Transcription
month in the uh in the books for 2025 and another up month. Uh we'll go through that.
A lot of stuff came out this week obviously on the macro side with China US and Mag 7 earnings and Powell. I'll go through that. Uh good podcast on the market structure. I think it's time we uh we have a conversation on the market structure because I believe it's going to be a major story for next year if I'm right about what's happening with stable coins, what's about to happen with AI agents, what's continuing uh with the energy issues around AI and the DRAM shortages and the K-shaped economy which is going to force the government in a midterm election year to make sure that uh they're getting votes. So, it's going to be a big year again for the retail uh component of the stock market. And there was good podcast this week on the structure. So, I'm not going to read this for you, but you guys saw it.
So, we finally got what effectively is a one-year truce, and that is important for two reasons. One is uh it really truly is the most important part of the tariff trade fight. So whatever uncertainty was out there for people across the country in terms of the cost of things uh this is going to bring certainty for the next year and the China situation and the stability is still going to mean the trade side. I showed you that the exports from China were down uh 27% to the US that has an impact on transports. I expect the PMIs to move higher this year and I think part of it is going to be a resolution of the uncertainty. Part of it's going to be the build massive build out for the data centers. Uh and with all that together and the fact that a lot of the energy side is going to be the big focus, I think we're going to see PMIs rise up towards 60 during the course of next year, particularly with rates lower around the globe. Uh and the fact that the midterms are coming in, he's going to have to do something. So despite the fact that the markets didn't react the same way, I'll get I'll get into that as we get into the the retail structure.
Um, Powell, you know, whatever. They they they cut uh they said December is not a sure thing. I don't know why that would really surprise anyone. Uh markets kind of cared for a second then didn't care. Uh still a 70% chance of a cut in December. I think the most important thing out of this is they've had no data. So when we get the economic data, we'll see how things change and I'm going to go through that.
Terms of the earnings. Uh just remember all year the amount of times you heard people worrying about capex and everyone all three companies early in the week described a rapid ramp in capex. Nothing has changed for the big guys. Uh Amazon reported later and I just want to make sure as we go through these elevated respending spending is a direct response to surging cloud and AI demand. Uh they set expectations for continued capex growth. Looking ahead, we expect our fullear capex to be approximately 125 billion in 2025. And we expect that will increase in 2026. It's not about overbuilding, but about responding to customer demand and being ready for the next wave of AI AI and cloud workloads. Just remember, every time you've listened to anyone, including the analysts who reported earlier in the year that Microsoft was cutting back, um don't make that mistake this year. Uh AI is changing everyone's lives. It's impacting businesses more and more every single day and you have to stick with finding the ways to make money off it because the rest of the economy will continue to not produce alpha outside of the S&P. It will be led again by things related to AI and by the speculative side of retail.
Um, Alphabet reiterated the same thing. Uh, when we go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here. Again, you have to remember these things and just not worried. We continue to invest aggressively due to the demand we're seeing from cloud customers. I can say this over and over again. The demand is insatiable. The models are much further ahead than the supply. They can't even release the models. They can't even do the build the models that they want to build because they don't have enough compute. The more that you ignore this, the more that you listen to the bubble talk, the more that you will lose money or sit there and drown in worrying about things. There will be large falls because the market is probably going to go through a true bubble phase. Uh the S&P being up the little amount that it is this year is not a bubble. I've talked about this before. Go back to the NDX, see that it was up 100% in the LTCM year of 1998 and it was up 85% in 1999. We have nothing like that. I do believe we're going to see pockets of that, particularly in crypto in the coming year. Uh but I think you have to pay attention. Short-term RPO of 400 billion shows that our need to build infrastructure is very high. This is Microsoft. This is not an attempt at a new business, but rather a fulfillment cycle for an existing contract.
I thought this was a good post. I remember when they complained companies were spending too much on buybacks and not enough on capex. Now they're complaining companies are spending too much on com on capex. I'm going to cover this in a uh a post for 22V this week in terms of the new QE being AI uh and the fact that people have to start realizing that as the expense side is reduced through efficiency, the operating leverage creates a much bigger number for QE. So every bear who fought QE, which is the same bears who were fighting AI, you're going to go through the exact same pain.
Earnings, the numbers just keep coming across. uh so far year-over-year 10.7% revenues beating and the numbers are are significantly above nominal GDP at this point which is um surprising we're actually getting the multiplier back on this uh I think it's because a lot of the revenues coming into uh the bigger companies are coming in related to the AI buildout and the US is benefiting again as US exceptionalism regains its its status that people had bailed out on with the dollar also rising uh so revenues news coming through on every level and the earnings growth rate again these are the forecasts and you can see how much the numbers were undershot and now going higher profit margin in the S&P so far at 12.9 again up from 12.5 these are record numbers and it's not anyone's sector obviously tech is a big one but financials which I've highlighted you've got utilities here and then you've got all of these also it doesn't really matter the profit margins continue to go up and here will be the bare case as we come to the end. I'm sure when we end the year, the S&P will have a higher forward PE ratio than any point in the last 25 years. This does not include the bubble peak where it was obviously higher because this is only 25 years from where we are today.
