We are excited to announce the launch of a new podcast, first principles with Andy Constant. There are a lot of shows out there that give you opinions on what is going on in markets. But the goal of this show is to go deeper. We want to focus on the lessons and frameworks behind what is happening so we can all develop a better understanding of what actually drives markets and the economy. In this episode, we discuss the SpaceX IPO and what the rise of new issuance and IPOs means for markets. We also get Andy's take on AI and the economy. If you would like to continue receiving new episodes of first principles, you can subscribe on all major podcast platforms using the links in this episode description. Thank you for listening. We hope you enjoy the new show. That's, you know, $6,700 billion of shift from share reduction to no share reduction. So that's a big deal. That's a question, which is, is the, are the tokens going to create disinflationary productivity growth, meaning more output for the same costs? So nobody loses their job. And so they can buy the, they can buy the output and the output can be worth the token spent on it. If whale comes down, that will increase consumption on other goods, which is inflationary of those goods, while so corn will go up relative to headline, which will come down. There's no sign that the bubble is about to pop. So consumer disaving still has room to go. Now the thing is, disaving can only go so far. Welcome back to another first principles episode with Andy Constant. You can learn more about Andy and his research on his damp spring sub stack and also on his personal or company's website, dampspring.com. Today Andy, we're going to work through a wide variety of topics with you, including the recent wave of IPOs or at least the SpaceX IPO and the future IPOs are in the pipeline and sort of how investors should be thinking about that and how you think about it. I think we'll get into AI and its impact on growth and corporate earnings. And then just generally kind of wrap up with some of your thoughts on sort of the current macro backdrop and how you're viewing these major asset classes today. One of the interesting pieces that you wrote recently was this piece on IPOs where you were kind of making the point or the argument that in the IPO machine, you were sort of, I guess a little bit tongue in cheek, but maybe not saying everybody lies. All the players in the system are sort of in there from the issuers, to the banks, to the founders, to the institution, to retail investors. Everybody wants the deal to happen. People want to raise money. They want to see the stocks rally afterward. But I thought it'd just be interesting to hear your view as sort of set up this idea of what happens in this IPO process and why all the players want this to work for them. Sure. So, I mean, I think the big takeaway on IPOs is it really, it reaches the core reason for why markets exist. There's nothing more important. We all enjoy talking about trading and as investors were constantly thinking about all the possible securities we could own. But when it comes right down to it, the purpose of markets is to connect those who need money to those who have money. And so in particular, the ability for a company to raise equity capital when they have historically been private has been a critical aspect of the company being able to realize its potential. Without equity capital, private companies just have limited access historically, limited access to investors. So the IPO stands as the sort of the essential aspect of markets. And so it becomes an important thing to watch. Things have changed a lot since then, obviously, in terms of what gets IPO'd and how the private markets work. And at the base point, that's what the markets are for. And so you have to start to ask yourself, so what is a good IPO look like? And there are so many constituents that matter. How would you score or read the SpaceX IPO? Do you think it went relatively well or what was your assessment of that? Well, again, I think it has to be, you have to look at the various interests of the various characters that are involved. In any transaction, the buyer and the seller meet at a price. And in general, the ideal price is the price that neither the buyer nor the seller gets a good deal. They meet at a very fair price. No one gets taken advantage of in that transaction. And so every transaction we do is like not just IPO's, but literally every transaction we do is like that. And so you want the market price to be something that the buyers and sellers agree is a very fair price. These are really not like that in that it's just one transaction that a corporation is doing of potentially many future transactions that they do. And so it's not one and done transaction where you have to get a fair price. It's what I'm really looking for as the issuer is to be able to access the capital markets for an extended period of time for me to be able to reward my employees with shares that they can then freely sell in the marketplace as restricted stock compensation that they think is valuable that companies that we then use our equity to buy in a merger transaction. They think the equity is valuable. So the IPO is just the first transaction in a set of transactions that will really define the life of a corporation. So it doesn't have to necessarily go so well for the corporation. On the other hand, no corporation wants to get ripped off. And when they do sell, often third party investors raise money. So employees venture capital firms, all manner of people who were early investors either were their labor, their contribution in terms of intellectual property, invention, their money in the case of venture capital, they may be selling too. And so they have a slightly different interest than the corporation who's selling because it may be a significant portion of their wealth. It may be all of their wealth that's tied up in that company. And so they want the best price. So you can see how their interest and the corporations interest may not be perfectly aligned. Those are the sellers. The buyers, they want a good price. They're pretty straightforward. They want a good price. And so there are a whole series of buyers that want a good price. And each of them compete and their leverage in the competition to get an allocation varies. And so there are lots of interests on the buy side. And then of course there's the intermediaries, the underwriter, the lead underwriter, the co lead underwriter and the syndicate. And they are trying to get their clients allocations to the deal and they're trying to get the best price for the sellers who themselves have different interests. So their job is to sort of manage that. And then of course there's the underwriters have an interest in making sure a deal goes well for all parties involved because they get a fee. That's good. But more importantly, they get the next deal because they've done a good deal well. The next IPO goes to them. So they're very long term incentive to make the deal work. The regulators, they don't want investors disappointed. They don't want the company disappointed. They don't want anything illegal to happen, but they policymakers in general really want successful IPOs that solve the issue.
