STOCKS TO CRASH: Warning Signs Being Ignored, FED HIKE (Uncut) 02-19-2025

STOCKS TO CRASH: Warning Signs Being Ignored, FED HIKE | Dan Niles

What should scare people is when you’ve got, you know, six of the seven biggest companies in the world already cutting, having the Ford estimates come down. Well, what does that mean for everybody else who isn’t one of the Magnificent Seven? And arguably, you could argue it’s the Magnificent One, because it’s really Facebook, right? Facebook stocks up, you know, over 20% year over year. And if you take that out of the average, they’d be down.

Hello, and welcome to Soar Financially, a channel where we discuss the macro to understand the micro. My name is Kai Hoffman. I’m the EdgeAR mining guy over on X and of course, your host of this channel.

And I’m really looking forward to welcoming a first time guest to the program. It’s Dan Niles. He’s the founder over at Niles Investment Management, somebody you might have seen already on mainstream TV, like he’s a commentator on CNBC quite regularly, other channels as well.

And he’s quite famous for calling the tech bubble back in 1998, 1999. And I’m excited to have him on this program this week. We’re going to talk macro, meaning we’re going to start discussing general economy in the US.

But I also want to grill him a little bit on the AI developments here. Like, how is AI impacting productivity growth? Is AI potentially the savior out of the US debt bubble? Something I want to discuss with him. So stay tuned for that.

It’s going to be a deep dive, it’s going to be an interesting conversation. I just had a chance to chat with him. And I think we’re in for a doozy here.

So make sure to stay tuned. And if you haven’t done so, hit that like and subscribe button. We tremendously appreciate your support.

And it’s free. Just hit that subscribe button. We do appreciate it.

Now, let me bring Dan on the screen. I’m really excited to have him on. Dan, thank you so much for joining me.

My pleasure to be on, Kai. Thanks for having me. Yeah, absolutely.

I gave you a lot of credit already for calling the tech bubble. Maybe we can call the tech bubble 2.0 here in a minute. But maybe before we get to that topic here, let’s start assessing the global or the state of the economy right now.

What is your assessment? How strong or how weak is the economy, Dan? I mean, it’s a good news, bad news situation. The economy is incredibly strong. We’ve got in the US close to 4% unemployment.

We have 3% GDP growth. And we have a pro-growth new president and Donald Trump. So those are all things that are positive for earnings.

The problem is it’s also a negative in the sense that pro-growth policies from President Trump also are inflationary. Because unemployment is so low, because GDP growth is so high, the Fed obviously, we’ve been pricing out rate cuts for the last several months. And entering the year, one of my big concerns was that by the end of the year, and I think the odds have actually crossed over 50%, that the Fed does not cut at all anymore and potentially ends up raising rates, in which case I think the market could be down 20% on just multiple contractions.

So to some degree, the good news, which is the economy is strong, is also the bad news, is it might re-trigger inflation, which has already been happening. And the Fed might have to change tactics. It’s an interesting take, the whole interest rate debate on our channel.

Just yesterday, I had a guest and I said, well, interest rates aren’t low enough. We need lower interest rates to stimulate growth and just stimulate the economy. How do you counter that? Why do you think we need to raise rates? Aren’t you seeing the crux? Yeah, I think anybody who thinks rates are too high, I don’t know how you get there.

Because at the end of the day, if you’ve got 4% unemployment, 3% GDP, I think you’re forgetting the lessons of 2021, when the Fed just said, oh, inflation is transitory, as CPI went from 1.4% at the beginning of 2021 to 7% at the end of 2021. And so, and then, you know, and the S&P was up 27%, because everybody wants to believe, right? Then you get into the next year, 2022. And the Fed changes course says it’s not transitory, fastest rate hikes in 40 years.

And I think you run a real risk of a repeat of the 1970s, where the Fed cut, and then had to raise and then cut and had to raise again, because they preemptively kept cutting. So, I don’t know why anybody would believe rates need to go lower, because clearly the data is not supporting that. The second thing is, if you look at inflation, core PCE, which is the Fed’s favorite measure of measuring inflation, it bottomed in June.