Uh it wasn't just the AI names and it wasn't just the Mag 7 earnings. I just want to bring up a few. Caterpillar. When a stock like Caterpillar is up 13% in a day, I think it finished up 12% for the day. They're selling generators. They're selling turbines. They're selling compressors. And they're selling autonomous mining vehicles. I've highlighted Pterodine multiple times, especially recently as one of my favorite names that hadn't yet performed to the level when it was about 130 up to 200 for doubling. Um, we're not there yet, but you're starting to see Pterodine had shifted from previous weaknesses in mobile sectors to growth led by AI and computing. We will have an upgrade cycle for both computers and phones coming soon. The same way we'll be having autonomous driving upgrades for the auto side. Uh we will be having all kinds of semiconductors and intelligence put into all industrial components not just the components that were working before. This is a massive massive buildout that which will continue for years.
Um Modine manufacturing is another one of these. Um, you know the stock opened down I think seven 8% and then climbed its way back. More importantly, it's again everything is around data centers, industrials, it doesn't really matter. So for the month, the S&P was up 2%. Russell 2000 was up 2%. Q's were up much more up at 5% and semis blew away the bunch at 11%. Again, this is the fourth of the last six months with at least 10% gains in semiconductors. If you've missed this trade, don't worry, it's still early.
Um, the move index V's coming down. So we have stocks going up. We have the Fed cutting rates. We have spreads tightening. We have bond coming down. And people still want to be bearish. Uh financial conditions are easing. And as I go through the job market is not only weak, but it's weakening. Uh gas at the pump added to the financial conditions. The biggest down month in over a year. gas at the pump right around three bucks.
All right, this is where I want to go into the market structure. This is a different component. I thought this was really good. Um I've highlighted these guys before. I listen to their weekly roundup every week. Um but there was one topic in particular that I thought was really interesting and this goes for everyone who is uh saying that stupid things are happening and I've heard this from many hedge fund people um at dinners and many hedge fund people that have basically reached out to me. When is the stupid buying by retail going to stop? When are these names that have no revenues going to stop? I am here to tell you it will never stop. This is the market structure changing. And I thought these guys did a good um a good job of covering it. It is not stupid to to to continue to try quantum stocks and energy stocks. These are not long-term holders. These are traders. They are trading numbers on a screen and as long as they're going higher, they're making money. This is the way they've been trained and they use options. And one of the things that's become more important as you go through this is what happened this past week. So what these guys go through is how retail traders are buying massive amounts of calls. They are I I will go through some of the numbers and make sure that you see them. But this is becoming something really important and this is not something new. This has been a trend that's been in place. So I believe next year we will see another one of these GMA the GameStop situations but at a much bigger level. I believe it has started already. I've showed you guys the quant unwind type situation where the most shorted positions have gone higher for Goldman Sachs at an index level and how that has gone up higher than the crowded longs. I think you're going to see a lot of that in the coming year. I think we are in the the midst of something which is going to remind people what a bubble actually is. People have called this a bubble. This is not a bubble. A bubble is when the short side of this stuff where retail has the ability of pressing it and they're buying massive amounts of call options and then as these things break through it, you get a gamma squeeze. I think this is going to happen in Bitcoin. I think this is going to happen in so many areas of the market. And I'm going to go through the reason why because this is a structural shift and that's what these guys covered post an event that is expected like last week. So China US MAG7 Fed everything went good. V gets crushed the market kind of consolidates and goes back down. It becomes a sell the news event. You either get a sell the news event or you get these massive squeezes. So when Caterpillar can go up 12% in a day, when Oracle can go up 30% in a day, I could go through the list of them, there are so many names that are just gapping. I've shown you guys the VIX EQ relative to the VIX. This is the problem is that single stuff because of partly because of AI and the demand shift that's happening, but partly because of the massive option flow. I think you're going to see something next year that's on the back of this. So, I would go listen um to their uh their conversation. I think it's worthwhile.
Scott Rubner put this out this week, and this is where I want to just show you. This has been a trend that has been in place for quite some time in terms of the retail option volumes. Uh they're continuing to set new weekly records. Uh this is a gambling community. I remember going through the baby boomers buying every dip. That's where buy the dip really started, which was in the 1990s after the internet side. And again, fast forward, this generation different than the baby boomer generation. But if you're in your 20s and 30s and you're trying to make extra money and this is the way you do it, gambling on whatever you want to gamble on, why not gamble on this? The odds are better in your favor than they are in gambling on sports or things where there's actually efficiency. The stock market goes up 80 plus percent of the time and hedge funds are forced to run market neutral and mutual funds are forced on the active manager side to be benchmarked to an index. It's very very difficult when you get to this point that you have two forces passive investing and now retail as the other part. So when you take the barbell and you realize how much smaller the active managers have gotten and more importantly how much more market neutral and factor neutral you've gotten leverage has gone higher and I think we're going to see a GameStop type situation uh which will have huge implications uh zero DTE option date to expiration options amplify the squeezes this is into the S&P now so this has been a major thing as well the zero date options and to give you an idea idea. Here is the GameStop quarter. Here's where we are now. Look at the blue. The blue is the zero DTE options as a of of of flow of the volumes. So look how much you've had barely any change in longerdated options. You really haven't had much change in the one to five week. You've had change in everything that is short-term in nature. that leads to potential of massive squeeze in terms of gamma. So, as someone who traded options throughout his career at Morgan Stanley and managed the S&P book for the firm in 99 to 2002, I can tell you that having this much zerodday contracts become a dominant force. This is a big deal and I don't think we've seen the the disruption yet that will come. I think it's going to happen because I think the market's been warning you. I think it takes