Title: The AI Demand Is Real. The Accounting Games Are Growing. How Long Can Both Be True? Show: Excess Returns — weekly wrap Hosts: Jack Forehand, Matt Zeigler Clipped guests: Dan Niles (Niles Investment Management) · Ben Hunt (Epsilon Theory / Second Foundation Partners) · Cameron Dawson (NewEdge Wealth) · Dave Nadig Date: 2026-09-07 URL: https://youtu.be/ks0DhmOPTj8 Length: 49:19 (2959s) Note: YouTube auto-transcript. Fillers (um/uh/you know) and stutters removed; wording otherwise verbatim. ">>" marks a speaker change in the source captions and is retained.
00:02 Welcome to the Excess Returns weekly wrap. I'm Jack Forehand, joined as always by Matt Zeigler. Matt, what's going on? We have made it through yet another week. I am endlessly amazed by the through lines that emerge when we pull these up. I can't believe how connected some of these clips are and it's a beautiful thing.
00:18 That's what I >> But first before we get going, I got a little aside here because you do this podcast all the time. You're like, are the viewers seeing the real me? And you don't know. But then last week, as you know, we got a comment. And that comment was, "My god, Jack looks like such a badass.
00:33 AI didn't do that. Jack comes across as a grizzled veteran boxer coming off that private jet." This is for Last Call where we have us coming off a private jet, which is a fake AI video for anybody who hasn't seen it. Send that to Hollywood. Somebody's going to want him in a movie. And so I feel like the viewers may not have been seeing the truth the whole time, but I feel like the most seen I've ever been on the podcast here because of that.
00:54 So I'm going to let the viewers in on a little secret. Jack is the grizzled boxer. He really is. He really really is. He's the Bruce Willis of Excess Returns in so many ways. And that's part like boxer Bruce Willis in Pulp Fiction, but also just the consummate badass from the Die Hard franchise.
01:13 Before we press record on every episode, he turns to me and he says, "You be cool, melon farmer." Because he self-edits. Because he knows. >> Yeah. So they say there are no more great action stars in Hollywood, Matt. So who knew this random quant nerd guy sitting on a random finance podcast was the answer to this.
01:37 >> You're the last great action hero. What's the name of that movie? Schwarzenegger. Who was that? That movie? I don't even remember. >> Deep cut, kids. Tell us in the comments. >> You know what's funny though, Matt, is our good friend Ayesha Manan is this. Have you seen his boxing videos? He puts stuff on Twitter.
01:52 >> No. >> Oh, yeah. You got to look this up. >> I'm not asking him any difficult questions when I have him on. I'm a bit scared. So >> well, I'm already planning on trolling him with a Pro Bonds episode in the next week with my Janus Henderson people. So we'll see.
02:11 Hopefully he won't come with a headshot for me. But no kidding. Boxing, I don't know. Can you take a punch to the face at your I know you're a young man, but could you handle this? >> I'm sure. Yeah, I don't want to find out. >> Yeah, I don't want to find out. I think >> there's an age you get to where you're like, this is just not
02:28 >> I could understand boxing for the physical training. I cannot even imagine. I hit my head coming out of my basement on the low ceiling thing the other day. Barely bumped it and I was like, well, I'm hung over for two days now. Not concussed, nothing serious, no blood, but I can't imagine willingly taking a shot to the face.
02:51 So, Ayesha, you are the second great adventure hero of Excess Returns, Jack Forehand. >> Yeah, maybe him and I, a little duo type thing. >> No, what we need is we need an AI segment where you get off the plane and then he tries to fight you and then he just knocks me out basically, right? >> Like he comes from the side and just punches me in the face like in the video and I just go flying.
03:07 >> We're going to do the Indiana Jones thing. You'll fight on the wing. Feed him into the engine. >> Next time bonds rally, we'll do that video. So anyway, we've got way off on too much of a tangent this time. Let's get into our clips.
03:23 We had Dan Niles on the podcast for the first time this week. We had Ben Hunt, second episode of Why Am I Reading This Now? We had Cameron and Dave for Clip Beta. We got some awesome stuff here. Dan was pretty cool. Got to be honest, I wasn't sure exactly where this one would go.
03:38 You guys got some amazing stuff out of Dan and not not your standard takes. >> Yeah, and he's really great. Some people see him, he has a lot of tech analysis, so some people see him for that, but he really can look at the whole big picture. He's someone we wanted to have on for a long time and we just emailed him and he said yes.
03:53 So we were really excited about that. So we should probably get in the first clip here. And this is interesting because this is something I brought up with him and you hear it a lot now, which is this idea that with AI, there's very very smart people running all these companies. And how could they be wrong? They're spending massive massive amounts of money, but you look at like the people that know the most about this are spending the most money.
04:16 How could they be wrong? We asked Dan that question. >> Well, for anybody who believes that they should go on to Cisco's investor relations website, pull the earnings release from May of 2021, if memory serves me correctly, where the CEO of Cisco Systems says we've gone from 70% year-over-year bookings growth in several months to negative 30%.
