The Equity Markets Are Insane Right Now | Jan van Eck

the equity markets, and if you've seen semiconductors, you know, who have doubled in the last 12 months and, or, or, or more, or memory stock companies, uh, the stocks of memory companies, excuse me, I mean, there's insanity going on um in the equity market. So I do want to really, you know, is Adam, you and I have never ever experienced the kind of appreciation that sectors of this market are providing and the and the related profit growth. So I want to walk through that.

Welcome to Thoughtful Money. I'm its founder and your host, Adam Tagert. When market uncertainty is as high as it is now, I often emphasize that the most useful people to interview are asset managers because they don't have the luxury of merely having an opinion on the road ahead. They've got to commit capital to their convictions and be judged upon the results.

Today we've got the great fortune of having the return appearance of one of the most respected capital allocators in the business, Jan Vanek. Jan is CEO of Vanek, an asset management firm with over 230 billion in assets under management, invested across its wide families of ETFs and funds, spending equity, bond, commodity, digital, and regional asset classes. As we've done the past several quarters now, Yan and I will spend the next hour discussing his Q3 macro and market outlooks, as well as where he sees the biggest opportunities for investors right now.

Yan, thanks so much for joining us today.

>> It's great to be back, Adam. I really look forward to these quarterly catchups.

>> Me, too. As does our audience. Uh they've really gotten to look forward to them. Um so folks are very excited that you're here, Yan. Um happy 250th. By the way, we're talking just a couple of days after the nation's uh great celebration there on the 4th. I hope you and your family had a good one.

>> Oh, um I I I love history and uh my two of my four children were born on the 4th of July. Uh my twins. So, uh it's in Sam and John. Is that their names? [laughter]

>> George.

>> Wait, wait a second.

>> George,

>> it's it's Wait, John. John Adams and Thomas Jefferson. Didn't they both? They both died. Actually, one one is named uh Yeah. Well, no, one's Theodore, but he's named after a president, but not not a founder. It would have to be, you know, who hated each they twins get along great. But uh yeah, Jefferson and Hamilton, I guess. Right.

>> Right. Right. But I think I think Jefferson and Adams both died on the same day and it was July 4th.

>> Um just one of the great

>> 50 years after the signing of the Declaration

>> to the Day. It's kind of it's it's so spooky that people never really mention it.

>> I I know it really is one of the great coincidences of fate. But anyways, um and last time you were on, if I recall correctly, actually, you you recommended uh a book for folks to go read. Um I know you said 1776 was a a book that you really liked about the founding of the the country, but there was another one. I'm blanking on the title. U but you are a big student of history, but of American history in particular.

Yeah, I think it's, you know, so many people don't really kind of know the basics and and it's great to great excuse to go over the basic principles of our country, which of course are freedom um but also the balancing of of power um within the government, right? So that we don't go too crazy and and that different branches kind of interact and in a way that survived for 250 years. It's kind of amazing. The book that I was recommending or do recommend is Founding Brothers by Joseph

>> because it kind of gets at the the principles uh that people believed but also a little bit the personalities without focusing too much on one founder or the military stuff which you know I don't think is of lasting interest.

>> Okay. I think I talked over you a bit. It's founding brothers by whom?

>> Joseph Ellis.

>> Joseph Ellis. Okay. Um, last point on this folks and then we'll get to the real meat of the discussion that you came here for. Um,

>> but you know, I I've been like many people have been reading up and brushing up on my Revolutionary War history leading up to the fourth. And it's amazing because there was there was, you know, kind of just as much, I guess you could say, disagreement and political friction and stuff going on back then as we've had sort of throughout American history. Um, and they were they were doing all this under duress in a short period of time. And it's just amazing how much they got right, how much of of, you know, what came out of kind of all that chaos and disagreement and whatnot. Uh, has has been this this founding structure that has, you know, endured and inspired so many other countries. It really is pretty amazing. Again, we're fortunate enough to have had the people in place at the time and some of these people are some of the smartest Americans that we've ever had. But, um, the odds of them getting that much right in one, you know, sort of desperate attempt is is mindboggling to me.

>> Yeah. I mean, there's a book called The Miracle. Um, and it talks about the declaration and and there's there it is sort of an amazing coincidence. Uh I think the other thing that's underappreciated is how impactful it was for the world, right? Because most of the world was monarchies at the time and this is the first really democracy, right? And and those ideas transmitted to France which had violent consequences and and and elsewhere. And I mean a British historian would say it was just part of the arc of power going to parliament over time. But still, I think this was a huge step forward in in world history.

>> Well, all right. Well, we've got lots to be grateful for, and I'm grateful that you and your family had a great time. I had a really fun time, too. Um, which folks, if you listen to my interview that aired the day before this one with Lance, um, our weekly market recap, I go into detail about what my July 4th experience was like. It's pretty cool. Um, all right. So um you always do a wonderful job for us Yan of um preparing for this discussion and um I don't want to stand for much longer between you and your slide deck which is really what everybody's here to watch you go through. Real quick though I just wanted to revisit um some of the key themes from last quarter and just get your reaction to them. Um, and and no matter whether you were spot on or or totally off the mark, um, I'd give you a buy for last quarter because, you know, nobody expected the Iran war and the disruptions that it would cause. But if if we can, really quickly, I do want to see where you are on a couple of different things. And if it's in your slide deck, feel free to punt any of these to say, "Hey, I'll talk about it more in the slides." So last time you talked an awful lot about the exploding token demand that you were seeing in AI um and and did a wonderful case study of how Vanek as a firm has becoming you know has been really leaning into AI. You had your technical expert Jonathan Wang on here for us. Uh but basically you were still pretty bullish on the AI sector because of the explosive growth that you saw in tokens. Has anything materially changed on that?

Um, well, listen, I I guess in some uh I'm going to review kind of what we talked about last time about halfway through the deck,

>> but um I know you always want to know like, you know, what do I think about the weather? And you know, this quarterly taped interview is a great forcing mechanism for me to think about things.