It has been going up since then. And the other measures of inflation, CPI and headline PCE, those all bottomed in the September quarter. And those have all been going up.

So, we’re nowhere near 2% for CP, you know, PCE, CPI. It’s been moving up. The latest inflation readings we’ve gotten also seem to indicate that it’s going to continue to move up.

And so, it’s hard for me to understand how anybody believes we need lower rates, other than, obviously, lower rates are great for the stock market. As I mentioned before, in 2021, you had inflation go from 1.4 to 7% on CPI, and the market’s up 27%. And so, obviously, it’s great for market multiples.

But that’s the other problem, which is whenever you’ve had CPI between two and a half to 3%, historically, the S&P trailing multiple has been 19 times. We entered this year 25. So, there’s no room for valuation support either.

And that’s, I think, also why you’ve seen the Magnificent Seven struggle so far this year, where they’re up about 2% versus the S&P up 4% and the equal weighted Nasdaq 100 up about 8%. So, I think that’s the only thing I can say is that the facts just don’t bear out why you need lower rates and why they’re too high. I want to stay on inflation for a second, because it seems quite important to the whole discussion in general.

3% inflation rate, as you said, it’s been creeping up from 2.4% to 3%. What does that tell you? Maybe, where is the inflation coming from? And where do you see it trending? What is triggering higher inflation right now, Dan? Well, I mean, it’s very simple. You look at the US and you say, well, it’s a services-based economy.

So, what’s the supply of people able to work? Well, unemployment is down near 4%. It’s not high at all. And that’s the real problem.

And then at the same time, you’ve got growth, which is very strong. And so, that’s the other side of that equation. And that’s what’s creating the problems.

And President Trump, obviously, has pro-growth policies for the US, which is great, but that also triggers inflation as well. You have wage growth at 5.7%. How much is that a factor or are wages just catching up to the overall inflation trend here? No, it’s absolutely a factor. And correctly, wage growth, when you have a services-led economy like the US is, that’s the most important part.

And that’s why if you go back and you look at some of my interviews back in 2021, I kept saying consistently, there’s no way this is transitory inflation because you’ve got twice as many job openings at one point as people unemployed. Even today, you have more job openings than people unemployed. Now, if you go back and you look at a long history, normally, it’s the other way around where you have more people unemployed than there are jobs available.

So, in my mind, there’s very little chance, especially when you throw in the fact that the US immigration policies now under President Trump, that’s going to increase wages at the low end because a lot of those jobs are obviously low-end jobs. And so, it’s going to put more upward pressure on wages in the future unless something changes with that. So, it’s supply and demand is really all that inflation is.

And right now, demand looks very strong. As you pointed out, wages are high. If you cut the number of workers available, it’s going to continue to put upward pressure.

And 70% or so of the US economy is services-based. So, it’s hard for me to figure out how inflation is not going to be an issue going forward. And that’s the thing that should scare investors because just like 2021 was really great with the stock market up 27%, when the Fed had to go hike, 2022, the market was down 19%.

But multiples are much higher today than they were back then, which should be what scares you, especially when the biggest companies on the planet, the Magnificent Seven, six of those names that reported so far, NVIDIA hasn’t reported yet, all six of them had the March quarter revenue estimates on Wall Street get cut. All six of them. And so, you can say whatever you want, but there’s only two things that determine stock prices, earnings, and we just talked about revenues getting cut for the March quarter for all six of the names that reported of the Magnificent Seven.

And the second one is multiples, and multiples are already very high at 25 times versus 19 times trailing when inflation is at these levels. I mentioned I had a guest on yesterday and before we hit the record button, we both had a discussion about consumer spending versus retail sales, because consumer spending is up 3.2% or 3% roughly, while retail sales are down 0.9%. How does that fit together? How do you make sense of that? And what is that telling you? Is that just, again, a function of inflation that consumer spending is up? Or is there more to it? Yeah, I think it’s just a function of inflation and quite honestly, for me, I pay attention to what the retailers actually report. I mean, government figures are great, but I have a lot of issues with the way some of that stuff is counted.

