like $15 billion.

It was tiny, like literally tiny.

Open AI is going to do like $15 billion in profit this year alone by itself.

And when you look at the revenue of the companies involved today and the market cap and the amount of employees and the amount of customers, it's literally night and day.

Back then, forget about price to earnings ratio.

These were companies that were pre-revenue.

No revenue, no business model.

You can't say that today.

These companies are among the most successful companies of all time on every metric.

Tons of revenue, tons of earnings, tons of growth.

So it's not a great analog.

Back then, there were 200 million internet users.

There are 7 billion internet users right now.

It's a completely different world.

So I don't love the comparison for that reason.

And it's almost too easy of a comparison.

Everyone's trying their best to figure out how do we make the analogy.

And that's kind of when you know, okay, it's too easy.

It's too easy.

Yeah.

We'll be right back after the break.

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We're back with ProfG Markets.

Trump has signed an executive order that could reshape how Americans invest for retirement.

The order tells regulators to update the rules for 401ks so that they can include alternative assets like crypto, private equity, and real estate.

Supporters say the move could unlock fresh capital for the private markets while also opening the door for Americans to gain exposure to investments that they are typically locked out of.

So this executive order actually happened a couple of weeks ago.

I've been on vacation, so that's why we haven't really covered it, but it is important.

It essentially means that your 401k manager, so you know, for us, it's a

manager called Empower.

So that's a 401k administrator.

So you have the plan sponsor, which is the company that you work for.

Yes, please tell me.

And then you've got the administrator, which is effectively like the platform that you log into to make your investments.

Yes.

And those platforms can now offer alternative investments.

So private equity, private credit, even digital assets like crypto.

And there are $9 trillion in retirement accounts in America today, and 90 million Americans have some form of retirement account.

So this is a big deal for private market investment.

It's basically opening it up to $9 trillion in capital.

And so I think this is relevant for a lot of reasons, one of which is we've been talking a lot on this show about this idea that retail investors are increasingly locked out of investment opportunities that are reserved for private investors, institutional investors, accredited investors.

We've talked about that as well.

And I've talked about the idea that you've got OpenAI, which is being valued at half a trillion dollars, most valuable private company in history.

And yet, if you're a regular investor, if you're a retail investor, you can't get in.

So

that's kind of another talk track, but it's, it's certainly related.

It's also relevant because you wrote an article about this new executive order on your blog page, downtown Josh Brown.

So, Josh, give us your reactions to the executive order.

A lot of people are saying this is going to open up the opportunities for retail investors.

Now they can get into alternative assets.

And there are other people saying, no,

this is going to sort of expose retail investors to all of the risk and the craziness that exists in the private investment world.

Plus, Trump was being lobbied by all of these private investment groups.

Yeah.

All right.

I think it's a really big deal for the private equity and private credit industry.

I think it's a nothing burger for investors.

I actually, there's no danger here.

The danger is like lagging returns because you're going to take a portion of your 401k, you're going to allocate it into some high-fee private equity fund.

You're going to lock up that portion of your money, which is already locked up anyway.

You're sitting with a 401k for decades anyway.

So that's not a big deal.

So you're giving up liquidity, but who cares?

Because it's not liquid for you anyway.

All right.

So I could see that people saying that's a negative.

I don't really view it that way.

I think the longer you hold investments, the better, personally.

So I don't know that that's definitely a negative in a 401k.

All right.

So put that hysteria aside.

The other thing people will say is like, oh, you're exposing people to new.

You're at at risk anyway.

When you cite NVIDIA is 8% of the S ⁇ P 5, well, what do you think America owns in the 401k?

They're already at great risk.

They already are overloaded in gigantic technology stocks in the midst of a CapEx bubble.

So it's like, it's not like, oh, now all of a sudden they're at risk.

Stocks are risky.

They're inherently risky.

Here's a fun fact.

I don't mean to name drop.

I was talking with a legendary investor, uh, Peter Lynch, considered to be the goat, literally, literally.

Name drop, I was talking, love it, fine, whatever.

I, I'm only, you know, exactly, you own me.

I'm dropping that name, I'm picking it back up, I'll drop it again.

Peter Lynch asked me a question, he stumped me.

He said, Do you know what the average range of a New York Stock Exchange stock is

over the course of a year?

And I was like, the average range, like, like, how much from the high to the low?

And I said, like, 30%.

He goes, okay,

90% of people say 30%.

It's 100%.

He said, he said, Josh, it's 100%.

What?

And I said, what do you mean?

He said, well, just think about it.

A stock starts the year at 20, drops to 14, rallies to 28.

That's 100%

range.