>> And last quarter, I was bullish on a lot of things. And I I for for one of the first times started reading the comments um in the in the YouTube video that you post and

>> always a mistake

>> and no it was actually really good because someone said you know this guy's just an asset manager of course he's just selling all the time and he's bullish on everything and you know my my first comeback to that is uh you know I have been bearish on things um I've been bearish on Bitcoin coming into the year but I was bullish on a lot of things um at the beginning of the second quarter. I'm still bullish on a lot of things. Um, but I I want to explain myself and and that's why I'll get to the to the slide deck if that makes sense.

>> Let's just go straight to the slide deck then.

>> All right. So the topics that I wanted to cover today are I mean the equity markets and if you've seen semiconductors you know who have doubled in the last 12 months and or or or more or memory stock companies uh the stocks of memory companies excuse me I mean there's insanity going on um in the equity market. So I do want to really you know is Adam you and I have never ever experienced the kind of appreciation that sectors of this market are providing and the and the related profit growth. So I want to walk through that um because it's either you're either unnerved or you have to at least explain it. So that's I think job number one because equities are are the biggest part of everyone's portfolios obviously. Uh I I do want to, you know, drill down on what I see as the risks to anthropic, uh which is kind of one of the darlings and has been in the headlines almost every week. Um and then I'll I'll do the revisit of some of the some of the opportunities that I saw at the beginning of Q2 and and revisit what I think about them today. And then just a quick run through of macro forces. um you know I I'm a long-term risk that I see is um the government spending rates in the in the US and so I you know you have to keep your eye on your risks as well as understand your opportunities for those of you have haven't listened um to our quarterly kind of updates before uh what I do I don't have an opinion on everything I just see hundreds of charts thousands of charts uh I pick my favorite kind of factoids Um, and um, you know, I don't like I'm not going to talk about the Iran war. I don't feel like I have to go through the headlines. I just try to focus on kind of questions that I think will are important to ask about, you know, the future in the in the markets. But, um, that's that that's kind of the perspective. So, uh, ready to start?

>> Ready to start. Just know Yan, at some point in here I will ask you your thoughts on if the war with Iran resumes back to going full boore. Would love to hear how that might impact any of what you're about to walk us through.

>> Okay. Um I would say pro probably not a lot, but let's uh let's start.

>> Okay.

>> Um so price to sales. Uh I I I love multi-deade charts. So this is you know this goes back to 1946 and you know what you can see is today's market um is more expensive by an order of magnitude than any other market um you know over whatever the last 60 years uh 70 years so 80 years what's what's going on another chart that's extremely unnerving not even a valuation chart but this this chart of the Korean stock market. Um, you know, 17 years basically of no performance whatsoever, right? And then it explodes um upwards, right? Driven by uh the memory stocks um SK Highix and and Samsung, right? It's just it's just it's a rocket chip, right? I mean, SpaceX, that's why I said stocks are in orbit. Of course, SpaceX, you know, went public this quarter, but I mean, this kind of price behavior is really distorting to markets and it's extreme. And so, I guess the you have to just ask yourself that question. And, you know, really the reason I'm comfortable is because of profit growth. So, I I love to just look at this profit growth um you know that was reported in the last quarter and then and then look forward as well. These are insane numbers for multi-t trillion dollar companies. And I know everyone kind of knows it, but Nvidia's profits going up 129%, right? Google's profits going up 80%, Meta 62. These are just insane numbers. Now, I know that's that's history. So, let's look going forward.

>> Can I ask you a couple questions on that real quick?

>> Yeah, of course.

>> So, Nvidia, I understand because basically everybody else is buying Nvidia's chips, right? Yeah, we're

>> placing a bet on the future. Whether that bet's going to play off, who knows? But obviously that goes straight to Nvidia's bottom line.

>> Yeah.

>> For the Google's, Metas, Amazon's, Microsoft, is that is is that phenomenal profit growth for them coming mostly from like cloud services or is that just their their general day-to-day other business lines?

>> I I think it's a it's really a combination. Um and and to that point right um Meta is now offering compute or they said they were thinking about offering compute ex externally. Um and it's interesting what I do do is drill into the different business models of these companies. So I'll flip forward if you don't mind to answer your question.

>> Not at all.

>> Right. So what I tried to to do um look ultimately I'm I'm bull why am I bullish? Because Adam, you know, demand for compute is still going up. We don't even know, but let's say five or six times a year and and supply is just not staying. Not not not

>> not keeping up.

>> Not keeping up. Thank you. And so the question at some point it will and every time I talk to investors they're like, you know, when do you think that'll happen? It doesn't seem like it's happening anytime soon. But let's just say that we don't know when it's going to happen. And it seems to us a ways out. That's why I think you just have to stay fully invested. But when that happens, what the question I ask is which of the companies that have a moat, right? In 10 years looking back at this, when are we going to say, oh yeah, these companies are still with us or you know, oh yeah, I remember that company. Do you remember that company? Right. So what

>> basically whether they're 1.0 or a 2.0, are they gonna be a 2.0 or are they gonna get their lunch eaten by a 2.0? Right. So the I I I I just did a I love to oversimplify but to your point here right I I broke out the companies into vertically integrated meaning they they're customerf facing they have compute they have their own models and they have some chips and you know uh Alphabet or Google um Amazon and SpaceX kind of fall into that category and they're they're hot meaning their their earnings are growing a And as you saw there to that was your question was about alphabet I think right

>> the second category um I think are you know potentially vulnerable

>> um but because they might only have part of the tech stack. So like Intel and Cabras only do processors um and then the memory companies uh we we're we're a little concerned about the memory companies. So they're, you know, they're they're very important. You know, they're part of the bottleneck right now. They're more important than the Street of Hormuz, but you know, do they have a moat that in five years will will go away or or do they have a moat? And I think they don't have a moat is I guess my point. Most of their profits, Adam, uh to your to your point, actually just come because they jacked up prices. They're not even increased volumes that much. It's just that their memory chips are that much more valuable. that's why they're so they're so profitable. So, I'm I'm a little worried um about them. And then the last one is just what I would call the the software companies. And there's um a fight right now which we'll talk about a little bit. Well, there are a couple of different business models in here, right? But one is a single LLM model. Uh so just like an open AI or a claude. Then we have someone's trying to be the middle middleware if you will saying all right I'm going to control your corporate AI environment and you get to pick which models you use. We'll talk about that a little bit later.