But for right now, I mean, if you think big picture, well, so what drives consumer spending? Well, if you have a job, that’s very helpful, right? Unemployment’s at 4%. If your wages are going up, and you correctly brought up wages are going up, so that’s positive. How’s the value of your home doing? Well, that’s going up.

How’s your stock portfolio doing? That’s doing very well also. And rates by historical standards are still very low. We’re in the 4% and change range.

By the way, if you look at when CPI is normally in this 2.5% to 3% range, the 10-year treasury is normally up at about 5.8%. So we’re nowhere near that either. And so you put all of those things together, and the consumer should be feeling great, and they are. Yeah, no, absolutely.

The US economy seems to be humming along nicely based on the numbers we’re getting. Of course, there are certain sectors that are struggling, but it seems to be doing fine. I’m just the outsider looking in here, right? I get to travel to the US quite often, and it seems to be doing all right.

Dan, we got to talk S&P 500. I’m just looking at it. We’re trading at 61.15 as we speak.

Extremely high. Given what we just discussed, like the inflationary environment, should it be trading at that level? Should we prepare for maybe a correction, or should we just remain bullish here? Yeah. As I said earlier, it’s not really the data.

It’s when do people acknowledge the data. So if you don’t think there’s inflation, like they didn’t in 2021, and the market goes up 27%, and everybody’s happy. If you go, well, there is inflation.

And here’s the funny thing. In 2022, CPI went from 7% ending 2021, and it went to 6.5. So it actually went down. But the stock market went down 19%.

So I think for people who’ve only entered the market in the last, let’s say, 17 years or so since Lehman Brothers failed, because remember, the investing environment changed when Lehman Brothers failed, because all of a sudden, the Fed stepped in and did all these things that they’d never done in the past with quantitative easing, taking interest rates to zero. In Japan, they went negative. And so you had all of this money flooding into the market.

And basically, people have gotten used to over the last almost two decades, I guess, at this point, that every time the market goes down, they’re going to get saved, because the Fed’s going to do something, or the government’s going to hand out free checks like they did during COVID. I mean, if you think about it, if I told you, hey, Kai, we’re going to have a global pandemic, your first thought isn’t, oh, let me run out and buy stocks, right? But that’s exactly what you should have done, because the stock market went up double digits during COVID. And so that tells you what a weird environment we’re in right now.

And there’s a famous saying by John Maynard Keynes, the market can stay irrational longer than you can stay solvent. And I lived through the late 90s, where, you know, you go back and you look at 1999, and it was just amazing, after you had a great year in 1998. And but then you ultimately had to pay the price of high multiples, and, you know, high sentiment with those multiples having to reverse and over two and a half years, after the buildup, during the formation, if you want of the internet, you had the NASDAQ go down 78% over two and a half years, a punishing grinding downward movement, and the S&P lost roughly half of its value.

And so, and that’s, you know, if you think about it, did the internet grow from 2000 to 2002? Absolutely. Amazon’s revenues doubled, but the stock went down 95%. And so there’s some analogies there to today with the AI buildout.

I don’t think we’re at that type of peak in 2000. But I do think we’re going to go through a digestion phase, as we get towards the middle of this year on all this AI spend, because and I’m sure we’re going to talk about it more, but you’re not seeing the return on investment that these big Magnificent companies expected when they put in all this money. Yeah, I do want to quiz you about project Stargate here in a minute as well, and see where that is going to lead us, because the first $100 billion are being raised and potentially spent already.

So we’ll talk about that in a minute. But I want to make the segue to AI here, coming from the macro discussion, talking to AI. And for me, the segue is potentially through debt to GDP ratio, like one way for the US to get out of its hole or out of its, I don’t know, get off its debt load, potentially.