and are, as I said, the essential aspect of capital raising in this country and the world. So they want it to go well. And of course, they also want to have the company succeed because that's good for economic growth. Like, a good investment, the company gets the money, they need, they invest it in the real economy. It works, it gets jobs, it gets new output, the stock rallies, all those things are very healthy and good. So those are all the various interests that are at play. And so a good deal is one in which that set of various and diverse interests are all relatively satisfied with how it went. And frankly, in this case, I think it went very, very well. It was the, I don't know if it was the biggest IPO. I think it was the biggest IPO or Ramco might be close, but it was bigger. It was bigger. It was bigger. It was bigger than one. Yeah. It's the biggest IPO in history. That's a big deal. Now it tells you that the capital markets have evolved to the point where a $2 trillion company is going, is going public with an $85 billion float. They don't, they didn't need the money. They were funded plenty by the private market. So it's a very different dynamic. But versus the traditional IPO, which was again a small part of the float typically, which is similar, but nowhere near as big a market cap as the, as this particular deal. But all deals look the same in terms of them trying to achieve those goals. And so one of the, so then you say, okay, what does it mean for a deal to go well? Well, I think the first thing it means is that the shares distributed to the public are kept such that the deals trades above. And there's follow on interest such that the deal trades above its issuance price. Google did a secondary offering, which is quite a bit different in that there's priests that you can, you can sell the stock short ahead of a deal, you can buy. There's a slight different dynamic than an IPO in a secondary. They issued stock at 155, which was doubt, this was last the week before. That was down, you know, five, six percent from where it had been. So pretty significant market impact. But the deal did trade up. And then it traded through the deal. That's not, that's not a great outcome. You want the deal to be well placed with investors and there to be enough aftermarket demand such that the deal trades up. In this case, the deal was priced to $135. It opened at 150. It traded into the 170s. I think it's trading there now. That's a good deal. The, certainly the investors are happy. Some investors didn't get as much as they wanted. But maybe they were buying at 150 and they increased. Other investors got what they wanted and flipped it, which is they bought at 135 and immediately sold at 150 for a riskless profit. That's all the nature of the IPO market is what happens in that thing. But at the high level, the deal went well. I had this one of the most interesting things about your piece to me is I had this feeling that like the, and it is probably from some tech companies talking about this over the years, but that the issue where kind of gets mad if it goes up a lot because they feel like they left money on the table. But you're making the opposite point. You're making the point that even though they've left money on the table, the issue where it wants the thing to go up, right? Perception standpoint. Right. So if you think about the outstanding, they sold $85 billion of stock, call it $80 billion just to make the numbers round and they had $2 trillion of market cap. That means they issued 4% of the total company. I gotta tell you, I don't care if I'm a seller of 90s, 100% of the company, the first 4% if it is a bad trade, but it also makes investors think that this is a high quality company that is hot. I'm happy to sell it a little, give a little bit of money away. Now, as I mentioned, there sometimes are third party selling shareholders and those guys don't want it to trade up because it's literally their money and it may be a significant portion of their money that is getting sold. So their interests tend not to be aligned with the company. Now, the company doesn't want to get ripped off. There have been times when deals have been priced, you know, in using these numbers at 135 and bullmit opens up 100% higher and then stays up. That's a bad deal and the issue is going to be pissed and you are not going to get the next deal. So at some level, your interests are aligned with them. You don't want to make a mistake either and allow it to trade up to a price it at such a level that it doesn't trade up. In this case, you know, I wasn't in any of the rooms by any stretch of the imagination. In this case, it seems that SpaceX had a very clear price. Like, there wasn't much wiggle route. They said it's 135. It happened to be low enough to attract enough interest. It would have been more interesting if they couldn't get the deal done at 135. If then SpaceX would have said, hey, let's do it lower or the underwriters would have stepped in. This case, SpaceX did very, was very aggressive in its