>> And then uh just where AI is inside like Microsoft or Apple. And so that's where the Microsoft and Apple um both backwardlooking and forward-looking are in that 10 to 20% earnings growth rate. but they're really relying on other people to provide that the AI models and compute, right? They're just kind of wrapping it, if you will.

>> Um, and so that's that's how I kind of categorize these companies. So, you get back here looking backwards. Um, the the people with AI inside, Microsoft is in the 20% range and that's the same as Apple, right? And that's going to be true going forward. And then you have the the hotter um you know kind of people in the tech crucial part of the tech stack but the the vertical uh vertically integrated companies to your point several minutes ago right are also doing really well right the Amazons and and and Alphabet at 80% backwards looking earning growth. So if you just look look forward I know there's a ton of data and this deck it will be available through Adam's distribution um you know later today or tomorrow um but without going through all the numbers if you look down you know down this list of implied earnings growth going forward Adam you you know you see the blazing hot again hardware shortage companies go growing two to three times their earnings next year again whereas as um you know a Meta or an Alphabet or a Microsoft are kind of in this the lower uh profit growth categories. I don't know if that's helpful or not. I guess my main

>> super helpful.

>> I mean my main point is the implied earnings growth the average earnings growth of these tech companies these are tech companies is 95% and the median is 40%. So, it's just these are just crazy profit growth. But the this is the last slide on this. Look at tech profits relative to the rest of the market, right? They're just outstripping everything. And I guess our our you know the reason I think it's still sunny outside is because we're still we still think that these higher profit numbers are possible for the tech companies because of the continued shift in our entire computer um you know infrastructure to towards this AI oriented software hardware combo.

>> All right. So let me just interject with sort of the question I was leading up to is this is what has happened so far. You seem to say look I don't see any real reason why this trajectory should change anytime soon especially because there's still such an imbalance between the demand for compute and the availability of compute. My question for you is is do we know yet um whether beyond just these companies um while there's sort of a mad dash gold rush for compute right now do we know if the incremental profits from companies making AI investments are materializing on a pace to justify this continued profit expansion for these big AI companies?

>> I I mean I I think so. Let's just talk about uh Google for a second, right? I used to joke to our marketing department. It's not really a joke, but you know, it's Google's world. We just live in it, right? Because all search was going through Google. Y

>> um and they would determine whether we got web traffic or not, traffic or not.

>> Google in the last 18 months, Adam, has completely transformed their business, right? as an AI vendor, they're not selling like blue links anymore, you know, access to blue links. They are now, you are now greater part of their ecosystem, right? Because they've taken all the knowledge on the web. They've processed it and they are now kind of drawing you in to their ecosystem by giving you the answer from Gemini, right, to most of your questions. I don't know about you, but most people are not clicking through anymore. or they're getting the answer through Gemini and that's it. And that

>> can I ask a naive question on that which is how do they make money on that? If if if they were making money on you clicking on a blue link and them getting some, you know, advertising share from the companies that were advertising on there, how are they making money or as much or more money if they're just giving you the answer in the Gemini summary?

>> Look, we're not Vanex is not spending less money on Google, right? we still uh want to get placement through I'll call it the old the oldfashioned way um you know number one

>> then there's a whole ecosystem of knowledge because basically they know the kind of customers that are coming to us right so we pay for analytics relating to that um so that their their uh I mean they're I mean really big picture again their business is so awesome because their revenue is going up while they don't have to increase their costs, right? AI is making their engineers more powerful. And so that that's why they're growing earnings at 80%.

>> And that is the central promise of AI, right? You you'll do a lot more with the same or less, right?

>> There's there's I guess if you wanted to think of Q2, one of the things I would flag is that a lot of these corporations now also have a venture arm that are contributing to profitability. So Google was one of the biggest shareholders in SpaceX for example, right? Nvidia has made a lot of venture investings investments in the ecosystem. So that is um other income I think on their on their you know on their income statements and and that's

>> anyway that's a whole separate webinar topic at some point but that's not insignificant. So they're they're really making money throughout the the ecosystem. You know, Google also has Whimo. Um, YouTube, you know, the way most people experience what you and I are doing is through an ad, right? An ad platform. Um, so there's or or subscription, right? If they want to get rid of the ads. Um, so they they have that vertical integration, right? They are dealing directly with corporate and and individual consumers.

>> Okay. Um so in general you think it's just all overall organic um incremental organic profit enhancement from the AI platform with you got to take some haircut of that 80% um profit growth and say well that's actually attributed to their investments and other stuff but it sounds like that's not like you know half of their of their profit growth. No, no, no. It's not right. And it's just it's just uh Yeah. And and and you know, we basically talked about the Mag 7 having, you know, having the scale of customers, right? That's when I I went back to this area. This is why I think this is so important. Um because if you're interfacing directly with customers, you have that frontto back. And if you're able to have the scale of inputs, it makes your product better, right? That is that is part of it, right? The more searches you do on Google, the better the results are. The more um videos you post on YouTube, right? This the same with content on Instagram for meta. So there all these all these economies of scale uh that that benefit the bigger tech companies,

>> right? And and network effects. Okay. And I I will note too that I mean these are they're impressive profit growth numbers period but when they're on the largest companies in the world it becomes even more impressive right

>> it's it's completely mind-boggling um the the maybe just flipping forward here um I found this chart to be helpful this is from JP Morgan but they are looking at the top 10 and so the green line on the left shows the valuation. So [snorts] what's happening is the profit growth is so big. Um and then another you know factor in the US equity markets is how these big tech companies have been driving the returns of the S&P and that's why the market cap S&P has done so well over the last two years right but the profit growth has caught up and and now the valuations of the top 10 you may not see the numbers are almost the same as their um as the their average over this time period. So the average is about 20.8 times forward earnings and they're about 21.6 times. So there's not some kind of valuation distortion Adam and that's why I think we can be you know really comfortable um just riding this wave the on the on the right hand side even though it feels uncomfortable in a way right and on the right hand side uh the the earnings of the top 10 in the in the green line um have been increasing to support the their market cap um appreciation. Now, of course, they've come down a little bit in price, which has helped with their valuations, and and that was a factor in Q2 relative to some of the blazing hot tech names.