04:42 Year-over-year bookings growth and they were at one point the most valuable company in the world. So to your point, yes, are these really really smart companies? Absolutely. Are they the best companies that we have right now? 100%. But do massively smart, big companies get it wrong? Yes, all the time.
05:10 And that's the thing about bubbles is they're great to be invested in. You can make a lot of money if you stay with them, but obviously you have to get the timing pretty well because you never know, is this the actual break or is this just a pause that refreshes? And when I put out that note on June 20th, I said, "Look, I think we have a short-term problem here.
05:37 We have a speed bump." And then I put out that note on July 29th saying, "Hey, I think we're near the bottom. We should be able to see things starting to rally again." The backdrop of all of this is agentic AI is new. We first heard about this thing called Open Claw being formalized on January 30, right? That's what, seven months ago?
06:03 So it's brand new. We didn't have that with the internet if you think about it, right? There wasn't a new thing that came out for the internet. If you look at AI, you've had distinct phases, right? You had the training phase initially, then you had the inference phase, and then on January 30th of this year, you had the agentic phase.
06:24 And the agentic phase uses 10 to 100 times more tokens than the chat-based AI phase. And so I think you've got a long way to go, at least another year for stocks to go higher. But I do think it's getting, like what I said about the Chinese memory companies, I do think you're going to have to get more selective and then watch the data like a hawk to make sure that you're not deluding yourself either by being too negative or being too positive.
06:55 So I fall into this trap a little bit, Matt, because I do think that I listen to the CEOs, I listen to a lot of tech podcasts just because I'm so outside of that in the real world, and it all makes complete sense, but then I feel like I wish there were podcasts back in the 90s where I could have listened to the CEO of Cisco doing the same thing and I would have been like this makes complete sense.
07:14 So I think it's important to realize they are very smart people, but you also have to recognize everybody gets trapped in this bubble and everybody sees what's in front of their eyes. And that doesn't necessarily mean that we're not in a bubble just because all these tech people are saying very positive things. It's the Bob Farrell-ism.
07:30 It's a common sentiment thing. It's people saying the same thing or the same version of the same thing. And that's the one contrarian itch. Not the one. It's the biggest contrarian itch I feel when I look at these S-1s, when I look at these companies going public, when I listen to stuff off of the earnings calls.
07:50 It's all of these guys believe in the same version of a very rosy future. And I'm just too much of a pessimist in my own life in so many ways where it's like, oh, stuff's going right. Something's about to go wrong because that's the way the world works. Do your earlobes itch with the same feeling? >> Yeah. No, I agree.
08:09 To be honest, I'm going to need you to come over here at some point and just when I'm listening to the All-In podcast and agreeing with everything again, just come rip the AirPods out of my ears, throw them in the pool and be like, "This is not" >> I won't knock you out, but I will tear those little earpods.
08:23 >> You and Ben Hunt together need to come have an intervention here to be like this cannot continue. >> The common knowledge deck. But the idea and the way he's painting it, and I think this is also important too. It's easy to look at these arguments and you want to take people and just say, "Oh, those guys are over optimistic.
08:40 They're idiots." No, they're smart people. They're smart people who got to this point and you should concede the idea that there might be an intelligent person on the other side of this and they might be right. And by the way, this doesn't mean the tech guys are wrong either. It just means you need to balance both sides of this and understand the facts on both sides because there are things that are different about AI.
09:01 I mean, number one is there is massive demand for it now which is very different in the late '90s where we were building in advance of demand. And there are things like governors that are limiting it that might make it not as much of a bubble as it could be. So it's not like they're all wrong about it.
09:15 It's just I can't sit here and listen to the All-In podcast and drink the Kool-Aid the whole time and think this is going on forever because that's just not accurate. The point that he made about training to inference to the agentic phase and then we have another phase of this agentic part that's still coming — and I'll say I'm seeing this talking to clients, talking to companies, in particular especially talking to companies. They are just now feeling the agentic lift in a bunch of areas.
09:44 Companies who have adopted this stuff are all of a sudden saying, oh, now this part made this aspect of my life easier. That's happening right now. That happened literally earlier this week talking to a client about this kind of thing today and they're seeing it in their own business.
09:59 So when he came and said, "I think this part could be a year more," it's yes, I know that client's going to turn around and is willing to spend more budget, spend more of their money on doubling down on some of these tools because this is the part where they just saw that return. That runs counter to the way I feel, which is like everybody's been doing this already.
10:17 Yeah. This is the part where I do drink the Kool-Aid a little bit because I do think the Excess Returns podcast has seen an increase in the ROI in the agentic phase. It's made huge differences in what we could do. So I do think maybe you might start seeing more and more real world results because to the point — I forget who it was, I think Kai made the point in that podcast — about like it took forever for anyone to adopt Excel 1997. What you and I are doing is not what the average person
10:41 >> No person does. >> Yeah. And we're not even — there's early adopters that are way beyond me that I'm trying to figure out what they're doing because I feel like they're 100x beyond me, but as the average person in the average business starts adopting this, you probably are going to see more and more ROI.