involvement in the setting of the IPO price. I think one of the statistics is at least on paper, after the IPO, there was over 4,000 millionaires that were either employees or contractors that had stock in SpaceX. I think over a roughly 400 are worth over 100 million, at least on paper. I'm trying to find a colleague of mine worked at Bridgewater who is now the director of all NASA space missions for SpaceX. She's been there 12 years. The ship's got a pretty good job. Talk to her, but I'm hoping for a big number for her. I'm sure. That's great. One of the things that's changing here in the markets is, and the SpaceX is the first of, looks like, many large IPOs that are coming to market. You have Anthropic, you have OpenAI. We've been in a period where last 10 or 15 years where there hasn't been a lot of IPOs, and there's been a lot of stock buyback. You've had a shrinkage of stock in the market. Over the next year, there's a lot of insight into this new stock coming online. How do you view this difference now, divergence between what going from a net shrinkage of stocks in the market to what looks like is going to be a pretty big supply of new issuance? Yeah, I've published on Twitter. You guys can put it attached to this episode or analysis of the net supply of shares. It's fairly a fairly radical shift. I think it's first important to recognize that when a company buys back their stock, what happens is they take cash out of their bank account and give it to a shareholder who gives them their shares. Now the shareholder has cash and could deposit it back in their bank account. It's so the banking system doesn't really even change, but what happens is there's less stock for the aggregate private investor to hold and the corporation has less cash. Somebody else has the cash. What typically happens is the person who sells their Apple shares into the buyback buys SPY or buys more any other stock, any other stock that Apple, because chances are they're selling their Apple. They're not simultaneously buying it. So they buy other stocks. And so the share buyback not only reduces the shares held in Apple, but at the macro level, reduces the total number of shares available for investors to invest. While their cash grows because the company has moved cash. Issue once works the opposite way. More shares for the investors in the world to invest in, less cash for the investors hold to make investments. And so that supply demand matters a lot. Now is it a fast moving signal? No, no, it doesn't, you're not going to know when this thing what makes a difference. For instance, the last time there was net supply of shares was late 2021. Well, the climate in late 2021 still was pretty good for another three to six months before 2022 happened. And our
you oblique it may not have had anything to do with that supply and demand of stocks. It had to do with lots of other things. But that is what's happening. What's happening is how to how to shares get created and disappear. So they get issued. They get issued as secondaries. They get issued when the company buys another company, another public company with common stock. They get a convert may come, an equity link deal may come, some other type of deal like a SPAC may occur. Each of these are offering shares to the public. Share buyback reduces those shares. So we've looked at how that changes. And during 2023 and 2024, share repurchases were roughly 2% of the gd, the net of all those things was roughly 2% of GDP reduction in share values in count and values. And it's flipped. And based on all the announced IPOs. Based on all what's also happening is share repurchases are being canceled. And video, Nvidia's increasing its share repurchase, but Google and meta are decreasing eliminating their share repurchase. Google obviously canceled their share repurchase and then issued $80 billion a common stock. So they've shifted in aggregate. Now supply is greater than what's retired. Working in 24 in 2026. So that's a big number. That's $600 billion of shift from share reduction to no share reduction. Will it cause the stock market to crash? No. Will it change through time? Well, that's an interesting question. What else is going on? I mentioned Nvidia's increasing its share repurchase. Why? Because they're getting tons of money when they sell their chips. Why are they increasing their share repurchase? It's not because they love their share price. It's because they're simultaneously increasing their employee stock restricted units award, which means they're issuing stock to employees who are then selling them. So Nvidia increased their buyback, but also increased their restricted stock awards, which means they net didn't change. So if you look at that down at the micro level to each of the companies and then you add it all up, there's been a massive switch. Why? Why do people, why did companies need the money? CapEx. Entirely CapEx. The reason why there are less share repurchases, more restricted stock unit sales, and more equity issuance. And by the way, also corporate