>> U, but that's kind of um I think th this is also kind of reassuring to me. And then the last um slide, you know, I like longer term slides, and this is like a long-term slide on top of a long-term slide. So, what this is is trailing 10-year returns of the S&P because I said, "Wow, we've really, you know, equity investors have really done well over the last 10 years. How does that compare to history?" We were we were talking about 1929 uh uh yesterday in the office. And um so that the trailing 10-year returns for the S&P through June is 15.5%. You can see that in blue, but it's not like crazy high, right? Um, compared to prior equity bull markets and and for prior equity bull markets that I think have benefited from the uh productivity from technology like AI, you've achieved those returns over a long time period, right? So,

>> if you will, the hump in the middle for the 1990s, you know, it was a really good equity market for a long time. So, yep. So, what I kind of get from all this from you, Yan, is for people who are seeing this rocket ride and saying, "Look, it's too good to be true." I kind of hear you saying like, "I know it looks that way, but it it's true. It's true and it's not abnormal relative to to history, believe it or not. Right.

>> Right. And go back to the previous slide for a second if you want.

>> Yeah, I was going to do that. Yeah.

>> Because I mean, look in contrast to the dot bubble,

>> right? Where the where the market cap got way extended uh rose way faster than the underlying earnings. Right. Right. And you're saying, hey, today it's actually different. You know, the the they're moving in lock step. the the the valuations as crazy as they might feel are supported because their earnings are growing at a pretty equally crazy rate.

>> Yeah. And listen, we were right to be worried over the last couple of years, right? Because the valuations of these top 10 companies on in the chart on the left were elevated, right? They were, you can see here, you know, well above 24 times forward, right? Up to up to 34 uhish times. So it was it was something to worry about. Um and and uh and to take into account. Um so and anyway, it's it's if it was flashing yellow before, it's now flashing green, I would say. Okay. Um so Yandex still very bullish on the AI complex. Um quick question and feel free to answer it in the rest of the deck if you want to but if you are bullish on AI right if you think that this demand is going to continue at this pace um and uh you know the capex will be there and the funding will be there do you have to then be bullish on the commodity complex that's going to be providing all the hard assets to supply this new future and build all these data centers and everything

>> absolutely um and and In prior quarters, right, we've talked about the AI, what we call the AI 2.0 trade.

>> You need the old world uh to supply the new world. And um I don't think I included the price of copper in here, but uh that's just that's just one example. And I and I think it's sustainable that that kind of demand and and shortage because this capex buildout is uh is really tremendous um that you know that we're seeing in the US economy right now. Uh so not you know not all of those segments um have have worked out. Uh so some of have you know appreciated a lot and then taken a pause. So, we've talked about nuclear in the past, right? Because there was a bipartisan change in in policy that's going to be supplying electricity. Uh some of the data center in independent power producers, their stocks have taken a little bit of a pause, but you know, o overall, absolutely, one of the ways that we implement this is is through those 2.0 uh beneficiaries.

>> Okay. And one last question on this, then I'll let you get started again. Um, there's a lot of people who were worried about the first couple charts that you showed, right? Price to sales higher than it's ever been. You know, that type of stuff. Um, and I understand why you then walk through everything here to say, "Well, it's actually pretty, it's a lot ser." So, for those people that are just saying, "Look, valuations are a poor timing technique, but man, come on. At some point things are going to have to mean Roert and um there's just going to be have to be some cooling off in this market. I mean the market will do what the market will do. No one knows for certain going forward but I would think you would say look as long as the earnings are growth is keeping up with the uh the share price appreciation here. This is a huge part of the market. It's like 45% of of the S&P market cap now is AI and AI adjacent companies. So, like, as long as that juggernaut's going, it seems pretty hard to think that there's going to be a real material market downturn as long as that party is raging like that. Is is is that an accurate statement?

>> Yeah. Uh, absolutely. I mean, it's it's it's it's just a huge tech shift that we haven't really experienced before, but it's driven by profit. So you know when I um when I when I talk to we have summer interns and when I talk to them about uh you know how do you value companies right what's expensive what's not expensive we start with PE ratios and because earnings is what really matters for a company right whether you're a dividend investor that wants to take physical possession of the earnings or or you just um you want profitable companies uh price to sales is a very very subsidiary valuation technique is what I'd say. And the fact that the price to sales ratio has gone up so much is more of a reflection that technology companies are really dominating this market, right? They're what's growing. They're the bulk of earnings growth. They're becoming more and more market cap part of market cap. So, it would be natural for the price to sales ratio to go up and not to worry about it too much. But it it you know it's something I had to start with.

>> Okay. And and for the people that kind of remember Scott McNeely's diet tribe back during the dotcom era where he railed against his own investors for paying 10 times sales because he said it's crazy. Do the math. I'm never going to be able to repay you what you're buying the stock for right now. You're kind of saying Scott was a little bit off because technology I mean maybe back then he was right but but you you can't use that as the the measure stick for price to sales in today's world because technology companies just operate differently.

>> Well, they have also very rich profit margins, right? That's the missing ingredient. That's the link between price to earnings that are normal and reasonable and the reason to price to sales is because instead of making 5% margins, they're making 50% margins,

>> right? So, it's just a a function of the math. Now, I'm not I'm not like I'm not saying that high price to sales ratios don't make me nervous, but um you know, that's that's the in this case supported by by profits is the way I see it. Okay. All right. So, sorry, back back to your your um plan of programming here.