10:55 It doesn't mean we're not in a bubble. It doesn't mean this whole thing doesn't end badly. It just means we are probably going to start seeing those results. And I think it was good that he delineated those three different things. The agentic phase is different in that first of all, it uses way way way more compute, but second of all, we might start to see more and more results from it.
11:14 I think this was the most useful framing of this phase of the argument that I've heard yet, and again anecdotal experience. But if we're seeing some of the software companies and the software sector, who is recovering off the lows — at least we'll see what happens with software. But if software is adopting some of these agentic tools so that the person who's not the early adopter on the crossing the chasm math, they're that sort of later adopter or that next phase,
11:38 if they're starting to see returns, they're not just going to do this once and then say done. There's another investment cycle that now follows with the software delivering of agentic stuff where people can see that ROI. This is the most compelling bull case framing I've seen of this, to stage it out the way that he did.
11:56 So this next clip I picked because I think it's one of the most important things in investing. I think it applies to everything, life, investing, everything. So here's Ben Hunt talking about credibility. >> I learned from my mentor, the people who hired me when we got into this crazy business of investing other people's money.
12:13 And I know you know this Matt, but in this business your reputation is everything. It's everything. And there is never — you should — this is a wonderful career to have in investing and financial services, whether as an adviser like you are or whether as an asset manager like I've been and I've tried to do. But through all of this there will always be places where there'll be a temptation to cut corners or to just — we all know what I mean, right? And you can't do it.
13:00 You should never do it. There is no possible advantage on a trade or with a client or anything that should ever let you do anything that chips at your reputation. Because once you break, once you crack your reputation, you can try to glue it back together. That's why I use the analogy of a teacup.
13:31 You break or you chip the teacup and you can glue it back together and it can still be a functional teacup, but it's never the same. It is never the same. So credibility, whether you're a Fed chair, whether you're a financial adviser, whatever you do here, credibility, your believability, your reputation is the most important thing.
13:54 And you can't put that ever at risk. And that's what's happened, right? So the teacup has been broken. The teacup got broken with Kevin Warsh at his press conference at the end of August — sorry, at the end of July — where they didn't hike rates. He was talking like he was going to hike rates and they didn't do it.
14:22 It would have been easy for him to do and then if he had, we wouldn't have any of this now. You would be cemented in everyone's perception as, yes, you said what you meant and you meant what you said about being an inflation fighter, and so now we believe you, and then that's when the market does the work for you as he likes to say is the goal here.
14:45 But when you come out and you say what he said, which is basically new boss same as the old boss, lots of words, lots of talk, but they will never do anything to raise rates if they can possibly help it — then that's when gold skyrocketed. I'm going to show you stuff on our narrative signals.
15:12 This shows just what a supernova this was at the end of July when he basically broke his credibility as being an inflation fighter. Now he's tried to reclaim the credibility at Jackson Hole with his speech last Friday. And the market correctly said, "Oh, this is a very hawkish speech." But he's got himself in such a bind now because it'll just be more words.
15:41 It'll just be more words if he doesn't actually pull the trigger on hiking rates in September. And I'm telling you, for all the reasons we're going to describe here, no one in this administration or in markets wants him to raise rates. They really don't want him to raise rates. But now he's painted himself in a corner.
16:01 He's trying to repair his credibility. And it just makes it more difficult for him. It's the problem of you're trying to glue the teacup back together and it's never the same. I don't know, man. I'll let you start with this, but I just thought this was — I put this on Twitter too because I think this is just a really good clip that we all need to think about because your credibility is everything in investing and in life, and he was talking about it with respect to the Fed, but it really carries to everything. Once that
16:26 credibility is broken, you have to do so much more after that than what you would have had to do if you maintained the credibility. He was talking about this with respect to if they hiked once, they would keep that credibility. They would avoid hiking three times. But I think it carries through to many different things.
16:42 There's this weird thing in the Fed — Ben didn't say this, I am saying this — there's this weird thing with the Fed and it's kind of there's Paul Volcker and then basically everybody else. >> Do you feel this too? Yeah. That is true. And I think there is a pedestal that we have put — not saying he shouldn't be on a pedestal.
17:02 There is a pedestal we put Volcker on for what he did both in a sense in defiance to the politicians but also in defiance to market participants and others, where we say that is Fed credibility. That is Fed reputation. That is the pedestal we look to when somebody talks a big game. And nobody has talked a big game and delivered on those words since Paul Volcker — in little ways a little bit, but nobody has done it like that.