bond issuance. Why are all those things happen because they need the money to buy chips? And so when I look forward on the CapEx promises that are built into the economy and built into semiconductor earnings, storage company earnings, energy companies, construction companies, anybody, cable makers, anybody that's supplying compute infrastructure that is being bought by the hyper scalers and data centers. The forward looking numbers are enormous. And the companies that are doing the buying have gone through all of their free cash flow, have reduced their cash holdings on their balance sheet, which is accumulate. These companies were all capital light. Now they're capital intensive, so they're not holding as much cash on their balance sheet. Cancel their share repurchase. Begun is showing corporate bonds and begun issuing common stock and increase their restricted stock unit, compensation awards. All of those things are the fuel CapEx. Now CapEx may turn out to be worth it. And in that case, all these equity issuance will easily get absorbed because the returns of holding these equities will be so attractive that they'll spin off returns, either dividends or unlikely more share repurchases going back to that. But right now we're in the phase in which the supply demand has radically shifted. And so that's a negative factor for asset prices. Now is that enough to hold the stock market down? No, not for now. So you look at this more like as a long term headwind. And if you think about we might have $3 trillion right to yours this year, like you talked about it, won't crash the stock market. And do you think like all of that coming online is maybe just a longer term headwind that will have now as we go forward if you reverse buybacks into like all these issuance? I mean, I think it's it's it's a factor. I think as long as so what is clear is as long as CapEx is running at a trillion a year and growing, they got to come up with the money. So they're going to have to keep selling. So does that mean that this is just the beginning? Sure. Sure. I'm sure you guys know of the famous who album, who's next. I've been using that as a meme. Every week we're going to get a who's next issuing something. Today it was Nvidia. Who you wouldn't think needs any money. But they issued $28 billion worth of corporate bonds today. Meta, they're coming. Microsoft. They're still repurchasing their shares so they're not coming this month. Amazon doesn't repurchase their shares. They're coming. They're they're already issuing corporate bonds. So it's just when they start to issue equity. So I look at it as a significant wall of supply being offered in equities that for them to succeed the compute has to pay off. And so how do markets work? They're going to be periods of time where people say yes, the commute computes definitely going to pay off. And they're going to be periods of time where there's some uncertainty on that. And during periods of uncertainty, those stocks that have been offering a lot of supply are going to shred down. Yeah, it's interesting. I mean, all this seems to come back to this idea of is this cat-back's all going to be worth it. And I guess none of us know that right now. But so many topics we've talked about in the podcast seem to come down to that. Like is this going to be worth it along right? And we don't know yet. Yeah. We certainly don't. The way I look at it is it has to come from somewhere like somebody has to buy the stuff. So just call them tokens because that's what they tend to be called. Somebody has to buy the tokens. They have to get value out of the tokens so that the price of the token matters. The value is what they can do with it. And the value is, okay, what can we do with it? We can do one of two, we can really do one of two things at the macro level. We can make more output for the same number, same cost, which includes the cost of the tokens, which is an important thing. But we can make more output for the same cost. That's what we call disinflationary growth. Or we could make the same amount of output for at lower cost. So let's listen to that. How do we lower costs? We have to fire people. There's no other way. If we fire people, how are they going to spend on tokens? So that's a question, which is, are the tokens going to create disinflationary productivity growth, meaning more output for the same costs? If so, nobody loses their job. Okay, that'll work. So if you get truly useful things that aren't useful because they reduce labor, it can work out fine. It can work out fine. If they do reduce labor, you have to say, what's going to, who's going to buy all this stuff? And so that becomes a, you know, a question of what does all this mean? And so at the macro level, the way I think about it is pretty straightforward. All of the corporate output and the profits they make on them are added up in GDP amongst all the other things that we do every year. And we go to the grocery store and buy dinner ingredients for dinner when we then cook them. We have dinner. That's GDP.