a catalyst to break the concentration. So the concentration has been about a very few amount of names that are participating. If if I'm right about the PMIs and I'm right about the fact that more and more companies are going to benefit from the buildout of the hardware and the material side and we get energy to start going higher. These things are all priced at massive discounts, particularly the Russell 2000 relative to the S&P. So whenever I talk to people about small caps, they go, "Oh yeah, this has been a trip." I really don't care. I'm not talking about them winning in the long run. I'm talking about a period of time where this all becomes about squeezes and gambling and positioning where quants and hedge funds are in the same thing on the short side. So just keep keep this in mind when you see this chart which is the gross leverage chart for the long short community. This was put out by Goldman Sachs this week. We're at all-time highs at 220. So this has been going on. So they don't have the GameStop situation here which brought the leverage down. And then we went higher. But you know what this looks like from 22 early 22 on as the leverage has just gone higher. It looks like this. And this is the Goldman Sachs crowded longs versus crowded shorts. It peaked in June and it started to go down. It went down because the quote unquote junk was rallying. I think there's a lot more junk to come to rally. So if you guys are in this stuff, you want to reach out to 22V, I'm happy to spend time. I think this has the potential to be something here. This was the GameStop month. So that's what that index did during that month. It was a 30 plus% fall that was even weaker at some points during it. And remember, this was all about a few names. I think this is going to happen in a much bigger scale. And so here we are four of the last five months, but in particular, it's been a while that this unwind has been happening. And this is all in my opinion because of AI and what it's doing to the market. It is allowing companies that have had no business. And I'm going to go through some of them or at least one of them today where they're now going to have AI agents and their profitability will change overnight. And the second that they start to squeeze higher and the quant strategies which are based on momentum need to buy, you'll have retail all over them. That's what they jump into. They're into momentum and quants turn into momentum as well. It will force hedge funds as well. So for positions and again this is IWM over SPY. This was all leading into the GameStop situation. That is the peak of the GameStop situation. You get a move like that in IWM versus S&P, same thing. you're going to knock a lot of funds out of business. I would be very wary again of being short small caps and I would start to pay attention to what retail is doing and what the quant strategies have been doing with fundamentally garbage companies that are all of a sudden seeing a benefit. PMIs have been below 50 for the exact same amount of time that that trade has worked. PMIs, if they go up to 60, that's a diffusion index. You have a lot of companies that are benefiting because a lot of industries are benefiting and a lot of those are on the manufacturing side.
Rebel Pal did an interview with Ahmad Mustak this week. Very good one. I'm just going to go through a few of the highlights. Um, and I'm going to highlight to you that if even if you're only going to listen to a little bit, I would listen from minute 12 to minute 22. The tipping point for cognitive work, the deflationary shock. This is to me what is the most important thing for everyone who has not spent the time on AI to get up to speed real quick. every I wrote two paces on labor this week. I do not think people fully grasp what is happening and what is going to continue to happen. We are at the beginning stages. I talked about inference in May of this year. It was a great timing for it. AI agents are all based on coming as inference grows. We've seen the tokens grow. We've now seen the cloud demands grow. That means the AI agents are coming. And when they come, you're going to see profit margins shift for companies. And you're going to see those margins shift very abruptly. And I'll show you some of those. Particularly if the PMIs go higher and we have nominal GDP go up a little bit where topline revenue grows, you're going to have some dramatic shifts where you're going to get some topline, but the expense side with the operating leverage that allows things to change quickly. And when a company embraces AI and they get one benefit, it just continues forever or at least for the next couple years.
So on the reasoning breakthrough, AI models can now solve Olympian level problems in physics, math, and coding. They're winning all of these competitions now. So for anyone that ever reads anything again that says they're not doing anything, the models aren't getting any better. This was not even a possibility. This means we're getting closer to AGI. Autonomous agents arrive. This is all from the 12 minute to 16 minute. We're going to have the cost collapse. The price of AI thinking has plunged from about $600 per token to 5. Cognitive labor. Anything done behind a keyboard is becoming virtually free. Tasks like research, data analysis, work can all be automated. Think about how many service jobs that is. So far, we've talked about coding. Now, we're getting into lawyers and everything else. I've shown you how they've been training them on experts. As intelligence gets cheaper, the output energy soarses, creating the most powerful deflationary shock in history. The cost of intelligence is collapsing. The shift from promoting to autonomous agents marks the true beginning. And I agree. I've called this the beginning of stage two where digital employees replace human employees followed by humanoids, physical employees replace him. That is all in the next three years, cognitive labor collapse. This is the deflationary shock. Everything collapses. You get a massive productivity game. When intelligence becomes abundant, prices and wages tied to co cognitive work fall. This is the largest deflationary event ever as knowledge work, the backbone of modern economies, gets automated. Private firms respond first. They start with hiring freezes. That's what we've seen now. Then they get into role restructuring. I'll get into some of that as AI replaces middle to office work. Government, healthcare, and regulator industries will be slower to change. We are entering an era where the marginal cost of intelligence is effectively zero driving a structural deflation that will redefine work productivity and value creation across the entire global economy. Emod describes a world where almost all cognitive work be done by AI at a negligible cost a few dollars per work equivalent per year. That means total economic output expanding rapidly while human labor input falls towards zero. You hit an economic singularity call comparing it to a black hole in economics where the normal equations don't work. Even the Fed doesn't make any sense anymore. You're already seeing this. Simon Kousnets, I've brought this up in speeches. I've brought this up in my writings for well over a year now. He created GDP. He was brought in to do it. And while he created, he said it was never designed to measure welfare welfare or intangible value and breaks down when production decouples from human labor. That's where we are. This is the ultimate paradox of abundance.