17:34 So when we were watching this Fed transition from Powell to Warsh and we were getting all these things about rates should be higher, I would hike, the critical stance — okay, here's your chance to be this much Paul Volcker. And he didn't do it. And because he didn't do it, what Ben's saying is now everybody looks and they have the data on this and says, "Meet the new boss, same as the old boss.
17:59 This is just the same story again from another Fed chair who wanted to talk like Volcker but wasn't willing to act like Volcker." And now he's seven steps down. And so if he does have to hike, even if he does have to cut, it's going to be viewed in a very different way by market participants. >> Yeah.
18:14 What's interesting is in a world of no forward guidance, the way you maintain this credibility now is action, because before the Fed might have said the right things and the market's like, all right, they're fighting inflation enough, we know they're serious. The only way you show you're serious now is action, right? The only way you show seriousness is action, because this is the — not surprise sneak attack — but this is a "I looked at the data, here's where we were decisive." And what we just got here was I've got
18:44 too much pressure to be decisive even by a little bit. And to Ben's point, even if he had just done one thing to show decisive action, he didn't have to do anything that would break the market. He could have turned around and cut rates at the next meeting basically from this or undone what he did, and that would have still preserved more credibility in his seat.
19:03 It's a weird thing to wrap your head around, but when we look at the price response in other categories, mainly in gold, mainly in some of the other parts of the market, you go, this has felt across it in a way that you can actually map into prices. And that's a really interesting and useful thought exercise for wherever these markets go next.
19:23 >> So this next clip is Cameron Dawson. And this is something I think a lot of us are thinking about because obviously in the late 90s you had what she called financial shenanigans going on. Did you read the book? Do you know this book? >> I do not know the book. >> Okay. >> I saw she showed it on the bookshelf behind her, right? >> This is an awesome book.
19:38 It is super accounting nerdy, but >> I like nerdy though, Matt. >> I know you do. >> I know I'm an action star, but I also like nerdy. Those two things can exist together. >> Let's be honest, you got best of both worlds right there.
19:53 So anyway, here's Cameron talking about that. >> So I'm also sitting in front of a book that's called Financial Shenanigans and I see
20:22 >> that's the accounting book on the shelf right there. >> Yeah. And financial shenanigans, I feel like they're cyclical. You typically don't see shenanigans as bad, as prolific, as widespread when things are in the earlier stages of an economic boom.
20:22 You see the most shenanigans at the end, at the crest, as you're going over the apex, and you start to see shenanigans in the descent, but then things start to clean up. You have credit issues kind of get washed out, and then you reemerge the other side. And the shenanigans that are popping up are all over the three different financial statements.
20:47 You know, we see for example, Nvidia extended its accounts receivables in order to help its customers. Well, its customers are the hyperscalers who had extended accounts payables, which flatters their free cash flow. So it made Nvidia's free cash flow look worse, but it made the hyperscalers' free cash flow look better.
21:11 And if you then normalize that, we would have probably seen even more negative free cash flow numbers coming out of the hyperscalers, because remember if you were to have normalized payables, it would help your cash flow from operations, and we know what's happening within capex. But then there's even games now being played with the capex side of things.
21:37 So Microsoft lowered its capex guidance because it reclassified financial and operating leases that move certain parts of its capex down from operating cash flow into investing cash flow. And so the capex calculation that they use looked to be lower than it actually was. Then you add on top of that, there's a bunch of stuff that's not even hitting the balance sheet or cash flow statements because it's all happening in these SPVs.
22:03 And these SPVs are super esoteric and very murky and we don't know what's going on in them and we don't know all the different players and we know that they're private, etc. And so we cannot ignore the fact that as you start to see more games being played, and then the clarion calls saying no it's not circular financing, it just ends up causing us to raise a lot more eyebrows because it doesn't make you feel good.
22:33 If things were as great as you say that they are, you should not have to be playing the games that you are playing. And there was a great article in, I think it was the FT, effectively saying Microsoft has done a terrible job at disclosing its AI business and it hides it in with a bunch of other businesses.
22:56 It makes it really murky and hard to see. And there's a really fun accounting thing that's going to happen because there's two different ways that you account for investments in other firms. One is called the equity method which has to be consolidated into the income statement, and is when you own a certain percentage of a company — if you have a controlling stake, effectively not controlling stake but a certain degree of stake in a company. Well, Microsoft owns 25% of OpenAI and so it accounts for it within the
23:27 equity method. We're going to be having to see a lot more disclosures about these companies over time. One last thing on all of this is we have the contribution as well from these one-time gains, from the security gains that are skewing all of these GAAP headline earnings numbers. And it's one of the reasons why I think as we go into '27, we could be talking about negative year-over-year growth in a quarter like the second quarter simply because you have a big huge gap of missing one-time gains that are
24:01 reported in the headline numbers. And the important part of that is that Google, Amazon, they only report on a GAAP basis. They don't report an adjusted number like some companies will. And there's a lot of issues with adjusted numbers, but the point is accounting is not something that people care about till the peak of the cycle.