It's not linear.

It doesn't like.

go in the direction it doesn't go all in one direction it doesn't the average stock doesn't double or get cut in half yeah So, like, he's like, people don't even understand the basic, the basics of how volatile the stock market is.

So, I bring that up to you so I could drop a name.

No, I bring that up to you, Ed, because the

stocks aren't doing anything, huh?

Public stocks are volatile, yes.

So, private equity, which is just privately owned companies, that volatility is not like this new dimension of risk.

Okay, so the hysteria around this

is not necessarily founded.

Um, the last thing is,

this is actually really important.

For the people listening to this, everyone pay attention to me.

I hope you already have been.

This is really important.

You're not forced to do anything.

No one's going to shove private equity down your throat.

They might include it as a sleeve in a target date or a life cycle fund, but it's going to be tiny.

You won't even know it's there.

And you can opt out of it if you don't want it.

You could say, well, I'm not buying that life cycle fund because it has private equity.

And I read something about the high fees of private equity funds.

And I don't believe in it.

And I'm opting out.

Yeah, but

those are the listeners of this show.

Those are the people who kind of know what they're doing.

I mean, certainly going to be a lot of people who don't really know what any of this means, but the administrator is going to say, oh, you've got to get into this.

This is the greatest thing since sliced bread.

All right.

So

you won't hear that from an administrator because none of them want to get sued.

And that's one of the interesting things I wrote about.

I agree with you, Ed.

That's not a good thing.

If

planned sponsors start pounding the table to their employees why they should allocate private equity, that's problematic, but there's no incentive for them to do that.

So it's not, I don't think it's a real danger.

What's actually going to happen is

these will be very large providers like Blackstone and Vanguard and huge private equity firms, and they'll create specific vehicles meant precisely for this 401k use case.

So, you are not going to be investing alongside people that traditionally invest in private equity.

They're going to create like a kiddie pool for you.

I'm not saying it's going to be bad.

I'm just saying don't think you're investing with Mark Cuban.

You will 100% are not.

Those people are getting into the top, top, top, top funds.

That is not going to be available through

Vanguard and Fidelity.

It's just, it's, you can't, why would they?

If you're an amazing private equity investor, why would you be looking to take in retail flows?

It makes no sense.

Nobody would do it.

So

I don't think this is that big of a deal.

And I don't think that many people are going to be into it.

The crypto stuff will probably

attract an audience faster.

Young workers who see an option to put 10% of their 401k into a Bitcoin

fund, they're going to do it.

100% they're going to do it.

The venture thing is really where we get silly.

So you kind of interchangeably were talking about open AI and private equity.

To be very clear, like venture capital opportunities do not belong in a 401k.

Just,

it's like the ultimate asset class mismatch.

There's absolutely no reason for there to be shares of privately held experimental companies with no earnings and revenue.

The odds of that working at scale are zero.

The nature of venture capital is like one out of 50 companies turns into something and one out of 100 can outperform regular stock market.

It's like very, very difficult odds.

It's a very specialized market where the practitioners

know what they're doing.

You can't export that into a mutual fund wrapper and throw it into

an insurance company's 401k.

So I don't like that at all.

I don't think it's necessary.

So, in summation, you will see private credit be substituted for some public bonds.

You will see private equity be substituted for some of the equity portion.

It'll be minor.

Very few people will actually be interested.

I don't think anyone's going to be massively hurt by it.

Venture capital in a 401k is fucking stupid.

And Bitcoin is probably going to attain some real fun flows, just given how much young people are attracted to being invested in crypto.

I find it interesting that venture capital is sort of off the table.

It's too silly in your view, but Bitcoin, you don't seem to have, or crypto, you don't seem to have the same view.

I'm not endorsing people do this, but I think it's,

I think it's just an easier, it's an easier rollout into a product at a 401k than venture capital would be.

So you could have an existing mutual fund and some of the large asset managers do this, where they have a sleeve in their portfolio for pre-public, pre-IPO venture-backed startup.

I'm okay with that.

But like you can't invest into Andreessen Horowitz in a 401k because they're not going to give you the access to be able to do so.

So like just, you're not going to get the best of the best.

And in venture capital,

you have to be in the best funds.

You can't be the fourth best fund.

There's just no way.

So I think that's like a very winner-take-all type of investing.

Bitcoin is a commodity.

One Bitcoin is as good as another Bitcoin.

And a Bitcoin fund doesn't need a manager.

So that's where I would draw that distinction.

Okay.

Well.

I'll lay down my views on this.

So I think this has been sort of portrayed as, oh, we are democratizing access to alternative investments.