And just maybe, or not even get rid of the debt, but maybe just make it look nicer on the balance sheet is by increasing GDP. And just make that whole ratio look more, what do you nice, I don’t know, like better term is just make it look nicer, right? Instead of 130, maybe bring that down back to 100 or so I’m not even know what the number is needed to get to that ratio, but has AI the potential to increase productivity enough to increase GDP, so we can maybe level out or at least increase the GDP growth to a level where it makes sense again, versus debt? Yeah, you know, that obviously is the hope. And AI is the most transformational thing we’ve seen, you know, since the smartphone, arguably in 07, when Steve Jobs introduced the iPhone, or before that in the mid 90s, when Netscape Navigator came along and gave us this browser to this new thing called the internet.

So I totally believe that AI is going to structurally change the way the environment functions, because exactly like you said, productivity is going to go up. And I use AI in my job already. A lot of people do.

And I think it’s going to become a way for people that are really productive to enhance their productivity even more, because it just really speeds up your ability to do your job, and to get the information you need to do your job. So I think that will definitely occur. But don’t forget, you had a recession back in 0102 time period, even though the internet was in its early stages.

Right? If you use Netscape Navigator as the chat GPT moment of the internet, that was introduced at the end of 1994. And you had five years of strong growth, and then you had to go through a recession, despite the fact that the internet kept growing, and kept changing our lives during that period of time. So I think the risk is that people get complacent with it.

And again, I go back to the fact that six of the most valuable companies in the world, the Magnificent Seven, six out of them had revenues cut for the March quarter, after they reported the December quarter. And four out of those seven Magnificent Seven names are down for the year. And so there’s some fundamental reasons to kind of sit there and go, AI will change the world.

But much like you saw a digestion phase of internet spending a couple of times during the late 90s. And then obviously, you had the big correction in 0102. I think you might have to, I don’t think we’re in the 2001-02 period.

But I do think we’re going to go through, much like you saw with Cisco, which became the most valuable company in the world. During the internet infrastructure build out, I think you’re going to see a similar situation in the US on AI CapEx. And quite honestly, if you look at the numbers closely, you can already see that.

It’s just it’s masked by the fact that people go, Oh, you know, Oracle spending is up 100% year over year. And they announced that and they’re in Project Stargate. And that’s all great.

But if you actually work the math out on the numbers for Oracle, and I’ve written about this, you can see, okay, CapEx doubles this fiscal year, but their fiscal year ends in May. And so that implies 13.7 billion in CapEx. But we already know what they’ve spent in the first half of the year, which only leaves seven and a half billion spent over the next six months.

Well, yes, okay, so seven and a half billion left over the next six months. But they spent 4 billion in their November quarter. So you go, wait a minute, 4 billion times two is 8 billion.

But their guidance says they only have to spend seven and a half billion. So their spending is actually down sequentially, even though on a fiscal basis, it looks like it’s doubling. And you can go through that with a lot of these different companies and go, even though the numbers look big on the surface, because of either it’s a fiscal year guide, or because of how big the fourth quarter was, the spending is actually going from growing at about 15% sequentially every quarter for these for this big AI spend to more like mid single digits for the next couple of quarters.

And I don’t think the market’s prepared for that. And that’s just driven by the fact that if you’re spending a lot of this money, and your revenue forecasts are getting cut, and your free cash flow is dropping, then at a certain point, you’re going to have to digest this. So that’s the other side of this AI spend is, are you getting the returns like you anticipated, just like you could argue that was an issue in 0102.

Curious, like what companies are most exposed to this trend? Of course, NVIDIA is the one that gets most capex like funneled its way. But you mentioned Oracle as well, just a network build out company, software company. Curious, what other names could be impacted by this, just to give our viewers a bit of an overview of what to potentially expect here? Yeah, I mean, the problem is, it really expands across everything.