>> Yeah. No, no, I think it's it's so that's that's the the last piece of the overall equity market before I get to the next section is there were some really big losers [laughter] so far this year, right? And um you the dispersion within the stock market is as high as it's it sort of is maybe every decade or so, right? So, uh there was a lot of mayhem and a lot of stocks bouncing all over the place, right? Um so anyway, I just wanted to make that point. And then related to that, I'm sorry this isn't as clear as it could be, but this takes momentum against quality. And we have continued to be in a momentum market, but what's interesting is that quality is a factor. So quality are uh companies with sort of more consistent earnings over time and and other financial metrics. Quality got destroyed um so far this year. and and it's basically the story is the big some of the biggest components of quality indices were SA software companies and those software companies those SAS software companies are being disrupted by uh by AI. So it's not to say that there aren't losers. Um my my colleague Angus basically says all the time like you have to think about AI and whether your business is going to survive, right? You have to be AI forward because AI is coming to eat everybody's lunch. Can you recreate Van? Can you, you know, all that kind of stuff. So anyway, so that's it. That's the market. Crazy performance, unbelievable profit growth supporting it. Um, and and a lot of dispersion.

>> All right. Um, but uh, Yan Vanek isn't saying endless summer, but he's saying um, you know, if if if if you're worried about the summer ending anytime soon, um, Yan's still going out and buying board shorts and sunglasses.

>> Yeah. Well, listen, I I think equities are are really important for investors and it's really hard to time them in the short term. I don't know uh, Adam, you know that it's not my philosophy. I don't know what's going to happen tomorrow or next week or next month. That's why I like longer term charts. But we look at 10-year trends and there's there's basically like three of them. One is AI, one is the rise of India and and and then third is actually the risk of of overspending by the US government. But we'll we'll get there. But I just wanted to to kind of remind people that we we very much focus on these 10-year trends in terms of portfolio construction. Um, but you know, you ask for a quarterly update and I got to tell you how I see the weather. So, um, that's that's the answer. All right.

>> It's super useful. And by the way, the time when you come on here and you tell me, "Hey, look, I think something's cooling off the AI trade." Oh my god, am I going to be paying attention?

>> Well, let me let me tell you who I think is a little bit too hot. Um, and and that's um, Anthropic. So Anthropic has uh you know clawed and I think there are some it's sort of I think the emperor is naked here a little bit. Um so uh anthropic is facing these headwinds. Number one yes corporations are spending on AI but they're they're they're costconscious consumers. So they're trying to cut their costs number one. Number two is there's a lot of competition in the model space. Number three, you now have people in the industry and in the government saying they're not to be trusted with you. They they they're basically ripping off their clients. And then number four, corporations who are the kind of people that are providing the revenue for Anthropic are I think over time and and starting now moving to control basically their computer infrastructure so they can protect their client data, their intellectual property and they can control costs which they can't if they're just reliance on one. So I'm going to try to tell this story quickly. So the the graph, this is sort of a repeat repeat, but I put the bullseye in there because the graph of the story of AI in Q1 was we finally have figured out how these AI companies are going to make money. They're going to sell it to corporations, right? That was the big news flash that literally we didn't know at the end of last year because Open AI uh hasn't probably solved that revenue problem as much. Anthropic suddenly saw their annual run rate revenue. This is a dated chart. I mean, this shows at 30. It's probably got to be approaching 50 now. But what what happened is now Anthropic has this bullseye on it, right? Where where people every time people are making a lot of money and everyone knows about it because they talk about it all the time,

>> they're they're going to be a target for competition. So, uh, this is a very simple chart. It's got a lot of colors. Don't worry about the the stuff on the right. The black line is Coinbase's token usage, right, which we said is going up.

>> Yeah.

>> The colors are what Coinbase is spending on AI models for tokens. So, right now, let's oversimplify the world. if

>> so, it's getting better pricing or what?

>> Um, so it's a whole bunch of different things. Um, and and the right I list some of them, right? But first of all, there are alternatives to uh to claude, you know, to claude, right? To the latest model, right? So there are open sour there are free AI models, right? You still need to pay for compute, but the compute is a lot cheaper. So some of these Chinese models that have come out um you know and anyway they're so they're using we looked at our our usage Adam I didn't go through it but um our usage at VANC half of what people use AI for they could just use Google for.

>> Yeah know like what's a restaurant like right there we could cut our bill by just moving that traffic. So that's the idea of a better default using more than one model and then using the model that's more appropriate to the search. That's just one example. Make sense?

>> Uh it does make sense but sorry help me just understand in general and it's probably multiffactorial as you said. How can token searches be going up but cost going down so much unless just the cost of compute is going down? uh because if I don't you I can use another open-source model at a fraction of the cost of anthropic.

>> Okay, great. So, and that's basically what I'm saying is

>> you're getting the compute for a lot less. Got it. In theory, you could go use Deepseek and get it for free if you could use DeepS here. Yeah.

>> Yeah. So, uh, at VANC, just to give you, uh, you know, and we're way behind some of these tech companies, but our, just to oversimplify the story, our token usage has doubled since I saw you last from like 10 million tokens to 20 million kind of.

>> Wait, wait, wait, wait. In the in the past three months, it's doubled.

>> Yeah. Well, we talked right here in April. So, that's kind of like where my cursor is here. This this this just dropped a little bit here.

>> So, that that was like be before we hit 10 10 million tokens, right?

>> And you were telling us about how it I mean you can see how it went from nothing to a lot when we talked last and then it's doubled since then. So you you really are I want to say eating your dog food, but you are you're saying, "Yeah, I think this is the future because we are really increasingly continuing to lean into it.

>> Yeah. And this this for the most part excludes our open AI usage. So it's not a complete picture, but it's really more apples to apples. Okay.