That's that's been the pitch.

That really has been the pitch.

And

that's the part that I really find a little annoying.

And I think it's especially annoying to me because I've been talking a lot about this, about how the private markets have been getting so big and there's so much money now that they are essentially acting as if they are the public markets.

There's basically no incentive to IPO if you're an open AI or if you're a Stripe or if you're a Databricks at this point.

If you're a big venture-backed company and as you say with massive profits, massive revenues, you're well on your way.

It used to be that you go public to get some liquidity.

You don't really need to do that anymore.

The liquidity is there in the private markets.

And what it essentially means is that if you want to get in on AI,

you only have your NVIDIA's and your big tech stocks to choose from in the public markets.

you can't invest in OpenAI and Anthropic and all of these other AI startups that honestly, that's where the actions kind of happen, at least on the conservation.

The 401k though is not the answer to that problem.

Well, so

fair enough.

And

this is part of my issue here.

So

the way that this has been presented is that now you have access through your 401k.

And by the way, I agree, the 401k is not where you should be putting that money.

But I also think there should be a distinction here.

There's a huge difference between investing in a private fund versus investing in a private company.

If you want to go invest in a private company with some leftover money that you have, I think that would be great.

And the big difference between those two things is, you know, one is autonomy.

I mean, you're kind of just letting these money managers decide what they're going to invest in.

And as you say, these venture funds that are going to go in these 401ks are probably going to be ridiculous.

Either two, the other big thing is the fees.

I mean, you're going to be paying stupid fees for these funds that, as you've pointed out in the past, don't even perform well.

I mean, I think one thing that you brought up in your article is that actually the stock returns on the top private equity companies.

I love this.

The stock has outperformed their own funds.

People hated this.

People hated this so much.

Let's take Blackstone as an example.

Yeah.

This is one of of the best performing stocks in the SP financial services sector.

It actually, when it came public, it wasn't a corporation.

It was a partnership.

And they changed the structure because a lot of funds couldn't own it

as a partnership structure.

They have to invest in corporations.

So all of these companies, KKR, Blackstone, they did these conversions.

And now they're all in the SP 500.

I think Blackstone's up 1,800% since it came public in 2007.

And that's including the stock probably losing like 60% of its value during the 2008 crash.

So this has been a runaway winner.

I can promise you, Blackstone doesn't have a single fund, private credit or equity, that has done as well as its stock price has.

At least I'd be shocked.

I really don't think so.

I know the average fund is not.

So what we did, my research partner Sean and I, is we took the universe of the top 10 publicly traded private private equity and private credit funds.

And you know all the names.

It's Aries, it's Apollo,

it's Carlisle.

These are amazing companies, by the way.

But we took the top 10, we market cap weighted it, and then we equal weighted it just to make sure that we weren't being unfair.

We compared it to Bloomberg has a PE index benchmark.

And I'm sure people will complain about what's in it, but effectively, it's the best way we know of to track the returns of private equity funds.

So basically, we raced the sponsors themselves, like the companies that launched the funds, their publicly traded stock prices versus the products they sell.

And the results are hilarious.

So if you had invested in the market cap weighted basket of the top 10 private equity companies, invested in their stocks, the $100 turned into $264 going back to 2022.

If you had put the money into the Bloomberg PE index benchmark, let's just assume that's like an approximate of the average of all their funds, $100 would have turned into $113.

So it's like not even like, you almost can't even see.

To put it in percentage terms, the funds returned 4% per year, the stocks returned 38%.

Yes, now.

Is it fair?

I'm just using the last three years.

No.

And I don't know what the next three years will be.

Maybe it'll be the opposite.

But it struck me,

why be a player in the casino when you can own a piece of the casino and let other people try to pick private equity funds to invest in?

So I just thought that was an interesting way to think about it.

Yeah.

And I think it's indicative of the point, which is,

I think, unanimously understood at this point, which is that these funds, net of fees, are not very good.

I mean, you compare them to the SP.

The SP consistently, I don't know if there's really been a 10-year span in the history of the stock market where the S ⁇ P has

underperformed these PFAS.

Maybe in the early days of private equity.

In the early days,

like if Mitt Romney was your private equity manager at Bain Capital in 1933.

Yeah, their returns are amazing.

I read Steve Schwartzman's biography last year.

It's incredible what these people have done.

I'm friendly with Harvey Schwartz at Carlisle.

I interviewed him for my podcast.

Well, I'm saying, like, I revere these people.

I think they're amazing, but that doesn't mean that an individual investor needs to own a product necessarily in a 401k.

Like, if the goal is long-term compounding equity returns, I think the stock market's good enough.