So, I gave my abundance speech last week on Pomp. I'm writing things about it more and more. Um, if you want to listen to a great podcast, I actually wrote a a Substack on this. Just go to YouTube, type in the Move 37. This is obviously in reference to Alph Go. Paul Roer, he has a weekly podcast called AI Intelligence. I've referenced things from it in the past. I always leave with something. He just gave this presentation uh for 45 minutes. Absolute mustwatch as far as I'm concerned for people go on YouTube. It led to not this paper. I wrote a paper at 22V the future of labor AI incentives and the end of work as we know it. Um this was all on the back of the Amazon leaked internal plan to replace 500,000 workers. But then I did write this substack as well. Um which used a lot of the information that I got from that podcast I referenced with Paul Rozer. Um, for those of you who reach out, uh, I am going to try and find a way to get you guys links, uh, on a payw wall. Um, in terms of everything that I do here, I'm still going to go through the podcast and and and the YouTube and the Substack and everything the way that I have, but I'm getting so many requests on having this so people can file it. Then I'm going to figure a way to do it. Um, this Substack gets into again a lot of the things that's preparing people that if you want to survive for as long as you can make money, you have to be using artificial intelligence. It's a collaborative effort.
Um, this is where the job situation to me just we have to go through. So Torstston put this out at Apollo uh back earlier in the year and he highlighted this. Fed starts raising interest rates and that's the reason why. This is exactly the reason why every economist I talk to, I have yet to talk to one who has either spent the time on AI or understands what's happening. If you're one of those people listening and you still doubt it, you better spend the time at some point because it's the only way you're going to be able to a make money and second save yourself going forward. This is going to just accelerate at an exponential pace. So like I said last week, if you want to stay in the slow lane, stay in the slow lane. This is such a dramatic change in terms of total employment growth in the mag 7 all of these years as they were booming in terms of their revenues. Their revenues are still double digits and now they're not they're not hiring. And this is the prior three years. This line here is when chat GPT started. So, Amazon, aside from the 500,000 that we heard about in terms of over the course of a few years, they officially laid off 14,000 corporate workers with plans for a total of 30,000. Their stocks flying, their business is flying. They have, as they said, they cannot meet the demand that they have. Think about that. They say they can't meet the demand. They don't have enough capacity. They need more intelligence. They don't need more people. Amazon just might replace 500,000 human humans with robots. That was last week's leak story. And this is from July when they proudly said they hit their 1 millionth robot. This is not something new. This has been going on. And this is why you can see this. So this is the employment chart overlaid with the revenue chart. Their revenue has not only not slowed, it's actually accelerating, but their job situation is unchanged since basically 2020. And this is before the layoffs that just went on. UPS cuts 48,000. So remember, we're now trying to be um economists are trying to bring us down to where, you know, well, the unemployment rate will stay the same if we're only getting 50 to 70,000 jobs a month. Now UBS is cutting 48,000 jobs. Whimo robo taxis in Austin are busier than 99% of human drivers.
Chipotle reported. So with all this weakness going on and we've heard that it's been hurting the lower-end consumer plus the lower-end consumer is getting hurt by the inflation side. So Chipotle reported stock gets hammered and in there earlier this year as consumer sentiment declined we saw a broad-based pullback in frequency among all income cohorts. Since then the gap has widened with low to middle income guest further reducing frequency. We believe this is guests with household income below 100,000 that represents 40% of our total sales. The the group that is particularly challenged is the 25 to 345year-old. Those are the ones being hurt. This group is faced with several headwinds including unemployment, increased student loan payments, and slower wage growth that consumers under pressure and they feel the pinch and we feel the pullback. They specifically mention who this is painful for. Uh I want to reiterate something I said on Pomp yesterday. You have to understand uh this cohort had a belief when they went to school that they would not only be having a job, they'd be in a position that it would grow every year by more than inflation. That is the reason why you go to college and you get it. Not just to get a job, but to actually see your wages grow. Now, what you're talking about is it's harder to get a job out of college. They're getting pressured on the AI side and then they have to transition to another job. But the corporate ladder is that exponential innovation is always in your face as a headwind. And that means there'll be more digital employees in two years, double that in three years. That's the whole point of this is it never gets better. So when I hear people like economists not talking about this and trying to pretend to sell you guys goods that well, the Fed shouldn't be cutting rates because we're going to have inflation and unemployment rate is low. The labor force participation rate continues to fall. And as I said, I am renaming the labor participation rate officially as the rate of people that need to work. It it has just become a problem that is only going to worsen. It has been falling since the rise of exponent innovation. That's why I traveled to Silicon Valley in 2013 to make sure I never again separated the fact of what software was meant to do, which was replace people. AI is not software, but AI is intelligence. And that's why this is going to be five times worse than what happened from 2010 to 2020. And go look at what happened to the labor participation rate. Go look at what happened to profit margins. We're going to see that at least for the next 3 to 5 years.
McDonald's co um confirmed what Chipotle said and they specifically said two-tier economy. If you're upper income earning over 100,000, things are good. What we see in the middle is actually a different story. Foot traffic among lower income consumers has decreased by double digits. Recessionary type things. Middle and lower income consumers are avoiding purchasing merchandise. Walmart, Target, we've seen a consumer that had no choice but to spend. We've seen inflationary pressure across household spending. Kohl's consumer spending. This is across the earning side of every company that's coming out.