GDP. When we buy a token, that's GDP. GDP, real GDP depends on the population and how much they can make, meaning how what they can produce. They can produce more GDP can grow because they have smarter tools. And so I could sit at the pie which we all eat from, which includes the corporations that eat profits from it. We literally eat pie in as human beings. Real goods and services are what we eat of the GDP pie. And we contribute to that GDP pie based on our labor. Corporations manage people to generate output and keep a share of the GDP as profits. If the GDP pie grows, that can be a very healthy because of people being able to be more productive. That can be extremely healthy. And so that's one way that we can, that the AI miracle can manifest itself. The other way is a little more difficult. If we cut workers, the, a corporation can eat more of the GDP pie, meaning it can take profits from the private sector labor. That can be good for their stocks, but it isn't necessarily good for GDP. So when I think about this whole thing, there's the corporations currently depend on productive growth, which again, we don't know if it's going to be productive. Productive growth to create a disinflationary relatively jobless, meaning no jobs get lost economy where top line GDP can outright grow and they can take a share of that GDP. And perhaps take more of a share than they normally take in of GDP because of the extra value they're producing. And in that way, you know, that's how these, these AI investments pay off, a combination of productivity and how much the pie grows and what share of the pie the corporations get. Do you have any feelings on like how realistic that disinflationary growth is? I mean, if you talk to the tech guys and they're talking about their world of abundance, I mean, that's how we get there, I think, is we need the disinflationary growth. But you've studied like a lot of economic history and how realistic do you think it is that that's possible? So I mean, there's two phases. One is the initial productivity and then two is the ongoing productivity. So when you have a productivity miracle, I like to think of it in the in the China example, when you take your citizenry and move them from subsistence farms in which they literally only produce for their own subsistence to cities where they're factories in which they can produce for three of themselves with the same amount of labor and the same potentially relatively similar wages. You have an immediate productivity miracle. All of a sudden the economy had been producing 100 widgets, it now produces 103 widgets and that's fantastic. But then you've moved everybody to the city, there's nobody left to move to the city. The tool has is now fully implemented across the economy. And the output is 103 widgets. But next year it's still 103 widgets. You don't have any GDP growth at all. So firstly, we're in the midst of what I think is likely to be a short-term productivity gain boost because all this spending is going into all this and so you look at the map at the overall economy, all this spending is going into real GDP which is going to boost real GDP, boost inflation, lots of spending, lots of building stuff. That's going to appear to be a productivity because at the same time you're not going to see anybody losing jobs because the tools have yet to be deployed. And then there's going to be a period of time in which the tools are deployed and I don't know how that plays out. You know, there are people that think this is the end of humanity and there are people who think it's the beginning of another golden age and I have no idea how it's going to play out. What I do know is it's going to be messy and I'll explain why briefly. But before I do that, the productivity boom is going to have some legs as we figure out what to do with these tools assuming they're useful. But at some point it stops being the tools are fully deployed and the productivity miracle ends. So that's the way it happens through time. Through history, and this is comes back to the bigger point. Through history, there have been productivity miracles. There have been coal in the energy space, in the assembly line space, railroads. Even the internet have been huge productivity boosters for society. And what happens is there's initially some fear that human beings will never have jobs again. It's happened every time. The thing about human beings, and I think this is timeless in universal, maybe it isn't, but I think it's timeless in universal is humans want to have agency to improve their personal standard of living and their family standard of living. It's they're given a job or given a certain amount of money as a universal basic income. Most are still going to try to make a personal effort to improve their situation in life and improve it in a relative way like beating the Joneses. It's just an actual thing. And frankly, even not even in the competitive sense, just in an absolute sense, you want more people want more and they're willing to work for it. So what does that mean? We're going to find a way. We're going to find a way to contribute even in the most doomed say or type world. We're going to try to figure a way to we're not going to be like that Waleem movie where we're going to be sitting on our spaceship drinking, you know, obese drinking our sodas. We may already be doing that. I admit that. But full on like living in a matrix sort of environment, it's possible, I guess, but my view is that human nature is such that we still will over time find new things to do. The fact is it won't be us. It won't be me for sure. Like by the time this matters, I'm already pretty old and in my dodged. By the time it really matters, you know, I'll be drooling. So my job, if it gets displaced, it's it. I'm going to die. It'll be a fine. The 30 year old who's getting displaced has time to recreate their themselves. And the 15 year rate who is staring out into a place where they may never have the sort of jobs their parents had is already retooling themselves. So that's my point. It'll be messy. And when it's messy, that'll create societal challenges that'll create policy maker challenges. I suspect all of the and all those things have happened before. And so they will happen again. I want to shift to the current economy and markets. And it sort of ties into this because in terms of it, getting your your view on the current economy, like a lot of people have said, this is the current economy right now. Like this new era spending, this cap X, like this is the only thing holding up the economy and the rest of it is kind of, you know, just kind of middling along doing nothing right now. So can you just talk about that and maybe talk about your view of where the economy is right now? Sure. The economy is pretty good. When there's a significant portion of the economy, the GDP, that is the direct beneficiary of large cap acts. It's a battle that shows up in the numbers. And it's supportive of this. It's moving faster than trend GDP. Consumptions doing okay though. And that's really the big thing. Like when you think about share of GDP, the share of GDP that's personal consumption is, you know, two thirds to three quarters of the economy. Huge, huge. It's all that matters. It's doing what we do. It's 350 million people going out and doing stuff every day. Some of us are using AI a little bit. Very few of us are actually in the business of building a data center and very few of us work in tech.