That would be my comment.

We'll be right back.

If you're enjoying the show so far, hit follow and leave us a review on Troschy Markets.

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We're back with Profit Markets.

The final thing that I've been thinking a lot here about is this distinction between the private markets and the public markets, which in my view, the distinction is becoming increasingly blurry.

I don't know if you agree with that.

Yeah, but

I mean, the private markets are functioning pretty much like the public markets.

And,

you know,

I just think it's,

I think it's a shame that this is happening because I think it's a shame that we're not having more companies, more

strong,

growthy AI companies that are that have really proven themselves.

They're not going public.

And I'll just put it flat out.

I want to invest in open AI.

I want to invest in all the AI soda.

Or they are coming public, but once all of the money has already been made.

Exactly.

Coming public at a full valuation.

And that's a shame.

And

my issue is, I think a lot of people saw this headline.

They said, well, this solves the problem.

You can get in.

It's like, no, no, no, no.

I can get in in some bullshit basket and pay one to 2% in fees per year and then pay

the 20% in the carriage.

I was going to say, if there's a venture capital fund that's like actively courting

people in their 20s and 30s that are not like

centimillionaires, you probably don't really want to invest there.

The best way to get in early on a hot venture-backed

private company that then goes public is to work there and be paid in part with RSUs or ISOs, some sort of stock option.

That's the best way.

The second best way is is to be like the college roommate of the guy that founds Uber.

Like that's a really great way.

And I'm saying this like half facetiously, but like at the end of the day, life is not fair.

Don't you think everybody wishes that they had the ability to invest in Facebook in 2006?

Like obviously everybody, it's just, it's not going to be democratized because The wealth of the world is not democratized.

It sucks.

Get mad about it.

Start a band.

Put on eyeliner.

You know what I mean?

Like, what do you want me to tell you?

Like, it's not going to be fair.

It's never going to be fair.

So it's become increasingly unfair is what I would say.

It's gotten a little unfair.

One thing that's true, one thing that's true, Ed, and one reason that's true,

people talk about the small cap premium in the stock market, which has vanished.

But there used to be this concept that small caps offered better performance than large caps over time.

And there were all these reasons for it, like growing earnings off of a smaller base and the multiple increasing as companies become more well-known.

Like there are a lot of good that's vanished, and people don't understand why it vanished.

The reason is the best young growth companies no longer come public as small caps.

Exactly.

They come public with $20 billion valuations.

They go right into the SP.

This is my point.

$500 billion valuations.

Open AI is the 19th most valuable company in the world.

It's a private company.

And 10 people benefited.

Exactly.

And my point to you, Josh, is that's new.

That's new.

And

I do believe it is unfair.

And fair point.

You know, I'm complaining.

Go start a band.

Go work for Open AI if you really want to.

Maybe I fucking will.

Maybe I'll be their podcaster.

But

my point is, we, the young people, the retail investors, can't get in.

And I just want to say this because it happened while I was on break.

There was a Business Insider article that came out about this at this point that I've been making,

specifically about how all the best companies are staying private and kind of the shitty companies, sans, maybe Figma, are going public.

And so we're frozen out.

I disagree with that.

I disagree with that premise.

I don't think it's all shitty companies going public, but okay, continue.

Okay.

Less impressive companies.

Maybe I'm being too harsh.

Well, it remains to be seen who's impressive.

You need a little bit more seasoning.

You need a little bit more time for these companies to see which are the good and which are the bad.

We'll table this one and then you and I will get into an argument about this later because we do need to get through this.

I just want to cover this one point.

Joe Wisenthal,

podcaster, Bloomberg journalist.

Shout out to Joe.

That's my boy.

I like the guy.

He came at me on Twitter.

He posted this article.

He said, the way people talk about wanting to get access to hot private companies drives me crazy, riddled with hindsight bias and other biases.

And I just want to say, Joe,

you got to at me next time.

I mean, he screenshotted the article, Ed Elson, Ed Elson, Ed Elson.

I hear people talking about this.

It's clearly, it's me talking about it.

So he's got to at me next time.

That's a vicious subtweet.

It's vicious.

Where he screen grabs your quotes in an article he doesn't like.

That's like

that's that's a very aggressive.

I don't know why he's coming at me.

You and Joe, you and Joe, if you guys, if you guys spend time together, you guys actually would probably be friends.

Joe is awesome.

I totally agree,

but we're going to have to get over this boot.

I'm going to connect you guys behind the scenes after this.

I'll do it.

I got it.

Okay, thanks, Josh.

Let's take a look at the week ahead.