France put this out. Uh I agree. I'd never seen anything like this. If you guys follow the conference board's data, this gets more granular for the jobs hard to get. Jobs plentiful. And again, you can see the baby boomers, no problem yet. Gen X, this is clearly by age with the worst one being Gen Z. So, they're having trouble getting jobs, they're having trouble finding them. Uh, race against the machine, a adoption, senior employees, fine. Junior employees, same same thing. Uh I just want to show this because again the reason the economy feels like a recession and technically it is. We have a two-tiered economy not just in terms of what people are making. This is personal income year-over-year 1.4% X transfer payments. So X government handouts 1.4%. It had been up at four and change had moved down here. So obviously we had the spike during COVID. But you can see that during the prior time, this was like a 3 to 4% number for the most part um during the prior decade. We're now down at 1.4%. Here's what it looks like when you overlay it with nominal GDP. Nominal GDP is up at 5% and we are seeing year-over-year income X transfer payments. That's about 17 trillion is only growing at 1.4%. How's the economy floating? Well, because the transfer payments are growing at 9%. So, the government transfer payments are still growing year-over-year at 9%. That number is about 5 trillion. So, you have 17 trillion on this number growing at 1.4%. You have 9% growth in transfer payments. And this is the way that you can see it. 17 trillion. This thing is growing at 9%. 9% on this is a big number. So, the government is basically created a situation and those transfer payments are getting to be a higher number of the two of them combined. We're now up to about 30%. Um, it's growing rapidly. It's like having Bitcoin in your portfolio versus any asset. If you leave it for five years, it ends up as the biggest waiting in your portfolio, even if you don't do anything.
Um, I just want to highlight again what I showed last week and the reason I'm going through this. This is temp employees overlaid with earnings per share of the S&P earnings per share going up temp hiring going down and this is chat GPT chat GPT and then this is the jolts higher. So there's no doubt right now that that's what's happening going on.
So what are CEOs talking about now as we come out of Q3? The agentic future agent deployment accelerates as organizations build confidence through early wins. Here's the company. CH Robinson, CHRW, a trucker, launches an AI agent to help shippers adapt. The stock is up 50% in the last four months. Here's what they said. Our fleet of AI agents are not only improving our productivity and operational performance, but automating tasks that free up our industryleading talent to focus on more strategic blah blah blah. Operating margin increased to 31% up 680 basis points. This is during a bad time for transports. Go look at the transport index. Go look at what's happened in trade. The productivity gains that come and you get rewarded where your stock goes up 50% in a short amount of time, including at earnings. Most of that happened in two days. They had a 20% jump after Q2 earnings and uh details and the same thing in Q3. So, go look at those two and just go through it. In terms of you get all the negative reports, this one's from Wharton. new data on the corporate ROI from generative. So this is return on investment. They found that 75% already have a positive ROI from AI. Less than 5% negative return. So whatever stories you're trying to read, remember clickbait, clickbait, clickbait. If you didn't see that one, it's because didn't get any clicks.
So I want to bring you back to something I wrote in May 15th. Um if you follow AI as much as I do, if you're watching all these podcasts or if you're going through it, you understand what tokens mean. You understand what inference means. You understand how much demand there is. I've heard, as I've said repeatedly, it shocked me when someone said, "I'm hearing from experts that DRAM prices for memory, memory related, will be overs supplied next year." This is something I heard less than six weeks ago. The experts don't seem to understand the demand side of the equation. This is not about the supply side. I can say it over and over again. This is something that has never happened before. We are literally putting intelligence in every machine and it will take forever, a decade. All we're doing right now is the data center buildout. We still have to put brains in every single machine, including dishwashers, washing machines, everything. Everything will have a brain. There is not enough semiconductors for that. So, if you guys don't have semis for some reason because it's not part of your silo. I wrote this back in May. These are the names that I put down. I am not a bottoms up person. These are the ones that I spent as I did my work to come up with which ones would have to include including ones on the edge embodied which are the next stage for robotic smart devices FSD. The ones that right now are going to start to go. So this was a combination of things. You go through these names on your own but I want you to see two things. Number one, it's up 40 plus percent. So this is an equal weight index of those names. The main thing I want you to show is look at the sharp ratio. There's no falls. These names are in different places. They're moving at different ways. You can build portfolios. This is the semi side pure. So see how it's more volatile. But this is it relative to the S&P up 16% versus 44. and software, which I'm going to keep saying, anyone who keeps trying to buy software, go read books about buying mall names from Amazon.
All bubbles and David Rosenberg. For those of you who've been in the business long enough, this is not a shocking title except for the fact that it's less than a year ago that he wrote Lament of a Bear. I'm not going to say the stock market always gets a story right, but it is a broad and liquid market and collective positioning by thousands, if not hundreds of thousands of participants, and they're not stupid. So, it was an exercise in really trying to more deeply understand what the message is and maybe tipping my hat to the bulls instead of arguing and calling it a bubble every single day. My missives, but at the margin, what's changed for me? Well, maybe it's not a bubble. And yet, he's back to all bubbles in that I'm I'm only showing that not to pick on David Rosenberg. He's been a bear the entire time that I've read anything from him. This is really about the fact that if you're in that class and you're waiting for this thing to come down, the market has left you by. There will be a time where this stuff will go down. But if what you're reading is stuff like this, look at the scam. Everybody, they're just exchanging money. It's a concentrated market. It's a concentrated market. If everyone was buying oil right now, Exxon, Kico, and Chevron make up 50% of the energy index. I don't know how people get through this by just trying to turn something. It's not. The Mag 7 market cap is $22 trillion now. It's bigger than it's bigger than a market cap of everything. I think Europe is right around 22 trillion in for the entire market cap. This is the mag seven.