So you can go back and look at what happened when Deepseed came out in, you know, hit number one on the App Store in January. And all the stocks that got absolutely obliterated that Monday, obviously, NVIDIA, like you mentioned, but you have the power companies. So you know, the energy companies, the constellations, the talons, etc.

You’ve got the, you know, industrial companies, the Eatons, etc. You’ve got, you know, you can kind of go through the list. Obviously, you’ve got the Magnificent Seven names that are involved in the cloud infrastructure.

So you’ve got, you know, Microsoft, Amazon, Google in there. And so you can, it really encompasses so much and in general, because the valuations of the Magnificent Seven have moved up so high. The entire market’s been dragged up with them in terms of the multiples across the group, obviously, the semiconductor sector in general beyond just NVIDIA, the optical companies, etc.

So there’s just a whole swath of stuff that’ll get impacted. Now, the positive is we might be able to get through this without a huge amount of damage if inflation can remain under control, if Doge can go in and actually cut that amount of expenses that they think they can a couple of trillion over the next year and a half. But you have to remember, there’s the other side of it as well, which is, if you have this spending, slow down digestion in AI, that people aren’t expecting quite honestly, because everybody’s looking at the surface numbers of Oracle is going to spend twice as much on AI capex and actually working the math to figure it out.

And that’s just one example I bring up just because, you know, obviously, in the spotlight with Stargate, etc. There’s a lot of things that can happen and go wrong. So I’m sort of taking this day by day.

Because much like in 2021, it doesn’t matter until investors acknowledge there’s a problem. And obviously, S&P sitting at all time record highs. And so investors right now are feeling like, oh, you know, things are still really good.

And we’ll see how things pan out. Now, it’s interesting, like you brought up DeepSeek. And I know it’s been discussed on other channels many, many times, but I’m really trying to figure out like how that fits in.

Is that, I don’t know, for lack of a better term, just a false flag that was planted there? Or is there more to it? And how much is that sending companies like the MAC-7 into a sort of a tailspin and having their head spin as well? Because they’re trying to figure out how could they do it with way less budget? Of course, it’s not the small number that they’ve suggested it would be, like $5 million or something. It’s way more than that, but still way less than what the MAC-7 are spending. Yeah, absolutely.

But I think you have to approach it from the other end of how many people do you know that are using AI? Consumers? Is there a killer app? Is there something on your smartphone that you go, oh, I got to use that? Is there something on your PC where you’re going, oh, I got to use that as a consumer? Because the consumer is what drives GDP. The US consumer is, as I said, over 70% of US GDP, but it’s something like one sixth of global GDP. There’s nothing, there’s no killer app.

So you’ve got all this money being invested. And now, with DeepSeek, what people are going is, well, maybe I shouldn’t have been spending this much because there is really no killer consumer app using AI. And now I have a way of being able to train these models and spend a lot less money because of some of the innovations they did.

And I’ve written about this as well, but without getting into the technical details, the things they’ve done that have reduced the cost to train, and you’re absolutely right, it’s not the number they put out. But if you’ve kind of had a step function lower because of some of the things they’ve done in terms of a mixture of experts, models, we are partially activating it. And so in plain English, if you ask a health question, it’s not going to ask the entire model to answer it.

It’s not going to ask the physics part of the model to answer it. It’ll just say, oh, this is a health question. So I’m going to just use the healthcare expert, and they’ll answer it.

And so things like that that may seem very intuitive, those are things that they added, and things where you don’t need to use as much memory. So the memory usage goes down by over 80% because of some of the ways that they approach this. So it definitely reduces the amount we need to spend on hardware.

The bull case is, well, hey, because the hardware costs have dropped so much, people are going to consume a lot more, and that’s Jevin’s Law. And that’s very true, but the thing is, you need some kind of killer app that people want to use to consume all that. Otherwise, what will happen is the spending will drop.