>> So our so so yes, our Vanx use of anthropic is is growing um or has doubled in three months if you want to be extreme. But what you can see here is that what we're spending um is leveling out a little bit.

>> And so we even in our very rudimentary way are um starting to be more costconscious or optimize, however you want to call it, our use of AI.

>> All right. And you can save this answer if it's a punch line later on here in your slides, but if we're talking about your concerns around anthropic, it seems like you're real anthropic dependent right now. Are you guys diversifying on other platforms as well?

>> We're doing the same thing. We're creating an environment where we can use multiple models.

>> Okay.

>> Um so that's that's number one. Okay. Number two, risk number two is there's competition. So the clawed models here this is effectiveness and I won't get into kind of the the details of the calculation uh and this is only the latest model and there's a lot of leaprogging but if you these three on the left are all from anthropic but the next three which are not that far behind are all Chinese open- source models. So the news flashed, you know, it's funny. You think not much happens in 3 months. The Chinese models have caught up with Claude and you know I can give you other charts but I'm and I'm oversimplifying but you know I can use these other models. are almost as good and some tasks Adam a lot of tasks in business are not time dependent right

>> there's like two categories of usage there's cutting edge I'm developing a new drug that's going to cure cancer or I need to swarm drones to defend my naval base in Qatar whatever that is that's one you know use and you need the most advanced models right but for a lot of business you do not right so um anyway So that's that's number two. Anthropic is facing competition. Then um I'd be curious. Did you see this interview?

>> I did with Alex Karp.

>> Yeah. On CNBC.

>> Yeah.

>> If a viewer um has not you you really have to go and listen to the whole thing. Uh but basically now he's a competitor of Anthropic but he is effectively saying look companies don't trust uh Anthropic anymore because Anthropic is stealing you know is learning how those businesses run and in some cases uh you know competing with them and then competing with them. And um the all-in pod talked about this uh and one of the stocks they cited was was Figma, excuse me. And Figma's down like 73%. So they basically co cooperated right with their client and then created a competing product against Figma, which is like a design uh a design tool and and now their customer stock is down 73%. Now, this is an argument from a competitor,

>> right? I'm just stating it's it's risk number three is

>> right,

>> you don't really usually in business have an extremely successful CEO blasting another software company uh for basically lack of ethics.

>> Yeah. Like I mean kind of corporate espionage. At the same time, you've got the government also saying it's got trust concerns with Anthropic, too. Right. So, it's coming from both the government and from the corporate side.

>> Yeah. It's it's, you know, it's pretty it's pretty dramatic. Again, I recommend people people listen to it. Uh I I just think, look, Anthropic is going to hit some bumps in the road. Okay. Now, let me if I could uh pivot. I I got a little bit of a time constraint today. Um Adam,

>> so I got about 10 more minutes. Um but uh so this is the scorecard. So last April um at the beginning of the quarter I was bullish on semiconductors including Nvidia. I was bullish on BDC's. I was bullish on alternative asset managers. I think we talked about blue owl and Aries and a bunch of them. I was bullish on India and I said listen I'm long-term bullish on gold and bitcoin and as I said that someone commented say what's you know of course he's bullish on everything. So, let me be really clear. Um, because I think the time frame is super important here and in what I'm saying and and um so I think it's

a great time. I still think it's a great time to be buying uh BDC's. Uh, I think their yields are very attractive. I think the alternative asset managers like Blue are attractive. I think, but I would say like in a year, you should be happy with these positions. So I'm more, I'll call it with a shorter-term view. I think they sold off dramatically in Q1 and they're just giving longer, you know, giving some of us a buying opportunity.

India, gold, and Bitcoin to me are in a completely different category. They are like 10-year trades. You can't say, "Yan, I lost money on gold and Bitcoin in Q2 or Q3 or Q4 or whatever," because Yan's looking out for 10 years. So, that's kind of that. That is, I think, a very important clarification that I want to add, like when I talk about some of these tactical trades.

All right, that's important. And as you said, VinX, big three tenure trades are AI, which we just spent a lot of time talking about, rise of India. So, yeah, bumps and wiggles along the way, but 10-year trend you're very bullish on. Gold and Bitcoin, that's trend number three, right? Is a way to deal with the risk of the US government overspending.

Exactly. Exactly. So, um, so I, you know, we we've just been quoted. Look, there's a little bit of internal debate at Van, like when do you buy Bitcoin? Uh, everyone feels that to do it before October. So, you know, those of us who follow it are bullish and think this is a reasonable entry point. It went down from, I think, like 70ish to 60ish over Q2. Yeah, Q2. But, um, I have a chart on that. I'm not, I'm not really worried.

Okay. This is a little bit out of, um, just a thought bubble for you. Great. If you look at the total return from investing in IBM, an unbelievable amount of that total return is coming from reinvested dividends. Sure. So the line of the stock, well, a lot of investors just look at the line of the stock and that's what's in black. If you look at reinvested dividends, you're almost approximating the S&P. I mean, it's pretty amazing for a tech company over multiple decades, you know, to be able to generate this kind of a return. Um, and so when I look at a company like Nvidia, which is one that I like, as you know, and I talked about last quarter, it's paying a dividend. It's buying back tremendous amount of shares. It's generating cash flow. Um, and just like IBM, I think Nvidia will be here in 10 years and be rewarding shareholders. And anyway, so that's just that's just my little story there.

You know, we we last time talked about high yield debt defaults are low. They continue to be low. So, I love BDC's. They kind of rallied a little bit during the quarter and then sold off, but you're still getting this this 9 plus% yield. Um, so I I'm I'm I'm still still holding on there.

So, so you still still believe that the private credit concerns are a bit overblown?