Gavin Baker gave an interview this week. Um, it was at a 16Z event. Um, and you know, he he simplifies it. Gavin Baker is someone I've referenced a bunch of times in here. At the peak of the dot bubble, 97% of the fiber that had been laid in America was dark, wasn't being used. Contrast that with today. There's not a single dark GPU. We have a shortage, severe memory shortage. Now remember the story I told you about someone who told me that experts in quotes multiple not one was that experts were saying there's going to be a supply issue. The memory shortage storm has entered a grim phase. The explosion of AI demand has triggered a widespread memory shortage and a rapid price surge across the entire industry. According to the supply chain, the shortage began to take a turning point in the third quarter and is now too late to secure supply. This is how quickly things change in this. Here is now the price of DRAM. I showed it when it was up at 12. It has just continued to move higher.
Adam Jonas, so last week I spent a decent amount of time on Tesla. Uh I can't say this enough. This is the most important event in my opinion in the fact that once we have a situation where you have full self-driving by Tesla, not by Whimo, by Tesla because of the structural difference in the approach and how important it is to humanoids. It's a major major event and Adam Jonas called it this week. He said Tesla has solved autonomous driving. Remember, I highlighted this if you ha if you didn't watch it yet. This is a video. You can find it here on Twitter. You can also find it on YouTube. It's called The Robots Are Coming with Adam Jonas. I highly recommend listening to it. Here's what he said. I'm calling it autonomous cars are solved. He likened Tesla's current achievement to the invention of the steam engine, saying it is enough to pull the safety driver at scale in major markets. Jonas flagged three key showstoppers in the reports. With no safety drivers in Austin within a few months, they will operate with no safety drivers within a few months. He highlighted Jonas believes the remaining hesitation on the safety driver is internal caution. There is no explicit regulatory approval required to pull the driver. So, I said this before, Texas is going to allow this to happen. It won't happen in New York. It won't happen in a blue state for now. But the cost differential, if an Uber is costing me $60 to go from Manhattan to Brooklyn in a 20inut ride and an autonomous vehicle can do it for 70% less without a person in it. Once it comes here, it's over. Now, there's no way in the situation that people are where the middle class is having trouble, the 100,000 and under people are having trouble because of inflation, there's no way you can stop this from being happening inside a city. He reiterated Morgan Stanley's view that solving autonomy for cars unlocks the path for autonomy in other form factors of AI enabled robotics, aviation, marine, weapons, etc. the implications of Tesla's FSD business global penetration about 8 million vehicles. This is just again if you're short Tesla because of valuation um or because you don't like Elon Musk or whatever reason that you have uh if it's going to hurt you guys in terms of alpha to be short it I'd cover it if you're going to have it on there as part of the thing not being long it from a mutual fund perspective. Uh I think at this point you should spend some time on it. Uh because this is an important thing not just for this year but it's really important from an AI basis and if you haven't spent the time I'm happy to spend the time on it. Uh Tesla autonomous driving might do it faster than any tech. I completely agree and that's the biggest problem is that it will accelerate once it starts. The Tesla chair Robin Denholm was on TV and spoke about optimist. I'm not going to read the whole thing, but this is all setting us up to see what's going to happen at the shareholder meeting. Tesla's position at the forefront of major advancements in AI, robotics, and autonomous vehicles. It's entering the most transformative phase ever.
Bitcoin down four and a half% for the month. Everyone's losing their mind inside the crypto space. We've got the crypto fear and greed index down around levels uh basically associated with points where you want to be buying. Um I mean literally every single time. It might take more time down here, but the sentiment is negative despite the fact that Bitcoin is still up 16 17% year to date. More than the S&P 500, but people expect more. I wrote this and published it on Saturday morning. Uh, I would just go read it. Uh, I think Bitcoin is really important for everyone to spend time. Last year and at the beginning of this year, I think there were a lot of people that didn't focus as much time on AI. If you're one of those people that played catch-up this year to really understand artificial intelligence, uh, you won't have as much time with crypto. Crypto will be dominating the markets next year in my opinion. The real bubble quote unquote will be in crypto. Uh, there is massive things going on, of which some of them I'll cover them. Uh, Bitcoin will always be a major benefactor, but we are still coming out of the.com bubble for crypto. The VCs are packed with investments they made in 21 in crypto. Those are locked into investments that were also made in SAS. Now you have AI. Crypto just does not have the money flows coming in. And you have this overhang that's been there. Bitcoin's been able to go higher because of institutional adoptions. The altcoins are still down 25 to 30%. You're at the beginning stages of the next phase in crypto and people need to pay attention. 17 years after the white paper, the Bitcoin network is still operational. Bessim put this out on the birthday of the white paper.