teachers were firemen were construction workers were lawyers and doctors and healthcare professionals were we're doing all sorts of things that have nothing to do with this topic. So how's that going? It's going pretty well. And why is it going pretty well? So far our job market is doing okay. And part of the reason our job market's doing okay is because no one can get into this country to take our jobs. The job pool is flat static. So you don't lose a lot of jobs when the job pool is not growing very fast. There's some demographics in that besides immigration. So that's keeping us in our jobs. And this new age catbecks is being built. It isn't displacing any of us yet. People may not be hiring as aggressively, but no one's getting fired because of AI because frankly we don't know how much it's going to cost. You're seeing a fair amount of token price subsidies while also hearing a lot about people replacing one worker with three workers worth of token purchases. There's some dynamics that have to be worked out and people don't know how reliable it is yet. What types of missions they can reduce workers. So employment's okay. But employers don't employees don't have a lot of wage leverage because of the pending doom of their jobs. And so unfortunately real wages are not keeping up with real growth. And so that's not good. That's not a good thing. So you ask how are the consumers able to continue to consume. The answer is extreme wealth effect. So prices, homes, everything that people own. Mostly people who have assets so it doesn't it doesn't affect the whole economy in the same way. But a lot of us have assets. And so we can disave. That means we can sell our assets to somebody else who's happy to buy our assets with some of their cat. Because you know they have an appetite for assets. But an aggregate if we disave that allows us to consume above our means. To replace the consumption we would have been unable to buy because of our flat wage real wages with assets. So that's been supportive of the consumer for pretty much since you know for the last three or four years. And so it's an important aspect of the economy. And you know equities are about to probably go through all time highs on the S&P today. So the market is solid crypto gold commodities pretty much they're all doing okay. And so and houses are doing okay because no one wants to sell their house. So there's just not enough housing supply. So you look at all those things and you know there's some weak areas of the economy. Don't get me wrong. Not everything's honkydory but the big thing the consumer and this very strong influx of catbacks. Don't okay. And that's keeping inflation on comfortably high but also keeping real real growth fairly strong. The question is how long can it persist and that's that's unknown. You know in policy makers matter. So the real spirits matter were in the midst of what I call a bubble in tech stocks that supports do that supports. Disaving big rallies and asset markets. So it can go on for a long time. So yeah, I think you just have to ask how could it end and usually what it ends is policy makers are act because they can't handle the inflation. I don't see on Friday on Wednesday. I don't think I don't think. Worsh is going to make news at all. He's certainly not going to start hiking. Particularly now that oil prices are falling with the relatively good news from the war. So that's not going to kill a bubble. So keep your eye on that can offset a lot of investment frenzy. And so I'm paying attention to that but there's no sign that the bubble is about to pop. Now the thing is. You can only go so far. You this is a real life thing that when you are selling assets because your cost, your annual budget is above your income, particularly if you're elderly, but also if you're just anybody. You tend to get to a point where jeez for one, you're not shrinks. Right. How much assets you own shrinks as you sell them. And two, you start to say, maybe I should change my behavior. Maybe I should look to get a better job. I can't do that. Maybe if I'm already retired, maybe you just maybe you can zoom less. And so that can the disaving can go pretty far, but it can't go infinitely for savings on the other hand can go very, very high. People can not consume a lot. So currently we're in a pretty low savings environment. And so you know, at some point there could be a squeeze. But I don't see anything that's worrisome right now. Just one word for hand it back to Justin. You mentioned the war. How do we think about the lasting impact of that? And then you've got some people who say, all right, well, prices went up. Now they're coming back down. The war seems resolves. Not too much of a problem. People are saying, although this is going to have lasting impact. Inflation is probably going to keep going for a little bit here. Like how do you think about the lasting impact of the war? Now that it appears to be resolved. I've never been a big, I think oil prices matter at the