Yeah. Yeah. And and just over the last couple of weeks, um, you can see this at the tail end here of Aries again. They did have redemption amounts, but, um, you know, they're they're basically flattish or up a little bit from the last time we spoke and they've paid an amazing dividend. So I know Blue Owl a little bit better. Their their dividend yield is like 9% Adam. So even if the stock is is goes nowhere, where I'm I've made 9% over the course of a year, right? So, um, I'm perfectly happy with this kind of price, uh, you know, behavior, uh, because I'm getting paid in the meantime. And, you know, I we felt in April that they had kind of done all the damage to the common stock, like all those fears had been priced in, and that at least was correct.

Looks like it may may be bottoming here. Yeah.

And and it's and it's up. If you look, like literally go back to the prior chart, it's it's up from our April interview. Um, India is, I I just want to put the chart in here. It's just gotten it's gotten cheaper. So, [laughter] you know, from a 10-year perspective, um, sorry, I don't know what this is. Uh, you know, it's, um, it's it's still it's still pretty good as far as I'm concerned. So, um.

And I'm sorry, is is there a Van? There is a Van there, a couple Van India funds, right? Yeah. Uh, I think better to talk to us offline. Uh, because, you know, the the mark, so there's really two markets in the world, right? There's Korea that has big tech companies and it behaves like a like a venture startup, and then there's like more mature diversified, I'd call it light tech markets. And India, even though they have a lot of services, is a lighter tech market overall. Um, so it's it's been hurt by that. Um, and it's been lagging, but, uh, you know, we just love the macro because of the effectively the progrowth business policies. Um, I think will translate into good long-term equity returns. Earnings are growing over this time period. It's just that the stocks are getting cheaper. Um, and and that's not a bad thing if you're a buyer.

So, so that's a quick review of of kind of our our recommendations from last quarter and, you know, kind of still still sticking with them. Uh, you know, uh, very much. Uh, I I'm not bothered by this correction in gold. Uh, you know, and and last quarter, um, I I guess I don't know if the war had started. I don't think so. I I have a slide that's very fervent about, you know, gold is not driven by inflation in the United States, right? It hit all-time highs last year when inflation was moderating in the US. Um, it's more of an Asian wealth story. So, it's no surprise when Asia gets a gut punch from the straight of Hormuz closure and the Iran war that gold sells off. That's just not a surprise to me. Um, I don't know anything else on this one.

Um, I've got a zillion questions for you, but I know you're tight for time and you still have your macro themes, so I don't want to stand between you and them.

Okay. Uh, yeah, thanks for that. And I'm sorry, I've got a hard stop this time. Um, all right. So, yeah, some in in prior quarters, we've spent a ton of time and you're so happy that I don't have a chart of the fiscal budget deficit or anything like that, Adam. Um, I I've spared you and and you know, you haven't insisted on it, but I've tried to stick to a discipline of no repeat slides. So, but you have to look through the big picture and like what's happening. And the short answer is monetary policy is exactly as we said it was at the end of last year, which is we are going to have a less interventionist Fed period. It's exactly what Bessant said in fourth quarter of last year. We have a little bit more visibility on that, but no change in monetary policy. Number two, labor market. You know, people had been at the beginning of the year worried about AI job losses and all this kind of stuff. We have to look at that data, but no signs of that. Looks looks perfectly healthy to me. Um, federal budget deficit, of course, I needed to update that number because we've talked about a lot. So year to date is actually the wrong thing. It's it's updated through fiscal year. So the fiscal year starts October one.

So, through May, um, we are running at a 5.8% budget deficit. Receipts, tax receipts are up 5% compared to last year. Spending is up 3%. So, overall, we're in a better spot. Uh, we had peaked at 6 and a half% budget deficit. Um, but interest rates, sorry, interest expense, um, is up 10% year-over-year. So that's a little bit. We'll we'll talk about that in the future, I'm sure. And then, uh, we have some Social Security news which I need to run through really quick. Um, I would, you know, Bessant again, like, sorry, Kevin Worsh, excuse me, like Scott Bessant has been very, I think, is being very careful about not maybe communicating week to week, but communicating their philosophy of a smaller, less interventionist Fed. And so, uh, when he took office, he set up these task forces. And my prediction would be in the end of this year, they'll issue their reports. The the conclusions will surprise absolutely no one.

No one. No one. Um, I think they're going to wait till after the midterms. Um, and I think that's a good time politically to start getting into some of the slightly contractionary concerns around shrinking the balance sheet. So, um, more just, we don't have to worry about it till the end of the year, but no no big surprises from the Fed in terms of tightening or loosening. Uh, labor market, a lot of colors. Um, but this is just sort of the sectors that have been generating jobs. And I I'll decode this in a minute. The blue is education and health care. But just think about health care. We're getting older as a society. Not you and me, Adam, but everyone else is getting older. And so we just month after month, you know, are creating more health care jobs. So that's the blue line and that's a consistent theme. Uh, this shows the last two ones are first quarter and then the first two months of the second quarter. So it's up-to-date data, but, you know, yes, health care spending and employment continues to be good. The second narrative is the the gray block was job growth under under Biden and then here in Q4 of last year, job reduction from the government under under Trump. So again, no surprises. The the basic picture is, look, no surprises. So this is the labor market and we can go sector by sector and and, um, maybe at some other time, but but basically we are, you know, the labor market is, I think there's a ton of displacement, but not overall job loss. So that's that's it.

Okay, Social Security. So we learned something in Q2. Uh, we're going to run out of money, Adam, not in 2033, but in 2032. [laughter] So this, you know, the US government not living up to its promises is coming at us a little bit faster than we thought. I will just point out two solutions that were voiced. No one, no one's really going to probably do anything until we have a crisis. Adam, I think we probably agree on that. Is this slightly interesting that one of the obvious solutions is to eliminate the cap on contributions, which means that higher income Americans are going to keep making contributions if they're earning more than whatever it is, 140 grand a year. Um, you know, it's bipartisan. Elizabeth Warren got Bernie Moreno out of the Midwest to co-sponsor that. I don't know if it goes anywhere later this year. Adam, I would expect to talk about your former state's wealth tax, California.