We'll see fresh inflation data from the Personal Consumption Expenditures Index for July.

We'll also see consumer confidence for August.

And NVIDIA is reporting earnings on Wednesday night.

Now, we're recording this just before the Jackson Hole summit where Jay Powell will be speaking, but a lot of stuff going on in Fed land,

specifically Trump asking one of the Fed governors to resign.

We're seeing more pressure on the Federal Reserve.

Any thoughts on what's happening with the Fed right now, Josh, and perhaps any predictions maybe on interest rates or what's going to happen in terms of the

Fed governorship?

What's going on here with the Fed?

All right.

On Wall Street, this is being characterized as Powell's last stand, meaning this is conceivably his last Jackson Hole address.

If you believe the president's rhetoric on Twitter, this guy's out of here when his term ends in May, if not sooner.

So this is really his chance, I think, to cement his legacy rhetorically

at the podium.

There's a lot of people who think he's going to use this as an opportunity to reassert

the need for there to be an independent Fed and to do something that's somewhat politically charged, I actually am predicting I would go the other way.

I think this is going to be more of like, I don't want to say victory lap, but like,

I think he's going to signal that September we're getting a rate cut because the Fed has given it so long and has done what it had to do.

The big debate in the Fed minutes that came out this week,

some of the committee believe that the risk is to the upside, meaning higher inflation, stickier inflation.

And then some believe the risk is actually to the downside because the labor market, by some metrics, is weakening.

So there's not agreement in the committee.

It's not like they all think one thing.

And you had two dissenters on the Fed's last FOMC, where they chose not to cut rates.

You had two dissenters who thought they should have.

And that's, you know, it's not that rare, but it's rare enough that it's worth mentioning.

So I think the Fed is not going to give a politically, I think Powell is not going to give a politically charged speech.

I think he's going to give us a dovish hint, and then in September, he'll follow through with maybe 25 basis point rate cut.

And I actually think he's aiming to cool down the temperature, not,

you know,

stick his chin up and say, come fuck with me.

Cool down the temperature politically.

Yeah.

I mean, that is what is interesting is I agree.

I think he does not want to get involved in a political spat.

By the way, Scott takes the other side of this.

He thinks, oh, Powell's, he says Powell's not going to cut rates because he wants to sort of give the finger.

My view.

This guy

has an ego like that.

Yeah, I don't think so.

I don't think so.

But what you're saying is he does want to turn down the temperature politically because it has become politicized.

The more independently he tries to act as Fed chair, the more he's endangering,

the more he's endangering the independence of the Fed.

This is not the first president in history to have an opinion on where interest rates should be.

This is not the first president in history to try to intimidate the chairman of the Federal Reserve into acting on the administration's best interest.

It's just not.

He has a style all his own.

It's the first president to do this on Twitter.

Important detail.

Important detail.

No, I get it, but

I just, I don't think that Powell thinks what's in the best interest of the institution is to give the middle finger to Donald Trump.

And I also don't think a rate cut would be so crazy.

Rates are too tight for a 1% to 2% GDP growth environment.

If you're basing your opinion on whether or not rates should be cut on the stock market, then you don't even understand how the Fed works.

The Fed is not supposed to be paying attention to the stock market as its own variable.

It's employment versus costs.

I don't think we're in an inflationary emergency, and I think rates are too high given economic growth.

The labor market is not as strong as it was last year, and they did a rate cut last year.

So I don't think it's that hard for Powell to get to the place where he says, all right, here's your fucking 25 basis points, enough already.

And that's what I think.

Well, that's my prediction.

I don't know anything more than anyone else.

That's what I think.

I like that prediction.

Okay, Josh Brown is the co-founder and CEO of Rit Holtz Wealth Management, a New York City-based investment advisory firm managing six and a half billion dollars in assets for individuals, corporate retirement plans, and foundations.

He also is a podcaster.

You should check out his podcast, The Compound and Friends.

Am I missing anything, Josh?

No, it's enough.

It's enough already with me.

It's enough.

Okay.

We really appreciate you standing in for Scott this week, and we hope to have you on again very soon.

Love you guys.

Thank you.

Thank you so much for having me.

Really appreciate it.

Thank you for joining us.

This was great.

This episode was produced by Claire Miller and engineered by Benjamin Spencer.

Our associate producer is Alison Weiss.

Miel Severio is our research lead.

Our research associates are Isabella Kinsell and Dan Shallan.

Drew Burroughs is our technical director.

Catherine Dillon is our executive producer.

Thank you for listening to Profit Markets from the Vox Media Podcast Network.

Tune in tomorrow for a fresh take on markets.

you have

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