margin. But I've never been a big fear monitor or euphoria for the direction of any wars. I mean, I mean, listen, there have been some wars that you should probably have paid attention to. But I think it was not one of them. If you made your energy thesis based on the Ukraine, your long oil at much, much higher prices. Maybe you got out on this war. But if you made any sort of stock or bond bet based on what happened in Ukraine, you're you got crushed. Similarly, you know, people make bets based on the war. But you know, there's wars that matter. For two, that mattered, you know, for Germany, particularly, but also for the UK anywhere where they were was a physical thing, ruining your means of production and directing production to nonproductive goods. That can have lasting century long impacts. But that's not what we have here. We've had in Iraq war two of them. We've had the war on terrorism in Afghanistan. That region has been lit up for as long as I've been alive basically and just doesn't matter to the United States economy. Just doesn't matter. Sure, we can pay a little bit more. We can't pay a little bit more at the pump that could hurt demand for other goods, at least we were. But those are small issues. Tiny issues. And so listen, I think it's good. If if oil comes down, that will increase consumption on other goods, which is inflationary of those goods. So corn will go up relative to headline, which will come down. Okay, we were still got it inflation. The oil inflation will just be replaced with some other inflation as long as we continue to spend in the consumer dissaves because of, you know, very easy financial conditions and very robust economy. Inflation isn't going to go away. It's just going to shift from oil inflation to some other kind of inflation, you know, as oil prices fall. So I'd, again, it's difference between headline and core. We had headlight, the war caused headline to go up and core to stay flat. Headlight is going to go down and core is going to go back up. And so that's just how you measure it. And so for me, I think we've been at inflationary environment for five years. And there's no sign that the central banks are willing to do anything about it. That's bullish assets. And bullish the economy. It's not good for people who actually have to buy stuff, but I've got to read this post on X because it's such an awesome point. And so, Jaylen Brunson and Andy, this is on your account. Jaylen Brunson took 113 million less by signing for four instead of five years, which enabled the next to sign talent, which helped them win the championship. my question is if he stays healthy, which is a gamble, is he ahead by more than
than 113 million as of today in expected lifetime earnings. Then you roll, I don't know, let's all just use a word crap, but I'm a huge nix of Nova fan. I thought that that's just like so awesome. - Yeah, I mean, I have, listen, I have four kids, three of them went to my alma mater, Penn and one went to the Lenovo. And arguably, Penn's sort of more, prestigious school, but holy moly, my daughter had a great experience at the Lenovo. She was on the dance team. The dance is like the Nick City dancers with, but it's Villanova. So, I mean, it's a Catholic school. They're not, they're not the Nick City dancers, but they're almost the floor, the whole game. And when did she start? She's MacKale Bridges and Jalen Brenson were freshmen when she started. She became good friends with them and Dante and Ryan Arch, I can never, Ryan Arch. And Chris Jenkins, who made that wonderful, final basket in the first NCAA championship and Josh Hart. And so, I got to see those kids play many, many times and follow the team. Just great kids, the J-Write, unbelievable coach. And it's, you know, I'm not a New York basketball fan, but I'm a Celtics Red Sox Patriots, Bruins fan, but you gotta love these guys and you gotta love the Villanova team. So, it's been a fun run. Yeah, and Brenson was so just, I, he appears to me just like a humble character, such a team player. Jack, I know you're a big next fan, so you were a half next fan, so yeah, this is a great team to do it to, because they do seem like good guys for the most part. Their team is easy to root for, I think. Yeah, sure was. I mean, even Cap, Cap too. I, it's a shame Dante wasn't on the team. He was really a fun, the fun guy he played for the next for a period of time, but they needed to trade him to get cat, I guess. So I guess if we wrap up Andy and Jack feel free to sort of chime in here, what, what are you paying most attention to sort of as we head into the summer months here? I mean, the market's up on this Iran news now, but of course, a lot could change is just a day, but it seems to be reacting positively to the, you know, some type of deal taking shape here. What's on your, you know, what's on your punch list in terms of what you're paying attention to? Well, I mean, the same things I always care about. The, I think the central bank is in, well, it's a big