And that’s part of what happened during the internet is there was all this optical spend, and people may remember names like Global Crossing, et cetera. And what happened was people thought internet traffic was going to double every three months, and turned out it was doubling, but it was doubling every year. And therefore, you went through this massive correction in 0102, and it took like a decade to work through all the dark fiber investments you had put in on the late 90s.

And so you can look at the AI infrastructure spend today, and go at some point, if you don’t get that under control, you may have to go through a similar phase. I don’t think that’s what’s going to happen this year. I think it’s going to be more of a you go from 15% growth every quarter to more like 5% growth every quarter, and you continue to grow.

But we’ll have to wait and see. When I got very negative in 2000, I didn’t think we’d go through a two and a half year period where NASDAQ would go down 78%. I just thought we’d go into a recession and sort of a digestion period, and it turned out to last a lot longer.

And so some of this is you got to take this day by day, see where the data comes out, and then adjust as you go. And more importantly, figure out when do government officials figure out there’s a problem or not, because then that’ll drive investor sentiment if the Fed’s either raising versus cutting or holding. You know, a weird thought popped into my head, and please don’t take that the wrong way, because I’m trying to have a serious conversation.

But it’s the spicy industry that usually is the early adopter and the killer apps and the killer productivity comes from there first, and then the rest adopts. That’s what we’ve seen with new technology, like 3D goggles and glasses. It’s usually the spicy industry first, and then everybody else starts adopting it.

And I’m no expert in that field, but I have yet to see something or even hear about something like that when it comes to the implementation of AI, besides maybe chatbots, but that’s not my game. Well, yeah. I mean, that was what led to… I love your euphemism there, but that’s what led to the adoption of the DVD player, right? And quite honestly, a lot of the internet traffic was driven by the spicy industry, as you call it, as well.

But, you know, whatever you want to pick, there’s nothing that’s grabbing people’s attention right now. And I do think that’ll happen at some point. But, you know, I have the latest iPhone, and it’s got their Apple intelligence on it, and it’s not any better than it was before.

I mean, I like using the AI for my work, for answering questions, et cetera, but I need it specifically for what I’m doing, but it’s not… it’s included within, you know, whatever Gemini offers on Google, et cetera. Now, my son, he’s doing a startup of his own, and he’s got a subscription to chat GPT Pro, and he finds that incredibly useful, but he’s not the average user. So we’ll have to see, but to your point, yes, the spicy industries have not adopted this yet.

But more importantly, like the mainstream, there’s nothing out there to drive adoption right now. And I think that’s the biggest problem, is eventually you need return on your investment. And unfortunately, if you think of Microsoft as the prime example, right? Microsoft, for your viewers that may not be aware, their 49% economic interest in open AI, which started this whole talk about AI with their introduction of chat GPT at the end of 2022.

Microsoft, when they reported their most recent quarter, they missed the forecast in Azure, which is where the open AI stuff feeds through their cloud business. They guided below the street for the next quarter, and then they did not reiterate the effect they expected acceleration in their Azure business during the back half of their fiscal year. And so, and the revenues got cut for the upcoming March quarter relative to where they had been before.

That’s not a good sign when the poster child for this is having an issue in terms of the top line, despite the amount of money they’re spending. Yeah, I don’t know. It’s like I’m wondering, because I’m a user of chat GPT Pro as well, I use it for the show helps me edit and all of that.

But also, I’m trying to figure out like, whether I even understand AI properly. So there are large language models and a good friend of mine, he’s a university professor, and he teaches AI and things. And he keeps telling me like how you’re using it wrong, because I tried to build a Lego train set, or Lego train like set with my son and said, Hey, I’ve got like 20 straights, three turns and blah, blah, blah, build me a truck.

You should have seen the images it spit out, like absolutely useless, right? So I’m trying to figure out if the general public even understands AI yet at this point. But that’s the thing, the general public shouldn’t have to understand it, right? It should be easy to use. Think of Steve Jobs with the smartphone.

He pulled out a smartphone from his pocket. There’s no user guide. You just gave it to a consumer and it was so intuitive, they could use it.