24:23 >> So this is what was interesting to me. I was thinking about this Damodaran interview too that Kai did recently, because on one hand Cameron is certainly right. You're seeing more and more of this shenanigan stuff and stuff that even I wouldn't understand in terms of what's going on and how things are being treated on the income statement and the balance sheet.
24:39 So I think that's true and that's going to become problematic because it always becomes problematic in these things. But also I was thinking about Damodaran and he made that point about like who cares about how depreciation is being done for a young growth company, that should be not even the top 10 of things you consider.
24:55 So if the growth keeps going on and if it's legitimate growth, this stuff probably will go to the wayside for a period of time, but we also know it's going to escalate to a point that it's going to be a problem, because when there's money in front of people and there's a big revolution like we're having, it happens every single time.
25:10 And this is Cameron's point that shenanigans are cyclical, which is a really fun thing to say. I'm really happy she put it this way. Shenanigans are cyclical and then that means they basically spiral up. They spiral up at some point. They blow up in our faces and they crash down. What's great about the book — I want to say it's Howard Schilit. It's a 90s book.
25:33 So I can't remember if you had Enron in there. I feel like you get WorldCom and some of that type of stuff. Or maybe there was a later edition that plugged this stuff in. I didn't read this book until probably 15 or so years ago when I thought I might have a gift for some of this financial engineering stuff.
25:48 I do this thing whenever — I learned this with music equipment a long time ago, that's just the way my brain works. I have to basically take a knob and turn it all the way up and all the way down to start to understand what it does. The great thing about that book is it's like, let's talk about the income statement.
26:05 Let's talk about the cash flow statement. Let's talk about the balance sheet. And now I'm going to show you how to turn that knob extra Spinal Tap all the way up to 11 on each. And what's crazy there is you start to see the examples of what can a company do when they need to push that extreme side of it to see can we get just a little more out of it.
26:24 And this is why it escalates up. This is why it spirals higher, because companies right now — like in the Azoth conversation, like in a bunch of the stuff that Kai's been talking about — we have all these examples across the income and the cash flow statement and to a degree the balance sheet of push that border to just get a little bit further in the next quarter in that guidance.
26:45 And that's all you need to know that we are pushing in all those categories and that push is going to lead to a bad ending at some point. >> Yeah, the knob's a great example because you just don't know where we are, and the knob is hard to figure out, but that's where we have to figure out — eventually we're going to get to a point where it's like we will not depreciate H100s because they will live forever or something like that.
27:05 And then suddenly we've gotten to just such a ridiculous point, but along the way we've just — the knob has been slowly slowly turning. >> And this is where the Spinal Tap reference is immortal. Not just because it's the greatest non-action movie maybe ever created in the history of man, but this is the idea.
27:21 Are you familiar with the scene? You know the scene to which I reference this pop culture reference to a possibly obscure comedy to you. Okay. So basically on a guitar amp the knobs go from 1 to 10 effectively. So 10 is all the way up. So in this scene he is demonstrating his guitar amp that actually goes all the way up to 11. And he's like my amps go to 11 because sometimes you're at 10 and you need that little extra.
27:48 And the guy who's interviewing him is basically like, "Well, wouldn't that just be the same as if you were at 9 and went to 10? Like why?" And he's like, "No, these ones go to 11." That is financial shenanigans as clear as day. >> This next one we're back to Dan Niles again. And this is another great one because there's this idea particularly in the compounding community that you just buy nice companies and you go off on vacation, hold them forever, and this is fantastic and you're going to make tons and tons of money. And
28:18 Dan doesn't love that. So here's Dan talking about that. >> I believe saying there's some stocks you just need to buy and hold is completely moronic
28:38 because you don't know that you have a lot of survivability. You hear from the people who said, "Oh yeah, Apple was a buy and hold." Well, you never have people on that say AOL was a buy and hold. Yahoo was a buy and hold. Nokia was a buy and hold. Cisco was a buy and hold. The list is really long of market share leaders. IBM was a buy and hold, of market share leaders that then went into trouble. But you always have some company that makes it through, right? Microsoft has done great through three different decades, right? But that's one company.
29:04 And so I think you have to have strong conviction but loosely held. And that's the way you want to think about it. And just because a stock's down a lot — one of my big disasters this year, we'll see how the rest of the year plays out, is Nike. It used to be a market share leader.
29:22 I don't think the oil situation has helped it. Obviously other brands have come in. They had years of mismanagement. We'll see what happens. Disney was another name, right? People were like, "Oh, you got to put it away for your grandkids." Well, that hasn't worked out. And so I completely disagree with that.
29:41 I think you want to have a very flexible open mind and as the facts change, you want to change too. >> We don't get a lot of "moronic" here. >> His quote was saying there's some stocks you just need to buy and hold is completely — which by the way is true. There's a bunch of survivorship bias in this idea that you just needed to buy and hold Amazon.