Um, but anyway, not I don't think enough to talk about now, but that's just, that's I thought that was just sort of interesting. And then, you know, one potential thing that came into effect last weekend on July 4th were these Trump accounts, which are basically tax advantages ways for all Americans to participate in the stock market. The basic problem of everything that we've talked about is it's great for investors, but half of Americans are not investors.

Sure. Right. And so the government will be contributing $1,000 to every one of these accounts that are started or anyone that's born in 26, 27, and 28. The problem is the people that aren't investing in the stock market are probably not going to be going to the Treasury Department website and signing up for these. Right? It's like the people whose employer offers a 401k, but only half of them actually use it, right? Half just don't go through the motions.

Yeah. So, but but there's a twinkle in the eye here. I'm just saying of solving, okay, maybe Social Security won't give you all your money, but here's another kind of way to build up retirement savings for Americans. So, that's that's it.

I'm kind of taking this as you're just saying, look, there's more reform is coming to Social Security. Like, don't be surprised if we start hearing about means testing or things like that going forward, too, right?

Yeah. I mean, well, I would, you know, I'm going to be extreme. It's not bankruptcy, right? In 2032, they will cut payments by about 20%. So, you're not going to get what you were promised in your quarterly statement from Social Security. You're getting 80% of that.

So, bankruptcy is coming. Again, wrong word, but bankruptcy is coming. Um, I don't think I don't know. We'll see if politicians try to solve it, but these are just two of the policy solutions that are in the air.

Got it. All right, just to summarize, equities are out of the world. Out of the out of off the, you know, they're in orbit, but profit growth is keeping valuations within reason. So no reason to get out of your equity positions. Um, and and the AI trade as well, that's an overweight. It's totally reasonable to be taking profits on some of your your extra gains in semiconductors or what have you, your AI trades. Uh, but that's, we're not eliminating them. That's what we're doing. We're taking profits. Um, I'd list some of the risks to Anthropic that I see. Um, I I don't think they're priced in their private equity offerings and it hasn't hit their revenue, but I would be surprised if there weren't a revenue surprise to Anthropic over the next 12 months. We'll see. Uh, then, you know, I still still like the opportunities that revealed themselves three months ago. And, um, you know, on the macro front, actually, you know, marginally, nothing to worry about, which is, you know, on fiscal spending, monetary policy, or the employment markets. But, um, you know, but you can't take your eye off it because interest payments are kind of like now the biggest part of, they're bigger than defense, um, and and we're kind of losing control over our budget because of the debt levels.

All right. Well, this has been fantastic. I know you get to go, Yan. So, we'll wrap it up real quick here. Uh, just two last things. One, um, I kind of look at all this, and I call this sort of Yan's keep the faith update. Um, you know, these things, you know, don't don't [clears throat] jump off the trade, whether it's the hot AI trade, whether it's some of these other big ones and long-term ones like you see like India and and precious metals and Bitcoin, that type of stuff. And actually things are holding together pretty well. You're not seeing any major warning signs, macro-wise. So, um, these are always so fantastic. Yan, I've got a ton of questions that we'll just have to follow up with personally or I'll ask you when you come on next quarter. Um, and, um, uh, for folks that would like to follow you and your work in between now and the next time you come on this channel for this, where should they go, Yan?

Yeah. Well, we we publish investment outlooks on our website. We're going to distribute it through through your lists, Adam. Um, van.com is is the best place to go. I will occasionally comment on on Twitter and LinkedIn, but, um, you know, this is, uh, this this website's probably the best place to go.

All right, fantastic. Um, and I'll put the website up there when folks, uh, when I edit this. And, um, yes, thank you for letting folks know that, folks. So, to get the, um, Yan slides, uh, just sign up for the Thoffoney Substack. To do that, just go to thoughtfulmoney.com/newsletter. And when I send out the summary of this interview, as I do for all our interviews, links to Yan's slides will be there. Yan, thanks so much, buddy. I know I'm speaking quickly because I know you got to go. Uh, but look forward to seeing you in a quarter.

Yeah. Well, we'll we'll see. And I just want to, you know, it it's funny. This is a great discipline to really rewrite all your investment thoughts every quarter and to have it on the record. Uh, I I am bearish sometimes on different assets. So, um, you know, we were bearish on Bitcoin coming into the year, the summer of 24, when Nvidia was trading at 50 times sales. You know, I said, "Nope, take take some money off the table." Um, and and so I just want people to put this in context. Don't don't don't blame me because I'm bullish. I'm just, you know, I can't, you know, it's just we look at the underlying technology, right, that's driving the equity markets and, uh, you know, I I just I just think that the profits are supporting equities.

Well, Yan, um, I I I respect you so much, um, because you're just a great guy, but you from your perch there at Van, you have a perspective and a view into all these different markets, right? So, you get to see all the data, all the trends. Um, and you're just a data driven guy. You at the end of the day, you just tell us what you see the data telling you right now, which I find super useful. I like it when you're bullish. Um, because I know it's coming from an honest perspective, but also because a lot of people look at the many of the other analysts who come in the channel and, you know, some of them do have some more pessimistic outlooks and they're always saying, "Oh, you only have bears on your channel." So, I love it when you come in and give a bullish perspective. Helps give some balance.

Good enough.

All right, folks. Well, look, please thank Yan for giving us so much time and his energy here by hitting that like button and then clicking on the subscribe button below as well as that little bell icon right next to it. If you would like to take action based on any of the insights that Yan had shared with us here today, um, if you don't already have a good financial advisor who can counsel you through that, feel free to talk to one of the ones that Thoughtful Money endorses. These are the firms that appear with me in this channel week in and week out. You can talk to them for free just by filling out the very short form at thoughtfulmoney.com. Again, these are totally free. Only takes you a couple seconds to fill out the form. There's no commitments involved. It's just a service these companies offer to help as many investors as possible. Yan, can't thank you enough. These updates are so valuable. Really look forward to seeing you a quarter from now, my friend. Take care.

All right, thanks, Adam.