Right? That’s what you need AI to be like. If you need a user guide to use it, you’re not going to get the general public to adopt it. That’s why voice is the most, you know, just like you and I are talking to each other, right? It’s the most logical, intuitive interface that there is.

But right now your smartphone is still useless in terms of being able to talk to it. And you can’t talk to it and say, Hey, I want to travel to California, go on vacation, book me a hotel, um, at this price range, book me flights, you know, use my frequent flyer miles. You can’t do that.

Now, when you, when you’ve gotten AI to the point where it can be like a low end or mid range personal assistant that can do some of these things and do it accurately, or like you said, right? You know, you look, you could get a kid to look or adult to look at, you know, Lego blocks. No. Okay.

This is kind of how you could build something that looks like a car or truck or whatever. And it probably does a lot better job than your AI based on what you just said. And so that’s the hurdle you’re trying to clear.

So your university professor friend is right. Obviously that a really skilled person can use it. Well, which is what really skilled people are doing.

My son’s using it for his startup, right? You’re using it to help edit this podcast, but the average person, that’s not what they want. They want something like the iPhone or the internet, right? You go to the browser, like Google made it really simple. You have one box.

That’s it. There’s nothing to clutter it. And you put a question into that little box and it gives you an answer.

And so until it’s as simple as that, you’re going to have a problem or until people feel like I’m really getting something out of this, right? There’s a reason that Apple, when they reported the December quarter, again, had numbers go down for the March quarter because the AI features, if they’re available, right, they’re not available in Europe or in China. Now it’s obviously supposedly coming, but even in the U S it’s not like demand was incredibly strong because the people that got ahold of it said, this is not particularly that good. And so I don’t really feel a need to upgrade my iPhone.

And that’s the problem. Yeah. Like people keep complaining about Apple, for example, that there hasn’t really been any innovation the last five years, perhaps.

Like I still have my iPhone 13 plus, whatever it is. I don’t see a need to change anything in the next. And I’m like three, it’s three years old.

There’s no need to change anything. Right. So that’s one, one of the points here.

You’ve obviously shifted away your focus away from the Mac sevens. I think we’ve established this. Like the question now is as you’re a contrarian value-oriented investor, like where do you see opportunity now in this market, Dan? Yeah.

I’m not a contrarian investor to be clear. It’s just, you know, I love, I mean, if you look at my top five picks coming into last year, I had two of the Mac seven on there, Meta and Amazon. This year I have none.

But where I’ve shifted my focus and I’m more of a growth at a reasonable price investor, because I think that helps cover you in case things go wrong. But if you look at my top five picks entering this year, and I’ve written about this, you know, at the beginning of the year, but I, my thought was, look, we’re going to go from the last two years has been all about investing in the AI infrastructure to now it’s going to be about getting access to that data. And so helping to network that data, get access to that data.

So Cisco and AdTran were two of my top five picks entering this year, because for Cisco, obviously it’s the networking side of it for enterprises, corporations. And for AdTran, it’s about the telecom services side, where you’re extending fiber to the home, both in Europe, where you have Deutsche Telekom and I believe British Telecom doing that. And then in the US where you have the bead funding, which should start to kick in, in the middle of the year, where you’re extending broadband to underserved communities driven by government funding.

Also, if you think about less regulation in the US and supporting more small and mid sized businesses that should really be helpful to the banks, which have been under humongous regulatory pressure for a long time, it should help also drive capital markets activity. So with more IPOs, more secondaries, more trading, you’ve seen optimism on that continue to grow. And so that should help that part of the business.

I also, the sectors that have been left behind, I like the mid cap value sector, particularly well. So IJJ is an ETF that covers that, but you’ve got the mid cap value space entering this year, it was trading at about 17 times trailing versus the S&P 500 trading at 25 times trailing. Well, if you’ve got growth slowing down for the mega cap names, then you’re going to see that money start to spread out.