Here's the big news. Zel um Zel is going to expand internationally using stable coins. This is a monumental development, but it's being quietly presented almost too quietly. This is what happens now with everything related to crypto and AI is these things happen and you just don't realize how important they are. Zel is just not another fintech app. It is the clearing interface for over 1,800 US banks including the big ones. It's responsible for over 80% of all deposits, collectively managing trillions in retail flow. When the network integrates stable coins for international transfers, what's really happening is the digitization of the US dollar settlement layer. the plumbing beneath the financial systems. So if you thought about the banking system having to go one at a time to go through this, this is the reverse Trojan horse of monetary control, a private sector roll out masking as convenience. This is because again just like I said with the Tesla thing, governments would be forced. Well, the banking system, the monopoly, trying to keep control, trying to keep their vig is basically saying we have to do something to keep compete with Visa, to compete with Mastercard, to compete with Stripe, to compete with Circle, to compete with Tether, to compete with everyone. Walmart's doing it, Amazon's doing it. Doesn't really matter. um stable coins become the invisible infrastructure. the adoption phase from 2526 estimated total stable coin transaction volume right now I think it's about 6 to 10 trillion so it would double next year but then you look this is the the point in exponential you get more than a doubling more than a doubling in the next few years so again I would just realize that what's going to happen here is the growth is going to accelerate we had hundreds of banks instantly stable coins will
replace Swift for high-frequency settlement. Most importantly, the integration into wallets. Basically, I thought it would take a long time for people to get wallets. Now, it's just going to be easier.
US banks enter the stable coin arena, disruption of 1 trillion in remittance market. So, this is for overseas. Um, I'm not going to talk about it now, but the Argentina situation, if Malay had lost last week, I think there would have been a run on Argentina, very similar to Silicon Valley Bank. That's for another day.
But I do think this brings again this high-speed activity just like it is for the retail structure of the stock market. Faster, faster things, exponential innovation, exponential change, exponential disruption leads to exponential periods of volatility, uh, including runs on sovereigns. Uh, this is all and again by turning zel into a regulated global stable coin network, the US quietly reasserts dollar dominance. They're trying to speed up the ability, which is why the regulations are so loose. Loose regulations like they are now as opposed to incredibly tight will definitely have some problems that pick up along the way, but for the time being, the adoption is going on.
It has huge implications for Bitcoin. I want to make sure you connect volumes inside the digital wallet. Allowing more wallets to grow means more money that's already there, which means on your phone, you can immediately transfer your stable coins into Bitcoin. Bitcoin will continue to be a growth factor.
I listened to this podcast for the first time this week. Bell curve loved it. This was a great episode. The token revolution again for you. Those of you are trying to catch up on how to deal on the crypto side. You've got Circle obviously is an IPO this year. Tokenization is going to be a big story next year and stable coins are going to help drive it. This particular episode they go through a lot of different things. They talk about some of the things that I talked about in terms of the participation that's going on now is just much different. Back then you had really money being thrown all over the place from every direction. It was much more of a bubble phase in '21-'22. There was money everywhere. Everything's now going in a different way.
But you got the regulatory green light open the door for regular regulated financial institutions to use blockchain rails. So the blockchain rails are growing. They're using all of this pathway for tokenized assets which is super important because the volumes just explode because everything becomes token, tokenized. The announcement crystallized a broader trend. Tokenization and stable coins are no longer speculative. They're becoming payment plumbing. It represents the fusion of trady and blockchain. So again, left lane, right lane. Left lane is crypto. Right lane is the old banking swift system. You want to be making money by investing on the things that are going to benefit dramatically from the speed.
The most interesting part of this, uh, for me, uh, in terms of this phase was comparing this to the web 2, web 3 analogy. This was for a minute in here. Uh, they brought up this Rivet Capital report that reminded the host of web two. After the dot-com bubble burst, the market went through a phase of disillusionment. Valuations crashed, investors retreated, but key infrastructure had already been built. So go back to the dark fiber thing that I mentioned from Gavin Baker. The dark fiber that was there eventually all filled up. This is what's happened. The blockchain, the rails, everything has been built. So now we can have the next generation of applications just like what went on with the telecom companies.
So the the buildout that we had in '21 and '22, right now there's not as much money going in the space. It's gradually going in. Like I said, a lot of it's trapped in the VC world. You've got hedge funds that invested a lot. They're not getting in. The altcoins haven't done well. So you don't have the momentum side, but you have a lot of smart entrepreneurs that are getting in.
Why this matters? The infrastructure maturity. So again, the level twos, you can go through this with already the cost deflation. There's a reason to do this. And again, when you have inflation problems for the 100,000 and below, the banks are a major friction. They're a major cost. They are major problem. Same thing as the credit cards. There's a lot of money that increases the cost of goods because of the cost that it costs a business to do this and individuals. All of the arbitrage, all of the fees, everything will all go down dramatically. The entrepreneurs' energy is returning. Shift from speculation to utility which is the most powerful point of anything.
Now in terms of the tokens, this Rivet Capital report on token revolution. Tokens are the heart of a new era acting as the building blocks of AI, money, identity, and digital assets. At their core, there these systems all run on tokens. This is the connection between AI and crypto. And again, whether it's tokens itself for tokenization or AI tokens, this report links them all, but it also breaks it down into the value loop, the expertise loop, the personalization loop. Think of it as your identity, your money, your, um, your healthcare, every identity that you have. So tokens unify AI and crypto.