deal. We got a new Fed share. I think the new Fed share is gonna be a serious guy. And he has the luxury of really not having to do anything right now. So he can build his credibility, and I think he will, without having to act. And so that'll be the sum he'll, he'll kick it off on Wednesday and then he'll follow up in July and he'll start guiding the big things the Fed does without having to actually pull any of the levers. But if he pulls a lever, that could be interesting. Like if he cuts any shouldn't be, you know, I don't think he will. I think he's a serious guy, but I'm gonna make sure he doesn't do anything wild. Um, on the fiscal side, there's very little limited room. There was a period of time where it looked like there could be a, another reconciliation bill that's stimulative. That seems to be passed with the skinny stimulus bill, the skinny bill reconciliation bill, which just authorize the DHS stuff. So I don't expect fiscal stimulus. On the other hand, and this is just not even being discussed. Tariffs need to be replaced by July 24th, or else they go away. Just disappear. Now the, there, there's been tariffs announced and there's been all manner of future tariffs that are likely to be announced. But as of the moment, the administration is not particularly doing much to slow the market or slow growth by impact, by reinstituting tariffs. So I'm paying attention to that. Um, and then I guess the big thing, as I said, I don't think we're going to get any answers whatsoever on. CapEx at its return to on investment or, and it's just going to keep flowing. They're going to keep buying chips and storage cables and building data centers and they'll need to fund it. They will fund it. They'll do the IPOs that supply that I talked about will flow from, um, and have its impact most will likely be absorbed. Um, but then it'll continue. But I don't think we'll get any resolution of any, any matter whatsoever on the big issues around AI and it's at its return on investment in the near term. I don't think we'll get it in 2026. Um, we will get real feedback on how the issuance goes. And so I'm paying a lot of attention to that. And then what's left? Do you have a, I'm just curious, um, on Worsh, you know, I know he's, people have talked about him having a very different view on the balance sheet with the Fed. Like, do you expect anything to change there with him with respect to Qt or how they handle the balance sheet? Um, that helps. So, I hope so. I've been a pretty strong advocate that the part that one of the major reasons why inflation is persistent is the, um, what is the Fed has loan, um, it's balance sheet management from the beginning and even still. And so I would hope they do something to change their balance sheet policy. He said he's interested. I know from personal contact that there are a number of people in the Fed that simply don't want to change the balance sheet policy. They, they've resisted it. And in fact, gone back and increased the balance sheet. Um, so I think there's a constituent there that's really against any tweaking lower of the balance sheet or changing in its composition. Um, and so he's going to have to work pretty hard to get that done and he may not be able to do it. Um, so I'm paying attention to see what he said. He seems to be going in the right direction. And that direction is he thinks that short term interest rates could be easier lower while any easing that created could be impacted by running more of the balance sheet off and changing its composition. He said those things, bests and agrees with those things. Guide Steve Myron, who's his, you know, the stooge from the administration says all these things and has written all these things. But there's no, no movement. And part of that is because the fed as an institution is resistant to changing its balance sheet because they seem to not understand. For think somehow that inflation is supply shock oriented and it doesn't have anything to do with them. And they're just completely wrong about them. And so yes, I hope you will. If he does, it'll be years of tweaks. It won't be where we're reducing the balance sheet 500 billion in 2027. That's just not going to happen. It's just not going to happen. It's going to be tweaks. And so like the supplier issue, it does, it does, it creates a headwind. And when the tailwinds of speculative frenzy, bubble dynamics, AI investment, all those sort of things turn, those headwinds can overwhelm. But there's no sign of it right now. It's just a, it's just a, it's just a slight breeze that may get a little strong. Thank you very much, Andy. Always very thoughtful. And I know our audience appreciates it. We will see you next month. Thanks guys. Go next. Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the excess returns network at excess returns pod.com. If you have any feedback or questions, you can contact us at excess returns
[email protected]. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.
PodcastTranscript AI