30:00 Oh, that's great. Let's look at the other companies that looked like you needed to buy and hold them at the beginning before Amazon looked like that and you did not need to buy and hold those. So it's great for the people who got it right, but there's a broader lesson for people that just buy them and put them in the drawer. That does work to some degree, but you got to be very careful because if you got the wrong companies in the drawer, you got a big problem.
30:22 >> I'm referencing this because these are both in arms reach right now. So you think about the Hundred Baggers, Chris Mayer, The Investor Odyssey, this new book, we did the hundred-year thinkers. We're talking about this one. So look for that episode. The idea is even if you hold it and you get the hundred bagger, there's probably still a time to sell. Same thing. It's already out.
30:41 The Ian Cassel one, the stock picker book. Giant holdings from micro cap stocks. Sell discipline. Neither of these guys are buy and hold forever people. That reminder that a lot of times the people we point to, the Warren Buffetts, the others of the world, and it's like, oh, this is great, you should be owning this forever — no, even they say no, please don't do that. Even your S&P 500 index fund does not do that. It changes, it reconstitutes, it rebalances, it reweights. So this idea that you can just do this — you might get lucky on a handful of
31:13 times. I've seen the client accounts, I've seen the people who do this and they get lucky on a handful of them, great, but this will not be your normal experience. And even with those, at some point somebody else is going to sell it for you because you're dead. So you might as well have some awareness of this while you're alive.
31:29 >> It's good from a behavioral perspective. I understand that idea, like if you're not even trading all day, that's good. Be a long-term thinker. That part's important. But
31:47 >> and it's always great when you see grandma has the statement that she didn't realize she had and suddenly she had Apple and it's worth all this money, and that's great too because she wasn't doing anything. But if grandma had Enron in there in the drawer or whatever, that wouldn't have worked out so well. So you just have to understand it's great from the perspective of I hold companies for the long term and I don't overtrade my account, but it's not great from the perspective of you got to have the right company.
32:02 >> This would be — I'm thinking of the inheritance and my grandfather that I absolutely adored who passed away. It is no small miracle that my grandmother, who has survived him, doesn't have a bunch of scam stocks or other things that are just forever there to be cleaned up by her or whatever the next generation is, being whatever the equivalent of scratchy lotto scams showed inside of a portfolio. Because yeah, you don't want to hold certain things forever and some stuff you just have to say, I got the gift, take it
32:36 down, or when it gets inherited, pass on. There's so much psychology to this, but it's an important lesson. Moronic might be a little harsh, but it got the idea across. >> So this next one you're going to help me with because this is so interesting to me because I'm a factor investor obviously and so I love quantifying things, and Ben Hunt has quantified narratives.
32:55 And it's really really cool to see these charts. So I'll play the clip and then you and I can talk about it. >> So what I'm going to put up as a slide here is a new look, I'll call it a breakthrough, that we had in our technology, which is now we're not just able to track how loud or how quiet a given narrative is but we're really able to track its life cycle, because all narratives have life cycles.
33:21 They have bursts where a new story comes on the scene. It'll persist for a while and then that burst may or may not lead to a change in what I like to call common knowledge — what everybody knows that everybody knows. And it's totally transforming our ability to make actionable steps from our narrative analysis.
33:52 Because if you know where you are in the life cycle of a narrative, then you're much better off to be able to say, well, how does that impact prices or policies that have to come out next? Now, the slide I'm putting up is showing the life cycle of one half of the coin, the credibility coin for the Fed.
34:20 We do this for all central banks. So this is central bank losing credibility. That's the signature or the narrative we're tracking and we're tracking it over the last 5 years I'm showing in this chart. And it's talking about the Fed. We've got this filter just on the US central bank.
34:38 And again, kind of as a backdrop, what we do is we're reading all the news in the world, all of it overnight. And we're looking for the presence of somebody saying, "Okay, the Fed's losing credibility." This isn't word search. This isn't sentiment analysis. We're able to track the underlying $10-word alert semantics.
35:04 Any way that you might want to say, "Oh, the Fed's losing credibility. Warsh is losing credibility," we're able to pick that up in all the news. And so we're looking for bursts of that story. We're looking for the overall loudness or quietness of that story over time. And we're looking for what does that mean for what state of the life cycle are we in? Is this people are arguing whether that's true? That's what we call contested.
35:39 Is it possible or building? Got that as a potential stage here. Or what happens when it gets confirmed, when, oh my god, we are in a confirmed state of everybody knows that everybody knows the Fed has lost credibility. And that's what we're able to show now in our different slides. The life cycle of a narrative as well as the virality of it.
36:08 That's what we're tracking when we're tracking the bursts. I mentioned earlier that when Kevin Warsh went and said that, oh, I know I've been talking a big game on we're going to be inflation fighters, and then oh my god he didn't do any of it — and so we saw an enormous burst like a supernova of a burst of stories and articles saying, "New boss, same as the old boss, just like all the other guys.