Why now? Frictions finally dropped. These are all the things that I mentioned in terms of why this is is happening now. You should go read the report. It connects them all. And most importantly, Dan Ies, who most people have heard, he got connected to Sam Alman's cryptocurrency. So, this is the identity token. This is the individual thing of who you are. So, this is the his orbs thing in terms of going through it. So how Worldcoin aligns with the token revolution framework: identity and proof of personhood, tokenization of human presence, intersection of AI and crypto, global ambition and interference of scale. So again, Worldcoin aims to scale its orbs and verification network globally.
The Solana founder was on Moonshots this week. This is the third episode of crypto. If you've at least listened to me on Moonshots but you haven't listened to the prior crypto ones. They did one over the summer. They did one a couple weeks ago. Here's another one. I would go listen to all three. There is alpha to be made in crypto next year. And now that you at least have ETFs, everyone can participate. There's more things that are coming.
Immad Musto made several points in that Raul Powell thing. Crypto as the next bubble and why it's inevitable. I'm not going to read all of these in here, but I really do believe that you need to understand how important it is for the financial guard rails to finally change. Literally putting lubricant on them so everything can move faster, more efficiently, cheaper, overnight, the transactions will explode. And we need that. In fact, his point was he argues that AI drives a massive deflationary shock, collapsing the cost of cognitive labor. Governments will need a way to increase money velocity. This is what we've been lacking. You've all heard that M2 velocity has gone down forever. The money goes into money markets and it just sits there. The money goes into something and it doesn't move. AI agents will be transacting tokenized assets. The ability of moving stuff around, getting liquidity from your assets that are not liquid. All of these things will happen, whether it's your house or everything.
France stuns Europe. Could lawmakers adopt Bitcoin and ban the digital euro? I only bring that up because of Michael Sailor. For whatever you think of Michael Sailor, I want to remind you where we are. We've got the halves and the have-nots. If you're not Apple, Google, Nvidia, you need to find a strategy to break free from the stranglehold of digital monopolies. There's 12,000 public companies in the US. Most of them have lost in most, most of them the market has lost interest in and they're competing against a Google, Amazon, or Apple. So this gets back into the $22 trillion for the size of the MAG 7 while the Russell 2000's market cap is 3 trillion. 22 trillion versus 3 trillion. The Russell 2000 was a bigger market cap in 2013 than the sum of those. This has all happened over the last decade.
Michael Sailor decided to do what he did with strategy. Regardless of what people think and the same reason that other companies are doing it, they're not doing it from a place of strength. They're doing it from a place of weakness. These companies are zombies. And this is the approach he made. His company was a zombie. MicroStrategy was a zombie. When you're one of those small midsize companies and you're staring at these trillion-dollar digital giants and no one cares about you, you start thinking it's kind of hopeless. I think 96% of public companies now qualify as zombie companies unable to outperform a Treasury bill. So every time that you hear equal weight S&P versus S&P and it looks like this, Michael Sailor decided to do what he did here. He decided at that point to put Bitcoin in because he had no other solution to his business. So that becomes a quote-unquote bubble by the bears. MicroStrategy must be a bubble. Everything he's done with the business in terms of the way he's done this has been not only smart, it's way above anything that public companies do in terms of terming out the debt. What he's done with the converts, what he's doing with the premium, everything in here, you look at what's happened. You get shown this chart. This is a concentrated market. So the S&P 500 is outperforming the equal weight cap weights. It's just getting worse. This is literally what he just described in there. So he made the decision to do something differently.
Here's what Bitcoin has done relative to the S&P. So, I just showed you equal weight to the S&P and it was a straight waterfall cliff. Here's what Bitcoin has done relative to the S&P since Michael Sailor decided to do that. Well, that was a pretty damn good trade. So, here's the MicroStrategy stock. Oh, wow. Here it is. Bitcoin over the S&P. He basically just decided I can't compete with the MAG 7. They're just going to continue to win. So, what I'm going to do as a zombie company that has no chance to win is I'm going to take the billion dollars I have and I'm going to go put it into something that actually is the opposite of what these guys are doing in the future of what I believe will happen. So, here we have Bitcoin relative to the MAG 7. And again, it's unchanged since the end of 2020. It's even outperformed the MAG 7 since he got into it.
So, I only bring this up as I finish this week out. You've had the chance this year to spend time on AI and yet many, many people are still worried that it's a bubble. I'm telling you this will only continue and there will be pockets of blowups along the way where the market will fall 20 to 30%. Your job is not to time the market. It's to figure out the places with inside the market that the majority of people have not discounted. Nobody spends enough time on artificial intelligence has done the work. It's not a technology. It is electricity. There are many, many places. Reach out to me. Reach out to 22V. Get you'll you'll get information that'll help.
We're entering the worst part for labor. This is the dystopian phase. This is when I expect crypto to not only accelerate to the upside, but to be necessary. This is coming out of the dot-com bubble. This is where you want to focus your attention. If you want to stick with the MAG 7 at this point, be my guest and enjoy it. But if you're overweight to those, if you're overweight Oracle, if you're overweight GEV, if you're overweight all of these tech, these AI names that have worked, I think this is going to be more about the retail structure changing. It's going to be a small cap, a gambling environment. It's going to be very, very difficult for people that wait. You do not have time on your side.
Uh, just a reminder, subscribe to this. Please keep it going. Um, this is my business now. If you guys like the content, like it, do what you need, but definitely subscribe. Show it to your family and friends. And I promise you, I am working on getting you guys videos and things to help you be able to use AI for whatever you want to use it for. That's it for this week. I'll see you next week.