And as I talked about earlier, entering today, you know, you had the Mag 7 up 2%, the S&P up 4%, but the equal weighted NASDAQ 100 up 8%. I think eventually you’re going to see that money move more into the mid cap value space more broadly, and that should benefit that sector. And the final pick I had was cash, which is the last time I had cash as a top pick was in 2022.

And unfortunately, the S&P went down 19% that year. But right now you can get 4% yield in a money market fund. And that’s not bad to have that kind of optionality.

If unfortunately, we get to the back half of the year and the Fed ends up having to be forced to raise rates. And so I think it’s good to have that available to round out a portfolio right now. Yeah, it was really interesting commentary, especially that last point I was going to ask you maybe tied into my last question here with you, Dan.

Is that the biggest thing the market doesn’t really anticipate is perhaps the Fed raising rates later this year? Is that the biggest like, I don’t know, for lack of a better term, blind spot? Absolutely. And that was the blind spot in 2021 as well in that, you know, once you got into 2022, and the Fed acknowledged it, there was a lot of pain involved. What should scare people is when you’ve got, you know, six of the seven biggest companies in the world already cutting, having the four estimates come down.

Well, what does that mean for everybody else who isn’t one of the magnificent seven? And arguably, you could argue it’s the magnificent one, because it’s really Facebook, right? Facebook stocks up, you know, over 20% year over year. And if you take that out of the average, they’d be down. And so that’s the thing that should concern you.

And the thing is that as human beings, we’re awful investors, because you people tend to go, oh, the stock market’s a new all time record high, so everything must be great. And that’s the default. And that’s the assumption.

And that’s not true. The stock market is a reflection of sentiment, to a large degree, because earnings is only half the equation, the rest is multiples, and it’s the multiple that changes a lot. And so I think people just kind of don’t, they think it’s going to be good forever, every dips of buying opportunity, there’s fear of missing out on all of these things.

And eventually earnings will matter. And if the Fed goes ahead, and people start to get a little bit more concerned, and we get some more inflation prints that aren’t good. And quite honestly, Donald Trump’s policies have a chance to work their way in the market, which is good for us growth, but it’s also not necessarily great for inflation, unless Doge can really go through and take out a lot of these expenses in the government, which would really help.

Or to your point, Kai, productivity from AI is strong enough. But it’s a very tight window to get through, especially when valuations are this high. And so, you know, I agree with you, this is, it’s probably one of the most underestimated things, which is the optionality of having some cash on hand, in case things do go south, because the returns over the last, you pick the time period, but but you know, to have the stock market go up during global pandemic, if you’re really thinking about it, that should not seem like that should be what was happening.

But it did just because of all the money thrown into the system. And at some point, and we’ll see when that is, you’re going to have to pay for that unless, you know, you make it through that really narrow window of AI really helping productivity, you’re cutting a lot of expenses, etc, in which case maybe multiples can hold here, which is why the two scenarios that I had coming into this year was market could be up 10% based on 10% earnings growth, which is what people are looking for in the multiple staying where it is, or if you have to raise rates, then the multiple contracting by 20 to 30% hitting the stock market. And that’s the other scenario that concerns me.

And with the data we’ve gotten so far to start the year that the potential that scenario keeps rising. Yeah, no interesting commentary there, Dan, really, really appreciate it is like really eye opening as well, to a degree, like we haven’t talked AI in detail here on this channel. So appreciate your insights here, and how the companies are performing the max sevens.

We haven’t really discussed them lately in detail. So appreciate your insights. Appreciate your time.

Thank you so much for joining us, Dan, we’ll have to get you back on maybe after the you know, q2 numbers or so just to catch up to see how the market is doing and whether there’s a storm brewing on the horizon, whether the clouds are darkening, perhaps. So we’ll have to catch up Dan, really appreciate your time. And everybody else.

Thank you so much for tuning in. Make sure to follow Dan on x he puts a lot of good commentary out. It’s Dan, Daniel T. Niles, over on x, so make sure to check him out there.

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