36:45 Talks a big game, but when it comes to it, doesn't do a damn thing." And so that's what we're seeing in our data and our charts here, is that you had this real burst of activity that transformed now almost immediately into a confirmed narrative regime of the Fed has lost credibility. >> This idea that you can see these narratives rising and falling.
37:12 You can see the bursts, but also we did a separate episode with Ben, it was called narrative as an investing factor a long long time ago, but he basically made the case, very compelling case, that this is an investing factor, that if you go back to Larry Swedroe's piece and stuff, that this meets all the requirements of that.
37:28 So maybe you can talk a little bit about how they're doing it because I know you work with him on this, but it's just so interesting to me to track these narratives and to think there's actually some actionability inside of this. >> There's actionability and it's pretty much always like a step removed.
37:42 You as the person who's figuring out what the actions are need to understand what's correlated to it to then make the decision, and that decision has to be right for you and however you invest. This Fed decision is really really cool because at first it was central — so first off, they're tracking narrative density and they're tracking it on not just a word count. Remember like the word clouds?
38:07 Every time the new Fed meetings would come out for a while, we'd get the word cloud. You get the red line version of the word cloud. You go, well, how many times was there a comma or did he say not or did he say this? >> That's a generic version of sentiment analysis where you just go, how many times did positive words show up or negative words.
38:24 Semantics are actually understanding the sentence construction, the argument construction, and saying, "How did they position it when they talked about inflation, whether it showed up a 100 times or not at all? How was it positioned inside of this piece?" And they're tracking that across all of media.
38:43 And then they're giving it a density score to say, oh, it showed up in the Journal. Oh, it's all over Reddit. Oh, it's all over Fox News. Oh, it's all over this. And that narrative density stacks up with a semantic signature that can say not just is this high or low relative to history, but how is it moving? Is it all of a sudden screaming? What Ben's showing here is we can show where this is relative to history, but then we can also target when there's a burst.
39:10 And the crazy one was at first they were just tracking central bank credibility. This is within the last year. They realized they shouldn't be looking at central banks as a whole. They should be looking at central banks by country. Magical things you can do with AI tools now. So they go, okay, let's divide all this up by country.
39:29 So they divide them all up by country. And now they start to look at the Fed and they go, oh my god, this helps explain, for example, the price of gold. Because if gold is basically the Brent Donnelly definition of like one divided by trust. So it's credibility and trust — gold is going up when people don't trust central banks.
39:47 So they looked at when Trump was beating up on basically Powell in that whole crazy rigmarole and they said here is a burst of just negative sentiment that led to everybody knowing that no matter what Powell does Trump is just going to beat the crap out of him right now, and that led to a lack of credibility for the Federal Reserve that was well perceived.
40:09 That was the run-up in gold a little over a year ago. That move you can tie directly to that change in sentiment. Then what was shocking was once Powell was on the way out and Warsh was on the way in, all of that lost credibility from a density perspective recovered. And what you saw in that period was the price of gold basically goes sideways.
40:29 And now leading up to Jackson Hole and post Jackson Hole, we've got another burst of it reversing again, because when he didn't take action, when Warsh didn't make a move, we have a burst. We have common knowledge that as Ben puts it, meet the new boss same as the old boss. To what I said earlier, he is not a Volcker. He is not a Volcker.
40:50 And now everybody knows that everybody knows it. Gold starts moving again. You start to have changes in the price that follow through. The idea that you can actually see and visualize these stories around the burst and the common knowledge moments is just incredible to see in graphical form. >> So our last clip here is something I've never done in my life, and I don't know if you have, but Dave Nadig talking about sports betting.
41:11 So here's Dave. >> I guess the thing — in some ways I worry that we're not going to have something that is catastrophic and horrific that shakes everybody out and gets everybody smart. The subtle problem of sports betting is that, as I've come to learn because I'm not a big sports gambler myself, is that it is rarely the big loss that's the problem, right? It's not that you go to the casino and you have your one big weekend where you took your $10,000 savings and you blew it all and then you go home destitute and you learn your
41:43 lesson. I think what we're saying is a little bit of that would be healthy for some of those consumers of these products. Sports betting has this insidious function which is that it's rarely that dramatic. Most people lose money over time. It's not that they're losing it all on a Super Bowl bet.
42:02 It's that they're betting on a hundred baseball games a summer and they're slowly losing 10% a week and then they put a little bit more in and they lose another 5% and then they have a 20% win and they feel like heroes and the cycle repeats. And that kind of grinding despair in a financial situation, I think, is much harder to recover from than the one big mistake, right?
42:28 We have lots of examples of — I mean, we opened with that, right? Everybody just needs to get burned real hard. I worry this isn't a one big mistake problem. I feel like this is a grinding tax on math literacy that we're not going to be able to turn around just by willing it.
42:55 >> So this is Gen Z's avocado toast, right? >> I was going to say this is scratchy lotto on steroids. That's what this is, because it's the removal from >> in my Christmas stocking every year. So >> God bless the generation. And again, this is the thing that drives me nuts, is I'm not anti-gambling, right? That's the thing, is I am not saying people shouldn't be allowed to do this stuff with their money.
43:09 If people want to burn their money, I fully believe people should be allowed to worsen their situation if it's genuinely what they want to do and that we shouldn't stop people from necessarily doing that. But it's just become insidious, and that's where it starts getting more concerning both on a cultural and what are we doing as a country perspective, but also just markets, market structure, right? The fact that all these products live right next to financial products literally in the same Robinhood app, or pretty soon on the same exchange at the
43:39 CME — that feels like something we should pay more attention to, right? Because if there's these qualities of gambling risk that are different than investment risk, polluting those against each other just seems like the opportunity for problems. >> I've never bet on a sports event. Matt, if you have — >> I have not, but my wife did discover the joys of sports betting in this last World Cup.
44:05 >> Oh, yeah. I think a lot of people discovered that joy in the World Cup. >> Discovered the joys of it. Discovered and had the amazing experience of getting a little bit lucky maybe on the first one. She was feeling something and put a bet on and won some money. Not a huge amount of money, but still it's that dopamine hit.
44:24 And because of that win, it was like, well, now she's going to do it again. She's going to try it. And I'm just amused watching on. And again, responsible amounts of money. But the psychology of it is just crazy. And this is part of where — I'm the same way. I walk into a casino and I'm just like, "Nope."
44:43 And there's no pleasure in that to me. So where are you on this? Let's talk about >> this. The point you made about the small losses is so important because it applies to investing. Any strategy where the losses are just very small and they accumulate over time, those are the most deadly strategies because you don't see that moment where you feel the loss.
45:01 Even something like overtrading your account could be an example of that because you're hurting yourself but you're hurting yourself a little bit over time unless you're doing it really badly. You're hurting yourself a little bit over time and when you don't see that, sometimes by the time you see it it's too late.
45:13 So I thought Dave's point about that was really important. >> Yeah. And we get into it a little bit in the episode about seeing it in financial planning. I've seen versions of this now multiple times and from multiple perspectives. The thing that I see that's the most important — and this is both with investing and gambling and it could be with trading,
45:31 we'll throw trading in there too as somewhere in the middle of them. The first question we're asking when somebody tells us they're doing this kind of stuff is, are you doing this out of income? Is this coming out of cash flow? Or is this coming out of assets? Because there's a big difference if you get paid on Friday and you get a six-pack and your scratchy lotto on the way home.
45:50 And it's like, yeah, it's a couple of bucks, but I still had money for groceries and I took care of my family or whatever else. Doing that additive income, not a big deal. If however you're emptying out your savings account to buy six-packs and scratchy lotto, it's a different type of problem. Likewise, your recovery from the drawdown from that risk.
46:10 So if you're spending that money out of income or if you're spending assets down, what is the ramification on when you can recover that? If you're spending assets down but income is coming in to replace it and solving for that habit, it might be papering over the hole. That could work all the way up until you retire and then that could sandbag your whole thing.
46:28 This balance is a new element of social psychology that we have to think about both as professionals and as a culture that we have not come to peace with. And I share Dave's concern. We are going to see some people YOLO their way out of a lot of savings in the next 10 years.
46:44 And there are going to be some really rough lessons. >> Yeah. And I do worry about society a little bit like this. I'm a big sports watcher and the change from sports betting is taboo or whatever 10 years ago to basically the play-by-play announcer is telling you parlays you can do, it's flashing on the side of the screen.
47:00 I don't know how it possibly came this far, but it's completely acceptable now for the play-by-play announcer or the studio host that you've trusted the whole time to be telling you, oh, go here and do this bet. And it's pretty crazy. >> Well, we've normalized talking about it as a part of the entertainment.
47:17 And the risk there is the average person, I will still contend, does not know how to contextualize that into their financial picture of what that should be. And this is no different than — what's weird is it's the same conversation with clients if they're in a concentrated stock. So you work at a company, you get compensation in the form of shares, RSUs, awards, grants, whatever,
47:37 and all of a sudden 20% of your net worth is in this company, or 50% or 100%. And you go, that number's too high. What do we have to do? What's the right number for you to start to back this off? This part of budget, of spend, of risk capital for things like gambling is going to become as important and as probably frequent of a conversation I think in the next 10 years of my career as concentrated stock was.
48:03 And a lot of it's the same psychology. It's don't get carried away with this. It can make for an irrecoverable loss. And we have normalized the heck out of it. And if you can do both things out of your Robinhood app >> be careful with the gambling, people. That's our takeaway here. Matt,
48:20 >> leave that crack alone, kids. >> Matt and I are the people that teach you the life lesson. So on that note, you should probably wrap us up. >> All right, let's wrap this up. Head over to the Excess Returns Substack, wherever you're watching or listening. Thank you. Tell us what you think down in the comments.
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